10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended July 31, 2006

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 $.01 per share, is registered pursuant to Section 12 (b) of the Securities Exchange Act of 1934 (the “Act”) and is listed on the New York Stock Exchange. Zale Corporation does not have any securities registered under Section 12 (g) of the Act. Zale Corporation (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.

     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, 2006 was $1,168,828,109. As of September 22, 2006, 48,195,001 shares of Zale Corporation’s common stock were outstanding. For this purpose, directors and officers have been assumed to be affiliates.

     Zale Corporation is a large accelerated filer and a well-known seasoned issuer.

     Zale Corporation is not a shell company.

DOCUMENTS INCORPORATED BY REFERENCE.

     Portions of Zale Corporation’s definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on November 15, 2006 are incorporated by reference into Part III.

TABLE OF CONTENTS

PART I
	ITEM 1. BUSINESS
	ITEM 1A. RISK FACTORS
	ITEM 1B. UNRESOLVED STAFF COMMENTS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 4A. EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
PART II
	ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
	ITEM 9A. CONTROLS AND PROCEDURES
	ITEM 9B. OTHER INFORMATION
PART III
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
Amendment to the Revolving Credit Agreement
Savings and Investment Plan as Amended
2003 Stock Incentive Plan as Amended
Outside Directors' 2005 Stock Incentive Plan as Amended
Supplemental Executive Retirement Plan as Amended
Employment Agreement - Mary E. Burton
Employment Agreement - Gilbert P. Hollander
Employment Agreement - Frank C. Mroczka
Zale Corporation Bonus Plan
Base Salaries
Subsidiaries
Consent of KPMG LLP
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Compensation Committee Charter

PART I

ITEM 1. BUSINESS

General

     We are, through our wholly owned subsidiaries, North America’s largest specialty retailer of fine jewelry. At July 31, 2006, we operated 1,456 specialty retail jewelry stores, 817 kiosks and 76 carts located mainly in shopping malls throughout the United States of America (“U.S.”), 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 is www.zalecorp.com.

     During the fiscal year ended July 31, 2006 (“fiscal year 2006”), we generated $2.4 billion of net revenues. We believe we are well-positioned to compete in the approximately $61 billion, combined U.S. and Canadian retail jewelry industry, leveraging our established brand names, economies of scale and geographic and demographic diversity. We have significant brand name recognition as a result of each brand’s long-standing presence in the industry and our national and regional advertising campaigns. We believe that brand name recognition is an important advantage in jewelry retailing as jewelry products are generally unbranded and consumers must trust in a retailer’s reliability, credibility and commitment to customer service.

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 2006, our Fine Jewelry segment generated $2.1 billion or approximately 88 percent of net revenues. During fiscal year 2006, the Kiosk revenues represented $276.7 million or approximately 11 percent of our total revenues.

Fine Jewelry

     Our Fine Jewelry segment is comprised of six brands, each targeted to reach a distinct customer. 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 Jewelers has extended the reach of its brand to the Internet shopper through its e-commerce site, zales.com. We have further leveraged the brand strength through Zales Outlet, which focuses on a slightly higher-income female self purchaser in outlet malls and neighborhood power centers. Gordon’s Jewelers® is a regional jeweler focusing on customer driven assortments. Bailey Banks & Biddle Fine Jewelers® operates jewelry stores that are considered among the finest luxury jewelry stores in their markets, offering designer jewelry and prestige watches to attract more affluent customers. Bailey Banks & Biddle Fine Jewelers has expanded its presence in the luxury market through its e-commerce site, baileybanksandbiddle.com. Peoples JewellersÒ and Mappins Jewellers® offer moderately priced jewelry in malls throughout Canada.

     Zale North America

     In fiscal year 2006, we consolidated the management of our flagship brands in the U.S. and Canada, Zales Jewelers, Peoples Jewellers, and Mappins Jewellers, respectively, under one senior management team, thereby creating Zale North America.

     Zales Jewelers. Zales, our national flagship, is a leading brand name in jewelry retailing in the U.S., with 784 stores in 50 states and Puerto Rico, and accounted for approximately 44 percent of our total revenues in fiscal year 2006. Zales’ average store size is 1,666 square feet with an average transaction total of $358 in fiscal year 2006.

     While placing added emphasis on the bridal segment of its business, Zales maintains a balance with non-bridal merchandise such as fashion jewelry and watches as well as its Brilliant Buy and promotional

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strategy to drive sales during gift-giving occasions and throughout the year. In fiscal year 2006, bridal merchandise represented 45 percent of Zales’ merchandise sales, while fashion jewelry and watches comprised the remaining 55 percent. The bridal merchandise category consists of engagement rings, bridal sets and diamond anniversary bands. Fashion jewelry consists of diamond fashion jewelry, precious and semi-precious jewelry, gold jewelry, watches and various other items. We believe that the prominence of diamond jewelry in our product selection and our reputation for customer service for over 80 years fosters an image of quality and trust among consumers.

     As the Zales brand entered into fiscal year 2006, the brand was repositioned, including more stylish and upscale merchandise in its assortments and marketing. The strategy did not succeed and significant changes were made (see “Business Developments” on page 4) with a goal of regaining market share.

     Zales, a multi-channel retailer, serves the Internet customer through its e-commerce site, zales.com, which accounted for approximately one percent of our total revenues in fiscal year 2006.

     Peoples Jewellers and Mappins Jewellers. In Canada, we operate 175 stores in nine provinces and enjoy the largest market share of any specialty jewelry retailer in Canada. Canadian operations consists of two brands, Peoples Jewellers and Mappins Jewellers. Canadian operations accounted for approximately nine percent of our total revenues in fiscal year 2006. The average store size is 1,590 square feet with an average transaction totaling $283 in fiscal year 2006.

     Peoples Jewellers and Mappins Jewellers are two of the most recognized brand names in Canada. Peoples Jewellers 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. Due to the similarity in marketing and store designs, Peoples Jewellers is able to leverage opportunities with Zales Jewelers. Since 2000, the Peoples brand has been building recognition with an aggressive television campaign. Over the past three years, Peoples had the largest television campaign of any Canadian jewelry retailer by a wide margin. Seasonal newspaper inserts are also a key element in the Peoples marketing campaign. Mappins Jewellers differentiates itself by offering exclusive merchandise primarily in its bridal assortments. Since 2000, Mappins has utilized newspaper inserts and targeted direct mail offers to reach its customers.

     Zales Outlet

     We operated Zales Outlet with stores in 35 states and Puerto Rico which accounted for approximately seven percent of our total revenues in fiscal year 2006. The average store size is 2,385 square feet, with an average transaction total of $398 in fiscal year 2006.

     The outlet concept has evolved into one of the strongest concepts in retail shopping today, featuring items in every major jewelry category including branded watches, gemstones, gold merchandise, and diamond fashion and solitaire products. The merchandise assortment in a typical Zales Outlet store caters to the higher-income female self purchaser, offering 20 to 70 percent off traditional retail prices every day. We have grown our Zales Outlet concept over the past eight years from four stores in 1998 to the 131 stores in operation at the end of fiscal year 2006.

     Although Zales Outlet was established as an extension of the Zales brand and capitalizes on Zales’ national advertising and brand recognition, Zales Outlet offers its own unique product line and augments this with promotional efforts that are geared specifically to the outlet consumer.

     Gordon’s Jewelers

     Gordon’s is positioned as our second mall-based brand. As of July 31, 2006, Gordon’s had 293 stores in 35 states and Puerto Rico and accounted for approximately 14 percent of our total revenues in fiscal year 2006. Average store size is 1,512 square feet with an average transaction total of $416 in fiscal year 2006. Gordon’s strives to distinguish itself by understanding local and regional differences to tailor its assortments more appropriately for each store’s locale.

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     We are continuing steps to differentiate the Gordon’s brand and determine the proper positioning of the brand. We believe its strengths include versioned product assortments and merchandise that caters to local ethnic demographics.

     Bailey Banks & Biddle Fine Jewelers

     At July 31, 2006, Bailey Banks & Biddle operated 73 upscale jewelry stores in 25 states. We also utilize the trade name Zell Bros® for one location operated by the Bailey Banks & Biddle brand. Average store size is 3,994 square feet with an average transaction total of $1,610 (excluding closed stores) in fiscal year 2006. Total revenue at Bailey Banks & Biddle accounted for approximately 13 percent of our total revenues in fiscal year 2006.

     During the second quarter of fiscal year 2006, we closed 32 Bailey Banks & Biddle stores as part of the brand’s strategy to improve profitability and performance. As a result of the store closings, we incurred charges of approximately $21.2 million or $0.43 per diluted share after taxes related to inventory, leasehold improvements, and lease exit costs.

     For 172 years, Bailey Banks & Biddle has combined classic jewelry with contemporary designs, offering a compelling shopping environment for the high-end luxury consumer. Bailey Banks & Biddle locations are among the preeminent stores in their markets. They carry both exclusive and recognized branded and designer merchandise selections to appeal to the more affluent customer. The Bailey Banks & Biddle merchandise assortments are carefully selected to provide treasures that will be appreciated for generations with a focus on diamonds, precious gemstones, gold, and branded designer jewelry, complemented by an extensive assortment of prestige watch brands and giftware.

Kiosk Jewelry

     The Kiosk Jewelry segment operates primarily under the brand names Piercing Pagoda®, Plumb Gold™, Silver and Gold Connection® (in the U.S.) and Peoples II™ (in Canada) through mall based kiosks and carts and reaches the opening price point select jewelry customer. The Kiosk Jewelry segment specializes in gold and silver products that capitalize on the latest fashion trends.

     At July 31, 2006, Piercing Pagoda operated 817 locations in 42 states and Puerto Rico. During fiscal year 2006, we operated 76 carts in Canada under the name Peoples II, which sell items consistent with the best selling fashion items in the Piercing Pagoda kiosks.

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

     Kiosks and carts are generally located in high traffic locations that are easily accessible and visible within regional shopping malls. The kiosk locations average 189 square feet in size, with an average transaction of $38 in fiscal year 2006.

All Other

     We provide insurance and reinsurance facilities for various types of insurance coverage, which typically are marketed to our private label credit card customers, through Zale Indemnity Company, Zale Life Insurance Company and Jewel Re-Insurance Ltd. The three companies are the insurers (either through direct written or reinsurance contracts) of our customer credit insurance coverages. 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 2006, 39.8 percent of our private label credit card purchasers purchased some form of credit insurance. Under the current private label arrangement with Citibank U.S.A., N.A. (“Citi”), our insurance affiliates continue to

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provide insurance to holders of our private label credit cards and receive payments for such insurance products. In fiscal year 2006, the All Other Segment accounted for less than 1 percent of our total revenues.

Business Developments

     During fiscal year 2006 there were significant changes in our management team. Effective January 31, 2006, President and Chief Executive Officer Mary L. Forté resigned and Mary E. Burton, a member of our Board of Directors, was appointed Acting Chief Executive Officer. Subsequently, Ms. Burton was permanently appointed as President and Chief Executive Officer. She remains as a director of the Company.

     Effective February 16, 2006, John Zimmermann was appointed President of Zale North America, responsible for the Zales Jewelers, Peoples Jewellers, Mappins Jewellers, and Peoples II brands. Mr. Zimmermann had formerly been President of Zale Canada which included the Peoples Jewellers and Mappins Jewellers brands.

     On March 23, 2006, Chief Operating Officer and Executive Vice President Sue E. Gove resigned.

     On May 5, 2006, Chief Financial Officer and Group Senior Vice President Mark Lenz was placed on administrative leave. This decision was made after discussions with our outside auditors concerning Mr. Lenz’s failure to timely disclose in conversations with the auditors that vendor payments scheduled to be made during the last two weeks of our fiscal year ended July 31, 2005 were delayed until the first week of August 2005. Cash and accounts payable were properly reflected on the balance sheet. Mr. Lenz’s employment ended on July 31, 2006 upon the expiration of his employment contract.

     On May 5, 2006, George R. Mihalko, Jr. was elected as a director of the Company and agreed to serve as Acting Chief Administrative Officer and Acting Chief Financial Officer.

     Rodney Carter was appointed Chief Financial Officer and Group Senior Vice President, effective October 16, 2006. Prior to joining the Company, Mr. Carter was the Senior Vice President and Chief Financial Officer of PETCO Animal Supplies, Inc., and prior to that position, was the Executive Vice President and Chief Financial Officer for CEC Entertainment, Inc.

     In making these executive changes, we reiterated our commitment to long-term growth through our core strategies of regaining market share, increasing margin through direct sourcing and internal production of diamond product, and making investments in our people.

     In the fourth quarter of fiscal year 2006, we recorded an after tax special charge primarily consisting of (1) $16.8 million to accelerate inventory markdowns on discontinued items, (2) $3.3 million related to the termination of an information technology initiative not consistent with the needs of our business, and (3) a $2.9 million asset impairment related to certain test stores. Separately, we recorded a $1.5 million after tax charge for accrued percentage rent related to prior periods and a $1.9 million tax charge primarily related to Canadian earnings.

Business Initiatives and Strategy

Regain Market Share

     We believe rebuilding the Zales brand is key to our return to a leadership position. Last Holiday season, assortments were repositioned with less emphasis on diamond fashion to a focus on trendier styles. This repositioning was not successful. The merchandise direction for fiscal year 2007 will include a renewed emphasis on diamond fashion and solitaire engagement rings, dominant assortments across bridal and diamond fashion and consistent assortments of moderately priced merchandise across all stores. In addition to more robust assortments, Zales will reemphasize Brilliant Buys and add back key promotional events backed by television advertising.

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     In the upcoming Holiday season, a new creative, a return to “Zales, the Diamond Store,” and a focus on the breadth and depth of assortments will better position the Zales brand. The strategy also includes an investment in store personnel, a revised compensation structure and increased product training, as well as additional training to translate product knowledge to sales. We believe this approach should result in higher average store revenues and is consistent with our strategy of regaining market leadership.

     We believe our brand recognition is a competitive advantage across each of our nameplates. This is especially important because, when consumers feel they lack the expertise to evaluate the quality and value of jewelry purchases, they rely on known brand names to ensure quality and value. As an industry leader, we continue to set the standard for delivering innovative and creatively designed products to consumers. We believe our proven ability to capitalize on evolving merchandise trends and interpret those trends to our entire customer base is what differentiates us from our competition. In addition, as the largest specialty retailer of fine jewelry in North America, we believe we realize economies of scale in purchasing, distribution, leasing, advertising and administrative costs. We also believe that the geographic diversity of our retail distribution network through all 50 states, Puerto Rico and Canada, and the demographic breadth of our target customer groups may serve to reduce earnings volatility typically associated with local or regional conditions.

     During the second quarter of fiscal year 2006, we closed 32 Bailey Banks & Biddle stores that did not fit with the brand’s long term positioning in the luxury market and as part of the brand’s strategy to improve performance and profitability. The closings resulted in a charge of approximately $21.2 million or $0.43 per diluted share after taxes related to inventory, leasehold improvements, and lease exit costs.

     In fiscal year 2006, we tested a repair store concept with three locations that were ultimately closed.

     In fiscal year 2007, we plan to open approximately 58 new stores, principally under the brand names Peoples Jewellers, Mappins Jewellers, Zales Jewelers, and Zales Outlet, as well as 10 Piercing Pagoda kiosks. We expect to incur an aggregate of approximately $22 million in capital expenditures. During fiscal year 2007, we also plan to refurbish, renovate or relocate approximately 170 stores and kiosks at a cost of approximately $40 million.

Improve Gross Margin

     We plan to increase direct product sourcing to enhance margins, ensure consistency of quality, and reliability of supply. This initiative consists of two opportunities: (1) the purchase and assembly of cut and polished diamonds into a finished jewelry product and (2) direct importing of finished goods.

     We have a direct sourcing organization to coordinate the purchase and assembly of mountings and loose diamonds into finished diamond product. This organization supplied approximately $84 million in purchases for our Canadian fine jewelry brands, Zales, Gordon’s and Outlet, making it one of our largest sources for product in fiscal year 2006.

     In addition to the purchase and assembly of diamond products, direct importing of finished product from overseas vendors also was identified as an opportunity. The Kiosk Jewelry segment and the Fine Jewelry segment import basic gold and diamond merchandise directly from factories in Europe, Asia and the Middle East in order to reduce product cost.

     During fiscal year 2006, direct product sourcing of our merchandise improved gross margins on the related products. In fiscal year 2006, we had gross margin improvements of 60 basis points related to direct product sourcing. In fiscal year 2007, we expect to further improve margins by increasing the percent of directly sourced product, particularly at Zales Jewelers.

     As we move into fiscal year 2007, our Information Technology department has repositioned its strategic initiatives by linking our business needs with related technology investments. More efficient and effective store processes will be enabled as newer point-of-sale (“POS”) software is introduced at select pilot stores. Additionally, we expect to design and begin implementing a best-in-class merchandising, planning and allocation system. By electing a modular system, we believe certain supply chain benefits will be achieved beginning in late fiscal year 2007 with a full implementation set for completion in fiscal year 2009 (August 1, 2008 to July 31, 2009). This direction marks a departure from an enterprise-wide

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solution that we determined did not meet the needs of our business. We recorded an after tax charge of $3.3 million or $0.07 per diluted share related to the abandoned information technology initiative.

Invest in People

     We are investing in people to make sure we attract and retain the best associates. We are investing in training to support our customers’ need for knowledgeable sales associates. The strategy also includes an investment in store personnel, a revised compensation structure and increased product training as well as additional training to translate product knowledge to sales.

     In fiscal year 2006, we increased the number of employees who completed product training through the Diamond Council of America (“DCA”). Additionally, we have a well-developed buyer training program to develop and train new buyers on merchandise negotiation techniques and Company standards.

Current Year Capital

     On August 30, 2005, we announced that our Board of Directors had approved a stock repurchase program pursuant to which we, from time to time, at management’s discretion and in accordance with our usual policies and applicable securities laws, could purchase up to an additional $100 million of our common stock. During the first six months of fiscal year 2006, we repurchased 3.7 million shares of common stock at an aggregate cost of approximately $100 million, which completed the Board’s authorization under the fiscal year 2006 program. We will reevaluate the possible repurchase of additional shares after the upcoming Holiday season.

     In 2007, we are investing our capital resources in new inventory assortments, new stores and remodeling locations, and information technology initiatives to ensure the long-term growth of our brands.

Industry and Competition

     Jewelry retailing is highly 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 are also competing for consumers’ discretionary spending dollars and, therefore, compete with retailers who offer merchandise other than jewelry or giftware. Therefore, we compete primarily on the basis of our reputation for high quality products, brand recognition, store location, distinctive and value-priced merchandise, personalized customer service and ability to offer private label credit card programs to customers wishing to finance their purchases. Our success is also dependent on our ability to both react to and create customer demand for specific merchandise categories.

     The U.S. and Canadian retail jewelry industry accounted for approximately $61 billion of sales in 2005, according to publicly available data. We have a four 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. and Sears, Roebuck and Co.), mass merchant discount stores (such as Wal-Mart Stores, Inc.), other general merchandise stores and apparel and accessory stores. The remainder of the retail jewelry industry is comprised primarily of catalog and mail order houses, direct-selling establishments, TV shopping networks (such as QVC, Inc.) and online jewelers.

     Historically, retail jewelry store sales have exhibited limited cyclicality. The United States Census Bureau has recorded only three years of negative growth in specialty retail jewelry store sales from 1984 to 2005.

     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.

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Operations by Brand

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

	Year Ended July 31, 2006
	2006		2005		2004
Total Revenues (in thousands)
Zales (including ZLC Direct)	$	1,092,625	$	1,079,230	$	1,070,576
Zales Outlet		177,736		166,000		137,613
Gordon’s		339,510		324,854		313,881
Bailey Banks & Biddle (a)		309,311		320,869		326,086
Peoples (b)		229,574		198,308		174,058
Piercing Pagoda		268,936		274,296		269,660
Peoples II		7,683		6,601		—
Insurance Revenues/Other		13,602		12,908		12,566
	$	2,438,977	$	2,383,066	$	2,304,440
Average Sales Per Location (c)
Zales	$	1,383,000	$	1,366,000	$	1,390,000
Zales Outlet		1,360,000		1,249,000		1,287,000
Gordon’s		1,200,000		1,112,000		1,101,000
Bailey Banks & Biddle		3,738,000		3,474,000		2,848,000
Peoples		1,397,000		1,140,000		1,041,000
Piercing Pagoda		332,000		343,000		339,000
Peoples II		82,000		100,000		—

	Locations By Brand
	Locations Opened During		Locations Closed During		Locations at End of
	Period		Period		Period
Year Ended July 31, 2006
Zales (d)		24		20		784
Zales Outlet (d)		7		1		131
Gordon’s		17		11		293
Bailey Banks & Biddle		1		32		73
Peoples		7		—		175
Piercing Pagoda		38		33		817
Peoples II		16		9		76
Master Jewelry Repair		3		3		—
		113		109		2,349
Year Ended July 31, 2005
Zales		24		14		767
Zales Outlet		18		1		138
Gordon’s		13		13		287
Bailey Banks & Biddle		—		4		104
Peoples		6		1		168
Piercing Pagoda		50		36		812
Peoples II		71		2		69
Master Jewelry Repair		—		—		—
		182		71		2,345
Year Ended July 31, 2004
Zales		9		7		757
Zales Outlet		25		—		121
Gordon’s		9		9		287
Bailey Banks & Biddle		—		8		108
Peoples		5		9		163
Piercing Pagoda		24		39		798
Peoples II		—		—		—
Master Jewelry Repair		—		—		—
		72		72		2,234

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(a)	Includes revenues of $24.3 million, $49.8 million, and $48.1 million for fiscal years 2006, 2005, and 2004, respectively, related to the Bailey Banks & Biddle store closings in the second quarter of fiscal year 2006.
(b)	Peoples (including Mappins) and Peoples II reflects all revenue from Canadian operations, which constitutes all our foreign operations. Long-lived assets from foreign operations totaled approximately $29.3 million, $27.6 million, and $23.2 million at July 31, 2006, 2005, and 2004, respectively.
(c)	Based on merchandise sales for locations open a full twelve months during the applicable year.
(d)	In fiscal year 2006, the total locations at the end of the period reflect 13 stores that were moved from the Zales Outlet brand to the Zales brand.

Business Segment Data

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

Store Operations

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

     Each of our stores is led by a store manager who is responsible for store-level operations, including overall store sales and personnel matters. Administrative matters, including purchasing, distribution and payroll, are consolidated at the corporate level in an effort to maintain efficiency and low operating costs at the store level. In addition to selling jewelry, each store also offers standard warranties and return policies, and provides extended warranty coverage that may be purchased at the customer’s option. In order to facilitate sales, stores will hold merchandise in layaway, generally requiring a deposit of not less than 20 percent of the purchase price at the inception of the layaway transaction.

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

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

     We continue to focus on the level and frequency of our employee training programs, particularly with store managers and key sales associates. We also provide training in sales techniques for new employees, on-the-job training for all store personnel and management training for store managers. Under the banner of Zale Corporation University, we offer training to employees at every level of the organization.

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, Southeast Asia and Italy. All purchasing is done through buying offices at our headquarters. As discussed in the section “Business Initiatives and Strategy,” a centralized product sourcing organization also has been established to coordinate the purchase and assembly of core diamond products such as solitaire rings, earrings and pendants. Consignment inventory has historically consisted of test programs, merchandise at higher price points or merchandise that otherwise does not warrant the risk of ownership. Consignment merchandise can be returned to the vendor

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at any time or converted to owned inventory if it meets certain productivity thresholds. We had approximately $175.1 million and $150.9 million of consignment inventory on hand at July 31, 2006 and 2005, respectively. During fiscal years 2006 and 2005, we purchased approximately 22 percent of our finished merchandise from our top five vendors, including more than six percent from one vendor in 2006. 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. During fiscal year 2006, our direct sourcing organization accounted for approximately six percent of our merchandise requirements.

     In fiscal year 2006, we expanded our use of forward contracts for the purchase of our gold and silver in order to reduce the effects of fluctuating commodity prices. We generally hedge certain planned inventory purchases covering a designated period of no longer than twelve months and amounts consistent with our identified exposure. The purpose of hedging activities is to minimize the effect of commodity price movements on cash flows. All forward contracts are currently with four financial institutions rated as investment grade by a major rating agency. No fees or up front payments are required when using these commodity forwards. These contracts settle on a net basis.

     As a specialty retail jeweler, we could be affected by industry-wide fluctuations in the prices of diamonds, gold, and other metals and stones. The supply and prices of diamonds in the principal world markets are significantly influenced by a single entity, the Diamond Trading Company, 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 to the Diamond Trading Company and our suppliers is to some extent dependent on the political situation 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.

     Within the jewelry industry there has been continued focus on “conflict diamonds,” which are allegedly extracted from war-torn regions and sold by organizations to fund insurrection. Through an international system of certification and legislative initiatives, the diamond trade has taken steps to ensure the exclusion from the supply chain of these diamonds, which represent a small fraction of the world’s supply. It is not expected that such efforts, if successful, will substantially affect the supply of diamonds. However, in the near term, efforts by non-governmental organizations to encourage legislative response combined with an upcoming movie about conflict diamonds scheduled for national release in December 2006 could increase consumer awareness of the issue and could affect consumer demand for diamonds.

Proprietary Credit

     Our private label credit card program helps facilitate the sale of merchandise to customers who wish to finance their purchases rather than use cash or other payment sources. We offer revolving and interest free credit programs under our private label credit card program. Approximately 41 percent and 44 percent, respectively, of our U.S. total sales excluding Piercing Pagoda, which does not offer proprietary credit, were generated by proprietary credit cards in fiscal years 2006 and 2005. Our Canadian propriety credit card sales represented approximately 27 percent of Canadian total sales for fiscal year 2006 and approximately 29 percent of Canadian total sales in fiscal year 2005.

     In fiscal year 2006, we continued our proprietary credit offerings of same-as-cash, revolving and interest free programs, all of which allowed our sales personnel to provide the customer additional financing options.

     In July 2000, we entered into a ten-year agreement with Citi whereby Citi issues private label credit cards branded with appropriate trademarks, and provides financing for our customers to purchase merchandise in exchange for payment by us of a merchant fee based on a percentage of each credit card sale. The merchant fee varies according to the credit plan that is chosen by the customer (i.e., Revolving, Interest Free, Same as Cash).

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Employees

     As of July 31, 2006, we had approximately 16,900 employees, approximately 10 percent of whom were Canadian employees and less than one percent of whom were represented by unions. We usually hire temporary employees during each Holiday season.

Seasonality

     As a specialty retailer of fine jewelry, our business is seasonal in nature, with our second quarter, which includes the months of November through January, typically generating a proportionally greater percentage of annual sales, earnings from operations and cash flow than the other three quarters. We expect such seasonality to continue.

Information Technology

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

     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 mainframe processing operations, client server systems, Local Area Network operations, Wide Area Network management and e-commerce hosting. The agreement, effective August 1, 2005, requires fixed payments totaling $30.0 million over an 84-month period plus a variable amount based on usage, and extends through 2012. We believe that by outsourcing our data center operations, we are focusing our resources on developing and enhancing the strategic initiatives discussed in the Business and Strategy section.

     We have historically upgraded, and expect to continue to upgrade, our information systems to improve operations and support future growth. We estimate we will make capital expenditures of approximately $8 million in fiscal year 2007 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®. 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 by us is also highly regulated. State laws currently impose disclosure obligations with respect to our sale of credit and other insurance. In addition, our sale of insurance products

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in connection with our private label credit cards appears to be subject to certain disclosure and other requirements under the Gramm-Leach-Bliley Act of 1999. Our and our competitors’ practices are also subject to review in the ordinary course of business by the Federal Trade Commission and our and other retail companies’ credit cards are subject to regulation by state and federal banking regulators. We believe that we are currently in material compliance with all applicable state and federal regulations.

     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. We monitor changes in those laws and believe that we are in material compliance with applicable laws with respect to such practices.

Available Information

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

     Our certificate of incorporation and bylaws as well as the charters for the compensation, audit, nominating and corporate governance committees of our Board of Directors and the corporate governance guidelines are available on our website at www.zalecorp.com, under the heading “Corporate and Social Responsibility.”

     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 “Corporate and Social Responsibility-Code of Business Conduct and Ethics.” Waivers of the Code for directors and executive officers will be disclosed in a SEC filing on Form 8-K.

ITEM 1A. RISK FACTORS

     We make forward-looking statements in the 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, store opening, renovation, remodeling and expansion, inventory management and performance, liquidity and cash flows, capital structure, capital expenditures, development of our information technology and telecommunications plans and related management information systems, e-commerce initiatives, human resource initiatives, impact of the Bailey Banks & Biddle store closings 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.

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If the general economy performs poorly, discretionary spending on goods that are, or are perceived to be “luxuries” may not grow and may even decrease.

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

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

Most of our sales are of products that include diamonds, precious metals and other commodities, and fluctuations in the availability and pricing of commodities could impact our ability to obtain and produce 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. In the near term, efforts by non-governmental organizations to encourage legislative response combined with a movie about conflict diamonds scheduled for national release in December 2006 could increase consumer awareness of the issue and could affect consumer demand for diamonds.

     We are also affected by fluctuations in the price of diamonds, gold and other commodities. We historically have engaged in hedging against fluctuations in the cost of gold. 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 sales are dependent upon mall traffic.

     Our stores, kiosks, and carts 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.

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, mass merchandisers and catalog showrooms. We also are beginning to 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 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.

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 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. Further, 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.

Changes in regulatory requirements relating to the extension of credit may increase the cost of or adversely affect our operations.

     Our operations are affected by numerous U.S. and Canadian federal and state or provincial laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum aggregate amount of finance charges that may be charged by a credit provider. Any change in the regulation of credit (including changes in the application of current laws) which would materially limit the availability of credit to our customer base could adversely affect our sales and earnings.

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

     Our agreement with Citi, through which Citi provides financing for our customers to purchase merchandise through private label credit cards, enhances our ability to provide consumer credit and write credit insurance. Any disruption in, or change to, this agreement could have an adverse effect on our business, especially to the extent that it materially limits credit availability to our customer base.

Acquisitions involve special risk, including the possibility that we may be unable to integrate new acquisitions into our existing operations.

     We have made significant acquisitions in the past and may in the future make additional acquisitions. 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. Additionally, attractive acquisition opportunities may not be available at the time or pursuant to terms acceptable to us.

We recently appointed a new CEO, who may initiate strategies or other changes in store levels, expenses, staffing, and related matters.

     Mary E. Burton was named Acting Chief Executive Officer in January 2006 and President and Chief Executive Officer in July 2006. As discussed under “Business Initiatives and Strategy,” we have a number of strategy initiatives and expect Ms. Burton to initiate others. Each of these initiatives will require the commitment of capital and human resources. These initiatives may or may not generate the expected results.

ITEM 1B. UNRESOLVED STAFF COMMENTS

     Not applicable.

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ITEM 2. PROPERTIES

     We lease a 430,000 square foot corporate headquarters facility, which lease extends through 2018. The facility is located in Las Colinas, a planned business development in Irving, Texas, near the Dallas/Fort Worth International Airport. We lease approximately 40,000 square feet of warehouse space that in June 2003 was subleased to a third party through the remainder of the lease term, which extends through March 2009. We expanded our Canadian distribution and production operations in July 2005 by leasing a 26,280 square foot facility in Toronto, Ontario with a lease term through November 2014. We also lease a 20,000 square foot distribution and warehousing facility in Irving, Texas with a lease term through June 2008 that serves as the Piercing Pagoda distribution center.

     We rent our store retail space under leases that generally range in terms from five to ten years and may contain minimum rent escalation clauses, while kiosk leases generally range from three to five years and carts from 12 to 18 months. Most of the store leases provide for the payment of base rentals plus real estate taxes, insurance, common area maintenance fees and merchants association dues, as well as percentage rents based on the stores’ gross sales.

     We lease 15 percent of our store and kiosk locations from each of Simon Property Group and General Growth Management, Inc. Otherwise, we have no relationship with any lessor relating to 10 percent or more of our store and kiosk locations.

     The following table indicates the expiration dates of the current terms of our leases as of July 31, 2006:

									Percentage of
Term Expires	Stores		Kiosks		Other (1)		Total		Total
2007 and prior		369		389		1		759		32.1	%
2008		155		171		1		327		13.9	%
2009		153		121		2		276		11.7	%
2010		156		134		2		292		12.4	%
2011 and thereafter		623		78		5		706		29.9	%
Total number of leases		1,456		893		11		2,360		100.0	%

(1) Other includes warehouse, distribution, storage facilities, and four locations that are either not yet opened, or are locations that have been closed but are still under lease obligations.

     Management believes substantially all of the store leases expiring in fiscal year 2007 that it wishes to renew (including leases which expired earlier and are currently being operated under month-to-month extensions) will be renewed. Generally, although rents continue to increase, we otherwise expect leases will be renewed on terms not materially less favorable to us 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

     We are involved in various legal proceedings and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without any material adverse effect on our financial position or results of operations.

     SEC Investigation. On April 10, 2006, we announced that the SEC had initiated a non-public investigation into various accounting and other matters related to our business, including accounting for Extended Service Agreements (“ESAs”), leases and accrued payroll. Subpoenas issued in connection with the investigation requested materials relating to these accounting matters as well as to executive compensation and severance, earnings guidance, stock trading, and the timing of certain vendor payments. On September 21, 2006, the staff of the SEC notified us that the investigation of Zale Corporation had been terminated with no enforcement action being recommended.

     Securities and ERISA Litigation. We are named as a defendant in six lawsuits arising, in general, from the matters that the SEC was investigating as described above. The lawsuits are: (a) Levy v. Zale Corp., No. 1:06-CV-05464, filed July 19, 2006, U.S. District Court for the Southern District of New York, (b)

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Agoos v. Zale Corp., No. 1:06-CV-5877, filed August 3, 2006, U.S. District Court for the Southern District of New York, (c) Pipefitters Local No. 636 Defined Benefit Plan v. Zale Corp., No. 3:06-CV-1470, filed August 15, 2006, U.S. District Court for the Northern District of Texas, (d) Chester v. Zale Corp., No. 1:06-CV-06387, filed August 23, 2006, U.S. District Court for the Southern District of New York, (e) Salvato v. Zale Corp., No. 3-06 CV 1124-D, filed June 26, 2006, U.S. District Court for the Northern District of Texas, and (f) Connell v. Zale Corp., No. 06 CV 5995, filed August 7, 2006, U.S. District Court for the Southern District of New York. Mary L. Forté, Mark R. Lenz, and Sue E. Gove are named as defendants in all six lawsuits. Cynthia T. Gordon is also named as a defendant in the Levy, Agoos, and Chester lawsuits. Richard C. Marcus, J. Glen Adams, Mary E. Burton, John B. Lowe, Jr., Thomas C. Shull, David M. Szymanski, and the Zale Plan Committee also are named as defendants in the Salvato and Connell lawsuits.

     All six lawsuits are purported class actions. In the Levy, Agoos, Pipefitters and Chester lawsuits the plaintiffs allege various violations of securities laws based upon our public disclosures. In the Salvato and Connell lawsuits the plaintiffs allege various violations of the Employee Retirement Income Security Act of 1974 (“ERISA”) based upon the investment by the Zale Corporation Savings and Investment Plan in Company stock. The plaintiffs in all six lawsuits request unspecified compensatory damages and costs and, in the Salvato and Connell lawsuits, injunctive relief and attorneys’ fees. All six lawsuits are in preliminary stages. We intend to vigorously contest all six lawsuits.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of our security holders during the quarter ended July 31, 2006.

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ITEM 4A. EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT

     The following individuals serve as our executive officers or are other key employees of the Company. 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		Position
Executive Officers:
Mary E. Burton		54	President, Chief Executive Officer and Director
George R. Mihalko, Jr.		51	Acting Chief Administrative Officer, Acting Chief Financial Officer and Director
John A. Zimmermann		47	Group President and President, Zale North America
Gilbert P. Hollander		53	Group Senior Vice President and President, Corporate Sourcing/Piercing Pagoda
Frank C. Mroczka		48	Senior Vice President and President, Gordon’s Jewelers
Key Employees:
Mary Ann Doran		50	Senior Vice President, Human Resources
Charles E. Fieramosca		58	Senior Vice President and President, Bailey Banks & Biddle Fine Jewelers
Cynthia T. Gordon		42	Senior Vice President, Controller
Steven Larkin		48	Senior Vice President, E-Commerce
Stephen C. Massanelli		50	Senior Vice President, Real Estate
Susann C. Mayo		54	Senior Vice President, Supply Chain
Hilary Molay		52	Senior Vice President, General Counsel and Secretary
Nancy O. Skinner		56	Senior Vice President and President, Zales the Diamond Store Outlet
George J. Slicho		57	Senior Vice President, Loss Prevention
Mark A. Stone		48	Senior Vice President, Chief Information Officer

Executive Officers

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

     Ms. Mary E. Burton was appointed President and Chief Executive Officer effective July 24, 2006. Ms. Burton served as Acting Chief Executive Officer from January 31, 2006 through July 23, 2006. Ms. Burton has served as a director of the Company since August 1, 2003. Since July 1992, Ms. Burton has served as Chief Executive Officer of BB Capital, Inc., retail advisory and management services company. Ms. Burton was Chief Executive Officer of the Cosmetic Center, Inc., a chain of 250 specialty retail stores, from June 1998 to April 1999. Prior to occupying that position, she served as Chief Executive Officer of PIP Printing from July 1991 to July 1992, and as Chief Executive Officer of Supercuts, Inc. from September 1987 to June 1991. She is also a director of Staples, Inc., Rent-A-Center, Inc., and Aeropostale, Inc.

     Mr. George R. Mihalko, Jr. was elected to the Company’s Board of Directors in May 2006 and agreed to serve as Acting Chief Administrative Officer and Acting Chief Financial Officer. Prior to joining the Company, Mr. Mihalko served as Vice Chairman, Chief Administrative Officer and Chief Financial Officer of The Sports Authority, Inc. from September 1999 through August 2003. From August 2003 through May 2006, Mr. Mihalko has been a private investor.

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     Mr. John A. Zimmermann was appointed Group Senior Vice President and President, Zale North America in February 2006. He was promoted to Group President in August 2006. Prior to this appointment, Mr. Zimmermann held the position of President, Peoples Jewellers from May 2001 through February 17, 2006. Mr. Zimmermann joined the Company in May of 2001 after serving as Senior Vice President for Smartkids.com from June 1998 through May 2000, and Senior Vice President of The Big Party from November 1996 through May 1998. Mr. Zimmermann started his retail career at John Wanamaker and went on to work at additional divisions of Carter Hawley Hall as well as Federated.

     Mr. Gilbert P. Hollander was promoted to President, Corporate Sourcing/Piercing Pagoda 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 Vice 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 when Piercing Pagoda acquired Silver and Gold Connection, where he was a part owner.

     Mr. Frank C. Mroczka was promoted to Senior Vice President and President, Gordon’s Jewelers in April 2003. Mr. Mroczka was previously the Senior Vice President of Store Operations for Gordon’s Jewelers, to which he was appointed in 1997. In 1993, Mr. Mroczka was promoted to Director of Stores for Gordon’s West Region. Mr. Mroczka joined the Company in 1983 and served in numerous positions until his appointment to Senior Vice President in 1997.

     Mr. Rodney Carter was appointed Chief Financial Officer and Group Senior Vice President, effective October 16, 2006. Prior to joining the Company, Mr. Carter was the Senior Vice President and Chief Financial Officer of PETCO Animal Supplies, Inc., and prior to that position, was the Executive Vice President and Chief Financial Officer for CEC Entertainment, Inc.

Key Employees

     Ms. Mary Ann Doran was promoted to Senior Vice President of Human Resources in February 2005. Ms. Doran previously held the position of Vice President of Organizational Development & Recruitment, to which she was appointed in August 1997. Ms. Doran began her career with the Company in October 1996 as Vice President, Personnel Development & Staffing. Prior to joining the Company, Ms. Doran held positions with Kenzer Corporation, Bombay Company and the Jordan Marsh Company, where she served as Vice President of Human Resources.

     Mr. Charles E. Fieramosca joined the Company in April 2001 as Senior Vice President and President of Bailey Banks & Biddle Fine Jewelers. In the ten years prior to joining the Company, Mr. Fieramosca founded and served as the CEO of Ascend Consulting, a product and brand development company. Prior to his role at Ascend Consulting, Mr. Fieramosca held various positions with Jones New York Menswear, BASCO All American Sportswear, and Macy’s.

     Ms. Cynthia T. Gordon was promoted to Senior Vice President, Controller in February 2003. From April 2001 to July 2003, Ms. Gordon served as Vice President of Corporate Planning. From 1998 to 2001, Ms. Gordon served as Senior Director of Investor Relations. Ms. Gordon joined the Company in October 1994 as the Director of Corporate Planning. Prior to joining the Company in 1994, Ms. Gordon served in various positions, including Director of Investor Relations and External Reporting for A Pea in the Pod, a maternity wear retailer, and in the audit division of Ernst & Young LLP in Dallas, Texas.

     Mr. Steven Larkin joined the Company in January 2006 as Senior Vice President, E-Commerce. Prior to joining the Company, Mr. Larkin held positions of Vice President, Merchandising for Benchmark Brands (2003 – 2004) and Shop NBC (2001 – 2002). Mr. Larkin also held the position of Vice President, E-Commerce for Broadband Sports.com from 2000 through 2001, and Chief Merchandising Officer at The Fingerhut Corporation from 1995 through 2000.

     Mr. Stephen C. Massanelli was appointed Senior Vice President, Real Estate in May 2004. Mr. Massanelli joined the Company in June 1997 as Senior Vice President, Treasurer. From 1993 to 1997, Mr. Massanelli was a principal and member of the Board of Directors of The Treadstone Group, Inc., a private

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merchant banking organization in Dallas. Prior to 1993, Mr. Massanelli served in various financial roles at AMRESCO, Inc. and NationsBank of Texas, predecessor to Bank of America.

     Ms. Susann C. Mayo joined the Company in October 2005 as Senior Vice President, Supply Chain. Prior to joining the Company, Ms. Mayo was the Vice President of Logistics & Distribution for The Bombay Company from 2001 through February 2005. Prior to 2001, Ms. Mayo held various positions at Sears, Roebuck & Co. from 1973 through 2001.

     Ms. Hilary Molay was promoted to Senior Vice President, General Counsel and Secretary of the Company in September 2005. Prior to her most recent promotion, Ms. Molay served as Vice President, General Counsel and Secretary of the Company from August 2002 through August 2005. Ms. Molay also serves as Secretary to the Zale Board of Directors. Previously, Ms. Molay served as Director, Senior Attorney for Zale Corporation when she joined the Company in February 2000. Prior to working for the Company, Ms. Molay served in various legal positions, including Senior Attorney for J. C. Penney Company, Inc., Trial Attorney, U.S. Department of Justice, and Judicial Law Clerk, Court of Appeals of Maryland.

     Ms. Nancy O. Skinner was promoted to Senior Vice President and President of Zales Outlet in August 2003. Prior to her promotion, Ms. Skinner served as Vice President and Senior Vice President of Merchandising, Zales Outlet from April 2001 to July 2003. From May 1998 to April 2001, Ms. Skinner was a Diamond Buyer for Zales Outlet. Ms. Skinner joined the Company in April 1984 and has held numerous senior buying positions in Diamond Park Fine Jewelers, Gordon’s Jewelers, and Bailey Banks & Biddle Fine Jewelers. Prior to joining the Company, Ms. Skinner held various merchandising positions with Gordon’s Jewelry Corporation which merged with the Company in 1989.

     Mr. George J. Slicho was promoted to the position of Senior Vice President, Loss Prevention in November 2000. Mr. Slicho began his career with the Company in March 1991 as Vice President of Loss Prevention. Prior to joining the Company, Mr. Slicho held various positions in corporate security, including Vice President of Loss Prevention and Audit for P.A. Bergner & Company. In addition, Mr. Slicho served as a special agent in various field offices of the Federal Bureau of Investigation.

     Mr. Mark A. Stone was promoted to Senior Vice President, Chief Information Officer in May 2006. From August 2003 through April 2006, Mr. Stone held the position of Vice President, Planning and Analysis. From March 2002 through July 2003, Mr. Stone held the position of Senior Director, Pagoda Distribution. Mr. Stone joined the Company in January 1995 and held various positions within the Information Technology group until February 2002. Prior to joining the Company, Mr. Stone was Director of Financial Operations for the Resolution Trust Corporation from January 1990 to January 1995.

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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 the common stock for each fiscal quarter during the two most recent fiscal years.

	2006				2005
	High		Low		High		Low
First	$	34.42	$	25.62	$	29.17	$	24.59
Second	$	29.95	$	24.28	$	31.25	$	25.50
Third	$	28.61	$	23.54	$	30.96	$	26.15
Fourth	$	27.75	$	21.01	$	34.28	$	26.95

     As of September 22, 2006, the outstanding shares of common stock were held by approximately 700 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 long-term debt limits our ability to pay dividends or repurchase our common stock if borrowing availability under our U.S. $500 million revolving credit facility is less than $75 million. At July 31, 2006, we had borrowing availability under the revolving credit agreement of approximately $313.9 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and “Notes to the Consolidated Financial Statements – Long Term Debt.”

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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 Form 10-K and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The income statement and balance sheet data for each of the fiscal years ended July 31, 2006, 2005, 2004, 2003, and 2002 has been derived from our audited Consolidated Financial Statements.

	Year Ended July 31,
	2006			2005		2004		2003			2002
	(amounts in thousands, except per share amounts)
Total revenues (a)	$	2,438,977		$	2,383,066	$	2,304,440	$	2,212,241		$	2,191,727
Costs and expenses:
Cost of sales (b)		1,215,636			1,157,226		1,122,946		1,101,030			1,083,053
Selling, General and Administrative expenses (c)		1,087,458			982,113		942,796		884,069			873,265
Cost of insurance operations		6,699			6,084		5,963		8,228			8,620
Depreciation and amortization expense		59,771			59,840		56,381		55,690			58,340
Impairment of Goodwill		—			—		—		136,300			—
Executive transactions		—			—		—		—			2,298
Retiree medical plan termination/curtailment		(13,403	)		—		—		—			(3,500	)
Derivatives (Gains)/Losses		1,681			—		—		—			—
Operating earnings		81,135			177,803		176,354		26,924			169,651
Interest expense, net		11,185			7,725		7,528		6,319			7,750
Costs of Early Retirement of Debt		—			—		—		5,910			—
Earnings before income taxes		69,950			170,078		168,826		14,695			161,901
Income taxes (d)		16,328			63,303		62,353		55,340			59,256
Earnings (loss) before effect of accounting change		53,622			106,775		106,473		(40,645	)		102,645
Effect of change in accounting principle (e)		—			—		—		—			(41,287	)
Net earnings (loss)	$	53,622		$	106,775	$	106,473	$	(40,645	)	$	143,932
Earnings (Loss) Per Common Share:
Basic:
Before effect of change in accounting principle	$	1.10		$	2.08	$	2.02		($0.63	)	$	1.48
Net Earnings (Loss) Per Share	$	1.10		$	2.08	$	2.02		($0.63	)	$	2.08
Earnings (Loss) Per Common Share:
Diluted:
Before effect of change in accounting principle	$	1.09		$	2.05	$	1.99		($0.63	)	$	1.47
Net Earnings (Loss) Per Share	$	1.09		$	2.05	$	1.99		($0.63	)	$	2.07
Weighted average number of common shares outstanding (f):
Basic		48,808			51,280		52,650		64,528			69,178
Diluted		49,211			51,975		53,519		64,528			69,692
Balance Sheet Data:
Working capital	$	646,115		$	611,561	$	582,888	$	532,443		$	561,939
Total assets		1,462,568			1,380,900		1,342,084		1,294,106			1,489,265
Long-Term Debt		202,813			129,800		197,500		184,400			86,749
Total stockholders investment	$	801,249		$	817,588	$	726,114	$	652,323		$	939,807

(a)	Total revenues include $24.3 million, $49.8 million, $48.1 million, $46.3 million, and $46.0 million for fiscal years 2006, 2005, 2004, 2003, and 2002, respectively, of revenues generated in the closed Bailey Banks & Biddle stores.
(b)	In fiscal year 2006, cost of sales includes charges of $26.9 million related to the accelerated markdown of discontinued merchandise and $21.4 million related to closing certain Bailey Banks & Biddle stores (including a $6.2 million charge on inventory).
(c)	In fiscal year 2006, SG&A includes (1) $12.1 million in executive severance costs, (2) $28.0 million related to Bailey Banks & Biddle store closings, (3) $5.2 million related to adoption of SFAS 123(R), (4) $5.3 million related to termination of an IT initiative, and (5) $4.6 million related to asset impairment charges.

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(d)	Income taxes in fiscal year 2006 decreased primarily due to lower earnings, tax benefits related to the AJCA repatriation and reduced tax rates in Canada.
(e)	Fiscal year 2002 reflects a change in accounting principle for the write-off of the excess of revalued net assets over stockholders equity (negative goodwill).
(f)	Outstanding share amounts have been adjusted to give retroactive effect to a two-for-one stock split completed on June 8, 2004.

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Segment Data

Selected Financial Data by Segment

	Year Ended July 31,
	2006			2005			2004			2003			2002
	(amounts in thousands, except per share amounts)
Revenues
Fine Jewelry (a)	$	2,149,217		$	2,089,261		$	2,022,214		$	1,939,454		$	1,900,177
Kiosk (b)		276,619			280,897			269,660			256,665			273,225
All Other		13,141			12,908			12,566			16,122			18,325
Total Revenues	$	2,438,977		$	2,383,066		$	2,304,440		$	2,212,241		$	2,191,727
Depreciation & Amortization Expense
Fine Jewelry	$	43,273		$	44,410		$	41,757		$	40,915		$	40,453
Kiosk		5,571			4,708			4,199			4,653			5,618
All Other		—			—			—			—			—
Unallocated		10,927			10,722			10,425			10,122			12,269
Total Depreciation & Amortization Expense	$	59,771		$	59,840		$	56,381		$	55,690		$	58,340
Operating Earnings (Loss)
Fine Jewelry	$	108,082		$	147,414		$	153,739		$	151,650		$	145,816
Kiosk (c)		20,402			29,030			25,951			(125,629	)		20,335
All Other		6,443			6,824			6,603			7,894			9,705
Unallocated (d)		(53,792	)		(5,465	)		(9,939	)		(6,991	)		(6,205	)
Total Operating Earnings	$	81,135		$	177,803		$	176,354		$	26,924		$	169,651
Assets (e)
Fine Jewelry (f)	$	1,119,679		$	1,103,142		$	1,055,755		$	1,036,080		$	1,022,790
Kiosk (g)		124,415			117,125			111,238			96,485			238,048
All Other		39,261			35,670			37,737			38,217			38,788
Unallocated		179,213			124,963			137,354			123,324			189,639
Total Assets	$	1,462,568		$	1,380,900		$	1,342,084		$	1,294,106		$	1,489,265
Capital Expenditures
Fine Jewelry	$	54,942		$	59,587		$	42,535		$	27,064		$	41,602
Kiosk		7,750			8,650			6,038			6,383			3,644
All Other		—			—			—			—			—
Unallocated		20,026			14,887			12,215			10,132			8,913
Total Capital	$	82,718		$	83,124		$	60,788		$	43,579		$	54,159

(a)	Includes $229.6, $198.3, $174.1, $150.4 and $147.5 million in fiscal years 2006, 2005, 2004, 2003, and 2002, respectively, related to foreign operations.
(b)	Includes $7.7 and $6.6 million in fiscal years 2006 and 2005, respectively, related to foreign operations. There were no foreign operations in the segment prior to fiscal year 2005.
(c)	Includes impairment of goodwill of $136.3 million in fiscal year 2003.
(d)	Fiscal year 2006 includes $36.7 million related to the special charge, $13.4 million benefit related to the settlement of certain retirement plan obligations, $12.1 million for executive severance, $5.3 million related to share-based compensation expense, and $2.4 million related to accrued percentage rent. Also, includes $70.9, $71.0, $65.9, $63.3, and $61.1 million in fiscal years 2006, 2005, 2004, 2003, and 2002, respectively, to offset internal carrying costs charged to the segments.
(e)	Assets allocated to segments include fixed assets, inventories and goodwill. Unallocated assets include cash, prepaid assets such as rent, corporate office improvements, and technology infrastructure.
(f)	Includes $28.8, $27.2, $23.2, $20.0, and $16.9 million of fixed assets in fiscal years 2006, 2005, 2004, 2003, and 2002, respectively, related to foreign operations.
(g)	Includes $466,000 and $390,000 of fixed assets in fiscal years 2006 and 2005, respectively, related to foreign operations. There were no foreign operations in the segment prior to fiscal year 2005.

NOTE: The segments are not organized based on product differences or geographic areas and, accordingly, it is not practicable to report revenues based on such organization.

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

     With respect to forward-looking statements made in this Management’s Discussion and Analysis of Financial Condition and Results of Operations see “Item 1A – Risk Factors.”

Executive Overview

     We are North America’s largest specialty retailer of fine jewelry. At July 31, 2006, we operated 1,456 specialty retail jewelry stores and 817 kiosks and 76 carts.

     During fiscal year 2006, there were significant changes in our management team. Effective January 31, 2006, President and Chief Executive Officer Mary L. Forté resigned and Mary E. Burton, a member of our Board of Directors, was appointed Acting Chief Executive Officer. Subsequently, Ms. Burton was permanently appointed as President and Chief Executive Officer. She remains as a director of the Company.

     Effective February 16, 2006, John Zimmermann was appointed President of Zale North America, responsible for the Zales Jewelers, Peoples Jewellers, Mappins Jewellers, and Peoples II brands. Mr. Zimmermann had formerly been President of Zale Canada which included the Peoples Jewellers and Mappins Jewellers brands.

     On March 23, 2006, Chief Operating Officer and Executive Vice President Sue E. Gove resigned.

     On May 5, 2006, Chief Financial Officer and Group Senior Vice President Mark Lenz was placed on administrative leave. This decision was made after discussions with our outside auditors concerning Mr. Lenz’s failure to timely disclose in conversations with the auditors that vendor payments scheduled to be made during the last two weeks of our fiscal year ended July 31, 2005 were delayed until the first week of August 2005. We believe that both cash and accounts payable were properly reflected on the balance sheet. Mr. Lenz’s employment ended on July 31, 2006 upon the expiration of his employment contract.

     On May 5, 2006, George R. Mihalko, Jr. was elected as a director of the Company and agreed to serve as Acting Chief Administrative Officer and Acting Chief Financial Officer.

     Rodney Carter was appointed Chief Financial Officer and Group Senior Vice President, effective October 16, 2006. Prior to joining the Company, Mr. Carter was the Senior Vice President and Chief Financial Officer of PETCO Animal Supplies, Inc., and prior to that position, was the Executive Vice President and Chief Financial Officer for CEC Entertainment, Inc.

     In making these executive changes, we reiterated our commitment to long-term growth through our core strategies of increasing market share, increasing margin through direct sourcing and internal production of diamond product and making investments in our people.

     On April 10, 2006, we announced that the SEC had initiated a non-public investigation into various accounting and other matters related to our business, including accounting for ESAs, leases and accrued payroll. Subpoenas issued in connection with the investigation requested materials relating to these accounting matters as well as to executive compensation and severance, earnings guidance, stock trading, and the timing of certain vendor payments. On September 21, 2006, the staff of the SEC notified us that the investigation of Zale Corporation had been terminated with no enforcement action being recommended.

     In the fourth quarter of fiscal year 2006, we recorded an after tax special charge primarily consisting of (1) $16.8 million to accelerate inventory markdowns on discontinued items, (2) $3.3 million related to the termination of an information technology initiative not consistent with the needs of our business, and (3) a $2.9 million asset impairment related to certain test stores. Separately, we recorded a $1.5 million after tax charge for accrued percentage rent related to prior periods and a $1.9 million tax charge primarily related to Canadian earnings.

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Other events for fiscal year 2006 include:

• Expanded internally purchased and assembled product for Zales Jewelers, Gordon’s Jewelers, Peoples Jewellers, and Zales the Diamond Store Outlet

• Implemented new Human Resources management solution, including payroll services solution

• Completed test/pilot of new point of sale system

• Closed 32 Bailey Banks & Biddle stores that did not fit the business model

Key Objectives for fiscal year 2007 include:

• Increase market share through improved assortment and execution in the Zales brand

• Improve margin by expanding direct sourcing of diamonds for the Zales brand as well as Peoples, Gordon’s, and Outlet

• Retain and attract key employees through competitive compensation, training, resources, and support

     Our business is divided into three business segments: Fine Jewelry, Kiosk Jewelry, and All Other.

     The Fine Jewelry segment operates under four business units and six primary brands, each targeted to reach a distinct customer as described below:

• Zales Jewelers (including zales.com), our national brand in the U.S., provides moderately priced jewelry to a broad range of customers

• Zales Outlet caters to the slightly higher-income female self purchaser in malls and neighborhood power centers

• Gordon’s Jewelers is a regional jeweler focusing on customer driven assortments

• Bailey Banks & Biddle Fine Jewelers (including baileybanksandbiddle.com) operates jewelry stores that are considered among the finest luxury jewelry stores in their markets, offering designer jewelry and prestige watches to attract more affluent customers

• Peoples Jewellers and Mappins Jewellers are two of the most recognized brand names in Canada, providing moderately priced jewelry to a wide variety of Canadian customers

     The Kiosk Jewelry segment reaches the opening price point select jewelry customer through mall-based kiosks operated primarily under the name Piercing Pagoda in the U.S., and carts primarily under the name Peoples II in Canada.

     See “Part I. Item 1. Business” for more detailed information regarding our business.

Results of Operations

     The following table sets forth certain financial information from our audited consolidated statements of operations expressed as a percentage of total 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, 2006
	2006			2005			2004
Total Revenues		100.0	%		100.0	%		100.0	%
Cost of Sales (a)		49.8			48.6			48.7
Selling, General and Administrative Expenses (b)		44.6			41.2			40.9
Cost of Insurance Operations		0.3			0.3			0.3
Depreciation and Amortization Expense		2.5			2.5			2.5
Benefit from Settlement of Retirement Benefit Obligation		(0.6	)		—			—
Derivatives (Gains)/Losses		0.1			—			—
Operating Earnings		3.3			7.4			7.6
Interest Expense, Net		0.4			0.3			0.3
Earnings Before Income Taxes		2.9			7.1			7.3
Income Taxes (c)		0.7			2.6			2.7
Net Earnings		2.2	%		4.5	%		4.6	%

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(a)	The cost of sales increase is primarily due to a special charge of 110 basis points related to the accelerated markdown of discontinued merchandise and a 10 basis points charge related to closing certain Bailey Banks & Biddle stores.
(b)	The increase in SG&A in fiscal year 2006 is primarily related to executive severance costs (50 basis points), Bailey Banks & Biddle store closings (120 basis points), adoption of SFAS 123(R) (20 basis points), termination of an IT initiative (20 basis points), and asset impairment charges (20 basis points), and incremental store operating costs.
(c)	Income taxes decreased in fiscal year 2006 primarily due to tax benefits related to the repatriation of Canadian revenues pursuant to the American Jobs Creation Act of 2004, and Canadian earnings.

     Bailey Banks & Biddle Store Closings. During the second quarter of fiscal year 2006, we closed 32 Bailey Banks & Biddle stores to improve performance and profitability. We incurred a total of $21.2 million or $0.43 per diluted share after taxes, related to the Bailey Banks & Biddle closings for fiscal year 2006.

     American Jobs Creation Act. On October 22, 2004, the American Jobs Creation Act (the “AJCA”) was signed into law. The AJCA includes, among other provisions, a special one-time deduction for 85 percent of certain foreign earnings that are repatriated to the U.S. from foreign operations, as defined in the AJCA. We have a Canadian subsidiary for which we elected to apply this provision to qualifying earnings repatriations in fiscal year 2006. In January 2006, we executed a Domestic Repatriation Plan under the provision and repatriated $47.6 million, realizing an income tax benefit of $11.9 million partially offset by a liability of $5.1 million related to management’s decision not to elect APB 23 for the fiscal year ending July 31, 2006. The net income tax benefit realized was $6.8 million, or $0.14 per diluted share for the fiscal year ended July 31, 2006.

Year Ended July 31, 2006 Compared to Year Ended July 31, 2005

     Total Revenues. Total revenues for fiscal year 2006 were $2.439 billion, an increase of approximately 2.3 percent over total revenues of $2.383 billion for the same period in the prior fiscal year. Total revenues include $24.3 million this year and $49.8 million last year from the 32 Bailey Banks & Biddle stores that we closed during the second quarter. Excluding these stores, total revenues were $2.415 billion, compared to $2.333 billion last year, an increase of 3.5 percent.

     Our comparable store sales increased approximately 1.6 percent in fiscal year 2006, compared to the prior fiscal year. Comparable store sales exclude amortization of ESAs and insurance premiums related to credit insurance policies sold to customers who purchase merchandise under our proprietary credit program, and include sales for those stores beginning 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 (hurricanes, etc.) are excluded from the calculation of comparable store sales.

     With the exception of the Piercing Pagoda and Zales Jewelers brands, all our brands achieved positive comparable store sales results. While the Zales brand had an overall decrease in comparable store sales, the brand did benefit from an improved assortment of diamond solitaires and diamond fashion categories during the fourth quarter of the fiscal year. In connection with this shift in assortment, the Zales brand increased inventory by approximately $24 million in fiscal year 2006, compared to the prior fiscal year. Piercing Pagoda continues to be impacted by a decline in sales of the Italian charms that have not been fully offset by increases in other categories.

     The Fine Jewelry segment contributed $2.149 billion of revenues in the fiscal year 2006, compared to $2.089 billion in fiscal year 2005, which represents an increase of 2.9 percent. Excluding the revenues from the closed Bailey Banks & Biddle stores, the Fine Jewelry segment contributed $2.125 billion and $2.039 billion in revenues for fiscal years 2006 and 2005, respectively, an increase of approximately 4.2 percent. In the Kiosk Jewelry segment, revenues decreased to $277 million from $281 million in fiscal year 2005, a decrease of 1.4 percent. All Other segment operations provided approximately $13.1 million in revenues compared to $12.9 million in fiscal year 2005, representing an increase of 1.6 percent from the prior year.

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     During fiscal year 2006, we opened 59 stores in the Fine Jewelry segment and 54 kiosks in the Kiosk Jewelry segment. In addition, we closed 67 stores in the Fine Jewelry segment, (including the 32 Bailey Banks & Biddle store closings), and 42 locations in the Kiosk Jewelry segment during the current period.

     Cost of Sales. Cost of sales includes cost of merchandise sold, as well as receiving and distribution costs. Cost of sales as a percentage of revenues was 49.8 percent for fiscal year 2006, an increase of 120 basis points over last fiscal year. The increase in cost of sales is primarily due to a special charge of 110 basis points intended to accelerate the sell-through of discontinued merchandise and an inventory charge of 10 basis points related to closing certain Bailey Banks & Biddle stores.

     We also experienced margin improvements driven by directly sourced goods of approximately 40 basis points and more productive use of trade-in product resulting in approximately 20 basis points improvement. These improvements were offset by increased promotions in the Bailey Banks & Biddle closed stores and the markdowns to sell through discontinued items in Zales.

     We recorded a LIFO charge of $5.8 million in fiscal year 2006 compared to $3.5 million in fiscal year 2005. We estimate that the portion of the special charge on approximately $90 million of inventory reduced the LIFO charge by approximately $2 million due to the liquidation of the inventory.

     Selling, General and Administrative Expenses. Included in selling, general and administrative expenses (“SG&A”) are store operating, advertising, buying and general corporate overhead expenses. SG&A increased 3.4 percentage points to 44.6 percent of revenues for the current fiscal year, from 41.2 percent of revenues for the prior year. The increase in SG&A of 340 basis points was primarily the result of Bailey Banks & Biddle store closing costs (120 basis points), executive severance (50 basis points), adoption of SFAS 123(R) (20 basis points), termination of an IT initiative that did not meet the needs of our business (20 basis points), asset impairment charges primarily related to certain test stores (20 basis points), and incremental store operating costs offset by a reduction in proprietary credit costs due to a shift to more profitable or less costly credit program offerings.

     Depreciation and Amortization Expense. Depreciation and Amortization Expense was $59.8 million in fiscal year 2006, or 2.5 percent of revenues, remaining flat to the prior fiscal year.

     Settlement of Retirement Plan Obligations. The settlement of certain retirement plan obligations resulted in a benefit of $13.4 million before taxes in fiscal year 2006.

     Derivatives (Gains)/Losses. We recognize all derivative instruments as either assets or liabilities in the statement of financial position measured at fair value. Any changes in the fair value of derivative instruments are reported in derivative (gains)/losses on the consolidated statements of operations. The fair market value of these instruments is subject to the changes in the underlying commodity. The (increase)/decrease in derivatives (gain)/loss is due to the (increase)/decrease in fair value of the derivative instruments. In fiscal year 2006, we recognized a loss before taxes in the amount of approximately $1.7 million, representing less than one percent of revenues.

     In connection with the audit of our financial statements, we determined that our forward contracts for the purchase of gold and silver to hedge fluctuations in inventory purchase costs did not meet the current interpretation of SFAS 133 for hedge treatment with regard to contemporaneous documentation of hedge effectiveness and effectiveness testing. Accordingly, all changes in the fair value of these instruments currently are recognized in our statement of operations, along with the related tax effects. Our failure to have in place a process for generating the documentation contemporaneously with the establishment of the derivative position was a material weakness in our internal control over financial reporting and our disclosure controls. Subsequent to the end of our most recent fiscal quarter, we implemented changes intended to remediate the material weakness discussed above.

     Interest Expense. Interest expense as a percent of revenues for the 2006 fiscal year was 0.5 percent compared to 0.3 percent in the prior fiscal year. The increase in interest expense was the result of an increase in the weighted average effective interest rate from 3.80 percent last year to 5.80 percent this year, and an increase in average borrowings under the Revolving Credit Agreement.

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     Income Taxes. The effective tax rate for the fiscal years ended July 31, 2006, and 2005 was 23.3 percent and 37.2 percent, respectively. The decrease in the effective tax rate was due to tax benefits associated with the repatriation under the American Jobs Creation Act (the “AJCA”) (described below), the tax rate on Canadian earnings, and the release of certain tax reserves upon resolution of certain state and local audits. Excluding the impact of the AJCA and the impact of Canadian changes on previously reserved items, the effective tax rate for fiscal year 2006 was 35.7 percent.

     On October 22, 2004, the AJCA was signed into law. The AJCA includes, among other provisions, a special one-time deduction for 85 percent of certain foreign earnings that are repatriated to the U.S. from foreign operations, as defined in the AJCA. We have a Canadian subsidiary for which we elected to apply this provision to qualifying earnings repatriations in fiscal year 2006. In January 2006, we executed a Domestic Repatriation Plan under the provision and repatriated $47.6 million, realizing an income tax benefit of $11.9 million partially offset by a liability of $5.1 million related to management’s decision not to elect APB 23 for the fiscal year ending July 31, 2006. The net income tax benefit realized was $6.8 million, or $0.14 per diluted share for the fiscal year ended July 31, 2006.

Year Ended July 31, 2005 Compared to Year Ended July 31, 2004

     Total Revenues. Total revenues for fiscal year 2005 were $2.383 billion, an increase of 3.4 percent over total revenues for the prior fiscal year. The overall increase in revenues during the fiscal year was partially offset by weaker revenues in the Holiday period. In addition, we estimate that revenues were adversely impacted by $6.5 to $7.0 million due to the hurricanes in Florida, Puerto Rico, and Alabama in August and September 2004.

     Our comparable store sales increased 0.3 percent for fiscal year 2005 as compared to the prior fiscal year. Comparable store sales exclude amortization of ESAs and include sales for those stores beginning 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.

     For the fiscal year 2005, all brands had flat to positive comparable store sales with the exception of the Zales brand, which had negative comparable sales primarily due to poor performance over the Holiday period.

     The Fine Jewelry brands contributed $2.089 billion of revenues in fiscal year 2005, compared to $2.022 billion in fiscal year 2004, which represented an increase of 3.3 percent. Total revenues included $281 million in the Kiosk Jewelry segment compared to $270 million in fiscal year 2004, an increase of 4.2 percent over the prior year, which was primarily due to the expansion of this segment into Canada. All Other segment operations provided $12.9 million in revenues, representing an increase of 2.7 percent from the prior fiscal year.

     During fiscal year 2005, we opened 61 stores and closed 33 stores in the Fine Jewelry segment and opened 121 kiosks and carts and closed 38 kiosks and carts in the Kiosk Jewelry segment.

     Cost of Sales. Cost of sales includes cost of merchandise sold, as well as receiving and distribution costs. Cost of sales as a percentage of revenues was 48.6 percent for fiscal year 2005, a decrease of 0.1 percentage points over the prior fiscal year. Approximately 0.4 percent of the increase was driven by our direct sourcing initiatives, which lowered costs on merchandise produced internally or purchased directly from factories, and 0.3 percent resulted from a higher mix of ESA sales, which have favorable costs as a percent of revenue. These improvements were partially offset by a product mix shift to lower margin merchandise and higher clearance markdowns.

     Our LIFO inventory charge was $3.5 million and $2.3 million for the fiscal years ended July 31, 2005 and 2004, respectively.

     Selling General and Administrative Expenses. Included in SG&A are store operating, advertising, buying and general corporate overhead expenses. SG&A increased 0.3 percentage points to 41.2 percent of revenues in fiscal year 2005, from 40.9 percent of revenues for fiscal year 2004.

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     Store operating expenses were approximately 1.0 percentage points higher as a percent of revenues, principally a result of higher fixed occupancy expense as a rate of sales due to the under-performance of the Zales Jewelers brand and sales lost to the hurricanes in the first two months of fiscal year 2005. Advertising expenditures also increased by 0.3 percent of sales due to our continued investments in marketing. The increase in store operating expenses was partially offset by a reduction in proprietary credit expenses of approximately 0.7 percentage points due to a change in the mix of our credit programs.

     Depreciation and Amortization Expense. Depreciation and Amortization Expense was $59.8 million in fiscal year 2005, an increase of 6.1 percent over fiscal year 2004, primarily due to investments in new store growth and IT systems.

     Income Taxes. The effective tax rate for the fiscal years ended July 31, 2005 and 2004 was 37.2 percent and 36.9 percent, respectively. The increase in the effective tax rate was primarily due to an increase in various state effective tax rates.

Liquidity and Capital Resources

     Our cash requirements consist primarily of funding inventory growth, capital expenditures for new store growth, renovations of the existing store portfolio, and upgrades to our management information systems and distribution facilities and debt service. As of July 31, 2006, we had cash and cash equivalents of $42.6 million.

     The retail jewelry business is highly seasonal, with a significant proportion of sales and operating income being generated in November and December of each year. Approximately 41 percent of our annual revenues were generated during the three months ended January 31, 2006 and January 31, 2005, respectively, which includes the Holiday selling season.

     Our working capital requirements fluctuate during the year, historically increasing substantially (up to $300 million) during the fall season as a result of higher planned seasonal inventory levels in preparation for Holiday. Primarily as a result of the repositioning of inventory in the Zales brand, we expect inventory to fluctuate to higher levels than in prior years through the fall of calendar year 2006.

     The increase in long-term debt compared to July 31, 2005 is partially due to the timing of certain income tax payments which in the past had been made in subsequent periods, cash outflows associated with the Bailey Banks & Biddle store closings, and an increase in the share repurchase program and operating earnings. Borrowings on long-term debt reached a maximum of $315 million in fiscal year 2006.

     In July 2005, we deferred vendor payments of approximately $8.2 million related to domestic operations and approximately $1.5 million related to international operations into August 2005. This effectively shifted net cash outflows of $9.7 million from fiscal year 2005 to fiscal year 2006, thereby increasing net cash flows provided by operating activities for fiscal year 2005 with a commensurate decrease for fiscal year 2006.

Cash Flow Activities

     Net cash provided by operating activities was $79.8 million and $168.3 million for fiscal years 2006 and 2005, respectively. In fiscal year 2006, the decrease in cash provided by operating activities was primarily attributable to the increase in inventory by $70.5 million excluding the impact of inventory write-downs of approximately $26.9 million. At July 31, 2006, owned inventory was approximately $50 million higher than at July 31, 2005 primarily due to an increase in directly sourced product for the Fine Jewelry segment which results in earlier receipt of raw materials than finished goods, and increased assortments resulting from the repositioning of the Zales brand.

     Net cash used in investing activities was $81.6 million in fiscal year 2006, related to capital expenditures of $82.7 million for new store openings, renovations and refurbishments and net purchases of investments. The increase in capital expenditures from the prior year is primarily due to investments in new store growth and IT system infrastructure. Net cash used in investing activities in fiscal year 2005 was $78.2 million primarily related to capital expenses for new store openings, renovations and refurbishments.

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     Net cash used in financing activities was $12.9 million in fiscal year 2006, primarily related to the repurchase of 3.7 million shares of our common stock, and net borrowings of $73.0 million under the Revolving Credit Agreement (see “Finance Arrangements” herein). Net cash used in financing activities was $100 million in fiscal year 2005, primarily related to the repurchase of approximately 1.8 million shares of common stock, and net payments of $67.7 million in borrowings under the Revolving Credit Agreement.

Finance Arrangements

     Revolving Credit Agreement. We have a U.S. revolving credit facility (the “Revolving Credit Agreement”) that provides us up to $500 million in commitments by a group of lenders, including a $20 million sublimit for letters of credit. The Revolving Credit Agreement is primarily secured by our U.S. merchandise inventory. On January 17, 2006, we amended the Revolving Credit Agreement to allow certain U.S. affiliates to guarantee up to CAD $40 million for a revolving credit agreement in the name of Zale Canada Co., to guarantee up to $20 million for other subsidiaries, and to increase the Administrative Agent’s flexibility in waiving annual audits and inventory appraisals based on our performance under the Revolving Credit Agreement. The amendment extends the terms of the Revolving Credit Agreement through August 11, 2009.

     The loans made under the Revolving Credit Agreement bear interest at a floating rate at either (i) the applicable LIBOR (as defined in the Revolving Credit Agreement) plus the applicable margin, or (ii) the Base Rate (as defined in the Revolving Credit Agreement) plus the applicable margin. The margin applicable to LIBOR based loans and standby letter of credit commission rates will be automatically reduced or increased from time to time based upon excess borrowing availability under the Revolving Credit Agreement. We pay a quarterly commitment fee of 0.25 percent on the preceding month’s unused commitment. We and our subsidiaries may repay the revolving credit loans outstanding under the Revolving Credit Agreement at any time without penalty prior to the maturity date. For the year ended July 31, 2006, the weighted average effective interest rate was 5.80 percent as compared to 3.80 percent for the year ended July 31, 2005. The applicable margin for LIBOR based loans was 1.25 percent at July 31, 2006 and 2005; and the applicable margin for Base Rate loans was zero percent at July 31, 2006 and 2005. At July 31, 2006 and 2005, $186.1 and $129.8 million, respectively, were outstanding under the Revolving Credit Agreement. Based on the terms of the Revolving Credit Agreement, we had approximately $313.9 million and $370.2 million in available borrowings at July 31, 2006, and July 31, 2005, respectively. The maximum amount outstanding under the Revolving Credit Agreement during fiscal year 2006 was $315.0 million and during fiscal year 2005 was $327.9 million.

     At any time, if remaining borrowing availability under the Revolving Credit Agreement falls below $75 million, we will be restricted in our ability to repurchase stock or pay dividends. If remaining borrowing availability falls below $50 million, we will be required to meet a minimum fixed charge coverage ratio. The Revolving Credit Agreement requires us to comply with certain restrictive covenants including, among other things, limitations on indebtedness, investments, liens, acquisitions, and asset sales. We are currently in compliance with all of our obligations under the Revolving Credit Agreement.

     Zale Canada Co. entered into a revolving credit agreement (the “Canadian Revolving Credit Agreement”) on January 17, 2006 with a maturity date of August 11, 2009. The Canadian Revolving Credit Agreement provides us up to CAD $30 million in commitments by Bank of America (acting through its Canadian branch). The Canadian Revolving Credit Agreement is secured by a guaranty from certain U.S. affiliates.

     The loans made under the Canadian Revolving Credit Agreement bear interest at a floating rate at either (i) the applicable BA rate (as defined in the Canadian Revolving Credit Agreement) plus the applicable margin, or (ii) the Base Rate (as defined in the Canadian Revolving Credit Agreement) plus the applicable margin. The margin applicable to BA based loans is equivalent to the margin for LIBOR based loans as defined in the Revolving Credit Agreement. Zale Canada Co. pays a quarterly commitment fee of 0.25 percent on the preceding month’s unused commitment. Zale Canada Co. may repay the revolving credit loans outstanding under the Canadian Revolving Credit Agreement at any time without penalty prior to the maturity date. At July 31, 2006, CAD $18.9 million was outstanding under the Canadian Revolving Credit Agreement. For the year ended July 31, 2006, the weighted average effective interest rate was 5.49 percent. The applicable margin for BA based loans was 1.25 percent at July 31, 2006, and the applicable

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margin for Base Rate loans was zero percent at July 31, 2006. Based on the terms of the Canadian Revolving Credit Agreement, we had approximately CAD $11.1 million in available borrowings at July 31, 2006.

Capital Growth

     During the fiscal year ended July 31, 2006, we invested $82.7 million of capital expenditures with approximately $54.9 million attributed to our Fine Jewelry segment to open 59 stores and to renovate, relocate or refurbish other locations. In addition, another $7.8 million of capital expenditures were invested in the Kiosk Jewelry segment to open 54 kiosks and carts, and to renovate, relocate or refurbish other locations during fiscal year 2006; we anticipate investing approximately $87.2 million of capital expenditures during fiscal year 2007.

Other Activities Affecting Liquidity

     Stock Repurchase Plan. On August 30, 2005, we announced that our Board of Directors had approved a stock repurchase program pursuant to which we, from time to time, at management’s discretion and in accordance with our usual policies and applicable securities laws, could purchase up to an additional $100 million of our common stock, par value $.01 per share (“common stock”). As of January 31, 2006, we had repurchased 3.7 million shares of common stock at an aggregate cost of approximately $100 million, which completed the Board’s authorization under the fiscal year 2006 program.

     We believe fiscal year 2007 is a year of repositioning our flagship brand, Zales Jewelers. As a result, we intend to use capital resources to invest in new inventory assortments as we reduce discontinued merchandise. However, we may elect, during fiscal year 2007, to repurchase additional shares of our common stock.

     Off-Balance Sheet Arrangements. Citibank U.S.A., N.A. (“Citi”), a subsidiary of CitiGroup, provides financing to our customers through our private label credit card program in exchange for payment by us of a merchant fee (subject to periodic adjustment) based on a percentage of each credit card sale. The receivables established through the issuance of credit by Citi are originated and owned by Citi. Losses related to a “standard credit account” (an account within the credit limit approved under the original merchant agreement between us and Citi) are assumed entirely by Citi without recourse to us, except where a Company employee violates the credit procedures agreed to in the merchant agreement.

     In an effort to better service customers, we and Citi developed a program that extends credit to qualifying customers above the approved credit amount (the “Shared Risk Program”). The extension of incremental credit is at our discretion to accommodate larger sales transactions. We bear the responsibility of customer default losses related to the Shared Risk Program, as defined in the agreement with Citi.

     Under the Shared Risk Program, we incurred approximately $107,000 in losses for fiscal year 2006, compared to $28,000 in losses for the prior fiscal year, and believe that future losses will not have a material impact on our financial position or results of operations.

     Net Operating Losses. Future liquidity will be enhanced to the extent that we are able to realize the cash benefit from utilization of our past Net Operating Losses (“NOL”) carried forward against current and future tax liabilities. The cash benefit realized from NOLs in fiscal year 2006 was approximately $6.8 million. As of July 31, 2006, we had NOLs (after limitations) of $40.0 million, which represents up to $14.0 million in future tax benefits. The utilization of this asset is subject to limitations. The most restrictive limitation is the Internal Revenue Code Section 382 annual limitation of $19.5 million. The NOL can be utilized through fiscal year 2008.

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     Contractual Obligations. Aggregate information about our contractual obligations as of July 31, 2006 is presented in the following table.

	Payments Due by Period
Contractual Cash Obligations			Less than 1						More than 5
($ in millions) (f, g)	Total		Year		1 - 3 Years		4 - 5 Years		Years		Other
Long-Term Debt (a)	$	203	$	—	$	203	$	—	$	—		—
Operating Leases (b)		1,026		198		318		228		282		—
Operation Services Agreement (c)		26		5		13		8		—		—
Severance (d)		12		12		—		—		—		—
Other Long-Term Liabilities (e)		8		—		—		—		—		8
Total	$	1,275	$	215	$	534	$	236	$	282		8

(a)	Long-term debt relates to principal payments due under our Revolving Credit Agreement. This amount does not reflect any interest, which would be based on the current effective rate, which was 6.47 percent at July 31, 2006 and assuming no prepayments.
(b)	Operating lease obligations relate to minimum payments due under store lease agreements. Most of the store operating leases provide for the payment of base rentals plus real estate taxes, insurance, common area maintenance fees and merchant association dues. For fiscal year 2006, these costs represented approximately 20 percent of fixed rent payments. (See “Notes to Consolidated Financial Statements-Lease Commitments” for further discussion).
(c)	We have an operations services agreement with a third party for the management of our mainframe processing operations, client server systems, Local Area Network operations, Wide Area Network management and e-commerce hosting. The current agreement is effective August 1, 2005 (see “Notes to Consolidated Financial Statements – Commitments and Contingencies” for further discussion).
(d)	Executive Severance reflects the contractual cash and equities obligations primarily resulting from the resignation of the Chief Executive Officer ($8.5 million) and the Chief Operating Officer ($3.6 million).
(e)	Other long-term liabilities reflect loss reserves related to credit insurance. We have reflected these payments under “Other,” as the timing of these future payments is dependent on the actual processing of the claims.
(f)	Not included in the above table is the long-term portion ($12.5 million) of the incentive payment received from Citi Commerce Solutions of $41.8 million. The incentive is amortized over the life of the contract and is included in long-term liabilities on the accompanying Consolidated Balance Sheet but does not impact cash payments in future periods. (See “Notes to Consolidated Financial Statements-Deferred Credit” for further discussion).
(g)	Not included in the table above as purchase obligations are our obligations under employment agreements and ordinary course purchase orders for merchandise and obligations, including certain merchandise on memo for which we may have a contingent liability to purchase certain items if they do not sell through.

New Accounting Pronouncement

     FASB Interpretation No. 48. The Financial Accounting Standards Board (“FASB”) released Interpretation 48, “Accounting for Uncertainty in Income Taxes,” in June 2006. Interpretation 48 supplements FASB Statement 109, “Accounting for Income Taxes,” by defining the threshold for recognizing the benefits of tax positions in the financial statements. Interpretation 48 is effective for fiscal years beginning after December 15, 2006. Therefore, we will adopt Interpretation 48 for fiscal year ending July 31, 2008. At adoption, our financial statements will be adjusted to reflect those positions that are more-likely-than-not to be sustained at the adoption date. We will record any necessary adjustments directly to retained earnings on August 1, 2007 as a change in accounting principle. Over the next fiscal year, we will begin the process of reassessing our worldwide historical tax positions in order to apply Interpretation 48. At this time, we do not anticipate this will result in a material adjustment to our results of operations, balance sheet or cashflows.

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Inflation

     In management’s opinion, changes in net revenues, net earnings, and inventory valuation that have resulted from inflation and increasing costs have not been material during the periods presented. The trends in inflation rates pertaining to merchandise inventories, especially as they relate to gold and diamond costs, are primary components in determining our last-in, first-out (“LIFO”) inventory. Current market trends indicate rising diamond prices. If such trends continue, our LIFO provision could be impacted. We currently hedge a portion of our gold and silver purchases through forward contracts. Inflation may materially affect us in the future.

Critical Accounting Policies and 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 policies 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, merchandise inventory valuation, goodwill and long lived asset valuation, LIFO inventory retail method, legal liability, credit insurance liability, product warranty, depreciation, employee benefits, workers’ compensation, tax, and contingencies. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

     Management believes the following accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

     Merchandise Inventories. Merchandise inventories are stated at the lower of cost or market. Substantially all U.S. inventories represent finished goods which are valued using the LIFO retail inventory method. Merchandise inventory of Peoples Jewellers and Mappins Jewellers of Canada is valued using the first-in, first-out (“FIFO”) retail inventory method. Under the retail method, inventory is segregated into categories of merchandise with similar characteristics at its current average retail selling value. The determination of inventory at cost and the resulting gross margins are calculated by applying an average cost-to-retail ratio to the retail value of inventory. At the end of fiscal year 2006, approximately seven percent of our total inventory represented raw materials and other inventory associated with internally sourced product. This inventory is valued at the weighted average cost of the items.

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

     We also reduce our inventory valuation for discontinued, slow-moving and damaged inventory. This write-down of inventory is equal to the difference between the cost of inventory and its estimated market value based upon assumptions of targeted inventory turn rates, future demand, management strategy, and market conditions. If actual market conditions are less favorable than those projected by management or 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. For example, in fiscal year 2006, we recorded inventory write-downs of $27 million resulting from the decision to accelerate the clearance of previously discontinued merchandise assortments and $6 million to the closure of Bailey Banks & Biddle stores.

     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

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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.

     Long-lived Assets and Goodwill. Long-lived assets are periodically reviewed for impairment by comparing the carrying value of the assets with their estimated undiscounted future cashflows. 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.

     In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” 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. An impairment is deemed to exist if the estimated fair value is less than the net book value of a reporting unit. We calculate estimated fair value using the present value of future cash flows expected to be generated using a weighted average cost of capital and updated financial projections. Based upon the amounts currently recorded as goodwill, recent performance and estimated projections, we believe the likelihood of additional impairment would not be material. However, a significant change in the related brand’s performance, such as the closing of a majority of the brand’s stores, could result in additional impairment. In the second quarter of fiscal year 2006, we performed our annual review for impairment of goodwill related to our Piercing Pagoda Inc., People’s Jewellers and other smaller acquisitions. We concluded that there was no evidence of impairment related to the goodwill of approximately $19.4 million for our Piercing Pagoda acquisition, $71.9 million recorded for the People’s Jewellers acquisition and $5.0 million for other smaller acquisitions.

     Revenue Recognition. We recognize revenue in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 “Revenue Recognition.” Revenue related to merchandise sales, which is approximately 94 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. Total revenues include two warranty programs: ESAs that cover sizing and breakage for a two-year period on certain products purchased from us, and sales from a diamond commitment program (“DCP”) that offers a traditional warranty to cover sizing and breakage for a 12-month period, as well as theft replacement coverage for the same 12-month period. The revenues from these agreements are recognized over the service period at the rates the related costs are expected to be incurred in performing covered services under the agreements. Any significant change in the proportion of costs expected to be incurred in performing services under the agreements could result in a change in the amount of revenue recognized. For instance, a five percent change on an annual basis in the timing of services under these agreements could result in a five percent change in the revenue recognized. Revenues also include premiums from our insurance businesses, principally related to credit insurance policies sold to customers who purchase our merchandise under the proprietary credit program. Insurance premiums are recognized over the coverage period.

     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.

     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. We believe that as of July 31, 2006, the realization of our gross deferred tax assets is more likely than not and thus there was no valuation reserve recorded.

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Other Matters

     SEC Investigation. On April 10, 2006, we announced that the SEC had initiated a non-public investigation into various accounting and other matters related to our business, including accounting for ESAs, leases and accrued payroll. Subpoenas issued in connection with the investigation requested materials relating to these accounting matters as well as to executive compensation and severance, earnings guidance, stock trading, and the timing of certain vendor payments. On September 21, 2006, the staff of the SEC notified us that the investigation of Zale Corporation had been terminated with no enforcement action being recommended.

     Securities and ERISA Litigation. We are named as a defendant in six lawsuits arising, in general, from the matters that the SEC was investigating as described above. The lawsuits are: (a) Levy v. Zale Corp., No. 1:06-CV-05464, filed July 19, 2006, U.S. District Court for the Southern District of New York, (b) Agoos v. Zale Corp., No. 1:06-CV-5877, filed August 3, 2006, U.S. District Court for the Southern District of New York, (c) Pipefitters Local No. 636 Defined Benefit Plan v. Zale Corp., No. 3:06-CV-1470, filed August 15, 2006, U.S. District Court for the Northern District of Texas, (d) Chester v. Zale Corp., No. 1:06-CV-06387, filed August 23, 2006, U.S. District Court for the Southern District of New York, (e) Salvato v. Zale Corp., No. 3-06 CV 1124-D, filed June 26, 2006, U.S. District Court for the Northern District of Texas, and (f) Connell v. Zale Corp., No. 06 CV 5995, filed August 7, 2006, U.S. District Court for the Southern District of New York. Mary L. Forté, Mark R. Lenz, and Sue E. Gove are named as defendants in all six lawsuits. Cynthia T. Gordon is also named as a defendant in the Levy, Agoos, and Chester lawsuits. Richard C. Marcus, J. Glen Adams, Mary E. Burton, John B. Lowe, Jr., Thomas C. Shull, David M. Szymanski, and the Zale Plan Committee also are named as defendants in the Salvato and Connell lawsuits.

     All six lawsuits are purported class actions. In the Levy, Agoos, Pipefitters and Chester lawsuits the plaintiffs allege various violations of securities laws based upon our public disclosures. In the Salvato and Connell lawsuits the plaintiffs allege various violations of the Employee Retirement Income Security Act of 1974 (“ERISA”) based upon the investment by the Zale Corporation Savings and Investment Plan in Company stock. The plaintiffs in all six lawsuits request unspecified compensatory damages and costs and, in the Salvato and Connell lawsuits, injunctive relief and attorneys’ fees. All six lawsuits are in preliminary stages. We intend to vigorously contest all six lawsuits.

     Executive Changes. Effective January 31, 2006, President and Chief Executive Officer Mary L. Forté resigned and Mary E. Burton, a member of our Board of Directors, was appointed Acting Chief Executive Officer. Subsequently, Ms. Burton was permanently appointed as President and Chief Executive Officer. She remains as a director of the Company.

     Effective February 16, 2006, John Zimmermann was appointed President of Zale North America, responsible for the Zales Jewelers, Peoples Jewellers, Mappins Jewellers, and Peoples II brands. Mr. Zimmermann had formerly been President of Zale Canada which included the Peoples Jewellers and Mappins Jewellers brands.

     On March 23, 2006, Chief Operating Officer and Executive Vice President Sue E. Gove resigned.

     On May 5, 2006, Chief Financial Officer and Group Senior Vice President Mark Lenz was placed on administrative leave. This decision was made after discussions with our outside auditors concerning Mr. Lenz’s failure to timely disclose in conversations with the auditors that vendor payments scheduled to be made during the last two weeks of our fiscal year ended July 31, 2005 were delayed until the first week of August 2005. We believe that both cash and accounts payable were properly reflected on the balance sheet. Mr. Lenz’s employment ended on July 31, 2006 upon the expiration of his employment contract.

     On May 5, 2006, George R. Mihalko, Jr. was elected as a director of the Company and agreed to serve as Acting Chief Administrative Officer and Acting Chief Financial Officer.

     Rodney Carter was appointed Chief Financial Officer and Group Senior Vice President, effective October 16, 2006. Prior to joining the Company, Mr. Carter was the Senior Vice President and Chief Financial Officer of PETCO Animal Supplies, Inc., and prior to that position, was the Executive Vice President and Chief Financial Officer for CEC Entertainment, Inc.

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     Special Charge. In the fourth quarter of fiscal year 2006, we recorded an after tax special charge primarily consisting of (1) $16.8 million to accelerate inventory markdowns on discontinued items, (2) $3.3 million related to the termination of an information technology initiative not consistent with needs of the business, and (3) a $2.9 million asset impairment related to certain test stores. Separately, we recorded a $1.5 million after tax charge for accrued percentage rent related to prior periods and a $1.9 million tax charge primarily related to Canadian earnings.

     Bailey Banks & Biddle Store Closings. During the second quarter of fiscal year 2006, we closed 32 Bailey Banks & Biddle stores to improve performance and profitability. We incurred a total of $21.2 million or $0.43 per diluted share after taxes, related to the Bailey Banks & Biddle closings for fiscal year 2006.

     American Jobs Creation Act. On October 22, 2004, the American Jobs Creation Act (the “AJCA”) was signed into law. The AJCA includes, among other provisions, a special one-time deduction for 85 percent of certain foreign earnings that are repatriated to the U.S. from foreign operations, as defined in the AJCA. We have a Canadian subsidiary for which we elected to apply this provision to qualifying earnings repatriations in fiscal year 2006. In January 2006, we executed a Domestic Repatriation Plan under the provision and repatriated $47.6 million, realizing an income tax benefit of $11.9 million partially offset by a liability of $5.1 million related to management’s decision not to elect APB 23 for the fiscal year ending July 31, 2006. The net income tax benefit realized was $6.8 million, or $0.14 per diluted share for the fiscal year ended July 31, 2006.

     Texas Margin Tax. In May 2006, the Texas legislature enacted a new law that changes the present Texas franchise tax system and replaces it with a new tax system, the Texas margin tax. The Texas margin tax is a significant change because it generally makes all legal entities subject to tax, including general and limited partnerships, while the current franchise tax system applies only to corporations and limited liability companies. We conduct a portion of our operations through Texas limited partnerships and will become subject to the new Texas margin tax. We will comply with the Texas margin tax effective January 1, 2008. The computation of the tax liability will be based on revenues as of July 31, 2007, as reduced by certain deductions.

     In accordance with the provisions of SFAS 109, which require that deferred tax assets and liabilities be adjusted for the effects of new income tax legislation in the period of enactment, we estimated the net charge to deferred tax expense is immaterial. The estimate is based on the Texas margin tax law in its current form.

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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. In seeking to minimize the risks from interest rate fluctuations, we manage exposures through our regular operating and financing activities. We do not use derivative financial instruments for trading or other speculative purposes and are not party to any leveraged financial instruments.

     We are exposed to interest rate risk primarily through our borrowing activities, which are described under “Long-term Debt” in the Notes to the Consolidated Financial Statements.

     The investments of our insurance subsidiaries, primarily stocks and bonds, had an approximate market value at July 31, 2006 of $22 million.

     Based on our market risk-sensitive instruments (including variable rate debt) outstanding at July 31, 2006, we have determined that there was no material market risk exposure to our consolidated financial position, results of operations or cash flows as of such date.

     Commodity Risk. We principally address commodity risk through retail price point adjustments and commodity price hedging.

     While commodity risk exposure to diamond price fluctuation is not currently hedged by financial instruments, we do enter into forward contracts for the purchase of gold and silver in order to reduce the effects of fluctuating costs of these commodities. We generally hedge certain planned inventory purchases covering a designated period of no longer than twelve months and amounts consistent with our identified exposure. The purpose of the hedging activities is to minimize the effect of unknown future commodity price movements on planned cash flows and to enable us to maintain a consistent and predictable pricing strategy. All forward contracts are currently with four financial institutions rated as investment grade by a major rating agency. No fees or up front payments are required when using these commodity forwards. These contracts settle on a net basis.

     We currently account for these forward contracts as undesignated derivative instruments. Accounting for our forward contracts as derivatives instead of hedges does not affect the underlying economics of our risk management strategies and has no impact on the timing or amount of cash flows under any derivative contract. The fair value of our derivative instruments is included in the consolidated balance sheets. These fair values are obtained from outside counterparties and verified with internal discounted cash flow models. During the term of the contracts, any changes in the fair value of derivative instruments are reported in derivative (gains)/losses on the consolidated statements of operations. The fair market value of these instruments is subject to the changes in the value of the underlying commodity. In the year ended July 31, 2006, gold fluctuated significantly, between a low of $432 per ounce to a high of $715 per ounce. At July 31, 2006, the price of gold was $637 per ounce. Based on our outstanding contracts as of July 31, 2006, we would record a derivatives gain before taxes of approximately $15 million if gold prices increase to the 2006 high (a 12 percent increase from the July 31, 2006 price). In turn, if gold prices were to decrease to the 2006 low (a 32 percent decrease from the July 31, 2006 price), we would record a derivatives loss before taxes of approximately $45 million.

     At July 31, 2006, the mark-to-market value of our outstanding forward contracts was a net loss before taxes of $1.3 million. As of October 9, 2006, the market price of gold had decreased to $577 per ounce. Based on our contracts outstanding as of July 31, 2006, such a decrease would result in a derivatives loss before taxes of approximately $15 million. While we realize a gain or loss on the derivative contract, we typically see a compensating gain or loss in the purchase cost of our products.

     We have classified cash activity associated with derivatives as an operating activity in the consolidated statements of cash flows.

     For additional information related to forward contracts, see “Notes to Consolidated Financial Statements — Derivative Financial Instruments.”

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     Foreign Currency Contracts. We are not subject to substantial currency fluctuations because most of our purchases are U.S. dollar-denominated. However, as a result of our Canadian operations, we are exposed to market risk from currency exchange rate exposure which may adversely affect our financial position, results of operations and cash flows. In seeking to minimize this risk, we manage exposures through foreign currency exchange contracts.

     In past fiscal years, we entered into foreign currency forward exchange contracts to reduce the effects of fluctuating currency exchange rates. We enter into forward currency exchange contracts with terms that are no longer than twelve months. These contracts are used to hedge certain forecasted inventory, advertising, and purchases relating to real estate activities anticipated to be incurred each fiscal year, denominated in foreign currencies for periods and amounts consistent with our identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on cash flows. When utilized, all foreign currency forward exchange contracts are denominated in Canadian dollars and are with financial institutions rated as investment grade by a major rating agency. No fees or up front payments are required when using these foreign currency forward exchange contracts. In fiscal year 2006, we did not enter into any foreign currency forward exchange contracts.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following Consolidated Financial Statements and supplementary data are included as pages F-1 through F-32 at the end of this Annual Report on Form 10-K:

	Page
Index	Number
Management’s Report on Internal Control Over Financial Reporting	F-2
Report of Independent Registered Public Accounting Firm	F-3
Report of Independent Registered Public Accounting Firm	F-5
Consolidated Statements of Operations	F-6
Consolidated Balance Sheets	F-7
Consolidated Statements of Cash Flows	F-8
Consolidated Statements of Stockholders’ Investment	F-9
Notes to Consolidated Financial Statements	F-11

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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. On October 5, 2006, management concluded that the Company did not maintain effective policies and procedures to ensure the accounting for certain derivative financial instruments were in accordance with FAS 133 as more fully described in “Management’s Report on Internal Control Over Financial Reporting” referred to below. Solely as a result of this material weakness, management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure and procedures were not effective as of July 31, 2006. However, the consolidated financial statements, contained in this Form 10-K, are fairly presented in conformity with the U.S. generally accepted accounting principles.

Internal Control Over Financial Reporting

     Our Management’s Report on Internal Control Over Financial Reporting is included on page F-2 of this Annual Report on Form 10-K. The report of KPMG LLP, our independent registered public accounting firm, regarding management’s assessment of our internal control over financial reporting and the effectiveness of our internal control over financial reporting is included on page F-3 of this Annual Report on Form 10-K.

     There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, subsequent to the end of our most recent fiscal quarter, we implemented changes intended to remediate the material weakness discussed above.

ITEM 9B. OTHER INFORMATION

Summary of Mary E. Burton Employment Agreement

     On October 12, 2006, the Company entered into an employment agreement with Mary E. Burton effective July 24, 2006, with respect to her employment as President and Chief Executive Officer of the Company. The agreement has a one-year term that automatically renews unless the Company or Ms. Burton elects otherwise 90 days prior to the end of the initial one-year term or any renewal term.

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     Ms. Burton will be paid an annual base salary of not less than $850,000, subject to annual review and potential increase by the Company’s Compensation Committee. She will be eligible to receive an annual incentive bonus with a target bonus equal to 125 percent of her base salary. For the fiscal year ending July 31, 2007 (“Fiscal Year 2007), she will be entitled to a bonus not less than her full target bonus (the “FY 2007 Bonus”). In addition, Ms. Burton has been granted 25,000 restricted stock units that cliff vest at the end of a three-year period, 25,000 restricted stock units that vest based on the Company’s achievement of financial goals for the performance period ending July 31, 2009, and an option to purchase 125,000 shares of Common Stock.

     In the event Ms. Burton’s employment is terminated other than for “cause” or Ms. Burton terminates her employment for a “termination reason” (both as defined in the employment agreement), the Company will pay Ms. Burton an amount equal to the sum of two times her annual base salary as of the date of termination, plus two times the average of her earned annual incentive bonus in the three fiscal year periods prior to the year of termination (or a shorter period if the agreement has been in effect for less than three years on the date of termination), all payable in equal installments for a period of 24 months. For purposes of calculating the bonus portion of Ms. Burton’s severance payment, the Company will ignore the FY 2007 Bonus and will instead utilize an amount equal to the actual bonus Ms. Burton would have earned in Fiscal Year 2007 absent such provision. The Company will continue group health insurance and certain other benefits for a period of 24 months. The payment of such amounts will be subject to and comply with the requirements of section 409A of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) as enacted by the AJCA. If, despite such compliance, Ms. Burton is required to pay additional tax, interest, or penalties under Section 409A of the Internal Revenue Code, Ms. Burton will receive a gross-up payment designed to reimburse her for those amounts. Upon such termination of Ms. Burton’s employment, all unvested restricted stock units and stock options will terminate and all vested stock options will remain exercisable for a 90-day period.

     If the Company terminates Ms. Burton’s employment (other than for cause) within two years following a “change of control” of the Company, or if Ms. Burton terminates her employment during that period for “good reason” (both as defined in the employment agreement): (1) the Company will pay Ms. Burton an amount equal to three times the sum of her annual base salary and target bonus for the fiscal year in which the termination occurs and (2) during the 36-month period following termination, the Company will provide Ms. Burton with group health insurance and certain other benefits. All equity compensation will immediately vest and all stock options will remain exercisable for a 90-day period after termination, unless any of those options expire earlier under their own terms. In addition, Ms. Burton will receive a gross-up payment designed to reimburse her for any “parachute” tax imposed under Internal Revenue Code Section 280G. Any change of control payments made under the agreement are also subject to and will comply with the requirements of Section 409A of the Internal Revenue Code as enacted by the AJCA. If, despite such compliance, Ms. Burton is required to pay additional tax, interest, or penalties under Section 409A of the Internal Revenue Code, Ms. Burton will receive a gross-up payment designed to reimburse her for those amounts.

Summary of Frank C. Mroczka Employment Agreement

     On August 1, 2006, the Company entered into an employment agreement with Mr. Mroczka with a term that continues through July 31, 2007. Under the employment agreement, Mr. Mroczka is entitled to an annual base salary of not less than $300,000. Mr. Mroczka is eligible to receive an annual incentive bonus with a target bonus equal to 45 percent of his annual base salary in accordance with the terms and conditions of the Company’s executive bonus program.

     In the event Mr. Mroczka’s employment is terminated other than for “cause” or Mr. Mroczka terminates his employment for a “termination reason” (both as defined in the employment agreement: (1) the Company will continue to pay Mr. Mroczka’s base salary for the greater of the remainder of the term of the employment agreement or the period for which Mr. Mroczka would be entitled to severance under the Company’s severance policy; and (2) for a period of up to 12 months the Company will provide Mr. Mroczka with group health insurance and certain other benefits. The payment of such amounts will be subject to and comply with the requirements of Section 409A of the Internal Revenue Code as enacted by the AJCA. If, despite such compliance, Mr. Mroczka is required to pay additional tax, interest, or penalties under Section 409A of the Internal Revenue Code, Mr. Mroczka will receive a gross-up payment designed to reimburse him for those amounts.

     If the Company terminates Mr. Mroczka’s employment (other than for cause) within two years following a “change of control” of the Company, or if Mr. Mroczka terminates his employment during such period for “good reason” (both as defined in the employment agreement): (1) the Company will pay Mr. Mroczka an amount equal to three times the sum of his annual base salary for the fiscal year in which the termination occurs and an amount equal to three times the average annual cash bonus paid to Mr. Mroczka during the preceding two years; (2) during the 36 month period following termination, the Company will provide Mr. Mroczka with group health insurance and certain other benefits; and (3) Mr. Mroczka will receive a lump sum payment equal to the actuarial equivalent of the benefit that would have accrued under the Company’s Supplemental Executive Retirement Plan if Mr. Mroczka (x) had remained a participant in the Supplemental Executive Retirement Plan for an additional three-year period, (y) earned benefits points in each such year equal to the highest number of benefits points earned by Mr. Mroczka during the three-year period preceding termination of employment and (z) had a final average pay during such additional three-year period equal to the greater of his monthly base salary on the date of the potential change of control (as defined in the employment agreement), the change of control or his termination of employment, provided that the amount payable to Mr. Mroczka will not exceed his accrued benefit under the Supplemental Executive Retirement Plan as of December 31, 2004, unless such excess is pursuant to a new Supplemental Executive Retirement Plan adopted by the Company subsequent to December 31, 2004. Any change of control payments made under the agreement are also subject to and will comply with the requirements of Section 409A of the Internal Revenue Code as enacted by the AJCA. If, despite such compliance, Mr. Mroczka is required to pay additional tax, interest, or penalties under Section 409A of the Internal Revenue Code, Mr. Mroczka will receive a gross-up payment designed to reimburse him for those amounts.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information set forth under the headings “Proposal No. 1: Election of Directors,” “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for the 2006 Annual Meeting of Stockholders is incorporated herein by reference. In addition, the information set forth under “Executive Officers and Key Employees of the Registrant” in Part I of this report is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

     The information set forth under the heading “Executive and Director Compensation” in our definitive Proxy Statement for the 2006 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 heading “Outstanding Voting Securities of the Company and Principal Holders Thereof” in our definitive Proxy Statement for the 2006 Annual Meeting of Stockholders is incorporated herein by reference.

     Equity Compensation Plan Information

     The following table provides information about common stock that may be issued upon the exercise of options and rights under all existing equity compensation plans as of July 31, 2006.

Equity Compensation Plan Information

	Number of shares of				Number of shares of common stock
	common stock to be				remaining available for future issuance
	issued upon exercise of		Weighted - average		under equity compensation plans
	outstanding options		exercise price of		(excluding shares reflected in 1st
Plan Category	(1), (3)		outstanding options		column) (2), (3)
Equity compensation plans approved by stockholders		3,121,744	$	23.80		4,261,248
Equity compensation plans not approved by stockholders		—		—		—
Total		3,121,744	$	23.80		4,261,248

(1)	Includes shares of common stock to be issued upon the exercise of outstanding options under the Zale Corporation Omnibus Stock Incentive Plan, the Zale Corporation 2003 Stock Incentive Plan, the Zale Corporation Outside Directors’ 1995 Stock Option Plan, and the Zale Corporation Outside Directors’ 2005 Stock Incentive Plan, as amended.
(2)	Includes shares of common stock available for future issuance under the Zale Corporation 2003 Stock Incentive Plan as amended, and the Zale Corporation Outsider Directors’ 2005 Stock Incentive Plan, as amended.
(3)	The number of shares to be issued upon exercise of outstanding options and the number of securities available for future issuance under the equity compensation plans were proportionally adjusted to give effect to our two-for-one stock split completed on June 8, 2004.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Not applicable.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information set forth under the heading “Independent Auditor Fee Information” in our definitive Proxy Statement for the 2006 Annual Meeting of Stockholders is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

The following documents are filed as part of this report.

1. Financial Statements

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

2. Index to Financial Statement Schedules

     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.

3. Exhibits

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

		The filings referenced
		for incorporation by reference are Zale
Exhibit		Corporation filings (File No. 1-04129) unless
Number	Description of Exhibit	otherwise noted
3.1a	Restated Certificate of Incorporation of Zale Corporation	October 31, 2001 Form 10-Q, Exhibit 3.1
3.1b	Certificate of Amendment to Restated Certificate of Incorporation of Zale Corporation	October 31, 2004 Form 10-Q, Exhibit 3.1
3.2	Bylaws of Zale Corporation	July 31, 2000 Form 10-K, Exhibit 3.2
4.1a	Revolving Credit Agreement, dated as of July 23, 2003	July 31, 2003 Form 10-K, Exhibit 4.1
4.1b	Amendment to Revolving Credit Agreement, dated as of December 10, 2004	December 10, 2004 Form 8-K, Exhibit 99.1
4.1c	Amendment to Revolving Credit Agreement dated as of January 17, 2006	Filed herewith
10.1	Zale Corporation Savings and Investment Plan, as amended	Filed herewith
10.2*	Form of Indemnification Agreement between Zale Corporation and its directors	July 31, 1995 Form 10-K Exhibit 10.2
10.3*	Zale Corporation Omnibus Stock Incentive Plan	July 31, 2000 Form 10-K, Exhibit 10.3a
10.4a*	Zale Corporation 2003 Stock Incentive Plan, as amended	Filed herewith
10.4b*	Form of Incentive Stock Option Award Agreement	July 31, 2004 Form 10-K, Exhibit 10.4b

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		The filings referenced
		for incorporation by reference are Zale
Exhibit		Corporation filings (File No. 1-04129) unless
Number	Description of Exhibit	otherwise noted
10.4c	Form of Non-qualified Stock Option Award Agreement	August 31, 2006 Form 8-K, Exhibit 10.1
10.4d*	Form of Restricted Stock Award Agreement	July 31, 2004 Form 10-K, Exhibit 10.4c
10.4e	Form of Time-Vesting Restricted Stock Unit Award Agreement	November 17, 2005 Form 8-K, Exhibit 10.5
10.4f	Form of Performance-Based Restricted Stock Unit Award Agreement	November 17, 2005 Form 8-K, Exhibit 10.6
10.5*	Outside Directors’ 1995 Stock Option Plan	July 31, 2001 Form 10-K, Exhibit 10.3c
10.6a*	Zale Corporation Outside Directors’ 2005 Stock Incentive Plan, as amended	Filed herewith
10.6b	Form of Stock Option Award Agreement	November 17, 2005 Form 8-K, Exhibit 10.2
10.6c*	Form of Restricted Stock Award Agreement	November 17, 2005 Form 8-K, Exhibit 10.3
10.7a*	Executive Severance Plan	Form S-1 (Reg. No. 33-27225), Exhibit 10.23
10.7b*	Amendment to Executive Severance Plan	July 31, 1996 Form 10-K, Exhibit 10.8a
10.8	Supplemental Executive Retirement Plan, as amended	Filed herewith
10.9a	Lease Agreement for Corporate Headquarters	July 31, 1996 Form 10-K, Exhibit 10.11
10.9b	First Amendment to Lease Agreement for Corporate Headquarters	July 31, 1996 Form 10-K, Exhibit 10.11a
10.9c	Second Amendment to Lease Agreement for Corporate Headquarters	July 31, 2004 Form 10-K, Exhibit 10.7c
10.10*	Employment Agreement with Mary E. Burton, dated as of October 12, 2006	Filed herewith
10.11*	Terms of Employment Arrangement with George R. Mihalko	August 10, 2006 Form 8-K, Exhibit 10.1
10.12*	Employment Agreement with John A. Zimmermann, dated as of March 31, 2006	April 6, 2006 Form 8-K, Exhibit 10.1

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		The filings referenced
		for incorporation by reference are Zale
Exhibit		Corporation filings (File No. 1-04129) unless
Number	Description of Exhibit	otherwise noted
10.13*	Employment Agreement with Gilbert P. Hollander, dated as of January 5, 2005	Filed herewith
10.14*	Employment Agreement with Frank C. Mroczka, dated as of August 1, 2006	Filed herewith
10.15*	Employment Agreement with Mary L. Forté, dated as of September 21, 2005	September 27, 2005 Form 8-K, Exhibit 10.1
10.16*	Employment Agreement with Sue E. Gove, dated as of September 21, 2005	September 27, 2005 Form 8-K, Exhibit 10.2
10.17*	Employment Agreement with Mark R. Lenz dated as of August 1, 2003	July 31, 2003 Form 10-K, Exhibit 10.12
10.18*#	Zale Corporation Bonus Plan	Filed herewith
10.19	Amendment to Citibank USA, N.A. Agreement, dated as of April 4, 2003	April 30, 2003 Form 10-Q, Exhibit 99.2
10.20*	Form of Change of Control Agreement of Senior Vice Presidents without separate employment agreements	July 31, 2004 Form 10-K, Exhibit 10.14
10.21*	Base Salaries of Named Executive Officers	Filed herewith
10.22*	Summary of Non-Employee Director Compensation	June 1, 2006 Form 8-K, Exhibit 10.1
10.23	Master Agreement for Information Technology Services between Zale Delaware, Inc. and ACS Commercial Solutions, Inc., dated as of August 1, 2005	July 31, 2005 Form 10-K, Exhibit 10.18
14	Code of Ethics	July 31, 2003 Form 10-K, Exhibit 14
21	Subsidiaries of the Registrant	Filed herewith
23.1	Consent of KPMG LLP	Filed herewith
31.1	Rule 13a-14(a) Certification of Chief Executive Officer	Filed herewith
31.2	Rule 13a-14(a) Certification of Chief Financial Officer	Filed herewith
32.1	Section 1350 Certification of Chief Executive Officer	Filed herewith
32.2	Section 1350 Certification of Chief Financial Officer	Filed herewith
99.1	Audit Committee Charter	July 31, 2004 Form 10-K, Exhibit 99.1
99.2	Compensation Committee Charter	Filed herewith
99.3	Nominating/Corporate Governance Committee Charter	July 31, 2004 Form 10-K, Exhibit 99.3

# Zale Corporation has requested confidential treatment for certain portions of this document pursuant to an application sent to the SEC. The Company has omitted such portions from this filing and filed them separately with the SEC.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Management’s Report on Internal Control Over Financial Reporting	F-2
Report of Independent Registered Public Accounting Firm	F-3
Report of Independent Registered Public Accounting Firm	F-5
Consolidated Statements of Operations	F-6
Consolidated Balance Sheets	F-7
Consolidated Statements of Cash Flows	F-8
Consolidated Statements of Stockholders’ Investments	F-9
Notes to Consolidated Financial Statements	F-11

F - 1

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Stockholders of Zale Corporation:

     The management of Zale Corporation and its subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the 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 and procedures included in such controls may deteriorate.

     Our management has assessed the effectiveness of our internal control over financial reporting as of July 31, 2006. In making this assessment, management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on this assessment, the following material weakness was identified in the Company’s internal control over financial reporting:

     The Company did not maintain effective policies and procedures to ensure the accounting for certain derivative financial instrument in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). Specifically, the Company had inadequate policies and procedures in place to ensure compliance with the documentation requirements of SFAS 133 at inception of the hedge relationship and failed to properly assess effectiveness and measure ineffectiveness at inception and on a quarterly basis. In addition, the Company did not have resources with sufficient technical experience related to the application of the provisions of SFAS 133. These deficiencies resulted in errors related to the recognition and classification of gains and losses on certain derivative financial instruments in the Company’s financial statements. These deficiencies also resulted in more than a remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected.

     Because of the material weakness described above, management concluded that the Company’s internal control over financial reporting was not effective as of July 31, 2006.

     KPMG LLP, the registered public accounting firm that audited the financial statements included in this Form 10-K filing, has issued an audit report on management’s assessment of our internal control over financial reporting. That report appears on page F-3.

Mary E. Burton	George R. Mihalko, Jr.
President, Chief Executive Officer	Chief Financial Officer,
and Director	Chief Administrative Officer and
	Director
October 12, 2006	October 12, 2006

F - 2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Zale Corporation:

We have audited management’s assessment, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting,” that Zale Corporation did not maintain effective internal control over financial reporting as of July 31, 2006 because of the effect of material weakness identified in management's assessment, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, 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.

F-3

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment:

The Company did not maintain effective internal controls to ensure the accounting for certain derivative financial instrument in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). Specifically, the Company had inadequate policies and procedures in place to ensure compliance with the documentation requirements of SFAS 133 at inception of the hedge relationship and failed to properly assess effectiveness and measure ineffectiveness at inception and on a quarterly basis. In addition, the Company did not have resources with sufficient technical experience related to the application of the provisions of SFAS 133. These deficiencies resulted in errors related to the recognition and classification of gains and losses on certain derivative financial instruments in the Company’s financial statements. These deficiencies also resulted in more than a remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected.

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 as of July 31, 2006 and 2005 and the related consolidated statements of operations, stockholders’ investment, and cash flows for each of the years in the three-year period ended July 31, 2006. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2006 consolidated financial statements, and this report does not affect our report dated October 12, 2006, which expressed an unqualified opinion on those consolidated financial statements.

In our opinion, management’s assessment that Zale Corporation did not maintain effective internal control over financial reporting as of July 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Zale Corporation has not maintained effective internal control over financial reporting as of July 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

KPMG LLP

Dallas, Texas
October 12, 2006

F-4

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Zale Corporation:

We have audited the accompanying consolidated balance sheets of Zale Corporation as of July 31 2006 and 2005, and the related consolidated statements of operations, stockholders’ investment, and cash flows for the three-year period ended July 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zale Corporation as of July 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2006, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Zale Corporation’s internal control over financial reporting as of July 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 12, 2006 expressed an unqualified opinion on management’s assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting.

As discussed in the footnotes to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123 (revised 2004) Share Based Payment in fiscal year 2006.

KPMG LLP

Dallas, Texas
October 12, 2006

F-5

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)

	Year Ended July 31,
	2006			2005		2004
Total Revenue	$	2,438,977		$	2,383,066	$	2,304,440
Cost and Expenses:
Cost of Sales		1,215,636			1,157,226		1,122,946
Selling, General and Administrative Expenses		1,087,458			982,113		942,796
Cost of Insurance Operations		6,699			6,084		5,963
Depreciation and Amortization Expense		59,771			59,840		56,381
Benefit from Settlement of Retirement Plan		(13,403	)		—		—
Derivatives (Gains)/Losses		1,681			—		—
Operating Earnings		81,135			177,803		176,354
Interest Expense, Net		11,185			7,725		7,528
Earnings Before Income Taxes		69,950			170,078		168,826
Income Taxes		16,328			63,303		62,353
Net Earnings	$	53,622		$	106,775	$	106,473
Earnings Per Common Share-Basic:
Net Earnings Per Share	$	1.10		$	2.08	$	2.02
Earnings Per Common Share-Diluted:
Net Earnings Per share	$	1.09		$	2.05	$	1.99
Weighted Average Number of Common Shares Outstanding:
Basic		48,808			51,280		52,650
Diluted		49,211			51,975		53,519

See Notes to the Consolidated Financial Statements.

F - 6

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share amounts)

	July 31, 2006			July 31, 2005
ASSETS
Current Assets:
Cash and Cash Equivalents	$	42,594		$	55,446
Merchandise Inventories		903,294			853,580
Other Current Assets		103,356			64,042
Total Current Assets	$	1,049,244		$	973,068
Property and Equipment, Net		283,721			282,033
Goodwill, Net		96,339			90,774
Other Assets		33,264			35,025
Total Assets	$	1,462,568		$	1,380,900
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current Liabilities:
Accounts Payable and Accrued Liabilities	$	341,182		$	296,309
Deferred Tax Liability, Net		61,947			65,198
Total Current Liabilities	$	403,129		$	361,507
Non-current Liabilities		20,105			37,325
Non-current Tax Liability, Net		3,768			5,008
Long-term Debt		202,813			129,800
Long-term Accrued Rent		31,504			29,672
Stockholders’ Investment:
Common Stock (Par value $0.01 per share, 150,000 and 150,000 shares authorized, 53,646 and 53,056 shares issued and 48,174 and 51,239 outstanding as of July 31, 2006 and 2005, respectively)	$	482		$	513
Additional Paid-In Capital		110,105			88,988
Accumulated Other Comprehensive Income		33,564			24,119
Accumulated Earnings		808,859			755,237
Deferred Compensation		(1,761	)		(1,269	)
		951,249			867,588
Treasury Stock		(150,000	)		(50,000	)
Total Stockholders’ Investment		801,249			817,588
Total Liabilities and Stockholders’ Investment	$	1,462,568		$	1,380,900

See Notes to the Consolidated Financial Statements.

F - 7

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)

	Year Ended			Year Ended			Year Ended
	July 31, 2006			July 31, 2005			July 31, 2004
Net Cash Flows from Operating Activities:
Net earnings	$	53,622		$	106,775		$	106,473
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization expense		59,771			59,840			56,381
Amortization of long-term debt issue costs		2,311			1,306			1,329
Repatriation impact on tax provision		(11,904	)		—			—
Deferred taxes (excluding repatriation impact)		1,542			12,993			30,976
Loss on dispositions of property & equipment		4,346			4,388			2,429
Impairment of fixed assets		19,123			1,497			2,627
Stock compensation expense		1,893			6,325			7,955
Retiree medical plan termination impact		(13,403	)		—			—
Derivatives (Gains)/Losses		1,681			—			—
Changes in assets and liabilities:
Merchandise inventories		(43,629	)		(20,968	)		(24,431	)
Other current assets		(27,704	)		261			(11,150	)
Other assets		(2,047	)		(2,194	)		(315	)
Accounts payable and accrued liabilities		38,033			3,216			12,113
Non-current liabilities		(3,817	)		(5,161	)		(6,309	)
Net Cash Provided by Operating Activities		79,818			168,278			178,078
Net Cash Flows from Investing Activities:
Additions to property and equipment		(82,718	)		(83,124	)		(60,788	)
Proceeds from sales of fixed assets		—			3,971			—
Purchase of available for sale investments		(2,149	)		(3,480	)		(4,980	)
Proceeds from sales of available for sale investments		3,311			4,440			5,751
Net Cash Used in Investing Activities		(81,556	)		(78,193	)		(60,017	)
Net Cash Flows from Financing Activities:
Borrowings under revolving credit agreement		1,125,613			1,388,900			717,400
Payments on revolving credit agreement		(1,052,600	)		(1,456,600	)		(704,300	)
Proceeds from exercise of stock options		10,669			17,725			39,565
Excess tax benefit on stock options exercised		3,380			—			—
Purchase of common stock		(100,000	)		(50,000	)		(143,358	)
Net Cash Used in Financing Activities		(12,938	)		(99,975	)		(90,693	)
Effect of Exchange Rate Changes on Cash		1,824			2,212			483
Net Increase (Decrease) in Cash and Cash Equivalents		(12,852	)		(7,678	)		27,851
Cash and Cash Equivalents at Beginning of Period		55,446			63,124			35,273
Cash and Cash Equivalents at End of Period	$	42,594		$	55,446		$	63,124
Supplemental cash flow information:
Interest paid	$	10,650		$	6,602		$	5,559
Interest received	$	525		$	644		$	409
Income taxes paid (net refunds received)	$	61,917		$	31,110		$	19,914

See Notes to Consolidated Financial Statements.

F - 8

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ INVESTMENT
(amounts in thousands)

										Accumulated
	Number of						Additional			Other
	Common Shares			Common			Paid-In			Comprehensive
	Outstanding			Stock			Capital			Income (Loss)
Balance July 31, 2003		55,222		$	552		$	566,552		$
											6,834
Net Earnings		—			—			—			—
Unrealized Loss on Securities, net		—			—			—			(163	)
Release of Pre-Bankruptcy Tax Reserve		—			—			54,547			—
Unrealized Loss on Derivatives		—			—			—			(292	)
Cumulative Translation Adjustments		—			—			—			7,091
Exercise of Stock Options, including related tax benefit		1,202			13			47,506			—
Purchase of Common Stock		(2,762	)		—			—			—
Contribution to 401(k) plan		—			—			302			—
Restricted Stock Issued		75			—			—			—
Effect of Stock Split		(1,627	)		(44	)		(605,246	)		—
Balance July 31, 2004		52,110		$	521		$	63,661		$	13,470
Net Earnings		—			—			—			—
Unrealized Loss on Securities, net		—			—			—			(474	)
Unrealized Loss on Derivatives		—			—			—			(338	)
Cumulative Translation Adjustments		—			—			—			11,461
Exercise of Stock Options, including related tax benefit		946			10			23,380			—
Purchase of Common Stock		(1,812	)		(18	)		18			—
Restricted Stock Issued/Cancelled		(5	)		—			1,929			—
Deferred Compensation Amortization		—			—			—			—
Balance July 31, 2005		51,239		$	513		$	88,988		$	24,119
Net Earnings		—			—			—			—
Unrealized Loss on Securities, net		—			—			—			(434	)
Unrealized Gain on Derivatives		—			—			—			370
Cumulative Translation Adjustments		—			—			—			11,259
Deferred Other Comprehensive Income		—			—			—			(1,750	)
Exercise of Stock Options, including related tax benefit		579			5			11,541			—
Purchase of Common Stock		(3,717	)		(38	)		38			—
Restricted Stock Issued/Cancelled		73			2			4,954			—
Deferred Compensation Amortization		—			—			(689	)		—
Stock Compensation Expense		—			—			5,273			—
Balance July 31, 2006		48,174		$	482		$	110,105		$	33,564

See Notes to the Consolidated Financial Statements.

F - 9

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ INVESTMENT (continued)
(amounts in thousands)

	Accumulated			Deferred			Treasury			Total			Comprehensive
	Earnings			Compensation			Stock			Investment			Income
Balance July 31, 2003	$	589,122		$	—		$	(510,737	)	$	652,323		$	(27,252	)
Net Earnings		106,473			—			—			106,473			106,473
Unrealized Loss on Securities, net		—			—			—			(163	)		(163	)
Release of Pre-Bankruptcy Tax Reserve		—			—			—			54,547			—
Unrealized Loss on Derivatives		—			—			—			(292	)		(292	)
Cumulative Translation Adjustments		—			—			—			7,091			7,091
Exercise of Stock Options, including related tax benefit		—			—			—			47,519			—
Purchase of Common Stock		—			—			(143,358	)		(143,358	)		—
Contribution to 401(k) plan		—			—			1,672			1,974			—
Restricted Stock Issued		—			—			—			—			—
Effect of Stock Split		(47,133	)		—			652,423			—			—
Balance July 31, 2004	$	648,462		$	—		$	—		$	726,114		$	113,109
Net Earnings		106,775			—			—			106,775			106,775
Unrealized Loss on Securities, net		—			—			—			(474	)		(474	)
Unrealized Loss on Derivatives		—			—			—			(338	)		(338	)
Cumulative Translation Adjustments		—			—			—			11,461			11,461
Exercise of Stock Options, including related tax benefit		—			—			—			23,390			—
Purchase of Common Stock		—			—			(50,000	)		(50,000	)		—
Restricted Stock Issued/Cancelled		—			(1,929	)		—			—			—
Deferred Compensation Amortization		—			660			—			660			—
Balance July 31, 2005	$	755,237		$	(1,269	)	$	(50,000	)	$	817,588		$	117,424
Net Earnings		53,622			—			—			53,622			53,622
Unrealized Loss on Securities, net		—			—			—			(434	)		(434	)
Unrealized Gain on Derivatives		—			—			—			370			370
Cumulative Translation Adjustments		—			—			—			11,259			11,259
Deferred Other Comprehensive Income		—			—			—			(1,750	)		(1,750	)
Exercise of Stock Options, including related tax benefit		—			—			—			11,546			—
Purchase of Common Stock		—			—			(100,000	)		(100,000	)		—
Restricted Stock Issued/Cancelled		—			(4,997	)		—			(41	)		—
Deferred Compensation Amortization		—			4,505			—			3,816			—
Stock Compensation Expense		—			—			—			5,273			—
Balance July 31, 2006	$	808,859		$	(1,761	)	$	(150,000	)	$	801,249		$	63,067

See Notes to the Consolidated Financial Statements.

F - 10

ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

     We are, through our wholly owned subsidiaries, North America’s largest specialty retailer of fine jewelry. At July 31, 2006, we operated 1,456 specialty retail jewelry stores, 817 kiosks, and 76 carts located mainly in shopping malls throughout the United States of America, Canada and Puerto Rico. We report our operations under three segments: Fine Jewelry, Kiosk Jewelry and All Other.

     Our Fine Jewelry segment is comprised of six brands, each targeted to reach a distinct customer. 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 Jewelers has extended the reach of its brand to the Internet shopper through its e-commerce site, zales.com. We have further leveraged the brand strength through Zales Outlet, which focuses on a slightly higher-income female self purchaser in outlet malls and neighborhood power centers. Gordon’s Jewelers^® is a regional jeweler focusing on customer driven assortments. Bailey Banks & Biddle Fine Jewelers^® operates jewelry stores that are considered among the finest luxury jewelry stores in their markets, offering designer jewelry and prestige watches to attract more affluent customers. Bailey Banks & Biddle Fine Jewelers has expanded its presence in the luxury market through its e-commerce site, baileybanksandbiddle.com. Peoples JewellersÒ and Mappins Jewellers^® offer moderately priced jewelry in malls throughout Canada. During fiscal year 2006, our Fine Jewelry segment generated $2.1 billion of net revenues.

     The Kiosk Jewelry segment operates primarily under the brand names Piercing Pagoda^®, Plumb Gold™, Silver and Gold Connection^®, (in the U.S.) and Peoples II™ (in Canada) through mall based kiosks and carts and reaches the opening price point select jewelry customer. The Kiosk Jewelry segment specializes in gold and silver products that capitalize on the latest fashion trends. During fiscal year 2006, our Kiosk Jewelry segment generated $267.7 million of net revenues.

     The accompanying Consolidated Financial Statements and related notes are those of our business as of and for the twelve month periods ended July 31, 2006 and July 31, 2005. We consolidate substantially all of our U.S. operations into Zale Delaware, Inc. (“ZDel”), a wholly owned subsidiary of Zale Corporation. ZDel is the parent company for several subsidiaries, including three that are engaged primarily in providing credit insurance to our credit customers. We consolidate our Canadian retail operations into Zale International, Inc., which is a wholly owned subsidiary of Zale Corporation. All significant intercompany transactions have been eliminated.

Summary of Significant Accounting Policies

     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, last-in, first-out (“LIFO”) inventory retail method, legal liability, credit insurance liability, product warranty, depreciation, employee benefits, workers’ compensation, tax, and contingencies. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

F - 11

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

     Cash and Cash Equivalents. Cash and Cash Equivalents includes cash on hand, deposits in banks and short-term marketable securities at varying interest rates with maturities of three months or less. The carrying amount approximates fair value because of the short-term maturity of those instruments.

     Merchandise Inventories. Merchandise inventories are stated at the lower of cost or market. Substantially all U.S. inventories represent finished goods which are valued using the LIFO retail inventory method. Merchandise inventory of Peoples Jewellers and Mappins Jewellers of Canada is valued using the first-in, first-out (“FIFO”) retail inventory method. Under the retail method, inventory is segregated into categories of merchandise with similar characteristics at its current average retail selling value. The determination of inventory at cost and the resulting gross margins are calculated by applying an average cost-to-retail ratio to the retail value of inventory. At the end of fiscal year 2006, approximately seven percent of our total inventory represented raw materials and other inventory associated with internally sourced product. This inventory is valued at the weighted average cost of the items.

     We are required to determine the LIFO cost on an interim basis by estimating annual inflation trends, annual purchases and ending inventory levels for the fiscal year. Actual annual inflation rates and inventory balances as of the end of any fiscal year may differ from interim estimates. We apply internally developed indices that we believe accurately and consistently measure inflation or deflation in the components of our merchandise (i.e., 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 (“BLS”) 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. For example, in fiscal year 2006, we recorded inventory write-downs of $27 million resulting from the decision to accelerate the clearance of previously discontinued merchandise assortments and $6 million to the closure of Bailey Banks & Biddle stores.

     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.

     Long-lived Assets and Goodwill. Long-lived assets are periodically reviewed for impairment by comparing the carrying value of the assets with their estimated undiscounted future cashflows. 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 if a permanent reduction were to occur. See “Property and Equipment” herein for the impairment charges recorded in the periods presented.

     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” 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. An impairment is deemed to exist if the estimated fair value of a reporting unit is less than its net book 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 and updated financial

F - 12

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

projections. Based upon the amounts currently recorded as goodwill, recent performance and estimated projections, we believe the likelihood of additional impairment would not be material. However, a significant change in the related brand’s performance, such as the closing of a majority of the brand’s stores, could result in additional impairment. In the second quarter of fiscal year 2006, we performed our annual review for impairment of goodwill related to our Piercing Pagoda, People’s Jewellers and other smaller acquisitions. We concluded that there was no evidence of impairment related to the goodwill of approximately $19.4 million for the Piercing Pagoda acquisition, $71.9 million recorded for the People’s Jewellers acquisition and $5.0 million for other smaller acquisitions.

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

     Selling, General and Administrative Expenses. Included in Selling, General and Administrative Expenses (“SG&A”) are store operating, advertising, buying 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 purposes of constructing the build-out.

     Depreciation and Amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or remaining lease life, whichever is shorter. Estimated useful lives of the assets range from three to twelve 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 included in operations in the year of disposal. Computer software costs related to the development of major systems are capitalized and amortized over their useful lives.

     Stock Based Compensation. Prior to fiscal year 2006, we accounted for our stock incentive plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and related interpretations, Financial Accounting Standards Board (“FASB”) Statement No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”), and complied with the disclosure provisions of FASB Statement No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure, and Amendment of FASB Statement No. 123.”

     Effective August 1, 2005, we adopted Statement of Financial Accounting Standards No. 123 (revised), “Share-Based Payment” (“SFAS No. 123(R)”), which requires the use of the fair value method of accounting for all stock-based compensation, including stock options. SFAS No. 123(R) was adopted using the modified prospective method. Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized for those awards vesting in the current period based on the value that had been included in pro forma disclosures in prior periods. Results from prior periods have not been restated.

     Prior to the adoption of SFAS No. 123(R), we presented all benefits of tax deductions resulting from the exercise of share-based compensation as operating cash flows in the Statements of Cash Flows. SFAS No. 123(R) requires the benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. We have elected to calculate the SFAS No. 123(R) APIC pool under FSP123R-(3) (“simplified method”).

F - 13

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

     Stock Based Compensation (continued)

     Had share-based compensation expense been determined based upon the fair values at the grant dates for awards under our stock incentive plans in accordance SFAS No. 123(R) in the years ended July 31, 2005 and 2004, our pro forma net earnings, basic and diluted earnings per common share would have been as follows:

	Year Ended July 31
	2005		2004
	amounts in thousands except
	per share amounts
Net earnings, as reported	$	106,775	$	106,473
Add: Restricted stock which is included in net earnings, net of related tax effects		414		—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		6,509		6,205
Pro forma net earnings	$	100,680	$	100,268
Earnings Per Common Share-Basic:
Earnings Per Common Share, as reported	$	2.08	$	2.02
Earnings Per Common Share, pro forma	$	1.96	$	1.90
Earnings Per Common Share — Diluted:
Earnings Per Common Share, as reported	$	2.05	$	1.99
Earnings Per Common Share, pro forma	$	1.94	$	1.87
Weighted Average Number of Common Shares Outstanding:
Basic		51,280		52,650
Diluted		51,975		53,519

     Revenue Recognition. We recognize revenue in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). Revenue related to merchandise sales, which is approximately 94 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. Total revenues include two warranty programs: extended service agreements (“ESAs”) that cover sizing and breakage for a two-year period on certain products purchased from us, and sales from a diamond commitment program (“DCP”) that offers a traditional warranty to cover sizing and breakage for a 12-month period, as well as theft replacement coverage for the same 12-month period. The revenues from these agreements are recognized over the service period at the rates the related costs are expected to be incurred in performing covered services under the agreements. Any significant change in the proportion of costs expected to be incurred in performing services under the agreements could result in a change in the amount of revenue recognized. For instance, a five percent change on an annual basis in the timing of services under these agreements could result in a five percent change in the revenue recognized. Revenues also include premiums from our insurance business, principally related to credit insurance policies sold to customers who purchase our merchandise under the proprietary credit program. Insurance premiums are recognized over the coverage period.

F - 14

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

     Credit Insurance Operations. Insurance premium revenue from credit insurance subsidiaries was $13.1 million, $12.9 million and $12.6 million for the fiscal years ended July 31, 2006, 2005 and 2004, respectively. These revenues are included in total revenues on the accompanying consolidated statement of operations.

     The associated cost of insurance operations was $6.7 million, $6.1 million and $6.0 million for the fiscal years ended July 31, 2006, 2005 and 2004, respectively.

     Advertising Expenses. Advertising is expensed when incurred and is a component of SG&A. All related production costs are expensed upon the first occurrence of the advertisement. Advertising expenses were $106.2 million, $93.2 million and $83.7 million for the fiscal years ended July 31, 2006, 2005 and 2004, respectively, net of amounts contributed to us by vendors. The amounts of prepaid advertising at July 31, 2006 and 2005, are $16.5 million and $9.8 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. We follow EITF 02-16, “Accounting by a Reseller (including a Retailer) for Cash Consideration Received from a Vendor”, under which qualifying vendor reimbursements of costs incurred to specifically advertise vendors’ products are recorded as a reduction of advertising expense, which is a component of SG&A.

     Foreign Currency. Translation adjustments result from translating foreign subsidiaries’ financial statements into U.S. dollars. Balance sheet accounts are translated at exchange rates in effect at the balance sheet date. Income statement accounts are translated at average exchange rates during the year. Resulting translation adjustments are included as a component of comprehensive income (loss) in the accompanying consolidated statements of stockholders’ investment.

     Derivative Financial Instruments. We recognize all derivative instruments as either assets or liabilities in the statement of financial position measured at fair value. We do not utilize derivative financial instruments for trading or speculative purposes.

     We enter into forward contracts for the purchase of gold and silver in order to reduce the effects of fluctuating costs of these commodities. We generally hedge certain planned inventory purchases covering a designated period of no longer than twelve months and amounts consistent with our identified exposure. The purpose of the hedging activities is to minimize the effect of unknown commodity price movements on planned cash flows and to enable us to maintain a consistent and predictable pricing strategy. All forward contracts are currently with four financial institutions rated as investment grade by a major rating agency. No fees or up front payments are required when using these commodity forwards. These contracts settle on a net basis.

     We currently account for these forward contracts as undesignated derivative instruments. Accounting for our forward contracts as derivatives instead of hedges does not affect the underlying economics of our risk management strategies and has no impact on the timing or amount of cash flows under any derivative contract. The fair value of our derivative instruments is included in the consolidated balance sheets. These fair values are obtained from outside counterparties and verified with internal discounted cash flow models. During the term of the contracts, any changes in the fair value of derivative instruments are reported in derivative (gains)/losses on the consolidated statements of operations. The fair market value of these instruments is subject to the changes in the value of the underlying commodity. In the year ended July 31, 2006, gold fluctuated significantly, between a low of $432 per ounce to a high of $715 per ounce. At July 31, 2006, the price of gold was $637 per ounce. Based on our outstanding contracts as of July 31, 2006, we would record a derivatives gain before taxes of approximately $15 million if gold prices increase to the 2006 high (a 12 percent increase from the July 31, 2006 price). In turn, if gold prices were to decrease to the 2006 low (a 32 percent decrease from the July 31, 2006 price), we would record a derivatives loss before taxes of approximately $45 million.

     At July 31, 2006, the mark-to-market value of our outstanding forward contracts was a net loss before taxes of $1.3 million. As of October 9, 2006, the market price of gold had decreased to $577 per ounce. Based on our contracts outstanding as of July 31, 2006, such a decrease would result in a derivatives loss before taxes of approximately $15 million. While we realize a gain or loss on the derivative contract, we typically see a compensating gain or loss in the purchase cost of our products.

     We have classified cash activity associated with derivatives as an operating activity in the consolidated statement of cash flows.

     We enter into foreign currency forward exchange contracts to reduce the effects of fluctuating currency exchange rates. We enter into forward currency exchange contracts with terms that are no longer than twelve months. These contracts are used to hedge certain forecasted inventory, advertising, and purchases relating to real estate activities anticipated to be incurred each fiscal year, denominated in foreign currencies for periods and amounts consistent with our identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on cash flows. When utilized, all foreign exchange contracts are denominated in Canadian dollars and are with financial institutions rated as investment grade by a major rating agency. No fees or up front payments are required when using these foreign exchange contracts.

F - 15

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

     Reclassifications. The classifications in use at July 31, 2006 have been applied to the financial statements for July 31, 2005 and 2004.

Merchandise Inventories

     Our U.S. operations use the LIFO retail method of accounting for inventory. The LIFO charge was $5.8 million, $3.5 million and $2.3 million for the years ended July 31, 2006, 2005 and 2004, respectively. The cumulative LIFO provision reflected on the accompanying consolidated balance sheets was $29.1 million and $23.3 million at July 31, 2006 and 2005, respectively. Domestic inventories on a FIFO basis were $844.4 million and $804.2 million at July 31, 2006 and 2005, respectively. 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 (“BLS”) producer price indices or other published indices.

     Our Canadian operations use the FIFO retail method of accounting for inventory. Inventory, net of reserves, was approximately $88.0 million and $72.6 million at July 31, 2006 and 2005, respectively.

     Consigned inventory and 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 merchandise 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 maintained consolidated consigned inventory at our retail locations of approximately $175.1 million and $150.9 million at July 31, 2006 and 2005, respectively.

Investments

     Investments in debt and equity securities are reported as Other Assets in the accompanying consolidated balance sheets. Investments are recorded at fair value based on quoted market prices. All long-term debt securities outstanding at July 31, 2006 will contractually mature within 1 to 29 years.

     Investments, principally related to our insurance subsidiaries as of July 31, 2006 and 2005 were as follows:

	July 31, 2006				July 31, 2005
	Cost		Fair Value		Cost		Fair Value
	(amounts in thousands)
U.S. government obligations	$	14,249	$	13,770	$	14,085	$	14,036
Corporate bonds and notes		4,153		4,076		5,047		5,071
Corporate equity securities		3,826		4,102		4,373		4,533
	$	22,228	$	21,948	$	23,505	$	23,640

F - 16

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

     All investments are classified as available for sale. At July 31, 2006 and 2005, the carrying value of investments included net unrealized losses of approximately ($400,000) and ($500,000), respectively, which are included in other comprehensive income (loss). The net realized gain on investments totaled $91,000 in fiscal year 2006, $400,000 in fiscal year 2005 and $300,000 in fiscal year 2004, as determined on a specific identification basis. Investments with a carrying value of $6.2 million and $4.3 million were on deposit with various state insurance departments at July 31, 2006 and 2005, respectively, as required by law.

Property And Equipment

     Our property and equipment consists of the following:

	July 31, 2006			July 31, 2005
	(amounts in thousands)
Building and Leasehold Improvements	$	245,343		$	231,274
Furniture and Fixtures		414,833			399,583
Construction in Progress		18,108			17,722
Total Property and Equipment		678,284			648,579
Less: Accumulated Amortization and Depreciation		(394,563	)		(366,546	)
Total Net Property and Equipment	$	283,721		$	282,033

     Depreciation expense of $59.8 million, $59.8 million and $56.4 million, respectively, was recorded at July 31, 2006, 2005 and 2004. Property and equipment are depreciated over the estimated useful lives of the assets. Useful lives for leasehold improvements and furniture and fixtures are the remaining term of the lease and three to twelve years, respectively.

     We recorded impairment charges of $19.1 million, $1.5 million, and $0.9 million for the fiscal years ended July 31, 2006, 2005, and 2004, respectively, related to unproductive assets. In fiscal year 2006, impairments included $4.1 million related to certain test stores, $5.2 million related to the terminated information technology initiative and $8.4 million related to the closed Bailey Banks & Biddle stores. These impairment charges, primarily in the Fine Jewelry segment, are included in SG&A and resulted from our ongoing process to evaluate the productivity of our asset base.

Accounts Payable and Accrued Liabilities

     Our accounts payable and accrued liabilities consist of the following:

	July 31, 2006		July 31, 2005
	(amounts in thousands)
Accounts Payable	$	174,581	$	133,300
Accrued Payroll		41,507		37,882
Accrued Taxes		26,549		49,466
Extended Service Agreement Deferred Revenue		27,480		24,617
Accrued Rent		17,713		12,156
Other Accruals (a)		53,352		38,888
Total Accounts Payable and Accrued Liabilities	$	341,182	$	296,309

a) Other Accruals include cash layaway sales in the amount of $5.7 million and $5.8 million for fiscal years 2006 and 2005, respectively.

Non-Current Liabilities

     Our non-current liabilities consist principally of the loss reserves for insurance subsidiaries, reserves for tax contingencies and the long-term portion of the incentive payment received from Citi described below, recognized as deferred income.

F - 17

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

     Deferred Credit. In connection with the sale of our customer receivables in fiscal year 2000, we entered into a ten year merchant services agreement whereby Citibank U.S.A., NA (“Citi”) will issue private label credit cards branded with appropriate Company trademarks. Citi provides financing for our customers to purchase merchandise in exchange for payment by us of a merchant fee based upon a percentage of each credit card sale. The merchant fee is a flat percentage per credit sale for standard revolving accounts and varies for certain special interest free or deferred payment credit sales, depending on the credit program. We received a $41.8 million incentive for entering into the agreement, the non-current portion of which is classified as a non-current liability on the accompanying consolidated balance sheet. This incentive payment is recognized ratably over the term of the agreement. Deferred credits of $16.7 million and $20.9 million are included in the accompanying consolidated balance sheets at July 31, 2006 and 2005, respectively. The long-term portion of the deferred credits is $12.5 million and $16.7 million at July 31, 2006 and 2005, respectively.

     Post-retirement Benefits. Effective March 31, 2006, we terminated our post-retirement insurance program. As a result of the termination, we recognized a benefit of $13.4 million. Prior to the termination we provided medical, dental, and vision insurance benefits for all eligible retirees and spouses who retired prior to April 1, 2002 with benefits to the latter continuing after the death of the retiree.

F - 18

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

Postretirement Benefits (continued)

	July 31, 2006			July 31, 2005
	(amounts in thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	3,612		$	4,983
Interest cost		120			280
Plan participant contributions		—			1,217
Curtailments		(3,292	)		—
Actuarial loss (gain)		(440	)		(921	)
Benefits Paid		—			(1,947	)
Benefit Obligation at end of year	$	—		$	3,612
Change in Plan Assets:
Market value at beginning of year	$	—		$	—
Employer contributions		157			730
Plan participant contributions		1,142			1,217
Benefit payments		(1,299	)		(1,947	)
Market value at end of year	$	—		$	—
Beginning of fiscal year assumptions (for Annual Expense) Discount Rate		5.89	%		6.00	%
End of fiscal year assumptions (for Year-End Benefit Obligation) Discount Rate		N/A			5.21	%
Projected Cash Flows:
Net Contributions
Current Fiscal Year	$	157		$	730
Fiscal Year + 1		—			425
Net Benefit Payments
Current Fiscal Year	$	157		$	730
Fiscal Year + 1		—			425
Fiscal Year + 2		—			386
Fiscal Year + 3		—			361
Fiscal Year + 4		—			341
Fiscal Year + 5		—			323
Sum of next 5 fiscal years		—			1,306
Reconciliation of Funded Status:
Benefit Obligation	$	—		$	(3,612	)
Unrecognized net actuarial gain		—			(5,821	)
Unrecognized prior service cost		—			(3,440	)
Net Amount Recognized	$	—		$	(12,873	)
Development of Accrued Benefit Cost:
Accrued last year	$	(12,873	)	$	(14,043	)
Plus: Net employer contributions last year		157			730
Plus: Net periodic benefit income expense last year		313			440
Less: Benefit from settlement of retirement benefits obligation		12,403			—
Accrued balance at end of year	$	—		$	(12,873	)

F - 19

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

     The measurement date used to determine the benefit obligation was July 31, 2005. The health care cost trend rate as of July 31, 2005 was 0.0 percent, as dictated by the plan design change in January 2003.

     Components of net periodic (benefit) cost:

	Year Ended
	July 31, 2006			July 31, 2005			July 31, 2004
	(amounts in thousands)
Service Cost	$	—		$	—		$	—
Interest Cost		120			280			349
Amortization of Prior Cost and Gain		(433	)		(720	)		(726	)
Settlement/Curtailment/Termination of Benefits		(13,403	)		—			—
Net Periodic (Benefit) Cost	$	(13,716	)	$	(440	)	$	(377	)

Non-Qualified Retirement Plan

     We have a Supplemental Executive Retirement Plan (the “Plan”). The Plan provides eligible executives with the opportunity to receive payments each year after retirement equal to a portion of their final average pay as defined by the Plan. Effective August 1, 2000, the eligibility requirements were changed to include corporate vice-presidents, division presidents, and division senior vice-presidents. The benefits provided by this plan are funded by corporate-owned life insurance policies. There is no material impact to the financial statements from this Plan.

Long-Term Debt

     Revolving Credit Agreement. We have a U.S. revolving credit facility (the “Revolving Credit Agreement”) that provides us up to $500 million in commitments by a group of lenders, including a $20 million sublimit for letters of credit. The Revolving Credit Agreement is primarily secured by our U.S. merchandise inventory. On January 17, 2006, we amended the Revolving Credit Agreement to allow certain U.S. affiliates to guarantee up to CAD $40 million for a revolving credit agreement in the name of Zale Canada Co., to guarantee up to $20 million for other subsidiaries, and to increase the Administrative Agent’s flexibility in waiving annual audits and inventory appraisals based on our performance under the Revolving Credit Agreement. The amendment extends the terms of the Revolving Credit Agreement through August 11, 2009.

     The loans made under the Revolving Credit Agreement bear interest at a floating rate at either (i) the applicable LIBOR (as defined in the Revolving Credit Agreement) plus the applicable margin, or (ii) the Base Rate (as defined in the Revolving Credit Agreement) plus the applicable margin. The margin applicable to LIBOR based loans and standby letter of credit commission rates will be automatically reduced or increased from time to time based upon excess borrowing availability under the Revolving Credit Agreement. We pay a quarterly commitment fee of 0.25 percent on the preceding month’s unused commitment. We and our subsidiaries may repay the revolving credit loans outstanding under the Revolving Credit Agreement at any time without penalty prior to the maturity date. For the year ended July 31, 2006, the weighted average effective interest rate was 5.80 percent as compared to 3.80 percent for the year ended July 31, 2005. The applicable margin for LIBOR based loans was 1.25 percent at July 31, 2006 and 2005; and the applicable margin for Base Rate loans was zero percent at July 31, 2006 and 2005. At July 31, 2006 and 2005, $186.1 and $129.8 million, respectively, were outstanding under the Revolving Credit Agreement. Based on the terms of the Revolving Credit Agreement, we had approximately $313.9 million and $370.2 million in available borrowings at July 31, 2006 and July 31, 2005, respectively. The maximum amount outstanding under the Revolving Credit Agreement during fiscal year 2006 was $315.0 million and during fiscal year 2005 was $327.9 million.

F - 20

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

     At any time, if remaining borrowing availability under the Revolving Credit Agreement falls below $75 million, we will be restricted in our ability to repurchase stock or pay dividends. If remaining borrowing availability falls below $50 million, we will be required to meet a minimum fixed charge coverage ratio. The Revolving Credit Agreement requires us to comply with certain restrictive covenants including, among other things, limitations on indebtedness, investments, liens, acquisitions, and asset sales. We are currently in compliance with all of our obligations under the Revolving Credit Agreement.

     Zale Canada Co. entered into a revolving credit agreement (the “Canadian Revolving Credit Agreement”) on January 17, 2006 with a maturity date of August 11, 2009. The Canadian Revolving Credit Agreement provides us up to CAD $30 million in commitments by Bank of America (acting through its Canadian branch). The Canadian Revolving Credit Agreement is secured by a guaranty from certain U.S. affiliates.

     The loans made under the Canadian Revolving Credit Agreement bear interest at a floating rate at either (i) the applicable BA rate (as defined in the Canadian Revolving Credit Agreement) plus the applicable margin, or (ii) the Base Rate (as defined in the Canadian Revolving Credit Agreement) plus the applicable margin. The margin applicable to BA based loans is equivalent to the margin for LIBOR based loans as defined in the Revolving Credit Agreement. Zale Canada Co. pays a quarterly commitment fee of 0.25 percent on the preceding month’s unused commitment. Zale Canada Co. may repay the revolving credit loans outstanding under the Canadian Revolving Credit Agreement at any time without penalty prior to the maturity date. At July 31, 2006, CAD $18.9 million was outstanding under the Canadian Revolving Credit Agreement. For the year ended July 31, 2006, the weighted average effective interest rate was 5.49 percent. The applicable margin for BA based loans was 1.25 percent at July 31, 2006, and the applicable margin for Base Rate loans was zero percent at July 31, 2006. Based on the terms of the Canadian Revolving Credit Agreement, we had approximately CAD $11.1 million in available borrowings at July 31, 2006.

Lease Commitments

     We rent most of our retail space under leases that generally range from five to ten years and may contain minimum rent escalations, while kiosk leases generally range from three to five years and carts from 12-18 months. Our headquarters lease extends until 2018. We recognize the minimum rent payments evenly across the period, including the construction period, through the end of the lease term. Lease incentives of $1.4 million for reimbursement of certain leasehold improvement expenditures are being amortized against lease payments over the life of the lease. All existing real estate leases are treated as operating leases. Sublease rental income under noncancelable leases is not material.

	Year Ended
	July 31, 2006		July 31, 2005		July 31, 2004
	(amounts in thousands)
Retail Space:
Minimum Rentals	$	228,363	$	196,647	$	182,520
Rentals Based on Sales		13,359		11,589		12,212
		241,722		208,236		194,732
Equipment and Corporate Headquarters		3,576		1,773		2,823
Total Rent Expense	$	245,298	$	210,009	$	197,555

     Rent expense is included in SG&A.

     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.

F - 21

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

     Future minimum rent commitments as of July 31, 2006, for all noncancelable leases of ongoing operations were as follows:

	Minimum Rent Commitments (amounts in thousands)
2007	$	197,954
2008		170,396
2009		147,750
2010		127,264
2011		101,205
Thereafter		282,162
Total	$	1,026,730

Interest

     Interest expense for the fiscal years ended July 31, 2006, 2005 and 2004 was $11.8 million, $8.4 million and $8.3 million, respectively.

     Interest income for the fiscal years ended July 31, 2006, 2005 and 2004 was $0.6 million, $0.6 million and $0.8 million, respectively.

Income Taxes

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

	Year Ended
	July 31, 2006			July 31, 2005			July 31, 2004
	(amounts in thousands)
Federal Income Tax Expense at Statutory Rate	$	24,483		$	59,527		$	59,089
State Income Taxes, Net of Federal Income Tax Benefit		1,666			2,634			2,657
Tax on Repatriation of Foreign Items (1)		(6,762	)		—			—
Canadian Rate Changes (2)		(1,908	)		—			—
Foreign Tax Credits (3)		(1,400	)		—			—
Other		249			1,142			607
Total Income Tax Expense	$	16,328		$	63,303		$	62,353
Effective Income Tax Rate		23.3	%		37.2	%		36.9	%

(1)	During fiscal year 2006, we repatriated $47.6 million under section 965 of the AJCA, realizing an income tax benefit of $11.9 million. Additionally, management is not certain all future foreign earnings will be permanently reinvested outside the U.S.; therefore, a $5.1 million liability related to the potential income tax on the remaining undistributed earnings offsets the benefit under section 965.
(2)	During fiscal year 2006, Canada enacted new tax rates. The decrease in the revised tax rates resulted in an income tax benefit of approximately $1.9 million.
(3)	During fiscal year 2006, we realized $1.4 million of additional foreign tax credits.

F - 22

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

	Year Ended
	July 31, 2006			July 31, 2005			July 31, 2004
	(amounts in thousands)
Current Provision:
Federal	$	10,598		$	36,771		$	29,375
Foreign		9,283			9,015			1,786
State		3,535			4,524			216
Total Current Provision		23,416			50,310			31,377
Deferred Provision:
Federal		(3,550	)		14,154			22,768
Foreign		(2,178	)		(286	)		5,606
State		(1,360	)		(875	)		2,602
Total Deferred Provision		(7,088	)		12,993			30,976
Total Income Tax Provision	$	16,328		$	63,303		$	62,353

     As of July 31, 2006, we have a tax net operating loss carryforward (“NOL”) (after limitations) of $40.0 million which represents up to $14.0 million in future tax benefits. The utilization of this asset is subject to limitations. The most restrictive is the Internal Revenue Code Section 382 annual limitation of $19.5 million. The NOL carryforward can be utilized through fiscal year 2008.

F - 23

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

     Deferred tax assets and liabilities are determined based on estimated future tax effects of the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates. Tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at July 31, 2006 and 2005, respectively, are presented below.

	Year Ended
	July 31, 2006			July 31, 2005
	(amounts in thousands)
Current Deferred Taxes:
Assets —
Customer receivables	$	292		$	467
Accrued liabilities		26,087			22,044
Net operating loss carryforward		6,821			6,821
Inventory reserves		20,738			10,766
Other		1,377			2,078
Total Assets		55,315			42,176
Liabilities —
Merchandise inventories, principally due to LIFO reserve		(107,431	)		(98,453	)
Accrued liabilities		(9,831	)		(8,921	)
Deferred Current Tax Liability, Net	$	(61,947	)	$	(65,198	)
Non-Current Deferred Taxes:
Assets —
Net operating loss carryforward	$	7,176		$	13,749
Postretirement benefits		875			5,020
Accrued liabilities		15,416			16,405
State and local taxes		8,420			9,784
Investments		3,286			3,286
Other		2,104			5,408
Total Assets		37,277			53,652
Liabilities —
Property and equipment		(20,020	)		(36,126	)
Other		(2,511	)		(1,380	)
Undistributed Earnings		(6,106	)		(8,629	)
Goodwill		(12,408	)		(12,525	)
Deferred Non-Current Tax (Liability), Net	$	(3,768	)	$	(5,008	)

     A valuation allowance must be provided when it is more likely than not that the deferred income tax asset will not be realized. We believe that, as of July 31, 2006 and 2005, the realization of our gross deferred income tax assets is more likely than not, and thus, there was no valuation reserve recorded.

F - 24

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

Capital Stock

     Common Stock. At July 31, 2006, 150,000,000 shares of common stock, par value $.01 per share (“common stock”) were authorized, 53,645,553 shares of common stock were issued and 48,174,379 shares of common stock were outstanding. At July 31, 2005, 150,000,000 shares of common stock were authorized and 53,055,799 shares were issued and 51,238,543 shares of common stock were outstanding.

     Stock Split. On May 18, 2004, we announced our Board of Directors had approved a two-for-one split of the common stock. The stock split was affected by issuing an additional share of common stock for each outstanding share of that common stock. The additional shares were distributed June 8, 2004 to shareholders of record at the close of business on May 28, 2004. Accordingly we have restated our earnings (loss) per share calculations, as well as reclassified amounts between common stock and additional-paid-in-capital to reflect the impact of the stock split of the outstanding common stock for all periods presented. In accounting for the stock split, 16.3 million shares of treasury stock were deemed reissued and an additional 9.6 million shares were issued. As the treasury shares that were reissued as part of the stock split had been purchased by us during fiscal year 2004 and previous fiscal years, treasury stock has only been reclassified to show the effect of the stock split as of July 31, 2004.

     Preferred Stock. At July 31, 2006 and 2005, 5,000,000 shares of Preferred Stock, par value of $0.01, were authorized. None was issued or outstanding.

     Treasury Stock. We use the par value method of accounting for treasury stock. At July 31, 2006, we held 5,551,174 shares of treasury stock.

     During the fiscal year ended July 31, 2005, we repurchased approximately 2.8 million shares of our common stock at an aggregate cost of $50 million. During fiscal year 2006, we repurchased approximately 3.7 million shares of our common stock at an aggregate cost of $100 million.

     Incentive Stock Plan. As of July 31, 2006, we had four stock incentive plans under which there were outstanding awards: the Zale Corporation Omnibus Stock Incentive Plan (the “Omnibus Plan”), the Zale Corporation Outside Directors’ 1995 Stock Option Plan (the “Directors’ Plan”), the Zale Corporation 2003 Stock Incentive Plan (the “Incentive Plan”), and the Zale Corporation Outside Directors’ 2005 Stock Incentive Plan (the “2005 Directors’ Plan”). Under these plans, exercised share options are issued as new shares of common stock.

     The Omnibus Plan expired with respect to new grants on July 30, 2003, and was replaced by the Incentive Plan. Options granted under the Incentive Plan (i) are granted at an exercise price no less than the fair market value of the shares of common stock into which such options are exercisable, (ii) generally vest ratably over a four-year vesting period and (iii) generally expire ten years from the date of grant. Restricted stock granted under the Incentive Plan generally vests on the third anniversary of the grant date and is subject to restrictions on sale or transfer. The Incentive Plan was amended on November 11, 2005 to allow for the grant of time-vesting and performance-based restricted stock units, which entitle the holder to receive, at a specified future date, a specified or determinable number of shares of common stock. In the sole discretion of the Compensation Committee, in lieu of a payout of shares of common stock, the holder of a restricted stock unit may receive a cash payment equal to the fair market value of the number of shares of common stock the holder otherwise would receive under the restricted stock unit. Time-vesting restricted stock units granted under the Incentive Plan generally vest on the third anniversary of the grant date and are subject to restrictions on sale or transfer. Performance-based restricted stock units granted entitle the holder to receive a specified number of shares of our common stock based on our achievement of performance targets established by the Compensation Committee. If we fail to meet the specified performance targets, the holder will not receive any shares of common stock under the performance-based restricted stock units, or, if we substantially exceed the targets, the holder may receive up to two hundred percent of the units granted. As of July 31, 2006, 4,043,048 incentive awards were available for grant under the Incentive Plan, and 3,206,944 options, restricted stock shares, and restricted stock units were outstanding for the Omnibus Plan and the Incentive Plan combined.

F - 25

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

     The Directors’ Plan expired with respect to new grants on November 3, 2005, and was replaced by the 2005 Directors’ Plan. The 2005 Directors’ Plan authorizes us to grant options to non-employee directors at the fair market value of the common stock on the date of the grant. Options granted under the 2005 Directors’ Plan vest ratably over a four-year period and expire ten years from the date of grant. The 2005 Directors’ Plan also authorizes restricted stock grants, which vest on the first anniversary of the grant date and are subject to restrictions on sale or transfer. As of July 31, 2006, 218,200 incentive awards were available for grant under the 2005 Directors’ Plan, and 186,800 options and restricted stock shares were outstanding for the Directors’ Plan and the 2005 Directors’ Plan on a combined basis.

     We recognized share-based compensation expense related to stock options of $5.3 million before taxes for the fiscal year ended July 31, 2006, as a component of SG&A. As of July 31, 2006, there was $16.1 million (before related tax benefit) of total unrecognized compensation cost related to non-vested share-based compensation that is expected to be recognized over a weighted-average period of 3.2 years.

     The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The expected life of the options represents the period of time the options are expected to be outstanding and is based on historical trends.

     The following table presents the weighted-average assumptions used in the option pricing model for stock option grants in fiscal years 2006, 2005, and 2004:

	Fiscal Year
	2006			2005			2004
Volatility		33.2	%		37.8	%		40.2	%
Risk-free Interest Rate		4.3	%		3.7	%		3.6	%
Expected lives (years)		5.0			5.0			5.0
Fair value per option granted	$	9.37		$	10.74		$	10.93

Stock option transactions are summarized as follows:

	Shares									Grant Price						Weighted Average Price
	Fiscal 2006			Fiscal 2005			Fiscal 2004			Fiscal 2006		Fiscal 2005		Fiscal 2004		Fiscal 2006		Fiscal 2005		Fiscal 2004
Outstanding, beginning of year		2,871,360			3,922,132			5,578,852		$	13.11-30.65	$	10.91-29.57	$	4.50-23.23	$	21.74	$	20.81	$	18.05
Granted		1,243,000			128,250			813,600			22.89-34.00		25.50-30.65		23.94-29.57		26.85		27.13		27.13
Exercised		(579,254	)		(946,209	)		(2,336,370	)		14.11-27.44		10.91-26.70		4.50-21.75		18.42		18.54		16.68
Cancelled		(413,362	)		(232,813	)		(133,950	)		14.15-34.00		14.15-30.03		4.50-26.55		26.17		22.00		17.65
Outstanding, end of year		3,121,744			2,871,360			3,922,132		$	13.11-30.65	$	13.11-30.65	$	10.91-29.57	$	23.80	$	21.74	$	20.81

F - 26

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

The following table summarizes information about stock options outstanding at July 31, 2006.

Options Outstanding												Options Exercisable
						Weighted Average
Range of Exercise				Number		Remaining Contractual		Weighted Average		Aggregate		Number		Weighted Average		Aggregate
Prices				Outstanding		Term(Years)		Exercise Price		Intrinsic Value		Exercisable		Exercise Price		Intrinsic Value
$	10.20	$	13.60		2,500		2.3	$	13.11				2,500	$	13.11
	13.60		17.00		490,770		4.7		14.49				477,770		14.49
	17.00		20.40		3,000		4.1		17.38				3,000		17.38
	20.40		23.80		902,599		5.8		22.82				768,099		22.75
	23.80		27.20		432,600		9.2		25.38				40,375		26.12
	27.20		30.60		1,289,275		8.5		27.54				586,825		27.51
$	30.60	$	34.00		1,000		8.4		30.65				250		30.65
					3,121,744		7.2	$	23.80	$	7,803,033		1,878,819	$	22.19	$	7,224,959

     Intrinsic value for stock options is defined as the difference between the current market value and the grant price. For the periods ended July 31, 2006, 2005, and 2004, the total intrinsic value of stock options exercised was $4.7 million, $10.5 million, and $21.9 million, respectively. For the periods ended July 31, 2006, 2005, and 2004, the fair value of the options vested was approximately $7.2 million, $6.9 million and $4.2 million respectively. Cash received from stock options exercised during the period ended July 31, 2006, 2005, and 2004 was approximately $10.7 million, $17.7 million, and $39.6 million, respectively.

     In addition to stock options, we had outstanding restricted stock and restricted stock units granted under the Incentive Plan. We recognized share based compensation expense related to restricted stock of approximately $1.2 million, $660,000, and $0.0 in the periods ended July 31, 2006, 2005, and 2004, respectively. The following table summarizes restricted stock and stock unit activity from the Incentive Plan and the 2005 Directors’ Plan for the periods ended July 31, 2006, 2005, and 2004:

	Shares Units						Price
	FY 2006		FY 2005		FY 2004		FY 2006		FY 2005		FY 2004
Non-vested Outstanding at Beginning of Year		70,300		75,300		—	$	27.44	$	27.44	$	—
Granted, Incentive Plan Performance-based Units		107,200		—		—		27.03		—		—
Granted, Incentive Plan and 2005 Directors Plan Shares		18,627		—		75,300		25.97		—		27.44
Granted, Incentive Plan Time-vested Units		140,700		—		—		24.27		—		—
Canceled, Incentive Plan Time-vested Units		19,700		—		—		27.03		—		—
Canceled, Incentive Plan Performance-based Units		19,700		—		—		27.03		—		—
Canceled, Incentive Plan and 2005 Directors’ Plan Shares		17,300		5,000		—		27.40		27.44		—
Vested, Incentive Plan Shares		45,127		—		—		26.93		—		—
Vested, Incentive Plan Time-vested Units		40,000		—		—		27.03		—		—
Vested, Incentive Plan Performance-based Units		40,000		—		—		27.03		—		—
Non-vested Outstanding at End of Year		155,000		70,300		75,300	$	24.18	$	27.44	$	27.44

     As of July 31, 2006, 2005 and 2004, 1,878,819, 1,440,594, and 1,457,457 of options outstanding were exercisable at a weighted average exercise price of $22.19, $20.23, and $19.52, respectively.

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

Earnings Per Common Share

     Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share of common stock reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options issued by us represent the only dilutive effect reflected in diluted weighted average shares. After giving effect to the stock split in fiscal year 2004, for the fiscal years ended July 31, 2006, 2005 and 2004, there were antidilutive common stock equivalents of 1,911,563, 27,119, and 26,530 respectively.

	Year Ended July 31
	2006		2005		2004
	(amounts in thousands, except per share annum)
Net earnings available to stockholders	$	53,622	$	106,775	$	106,473
Basic:
Weighted average number of common shares outstanding		48,808		51,280		52,650
Net earnings per share — basic	$	1.10	$	2.08	$	2.02
Diluted:
Basic weighted average number of common shares outstanding		48,808		51,280		52,650
Effect of dilutive stock options:
Stock options		403		695		869
Diluted weighted average number of common shares outstanding as adjusted		49,211		51,975		53,519
Net earnings per share — diluted	$	1.09	$	2.05	$	1.99

Comprehensive Income

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

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.

     The Fine Jewelry segment consists of six principal brands, which sell diamonds, gemstone, gold jewelry and watches. These six brands have been aggregated into one reportable segment. The Kiosk Jewelry segment operates primarily under the brand names Piercing Pagoda^®, Plumb Gold™, Silver and Gold Connection^®, (in the U.S.) and Peoples II™ (in Canada) through mall based kiosks and carts and reaches the opening price point select jewelry customer. The Kiosk Jewelry segment specializes in gold and silver products that capitalize on the latest fashion trends. The All Other segment includes credit insurance operations, which provide offerings of insurance coverage primarily to our private label credit card customers. Management’s expectation is that overall economics of each of our major concepts within each reportable segment will be similar over time.

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

     The reportable segments are groups of brands that offer merchandise with similar commodity characteristics and merchandise mix. Segment revenues are not provided by product type or geographically as we believe such disclosure would not add meaningful value and is not consistent with the manner in which we make decisions.

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

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

	Year Ended July 31
Selected Financial Data by Segment	2006			2005			2004
	(amounts in thousands, except per share amounts)
Revenues:
Fine Jewelry (a)	$	2,149,217		$	2,089,261		$	2,022,214
Kiosk (b)		276,619			280,897			269,660
All Other		13,141			12,908			12,566
Total Revenues	$	2,438,977		$	2,383,066		$	2,304,440
Depreciation & Amortization Expense
Fine Jewelry	$	43,273		$	44,410		$	41,757
Kiosk		5,571			4,708			4,199
All Other		—			—			—
Unallocated		10,927			10,722			10,425
Total Depreciation & Amortization Expense	$	59,771		$	59,840		$	56,381
Operating Earnings (Loss)
Fine Jewelry	$	108,082		$	147,414		$	153,739
Kiosk		20,402			29,030			25,951
All Other		6,443			6,824			6,603
Unallocated (c)		(53,792	)		(5,465	)		(9,939	)
Total Operating Earnings	$	81,135		$	177,803		$	176,354
Assets (d)
Fine Jewelry (e)	$	1,119,679		$	1,103,142		$	1,055,755
Kiosk (f)		124,415			117,125			111,238
All Other		39,261			35,670			37,737
Unallocated		179,213			124,963			137,354
Total Assets	$	1,462,568		$	1,380,900		$	1,342,084
Capital Expenditures
Fine Jewelry	$	54,942		$	59,587		$	42,535
Kiosk		7,750			8,650			6,038
All Other		—			—			—
Unallocated		20,026			14,887			12,215
Total Capital	$	82,718		$	83,124		$	60,788

F - 29

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

(a)	Includes $229.6, $198.3 and $174.1 million in fiscal years 2006, 2005, and 2004, respectively, related to foreign operations.
(b)	Includes $7.7 and $6.6 million in fiscal years 2006 and 2005, respectively, related to foreign operations. There were no foreign operations in this segment prior to fiscal year 2005.
(c)	Includes $36.7 million related to the special charge, $13.4 million benefit related to the settlement of certain retirement plan obligations, $12.1 million for executive severance, $5.3 million related to share-based compensation expense and $2.4 million related to accrued percentage rent. Also, includes $70.9, $71.0, and $65.9 million in fiscal years 2005, 2004, and 2003, respectively, to offset internal carrying costs charged to the segments.
(d)	Assets allocated to segments include fixed assets, inventories and goodwill. Unallocated assets include cash, prepaid assets such as rent, corporate office improvements, and technology infrastructure.
(e)	Includes $28.8, $27.2 and $23.2 million of fixed assets in fiscal years 2006, 2005 and 2004, respectively, related to foreign operations.
(f)	Includes $466,000 and $390,000 of fixed assets in fiscal years 2006 and 2005, respectively, related to foreign operations. There were no foreign operations in this segment prior to fiscal year 2005.

Commitments and Contingencies

     We are involved in a number of legal and governmental proceedings as part of the normal course of 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 to our financial position or results of operations.

New Accounting Pronouncements

     FASB Interpretation No. 48. The Financial Accounting Standards Board (“FASB”) released Interpretation 48, “Accounting for Uncertainty in Income Taxes,” in June 2006. Interpretation 48 supplements FASB Statement 109, “Accounting for Income Taxes,” by defining the threshold for recognizing the benefits of tax positions in the financial statements. Interpretation 48 is effective for fiscal years beginning after December 15, 2006. Therefore, we will adopt Interpretation 48 for fiscal year ending July 31, 2008. At adoption, our financial statements will be adjusted to reflect those positions that are more-likely-than-not to be sustained at the adoption date. We will record any necessary adjustments directly to retained earnings on August 1, 2007 as a change in accounting principle. Over the next fiscal year, we will begin the process of reassessing our worldwide historical tax positions in order to apply Interpretation 48. At this time, we do not anticipate this will result in a material adjustment to our results of operations, balance sheet or cashflows.

Guarantee Obligations

     In accordance with Financial Accounting Standards Board Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” specific credit and product warranty programs are subject to the following disclosure in interim and annual financial statements.

     Credit Programs. Citibank U.S.A., N.A. (“Citi”), a subsidiary of CitiGroup, provides financing to our customers through our private label credit card program in exchange for payment by us of a merchant fee (subject to periodic adjustment) based on a percentage of each credit card sale. The receivables established through the issuance of credit by Citi are originated and owned by Citi. Losses related to a “standard credit account” (an account within the credit limit approved under the original merchant agreement between us and Citi) are assumed entirely by Citi without recourse to us, except where a Company employee violates the credit procedures agreed to in the merchant agreement.

     In an effort to better service customers, we and Citi developed a program that extends credit to qualifying customers above the approved credit amount (the “Shared Risk Program”). The extension of incremental credit is at our discretion to accommodate larger sales transactions. We bear the responsibility

F - 30

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

of customer default losses related to the Shared Risk Program, as defined in the agreement with Citi.

     Under the Shared Risk Program, we incurred approximately $107,000 in losses for fiscal year 2006, compared to losses of $28,000 for the previous fiscal year, and believe that future losses will not have a material impact on our financial position or results of operations.

     Product Warranty Programs. We sell ESAs to customers to cover sizing and breakage for a two-year period on certain products purchased from us. In fiscal year 2006, we began to offer a diamond commitment program (“DCP”) that offers a traditional warranty to cover sizing and breakage for a 12-month period, as well as theft replacement coverage for the same 12-month period. The revenue from these agreements is recognized over the service period at the rates the related costs are expected to be incurred in performing the covered services. We also provide warranty services that cover diamond replacement costs on certain diamond merchandise sold as long as the customer follows certain inspection practices over the time of ownership of the merchandise. We have established a reserve for potential non-ESA warranty issues based on actual historical expenses.

     The changes in our product warranty liability for the reporting periods are as follows:

	Year Ended
	July 31, 2006			July 31, 2005			July 31, 2004
	(amounts in thousands)
Beginning Balance	$	28,264		$	31,794		$	32,160
Extended Service Agreements Sold		77,586			59,415			50,183
Extended Service Agreements Revenue Recognized		(74,066	)		(62,945	)		(50,549	)
Ending Balance	$	31,784		$	28,264		$	31,794

Benefit Plans

     Defined Contribution Retirement Plan. We maintain the Zale Corporation Savings & Investment Plan (the “Investment Plan”). As amended and restated in fiscal year 2006, it allows all employees who are at least age 21 to participate in the Investment Plan, although new employees are required to complete one year of continuous service with us to be eligible to participate. Each employee can contribute from one percent to 60 percent of his or her annual salary subject to IRS limitations, (30 percent for highly-compensated employees). Employees who have not otherwise elected will be automatically enrolled in the Investment Plan at a contribution rate of two percent upon satisfying all eligibility requirements. Through February 2002, we matched one dollar in common stock for every dollar an employee contributes to the plan up to four percent of annual compensation, subject to Internal Revenue Service (“IRS”) limitations. Effective March 1, 2002, we match $0.50 in common stock or cash for every dollar an employee contributes to the plan up to four percent of annual compensation subject to IRS limitations.

     Through February 2002, matching contributions were made on a monthly basis. Effective March 1, 2002, matching contributions are 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 vest in our matched contributions immediately. Our provisions for matching contributions were $2.1 million, $2.1 million and $2.7 million for fiscal years 2006, 2005 and 2004, respectively.

Financial Instruments

     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 fair value of our derivative instruments is included in the consolidated balance sheets. These fair values are obtained from outside counterparties and verified with internal discounted cash flow models. During the term of these contracts, any changes in the fair value of derivative instruments are reported in derivative (gains)/losses on the consolidated statements of operations.

     For fiscal year 2006, the carrying amount of $202.8 million related to the Revolving Credit Agreement approximates fair value due to the variable interest rate on long-term debt.

F - 31

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

     The investments of our insurance subsidiaries, primarily stocks and bonds in the amount of $21.9 million and $23.6 million, approximate market value at July 31, 2006 and July 31, 2005, respectively, and are reflected in Other Assets on the accompanying consolidated balance sheets. Investments are classified as available for sale and are carried at fair value.

     Concentrations of Business and Credit Risk. During fiscal years 2006 and 2005, we purchased approximately 22 percent of our finished merchandise from our top five vendors, including more than six percent from one vendor in 2006. If supply between us and 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. During fiscal year 2006, our direct sourcing organization accounted for approximately seven percent of our merchandise requirements. As of July 31, 2006 and 2005, we had no significant concentrations of credit risk.

     Subsequent Event. On September 24, 2006, we announced that Rodney Carter was appointed Chief Financial Officer and Group Senior Vice President, effective October 16, 2006. Prior to joining the Company, Mr. Carter was the Senior Vice President and Chief Financial Officer of PETCO Animal Supplies, Inc., and prior to that position, was the Executive Vice President and Chief Financial Officer for CEC Entertainment, Inc.

Other Matters

     SEC Investigation. On April 10, 2006, we announced that the SEC had initiated a non-public investigation into various accounting and other matters related to our business, including accounting for ESAs, leases and accrued payroll. Subpoenas issued in connection with the investigation requested materials relating to these accounting matters as well as to executive compensation and severance, earnings guidance, stock trading, and the timing of certain vendor payments. On September 21, 2006, the staff of the SEC notified us that the investigation of Zale Corporation had been terminated with no enforcement action being recommended.

     Litigation. We and certain current and former directors and officers are defendants in six purported class action lawsuits arising, in general, from the matters that the SEC was investigating. All six lawsuits are in preliminary stages. We are also named as a defendant in a number of other lawsuits arising in the ordinary course of our business.

     Executive Changes. Effective January 31, 2006, President and Chief Executive Officer Mary L. Forté resigned. Mary E. Burton, a member of our Board of Directors, was appointed Acting Chief Executive Officer. Subsequently, Ms. Burton was permanently appointed as President and Chief Executive Officer. She remains as a director of the Company.

     Effective February 16, 2006, John Zimmermann was appointed President of Zale North America, responsible for the Zales Jewelers, Peoples Jewellers, Mappins Jewellers, and Peoples II brands. Mr. Zimmermann had formerly been President of Zale Canada which included the Peoples Jewellers and Mappins Jewellers brands.

     On March 23, 2006, Chief Operating Officer and Executive Vice President Sue E. Gove resigned.

     On May 5, 2006, Chief Financial Officer and Group Senior Vice President Mark Lenz was placed on administrative leave. This decision was made after discussions with our outside auditors concerning Mr. Lenz’s failure to timely disclose in conversations with the auditors that vendor payments scheduled to be made during the last two weeks of our fiscal year ended July 31, 2005 were delayed until the first week of August 2005. We believe that both cash and accounts payable were properly reflected on the balance sheet. Mr. Lenz’s employment ended on July 31, 2006 upon the expiration of his employment contract.

     On May 5, 2006, George R. Mihalko, Jr. was elected as a director of the Company and agreed to serve as Acting Chief Administrative Officer and Acting Chief Financial Officer.

F - 32

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

     Bailey Banks & Biddle Store Closings. During the second quarter of fiscal year 2006, we closed 32 Bailey Banks & Biddle stores, 29 of which were managed by a third party liquidator during part of or all of the quarter as part of the brand’s strategy to improve performance and profitability. We incurred a total of $21.2 million after taxes or $0.43 per diluted share, related to the Bailey Banks & Biddle closings for the fiscal year.

     American Jobs Creation Act. On October 22, 2004, the American Jobs Creation Act (the “AJCA”) was signed into law. The AJCA includes, among other provisions, a special one-time deduction for 85 percent of certain foreign earnings that are repatriated to the U.S. from foreign operations, as defined in the AJCA. We have a Canadian subsidiary for which we elected to apply this provision to qualifying earnings repatriations in fiscal year 2006. In January 2006, we executed a Domestic Repatriation Plan under the provision and repatriated $47.6 million, realizing an income tax benefit of $11.9 million partially offset by a liability of $5.1 million related to management’s decision not to elect APB 23 for the fiscal year ending July 31, 2006. The net income tax benefit realized was $6.8 million, or $0.14 per diluted share for the fiscal year ended July 31, 2006.

     Texas Margin Tax. In May 2006, the Texas legislature enacted a new law that changes the present Texas franchise tax system and replaces it with a new tax system, the Texas margin tax. The Texas margin tax is a significant change because it generally makes all legal entities subject to tax, including general and limited partnerships, while the current franchise tax system applies only to corporations and limited liability companies. We conduct certain operations through Texas limited partnerships and will become subject to the new Texas margin tax. We will comply with the Texas margin tax effective January 1, 2008. The computation of the tax liability will be based on revenues as of July 31, 2007, as reduced by certain deductions.

     In accordance with the provisions of SFAS 109, which require that deferred tax assets and liabilities be adjusted for the effects of new income tax legislation in the period of enactment, we estimated the net charge to deferred tax expense is immaterial. The estimate is based on the Texas margin tax law in its current form.

Quarterly Results of Operations (Unaudited)

     Unaudited quarterly results of operations for the fiscal years ended July 31, 2006 and 2005 were as follows (amounts in thousands except per share data):

	Fiscal Year 2006
	For the Three Months Ended
	July 31, 2006			April 30, 2006		January 31, 2006		October 31, 2005
Total Revenues	$	490,695		$	526,895	$	993,749	$	427,639
Cost of Sales		257,370			254,361		495,094		208,812
Net Earnings (Loss)		(27,362	)		16,831		87,815		(23,661	)
Net Earnings (Loss) per diluted share	$	(0.57	)	$	0.35	$	1.78	$	(0.47	)

	Fiscal Year 2005
	For the Three Months Ended
	July 31, 2005		April 30, 2005		January 31, 2005		October 31, 2004
Total Revenues	$	472,343	$	515,618	$	972,332	$	422,773
Cost of Sales		225,566		246,151		480,229		205,280
Net Earnings (Loss)		4,053		14,456		99,197		(10,933	)
Net Earnings (Loss) per diluted share	$	0.08	$	0.28	$	1.91	$	(0.21	)

F - 33

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

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 12^th day of October, 2006.

ZALE CORPORATION
By:	/s/ Mary E. Burton
	Mary E. Burton
	President and Chief Executive Officer

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mary E. Burton and George R. Mihalko, Jr., and each of them, as his or her true and lawful attorneys-in-fact and agents, with full powers and substitution and resubstitution for him or her, in his or her 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 or she 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/ Mary E. Burton	President, Chief Executive Officer
Mary E. Burton	and Director (principal executive officer of the registrant)	October 12, 2006
/s/ George R. Mihalko, Jr.	Chief Administrative Officer, Chief
George Mihalko	Financial Officer and Director (principal financial officer of the registrant)	October 12, 2006
/s/ Cynthia T. Gordon	Senior Vice President, Controller
Cynthia T. Gordon	(principal accounting officer of the registrant)	October 12, 2006
/s/ Richard C. Marcus	Chairman of the Board	October 12, 2006
Richard C. Marcus
/s/ J. Glen Adams	Director	October 12, 2006
J. Glen Adams
/s/ John B. Lowe, Jr.	Director	October 12, 2006
John B. Lowe, Jr.
/s/ Thomas C. Shull	Director	October 12, 2006
Thomas C. Shull
/s/ David M. Szymanski	Director	October 12, 2006
David M. Szymanski

F - 34

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

Exhibit
Number	Description of Exhibit
4.1c	Amendment to the Revolving Credit Agreement, dated as of January 17, 2006
10.1	Zale Corporation Savings and Investment Plan, as amended
10.4a	Zale Corporation 2003 Stock Incentive Plan, as amended
10.6a	Zale Corporation Outside Directors’ 2005 Stock Incentive Plan, as amended
10.8	Supplemental Executive Retirement Plan, as amended
10.10	Employment Agreement with Mary E. Burton
10.13	Employment Agreement with Gilbert P. Hollander
10.14	Employment Agreement with Frank C. Mroczka
10.18	Zale Corporation Bonus Plan
10.21	Base Salaries of Named Executive Officers
21	Subsidiaries of the Registrant
23.1	Consent of KPMG LLP
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer
99.2	Compensation Committee Charter

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.

F - 35

EX-4.1(C)

THIRD AMENDMENT TO
CREDIT AGREEMENT

     This Third Amendment to Credit Agreement (the “Third Amendment”) is made as of the 17^th day of January, by and among

ZALE DELAWARE, INC., a corporation organized under the laws of the State of Delaware having a place of business at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003

ZALE CORPORATION, a corporation organized under the laws of the State of Delaware having a place of business at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003;

DDCC, INC., a corporation organized under the laws of the State of Delaware having a place of business at 101 Convention Center Drive, Suite 850, Las Vegas, Nevada 89109;

TXDC, L.P., a limited partnership organized under the laws of the State of Texas having a place of business at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003; and

the LENDERS party hereto; and

BANK OF AMERICA, N.A., as successor by merger to Fleet National Bank, as Administrative Agent and Issuing Bank, a national banking association, having a place of business at 40 Broad Street, Boston, Massachusetts 02109; and

FLEET RETAIL GROUP, LLC (f/k/a Fleet Retail Finance Inc.), as Collateral Agent, a Delaware limited liability company, having a place of business at 40 Broad Street, Boston, Massachusetts 02109; and

JPMORGAN CHASE BANK, N.A. successor to Bank One, N.A. and CONGRESS FINANCIAL CORPORATION (SOUTHWEST), as Co-Syndication Agents,

in consideration of the mutual covenants herein contained and benefits to be derived herefrom.

WITNESSETH

     WHEREAS, the Borrowers, the Agents, the Lenders, and the Co-Syndication Agents have entered into a Credit Agreement dated as of July 23, 2003 (as amended and in effect, the “Credit Agreement”); and

     WHEREAS, the Borrowers, the Agents, the Lenders, and the Co-Syndication Agents have agreed to amend certain provisions of the Credit Agreement as set forth herein.

     NOW THEREFORE, it is hereby agreed as follows:

1

1.	Definitions: All capitalized terms used herein and not otherwise defined shall have the same meaning herein as in the Credit Agreement.
2.	Amendments to Article I. The provisions of Article 1 of the Credit Agreement are hereby amended as follows:

a.	The definition of “Fleet” is hereby deleted in its entirety and the following substituted in its stead:
	“Fleet” means Bank of America, N.A. and its successors.
b.	The definition of “FRF” is hereby deleted in its entirety and the following substituted in its stead:
	“FRF” means Fleet Retail Group, LLC and its successors.
c.	The definition of “Obligations” is hereby deleted in its entirety and substituting the following in its stead:
	“Obligations” means (a) Loan Agreement Obligations, ((b) all obligations arising under the Zale Canada Guaranty, (c) the payment and performance of any transaction with FRF as Collateral Agent, or Fleet as Administrative Agent, or any of their respective Affiliates, which arises out of any cash management, depository, investment, letter of credit, interest rate protection or other Hedging Agreement, or other banking or financial services provided by any such Person, in each case, in connection with this Agreement or the other Loan Documents, as each may be amended from time to time and (d) the payment and performance of any transaction with any Lender, or any of their respective Affiliates, which arises out of any interest rate protection or other Hedging Agreement.
d.	The definition of “Reserves” is hereby amended by adding the words “the Zale Canada Guaranty Reserve” immediately after the words “Consignment A/R Reserve” in the second line thereof.
e.	The following new definitions are hereby added to Article I of the Credit Agreement in appropriate alphabetical order:

“CDN$” means Canadian Dollars.

“Zale Canada Credit Agreement” means that certain Credit Agreement to be dated on or about January 17, 2006 by and between Zale Canada Co. and Bank of America, N.A. (acting through its Canada branch), as agent, and the lenders party thereto (as amended and in effect from time to time).

2

“Zale Canada Guaranty” means that certain Guaranty to be dated on or about January 17, 2006, by and among the Borrowers in favor of Bank of America, N.A. (acting through its Canada branch) as administrative agent under the Zale Canada Credit Agreement and the lenders party to such agreement, to secure the obligations of Zale Canada Co. now existing or hereafter arising pursuant to the Zale Canada Credit Agreement.

“Zale Canada Guaranty Reserve” means, at any time of calculation, an amount determined by the Administrative Agent, in its reasonable discretion from time to time, but in no event to exceed the outstanding obligations of Zale Canada under the Zale Canada Credit Agreement (including principal, interest, fees, indemnities, and expense reimbursements).

3. Amendments to Article II. The provisions of Article II of the Credit Agreement are hereby amended as follows:

a.	The provisions of Section 2.2(b) of the Credit Agreement are hereby amended by adding the words “provided that the foregoing shall not apply to the imposition of, or change in the amount of, the Zale Canada Guaranty Reserve” at the end of the first sentence thereof.
b.	The provisions of Section 2.22(a) of the Credit Agreement are hereby amended as follows:

i.	by adding the words “(other than on account of the Zale Canada Guaranty)” in clause seventh immediately after the word “Obligations.”
ii.	by adding “and eighth, if there exists an “Event of Default” under and as such term is defined in the Zale Canada Credit Agreement, to pay all other Obligations on account of the Zale Canada Guaranty that are then outstanding and then due and payable.”
iii.	by deleting the word “seventh” in the second sentence thereof and substituting “eighth” in its stead.

4. Amendments to Article V. The provisions of Article V of the Credit Agreement are hereby amended as follows:

a.	The introductory provisions of Article V to the Credit Agreement are hereby deleted in their entirety and the following substituted in their stead:
	Until the Commitments have expired or been terminated and the Obligations shall have been paid in full and all Letters of Credit shall have expired or terminated and all L/C Disbursements shall have been reimbursed, each Borrower covenants and agrees with the Agents and the Lenders that:

3

b. The provisions of Section 5.9(b) of the Credit Agreement are hereby amended as follows:

i.	by deleting the number “$75,000,000” in the last line thereof and substituting the number “$250,000,000” in its stead.
ii.	by adding “and (x) during the period January 1 through October 31 and December 16 through December 31 of each year, Excess Availability is at all times greater than $150,000,000, or (y) during the period November 1 through December 15 of each year, Excess Availability is at all times greater than $100,000,000” at the end of the last sentence thereof.

5. Amendments to Article VI. The provisions of Article VI of the Credit Agreement are hereby amended as follows:

a.	The introductory provisions of Article VI to the Credit Agreement are hereby deleted in their entirety and the following substituted in their stead:
	Until the Commitments have expired or been terminated and the Obligations shall have been paid in full and all Letters of Credit shall have expired or terminated and all L/C Disbursements shall have been reimbursed, each Borrower covenants and agrees with the Agents and the Lenders that:
b.	The provisions of Section 6.1(e) of the Credit Agreement are hereby deleted in their entirety and the following substituted in their stead: (e) (i) The Zale Canada Guaranty and (ii) other Guaranties of other Indebtedness of Zale Canada in an aggregate amount with respect to clause (ii) not to exceed $12,000,000.
c.	The provisions of Section 6.4(k) of the Credit Agreement are hereby deleted in their entirety and the following inserted in their stead:
	(k)investments consisting of (i) the Zale Canada Guaranty, (ii) Indebtedness permitted by Sections 6.1(c), (d), (e), (i), and (j); (iii) other guaranties of Indebtedness or other obligations permitted by Sections 6.1(e), (f), and (g) in effect on the date hereof; and (iv) other loans, advances, guarantees or other investments in Zale Canada in effect on the date hereof, which, when combined with Guaranties permitted by Section 6.1(e)(ii), do not exceed $12,000,000 in the aggregate principal amount;
d.	The provisions of Section 6.4 of the Credit Agreement are amended by deleting the word “and” at the end of Section 6.4(o), by re-lettering Section 6.4(p) as Section 6.4(q) and adding the following immediately after said Section 6.4(o):

4

(p) Guarantees of obligations of a Subsidiary other than Zale Canada Co. in an amount not to exceed $20,000,000 in the aggregate for all such Guarantees at any time outstanding;

6. Amendments to Article VII. The provisions of Article VII of the Credit Agreement are hereby amended as follows:

a.	By adding the following at the end of Section 7.1 (p) of the Credit Agreement after the words “Closing Date”:
	(it being understood that for purposes hereof, the Peoples II carts operated by the Borrower shall not be deemed “store locations”);
b.	By adding the following subsection (s) to Section 7.1 of the Credit Agreement:
	(s) the Borrowers shall fail to pay any amount under the Zale Canada Guaranty within five (5) Business Days of the date when the administrative agent under the Zale Canada Credit Agreement makes demand for payment therefor;
c.	The provisions of Section 7.4 are hereby amended as follows:

i.	By adding the words “(other than the Obligations of the Borrowers under the Zale Canada Guaranty)” after the word “Obligations” in Section 7.4(c) and by deleting the word “and” at the end of Section 7.4(c).
ii.	By deleting the remainder of Section 7.4 in its entirety and substituting the following in its stead:
	(d) Fourth, to the Obligations of the Borrowers under the Zale Canada Guaranty;
	(e) Fifth, upon payment and satisfaction in full or other provisions for payment in full satisfactory to the Lenders and the Administrative Agent and the Collateral Agent of all of the Obligations, to the payment of any obligations required to be paid pursuant to §9-608(a)(l)(C) or 9-615(a)(3) of the Uniform Commercial Code of the State of New York; and
	(f) Sixth, the excess, if any, shall be returned to the Borrowers or to such other Persons as are entitled thereto.

7. Conditions to Effectiveness. This Third Amendment shall not be effective until each of the following conditions precedent have been fulfilled to the satisfaction of the Administrative Agent:

5

a.	This Third Amendment shall have been duly executed and delivered by the Borrowers, the Agents and the Lenders. The Administrative Agent shall have received a fully executed copy hereof and of each other document required hereunder.
b.	All action on the part of the Borrowers necessary for the valid execution, delivery and performance by the Borrowers of this Third Amendment shall have been duly and effectively taken. The Administrative Agent shall have received from the Borrowers true copies of their respective certificate of the resolutions authorizing the transactions described herein, each certified by their secretary or other appropriate officer to be true and complete.
c.	The Borrowers or Zale Canada shall have reimbursed the Administrative Agent for all expenses incurred in connection herewith, including, without limitation, reasonable attorneys’ fees.
d.	The Borrowers shall have executed and delivered the Zale Canada Guaranty.
e.	No Default or Event of Default shall have occurred and be continuing.
f.	The Borrowers shall have provided such additional instruments and documents to the Administrative Agent as the Administrative Agent and their counsel may have reasonably requested.

8. Miscellaneous.

a.	Except as provided herein, all terms and conditions of the Credit Agreement and the other Loan Documents remain in full force and effect. The Borrowers each hereby ratify, confirm, and reaffirm all of the representations, warranties and covenants therein contained. Without limiting the generality of the foregoing, each Borrower hereby acknowledges, confirms and agrees that all Collateral shall continue to secure the Obligations as modified and amended pursuant to this Third Amendment (including, without limitation, the Zale Canada Guaranty) and any future modifications, amendments, substitutions or renewals thereof.
b.	The Borrowers or Zale Canada shall pay all costs and expenses incurred by the Administrative Agent in connection with this Third Amendment, including, without limitation, all reasonable attorneys’ fees.
c.	This Third Amendment may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered, each shall be an original, and all of which together shall constitute one instrument. Delivery of an executed counterpart of a signature page hereto by telecopy or by electronic email in .pdf format shall be effective as delivery of a manually executed counterpart hereof.

6

d. This Third Amendment expresses the entire understanding of the parties with respect to the matters set forth herein and supersedes all prior discussions or negotiations hereon. Any determination that any provision of this Third Amendment or any application hereof is invalid, illegal or unenforceable in any respect and in any instance shall not effect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality or enforceability of any other provisions of this Third Amendment.

7

     IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be executed and their seals to be hereto affixed as the date first above written.

ZALE DELAWARE, INC.
By:	/s/ David Sternblitz
	David Sternblitz
	Vice President and Treasurer
ZALE CORPORATION
By:	/s/ David Sternblitz
	David Sternblitz
	Vice President and Treasurer
DDCC, INC.
By:	/s/ David Sternblitz
	David Sternblitz
	Vice President and Treasurer
TXDC, L.P.
By:	Zale Delaware, Inc., Its General Partner
By:	/s/ David Sternblitz
	David Sternblitz
	Vice President and Treasurer

8

BANK OF AMERICA, N.A., as Administrative Agent and Issuing Bank
By:	/s/ Sally A. Sheehan
Name:	Sally A. Sheehan
Title:	Managing Director

9

FLEET RETAIL GROUP, LLC, as Collateral Agent and Lender
By:	/s/ Sally A. Sheehan
Name:	Sally A. Sheehan
Title:	Managing Director

10

CONGRESS FINANCIAL CORPORATION (SOUTHWEST)
By:	/s/ Paul Truax
Name:	Paul Truax
Title:	Vice President

11

JPMORGAN CHASE BANK, N.A.
By:	/s/ Lavea Eisenberg
Name:	Lavea Eisenberg
Title:	Vice President

12

GENERAL ELECTRIC CAPITAL CORPORATION
By:	/s/ Brian P. Schwinn
Name:	Brian P. Schwinn
Title:	Duly Authorized Signatory

13

ABN/AMRO BANK, N.V.
By:	/s/ Ronald C. Spurfa and Frederick Jennings
Name: Ronald C. Spurfa and Frederick Jennings
Title:   Vice President

14

THE CIT GROUP/BUSINESS CREDIT, INC.
By:	/s/ Manuel Borges
Name: Manuel Borges
Title:   Vice President

15

NATIONAL CITY BUSINESS CREDIT, INC.
By:	/s/ Joe Kwasny
Name: Joe Kwasny
Title:   Director

16

WELLS FARGO FOOTHILL, LLC
By:	/s/ David Hill
Name: David Hill
Title:   Vice President

17

KEYBANK NATIONAL ASSOCIATION
By:	/s/ Alex Strazzella
Name: Alex Strazzella
Title:   S V P

18

THE BANK OF NEW YORK
By:	/s/ Scott DeTraglia
Name: Scott DeTraglia
Title:   Assistant Vice President

19

HIBERNIA NATIONAL BANK
By:	/s/ Shannan Pratt
Name: Shannan Pratt
Title:   Vice President

20

SOVEREIGN BANK
By:	/s/ Judith Kelly
Name: Judith Kelly
Title:   S V P

21

ROYAL BANK OF CANADA
By:	/s/ Dustin Craven
Name: Dustin Craven
Title:   Attorney-In-Fact

22

ROYAL BANK OF SCOTLAND
By:	/s/ Michaela V. Galluzzo
Name: Michaela V. Galluzzo
Title:   Vice President

23

COMERICA BANK
By:	/s/ Jeff P. Geisbauer
Name: Jeff P. Geisbauer
Title:   Assistant Vice President

24

UBS AG, STAMFORD BRANCH
By: Name:	/s/ Joselin Fernandes Joselin Fernandes
Title:	Associate Director
	Banking Products Services, US
By: Name:	/s/ Irja R.Otsa Irja R.Otsa
Title:	Associate Director
	Banking Products Services, US

25

ACKNOWLEDGEMENT

Bank of America (acting through its Canada branch), as administrative agent under the Zale Canada Credit Agreement hereby executes this Third Amendment for the sole purpose of acknowledging and agreeing to the provisions of Section 7.4 hereof.

BANK OF AMERICA, N.A.(acting through its Canada branch)
By:	/s/ NELSON LAM
Name:	NELSON LAM
Title:	VICE PRESIDENT

26

EX-10.1

EXHIBIT 10.1

ZALE CORPORATION SAVINGS & INVESTMENT PLAN

(As Amended and Restated Effective August 1, 2005)

TABLE OF CONTENTS

ARTICLE I DEFINITIONS		1
1.1	Administrator	1
1.2	Affiliated Company	1
1.3	Allocation Date	1
1.4	Alternate Payee	1
1.5	Beneficiary	1
1.6	Benefit Commencement Date	1
1.7	Break-in-Service	2
1.8	Catch-Up Contribution Account	2
1.9	Catch-Up Contribution	2
1.10	Code	2
1.11	Committee	2
1.12	Common Stock	2
1.13	Common Stock Fund	2
1.14	Company	2
1.15	Compensation	2
1.16	Daily Administrator	3
1.17	Direct Rollover	3
1.18	Disability	3
1.19	Domestic Relations Order	3
1.20	Effective Date	3
1.21	Eligible Employee	3
1.22	Eligible Retirement Plan	4
1.23	Eligible Rollover Distribution	4
1.24	Employee	5
1.25	Employee After-Tax Account	5
1.26	Employee Pre-Tax Matched Contribution Account	5
1.27	Employee Pre-Tax Unmatched Contribution Account	5
1.28	Employer	6
1.29	Employment Commencement Date	6
1.30	Entry Date	6
1.31	ERISA	6
1.32	Excess Aggregate Contributions	6
1.33	Excess Contributions	6
1.34	Excess Elective Deferral	6
1.35	Former Participant	6
1.36	Highly Compensated Employee	6
1.37	Hour or Hour of Service	6
1.38	Individual Account	7
1.39	Interactive Electronic Communication	8
1.40	Investment Fund	8
1.41	Karten's Plan	8
1.42	Leased Employee	8
1.43	Matching Contribution	8
1.44	Matching Contribution Account	9
1.45	Non-Highly Compensated Employee	9
1.46	Normal Retirement Date	9
1.47	Participant	9
1.48	Plan	9

(i)

1.49	Plan Year	9
1.50	Pre-Tax Contribution	9
1.51	Pre-Tax Contribution Accounts	9
1.52	Profit Sharing Account	10
1.53	QDRO	10
1.54	QNEC Account	10
1.55	QNECs	11
1.56	Qualified Election	11
1.57	Recordkeeper	12
1.58	Required Beginning Date	12
1.59	Rollover Account	12
1.60	Rollover Contribution	12
1.61	Safe Harbor Match Account	12
1.62	Spouse	12
1.63	Trust Agreement	12
1.64	Trust Fund	12
1.65	Trustee	12
1.66	Valuation Date	12
1.67	Year of Service	13
ARTICLE II ELIGIBILITY OF EMPLOYEES		14
2.1	Eligibility to Participate in the Plan	14
2.2	Eligibility upon Reemployment	14
2.3	Reemployment of Participant	14
2.4	Cessation of Participation	15
2.5	Eligibility Upon Entry or Reentry into Eligible Class of Employees	15
ARTICLE III CONTRIBUTIONS		16
3.1	Pre-Tax Contributions	16
3.2	Matching Contributions	17
3.3	QNECs	18
3.4	Catch-Up Contributions	18
3.5	Time and Form of Contributions	19
3.6	Limit on Employer Contributions	19
3.7	Manner of Making Contributions	19
3.8	Rollover Contributions	20
3.9	Contributions with Respect to Military Leave	20
3.10	Administrative Mistake	20
ARTICLE IV LIMITATIONS AND RESTRICTIONS ON PRE-TAX CONTRIBUTIONS		23
4.1	Excess Elective Deferrals	23
4.2	Actual Deferral Percentage Test	25
4.3	Other Permissible Methods of Testing and Correction	28
ARTICLE V LIMITATIONS AND RESTRICTIONS ON MATCHING CONTRIBUTIONS		29
5.1	Actual Contribution Percentage Test	29
5.2	Testing of Pre-Tax Contributions Under Contribution Percentage Test	31
5.3	Other Permissible Methods of Testing and Corrections	31
ARTICLE VI ALLOCATION OF CONTRIBUTIONS		32
6.1	Establishment of Individual Accounts	32

(ii)

6.2	Allocation of Pre-Tax Contributions	32
6.3	Allocation of Matching Contributions	32
6.4	Allocation of QNECs	32
6.5	Credit of Rollover Contributions	32
6.6	Included, Individual Accounts	32
ARTICLE VII LIMITATION ON ALLOCATIONS		33
7.1	Definitions	33
7.2	Disposition of Excess Annual Additions	33
7.3	Aggregation of Plans	34
7.4	Prospective Reduction of Deferrals	34
ARTICLE VIII ADJUSTMENT OF INDIVIDUAL ACCOUNTS		35
8.1	Trust Fund Valuation	35
8.2	Adjustments to Participant's and Former Participant's Individual Accounts	35
8.3	Statement to Participant	36
ARTICLE IX DISTRIBUTIONS AND WITHDRAWALS		37
9.1	Vested Interest	37
9.2	Entitlement to Distribution	37
9.3	Timing of Distribution	38
9.4	Qualified Election	38
9.5	Limitations on Timing of Distributions	39
9.6	Minimum Distribution Requirements	39
9.7	Normal Form of Benefits	40
9.8	Distributions from Common Stock Fund	40
9.9	Optional Forms of Benefits	41
9.10	Automatic Cashouts	42
9.11	Facility of Payment	42
9.12	Hardship Withdrawals.	42
9.13	Withdrawal of After-Tax Savings Contributions	44
9.14	Withdrawal at Age 591/2	44
9.15	Withdrawal of Rollover Account	45
9.16	Qualified Hurricane Katrina Distributions	45
9.17	Loans to Participants	46
9.18	Duty to Keep Administrator Informed of Distributee's Current Address	46
9.19	Failure to Claim Benefits	46
9.20	Distribution Pursuant to a QDRO	47
ARTICLE X DISTRIBUTIONS UPON DEATH; DESIGNATIONS OF BENEFICIARIES		48
10.1	Death Prior to Benefit Commencement Date	48
10.2	Designation of Beneficiary	48
10.3	Death After Benefit Commencement Date	49
ARTICLE XI AMENDMENT OF PLAN		50
11.1	Right to Amend	50
11.2	Limitation on Amendments	50
ARTICLE XII TERMINATION OF PLAN		51
12.1	Right to Discontinue Contributions, Terminate, or Partially Terminate	51

(iii)

12.2	Procedure in the Event of Discontinuance of Contributions, Termination, or Partial Termination	51
12.3	Merger, Consolidation, or Transfer	51
12.4	Reversion of Contributions to Employer	52
ARTICLE XIII PLAN ADMINISTRATION		53
13.1	The Administrator	53
13.2	Action by Committee	53
13.3	Rules and Regulations of Administrator	54
13.4	Powers of Administrator	54
13.5	Appointment of Daily Administrator	55
13.6	Duties of Daily Administrator	55
13.7	Indemnification of the Administrator and Daily Administrator	56
13.8	Plan Fiduciaries	56
13.9	Action Taken in Good Faith	57
13.10	Expenses of Administration	58
13.11	Claims Procedure	58
ARTICLE XIV ADOPTION BY AFFILIATED COMPANIES		60
14.1	Adoption by and Designation of Other Employers	60
14.2	Single Plan	61
ARTICLE XV THE TRUSTEE		62
15.1	Trust Fund	62
15.2	Trustee's Duties	62
15.3	Benefits Only from Trust Fund	62
15.4	Trust Fund Applicable Only to Payment of Benefits	62
15.5	Appointment of Investment Advisor	62
15.6	Administrator's Duty to Trustee	63
ARTICLE XVI PARTICIPANT INVESTMENT OPTIONS		64
16.1	Investments of Contributions	64
16.2	Participant Direction of Investment	64
16.3	Investments in Individual Loans to Participants	66
16.4	Voting Rights	66
ARTICLE XVII TOP HEAVY PROVISIONS		67
17.1	Applicability	67
17.2	Definitions	67
17.3	Top-Heavy Status	67
17.4	Minimum Contributions	68
ARTICLE XVIII MISCELLANEOUS		69
18.1	No Employment or Compensation Agreement	69
18.2	Spendthrift Provision	69
18.3	Construction	69
18.4	Gender and Number	69
18.5	Titles	69
18.6	Texas Law Applicable	69
18.7	Successors and Assigns	69
18.8	Plan Controls	69

(iv)

ZALE CORPORATION SAVINGS & INVESTMENT PLAN
(As Amended and Restated Effective April 1, 2006)

THIS AGREEMENT, executed this 31 day of July, 2006, and effective the 1st day of August 1, 2005, unless specifically provided elsewhere in this Agreement, is made by Zale Corporation, having its principal office in Irving, Texas (hereinafter referred to as the “Company”).

WITNESSETH:

WHEREAS, effective April 1, 1951, the Company established a plan known as “Zale’s Profit Sharing Plan” (the “Original Plan”);

WHEREAS, the Original Plan was amended, effective April 1, 1989, to comply with the Tax Reform Act of 1986 and subsequent tax act changes and to add employee salary deferral elections pursuant to section 401(k) of the Code and employer matching contributions pursuant to section 401(m) of the Code;

WHEREAS, the Original Plan was amended, effective April 1, 1991, to add an employee stock ownership plan component (the “ESOP Component”) which was intended to qualify as a stock bonus plan under section 401(a) of the Code and as an employee stock ownership plan under section 4975(e)(7) of the Code under the instrument entitled “Zale’s Savings and Employee Stock Ownership Plan” (the “Savings/ESOP Plan”);

WHEREAS, effective January 1, 1992, the Company split up the Savings/ESOP Plan into two separate plans: one through the amendment and restatement of the Savings/ESOP Plan, which was known as the “Zale’s Employee Stock Ownership Plan” (the “Zale ESOP Plan”), and the other through the execution of a new document, which plan was known as the “Zale’s Profit Sharing Plan” (the “Profit Sharing Plan”), each of which was a continuation of its respective component of the Savings/ESOP Plan without gap in time or effect;

WHEREAS, the Company terminated the Zale ESOP Plan effective January 1, 1992 and received a favorable determination letter from the Internal Revenue Service (the “IRS”) on the qualification of the Zale ESOP Plan upon its termination;

WHEREAS, the Company amended the Profit Sharing Plan on April 15, 1993 by adopting a First Amendment thereto and received a favorable determination letter from the IRS on the qualification of the Profit Sharing Plan, as amended by such First Amendment;

WHEREAS, effective April 1, 1994, the Company restated the Profit Sharing Plan to comply with then applicable legislation;

WHEREAS, the restated Profit Sharing Plan (the “Plan”) was thereafter restated by Amendments No. 1-7;

WHEREAS, the Company amended and restated the Plan to bring it into compliance with the Code, as modified by the Small Business Job Protection Act of 1996 (“SBJPA”), the General Agreement on Tariffs and Trades under the Uruguay Round Agreements Act (“GATT”), Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”), and the Taxpayer Relief Act of 1997 (“TRA ‘97”), as well as all rules and regulations enacted or promulgated since the date the Plan was last restated and administrative pronouncements issued by the Treasury Department applicable to the Plan;

(v)

WHEREAS, the Company amended the Plan, effective August 1, 2002, to adopt certain Model Amendments published in (i) IRS Notice 2001-37, relating to qualified transportation fringe benefits, (ii) IRS Notice 2001-57, for the changes to the Plan qualification requirements under section 401(a) of the Code that were made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), and (iii) IRS Revenue Procedure 2002-29, to comply with the minimum distribution rules;

WHEREAS, such amendment to the Plan was adopted to reflect the Plan’s good faith compliance with the requirements of EGTRRA, was to be construed in accordance with EGTRRA and the guidance issued thereunder, and was to supercede the provisions of the Plan to the extent those provisions were inconsistent with the provisions of the amendment;

WHEREAS, the Company elected, for the Plan Year ending July 31, 2002, in accordance with IRS Notice 2000-3, not to be a safe harbor plan for purposes of the actual deferral percentage test and the actual contribution percentage test, and the Company amended the Plan, effective August 1, 2001, to specify the testing method to be used for Plan Years ending July 31, 2002 and thereafter;

WHEREAS, the Company amended the Plan, effective June 1, 2003, to allow Piercing Pagoda Distribution Center employees and Warehouse employees who participated in the Plan to receive an allocation of matching contributions for the Plan Year ending July 31, 2003 in view of the closure of those facilities, and to allow the Company, in its discretion, to fund matching contributions prior to the end of the Plan Year for Participants who are not required to be employed on the last day of the Plan Year to be entitled to receive an allocation of such matching contributions;

WHEREAS, the Company amended the Plan, effective August 1, 1997 and August 1, 2000, as applicable, to comply with the requests of the IRS in order to secure a favorable determination letter regarding the Plan’s continued qualified status under section 401 of the Code;

WHEREAS, the Company subsequently amended the Plan, effective July 31, 2004, to clarify who makes the decision concerning the form of Company contributions, provide more flexibility in the investment of contributions made by Participants and the Company, and specify the investment treatment applicable to Participants who do not make investment directions;

WHEREAS, the Company amended the Plan, effective March 28, 2005, to (i) reduce the dollar limit on mandatory lump sum cashout distributions from $5,000 to $1,000 and (ii) reflect that no mandatory lump sum cashout distribution will be made after March 28, 2005 if the balance of the participant’s rollover account, when added to the balance of the remainder of his individual account, exceeds $1,000;

WHEREAS, by this instrument, the Company desires to amend and restate the Plan through a document generally effective August 1, 2005 to (i) incorporate into the Plan document the previous amendments to the Plan; (ii) reflect the transition of the recordkeeping and trustee services to Fidelity Investments and the following Plan design changes effective April 1, 2006: (A) provide for automatic enrollment for new Eligible Employees at the rate of two percent (2%) of Compensation, (B) increase the Pre-Tax Contribution rate for Non-Highly Compensated Employees to sixty percent (60%) of Compensation and for Highly Compensated Employees to thirty percent (30%) of Compensation, (C) increase the Catch-Up Contribution rate to fifty percent (50%), (D) prohibit Rollover Contributions to the Plan of after-tax monies and monies from a non-conduit individual retirement arrangement, (E) modify the method of determining whether an Employee has completed a Year of Service following his initial employment year to look at the Plan Year rather than the employment year, (F) allow Participants to continue to

(vi)

repay outstanding Plan loans following a termination of employment, (G) remove Company stock as a source for participant loans, (H) modify the hardship suspension period from six (6) months to one hundred eighty-three (183) days, (I) add an age fifty-nine and one-half (59¹/2) in-service withdrawal provision for all Participants, (J) eliminate systematic withdrawals as a form of distribution for Karten’s Plan Participants, (K) fully vest all Karten’s Plan Participants in their Karten’s Plan discretionary profit sharing and matching contribution accounts, (L) combine all Participants’ Karten’s Plan accounts with like accounts under the Plan (e.g., Karten’s matching contributions to the Matching Contribution Account source), and (M) permit affected Participants to receive qualified Hurricane Katrina distributions; (iii) comply with regulations issued pursuant to sections 401(k) and 401(m) of the Code; (iv) allow the Chief Executive Officer to amend the Plan to comply with changes in the law or to implement changes recommended by the Committee appointed pursuant to Article XIII that do not have a significant impact on Plan costs; (v) amend the Plan to address how errors in contribution percentage changes are addressed effective August 1, 2005; (vi) change the Plan Year, effective January 1, 2007, to the calendar year; and (vii) make certain other changes and clarifications in order to facilitate the transfer of the recordkeeping and trustee functions to Fidelity on April 1, 2006;

WHEREAS, in connection with the authority delegated to the Committee to recommend amendments to the Plan as described in the preceding paragraph, the Chief Executive Officer also desires to amend the Plan to include in this restated document the following changes, effective April 1, 2006: (i) change the definition of “Disability,” (ii) permit Participants to elect to have their annual Pre-Tax Contribution percentage automatically increased each Plan Year, (iii) clarify that the twenty-five percent (25%) limit on investments in Company stock applies to all contribution sources, (iv) provide for a lump sum distribution to Participants who reach their “Required Beginning Date,” (v) clarify that only Participant contribution sources are available for a hardship withdrawal, (vi) simplify the payout of benefits to Participants who die without a designated Beneficiary, (vii) reflect that the Benefits Department of the Company handles the daily operation of the Plan (i.e., is the Daily Administrator), (viii) expand the indemnity provisions of the Plan to cover the members of the Committee appointed pursuant to Article XIII and the Daily Administrator, (ix) update the claims procedure to reflect the maximum time requirements imposed by ERISA and those applicable to committees; and (x) provide for the correction of errors in implementing Participant investment directions; and

WHEREAS, this amendment and restatement of the Plan is intended to evidence the Plan’s continued good faith compliance with the requirements of EGTRRA and the guidance issued thereunder.

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Plan is hereby restated as follows:

(vii)

ARTICLE I

DEFINITIONS

Unless by the context hereof a different meaning is clearly indicated, whenever used in this Plan, the following words will have the meanings hereinafter set forth:

1.1	Administrator for the purposes of ERISA means the Company; provided, that the Company, by action of its Board of Directors or its Chief Executive Officer, may designate another person or entity, including the Trustee, the Recordkeeper or a Committee, as Administrator of the Plan. As of the Effective Date, the Company has designated the Committee as the Administrator. The Committee may delegate some or all of its duties to another person or entity pursuant to Article XIII (e.g., the Daily Administrator or Recordkeeper). Accordingly, any reference to the Administrator in this Plan will be deemed to refer to any such designee, as applicable.
1.2	Affiliated Company means the Company and any other entity which is, along with the Company, a member of a controlled group of corporations or a controlled group of trades or businesses (as defined in section 414(b) or (c) of the Code), any entity which along with the Company is included in an affiliated service group as defined in section 414(m) of the Code, and any other entity which is required to be aggregated with the Company pursuant to section 414(o) of the Code.
1.3	Allocation Date means the end of each calendar quarter or such other date or dates as the Administrator may establish from time to time.
1.4	Alternate Payee means any Spouse, former Spouse, child, or other dependent of a Participant who is recognized by a Domestic Relations Order as having a right to receive all, or a portion of, the benefits payable under the Plan with respect to such Participant.
1.5	Beneficiary means any person or fiduciary designated by a Participant or Former Participant in accordance with Section 10.2.
1.6	Benefit Commencement Date means the first day on which all events have occurred which entitle the Participant to such benefit, in accordance with the requirements of section 411 of the Code. For purposes of this Plan, a Participant’s Benefit Commencement Date will be determined as follows:

(a)

Termination of Service. With respect to any distribution upon termination of service for any reason, the Benefit Commencement Date will generally be the later of (i) the effective date of a Qualified Election (including all consents and applicable information in connection therewith) that is required to be made under section 411 of the Code with respect to such distribution, or (ii) thirty (30) days after the date of such termination of service; provided, however, that for purposes of Section 9.10, regarding Automatic Cashouts, the Benefit Commencement Date will be the date such cashout distribution is to be made.

(b)

In-Service Withdrawals. With respect to any withdrawal prior to termination of service, the Benefit Commencement Date will be the effective date of a Qualified Election (including all consents and applicable information in connection therewith) that is required to be made under section 411 of the Code with respect to such withdrawal.

(c) Attainment of Required Beginning Date. In the case of any distribution on account of the Participant’s attainment of the Required Beginning Date, if neither subparagraph (a) nor (b) applies, the Benefit Commencement Date will be the applicable April 1 following the calendar year in which the Participant attains age seventy and one-half (70¹/2) or terminates service, as applicable.

1.7	Break-in-Service means a Plan Year during which the Participant is credited with five hundred (500) or fewer Hours of Service.
1.8	Catch-Up Contribution Account means the portion of the Individual Account maintained by the Trustee or the Recordkeeper for each Participant, Former Participant or Beneficiary on and after April 1, 2006, reflecting the monetary value of such person’s interest in the Trust Fund attributable to Catch-Up Contributions made by the Participant under the Plan.
1.9	Catch-Up Contribution means the contributions made pursuant to section 414(v) of the Code as provided in Section 3.4 of this Plan.
1.10	Code means the Internal Revenue Code of 1986, as it may be amended from time to time. Reference to a section of the Code will include that section, applicable Treasury regulations promulgated thereunder and any comparable section of any future legislation that amends, supplements or supersedes said section, effective as of the date such comparable section is effective with respect to the Plan.
1.11	Committee means the committee appointed under Article XIII to administer the Plan, as from time to time constituted. If no such committee is appointed, the Company will constitute the Committee.
1.12	Common Stock means the shares of common stock of Zale Corporation.
1.13	Common Stock Fund means the Investment Fund maintained pursuant to the Plan which is invested in Common Stock.
1.14	Company means Zale Corporation, or such other organization which, pursuant to a spinoff, merger, consolidation, reorganization, or similar corporate transaction where a significant portion of the Company’s employees become employees of such organization, adopts and assumes the Plan and the Trust Agreement as the sponsor with the consent of the Company and agrees to accept the duties, responsibilities and obligations of the sponsor of the Plan and the Trust Agreement. Reference in the Plan to the Company will refer to any such organization which adopts and assumes the sponsorship of the Plan and the Trust Agreement.
1.15	Compensation means, with respect to an Eligible Employee, compensation paid to such Employee by an Employer which is includible in the Employee’s gross income for the Plan Year, plus amounts applied to purchase benefits pursuant to a salary reduction agreement under a cafeteria plan (as defined in section 125 of the Code) sponsored by an Employer, amounts deferred pursuant to a salary reduction agreement authorized in Section 3.1, amounts deferred pursuant to a salary reduction agreement under any other plan described in sections 401(k) and 408(k) of the Code sponsored by an Employer and amounts that are not includible in gross income of such Employee by reason of section 132(f)(4) of the Code, but excluding relocation expenses, merchandise incentives and car fringe benefits, and all other items of compensation.

2

	The Compensation of each Participant taken into account in determining allocations for any Plan Year will not exceed two hundred thousand dollars ($200,000), as adjusted for cost-of-living increases in accordance with section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to Compensation for the determination period that begins with or within the calendar year.
	For nondiscrimination testing purposes under Section 4.2 and Section 5.1, Compensation means any definition of compensation permitted under section 414(s) of the Code as elected by the Administrator for the applicable Plan Year.
1.16	Daily Administrator means the individual designated by the Administrator to handle on a ministerial basis the day-to-day operation of the Plan. In the event the Plan Administrator fails to appoint a Daily Administrator, the Administrator will be the Daily Administrator. As of the Effective Date, the Benefits Department of the Company is the Daily Administrator.
1.17	Direct Rollover means a payment by the Plan to an Eligible Retirement Plan specified by (a) the Participant, (b) the Participant’s surviving Spouse, or (c) the Participant’s former Spouse who is an Alternate Payee under a QDRO.
1.18	Disability means effective April 1, 2006 the Participant is either totally and permanently disabled within the meaning of a long-term disability plan sponsored by the Employer in which the Participant is a member or is determined to be totally and permanently disabled by a ruling issued by the Social Security Administration.
1.19	Domestic Relations Order means any judgment, decree, or order (including one that approves a property settlement agreement) that relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a Participant and is rendered under a state (within the meaning of section 7701(a)(10) of the Code) domestic relations law (including a community property law).
1.20	Effective Date means August 1, 2005, as to this amendment and restatement of the Plan, except:

(a)	specific provisions of the Plan designated as having a different effective date will be effective as indicated in such provisions; and
(b)	specific provisions of the Plan required to have a different effective date by applicable provisions of the Code, including revisions made by EGTRRA, will be effective as of the dates such provisions are required to be effective with respect to the Plan under the Code or, if later, under administrative pronouncements issued by the Internal Revenue Service or the Treasury Department.

1.21 Eligible Employee means any Employee who is on an Employer’s payroll in the United States, Puerto Rico or Guam. The term Eligible Employee will exclude:

(a)	all other persons who work outside of the United States unless the Committee elects to cover them by the Plan, in which case an appendix that reflects such coverage will be attached hereto;
(b)	any Leased Employee that section 414(n) of the Code treats as an Employee of an Employer, any independent contractor or any self-employed person even if

3

	such person is subsequently deemed to be a common law employee by the Employer, a governmental agency with jurisdiction over the Plan or a court of competent jurisdiction;
(c)	any Employee who is included in a unit of Employees covered by a collective bargaining agreement between the Employees’ representative and the Employer, even if they have met the requirements for eligibility, if there has been good faith bargaining between the Employer and the Employees’ representative and the collective bargaining agreement does not require the Employer to include those Employees in the Plan; and
(d)	any Employee who is a nonresident alien and who receives no earned income (within the meaning of section 911(d)(2) of the Code) from any Employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3) of the Code).

	An Eligible Employee who is a Participant in this Plan when he is excluded under the provisions of this Section 1.21 will cease active participation in this Plan on the effective date of that exclusion (e.g., the effective date of the collective bargaining agreement in the case of an exclusion under subsection (c)) and will not be eligible to make Pre-Tax Contributions or receive any Matching Contributions while a member of the ineligible class but will not be considered to have terminated employment for distribution purposes under this Plan.
1.22	Eligible Retirement Plan means (a) an individual retirement account described in section 408(a) of the Code, (b) an individual retirement annuity described in section 408(b) of the Code, (c) an annuity plan described in section 403(a) of the Code, (d) a qualified plan described in section 401(a) of the Code, which under its provisions and applicable law may accept such Eligible Rollover Distribution, (e) an annuity contract described in section 403(b) of the Code, and (f) an eligible plan under section 457 of the Code which is maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts rolled over to such plan from this Plan. This definition of Eligible Retirement Plan will also apply in the case of a distribution to a surviving Spouse, or a Spouse or former Spouse who is the Alternate Payee under a QDRO.
1.23	Eligible Rollover Distribution means any distribution of all or any portion of the Individual Account of a Participant, within the meaning of section 402(c)(4) of the Code, other than:

(a)	a distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee’s designated Beneficiary or for a specified period of ten (10) years or more;
(b)	a distribution to the extent such distribution is required under section 401(a)(9) of the Code;
(c)	generally, the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); provided, however, that an Eligible Rollover

4

	Distribution may include the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities), provided that such portion may only be rolled over to an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code or a qualified defined contribution plan described in section 401(a) or 403(a) of the Code that agrees to separately account for amounts so rolled over, including separately accounting for the portion of the distribution which is includable in gross income and the portion of such distribution which is not so includable.
(d)	a loan treated as a distribution under section 72(p) of the Code and not excepted by section 72(p)(2) of the Code;
(e)	a loan in default that is a deemed distribution;
(f)	any corrective distribution provided in Sections 4.2 and 5.1 (regarding excess Pre-Tax Contributions and excess Matching Contributions) and in Section 7.2 (regarding excess Annual Additions);
(g)	a hardship withdrawal under section 401(k)(2)(B)(i)(IV) of the Code; and
(h)	any other distribution so designated by the Internal Revenue Service in revenue rulings, notices, and other guidance of general applicability.

1.24	Employee means any individual in the employ of the Company or an Affiliated Company in the capacity of an employee and not in the capacity of an independent contractor, contract employee or Leased Employee.
1.25	Employee After-Tax Account means the portion of the Individual Account maintained by the Trustee or the Recordkeeper for each Participant, Former Participant or Beneficiary reflecting the monetary value of such person’s interest in the Trust Fund attributable to contributions made by the Participant on an after-tax basis when such contributions were permitted by the Plan. Effective April 1, 2006, the Employee After-Tax Account will also hold amounts repaid to the Plan by Participants who received an improper distribution of Excess Contributions pursuant to Section 4.2 or Excess Aggregate Contributions pursuant to Section 5.1.
1.26	Employee Pre-Tax Matched Contribution Account means the portion of the Individual Account maintained by the Trustee or the Recordkeeper for each Participant, Former Participant or Beneficiary on or after April 1, 2006, reflecting the monetary value of such person’s interest in the Trust Fund attributable to contributions made by the Participant on a pre-tax basis that were eligible for a corresponding Matching Contribution under the Plan. The Employee Pre-Tax Matched Contribution Account will also be credited with amounts attributable to pre-tax contributions made by the Participant under the Karten’s Plan that were entitled to a corresponding Matching Contribution under that plan.
1.27	Employee Pre-Tax Unmatched Contribution Account means the portion of the Individual Account maintained by the Trustee or the Recordkeeper for each Participant, Former Participant or Beneficiary on and after April 1, 2006, reflecting the monetary value of such person’s interest in the Trust Fund attributable to contributions made by the Participant on a pre-tax basis that were not eligible for a corresponding Matching

5

	Contribution under the Plan. The Employee Pre-Tax Unmatched Contribution Account will also be credited with amounts attributable to pre-tax contributions made by the Participant under the Karten’s Plan that were not entitled to a corresponding Matching Contribution under that plan.
1.28	Employer means the Company and any other Affiliated Company which adopts the Plan with respect to its Eligible Employees as provided in Article XIV.
1.29	Employment Commencement Date means the first day an Employee has an Hour of Service.
1.30	Entry Date means the first day of each month.
1.31	ERISA means the Employee Retirement Income Security Act of 1974, as it may be amended from time to time, and applicable regulations promulgated thereunder.
1.32	Excess Aggregate Contributions means Matching Contributions attributable to Highly Compensated Employees that cause the Plan to fail the actual contribution percentage test under section 401(m) of the Code, as described in Section 5.1.
1.33	Excess Contributions means Pre-Tax Contributions attributable to Highly Compensated Employees that cause the Plan to fail the actual deferral percentage test under section 401(k) of the Code, as described in Section 4.2.
1.34	Excess Elective Deferral means Pre-Tax Contributions that exceed the limit on such contributions under section 402(g) of the Code, as described in Section 4.1(a).
1.35	Former Participant means any individual who has been a Participant in the Plan, who is no longer in the employ of an Affiliated Company and who has not yet received the entire benefit to which he is entitled under the Plan.
1.36	Highly Compensated Employee means, for any Plan Year, any Employee who:

(a)

was, at any time during the Plan Year or the preceding Plan Year, a more than five percent (5%) owner of any Employer; or

(b)

during the preceding Plan Year received 415 Compensation (as defined in Section 7.1) from all Employers in excess of eighty thousand dollars ($80,000) (as adjusted to such other amount as the Secretary of the Treasury will prescribe at the same time and in the same manner as provided under section 415(d) of the Code for adjusting the dollar limitation in effect under section 415(b)(1)(A) of the Code (i.e., one hundred thousand dollars ($100,000) for 2006)).

1.37 Hour or Hour of Service means each hour credited to an Employee in accordance with the following:

(a)	An Hour of Service will be credited to an Employee for each hour for which he is directly or indirectly paid, or entitled to payment, by any Affiliated Company.
(b)	An Hour of Service will be credited to an Employee for each hour for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by an Affiliated Company. These hours will be credited to the Employee for the

6

	Plan Year or Plan Years to which the award or agreement pertains rather than the Plan Year in which the award, agreement or payment is made.
(c)	In no event will an Employee be given credit for a specific Hour of Service under more than one of the above subsections (a) or (b).
(d)	Hours of Service for periods during which no duties are performed will be determined and credited in accordance with Sections 2530.200b-2(b) and (c) of the Department of Labor regulations.
(e)	If an absence from the service of an Affiliated Company occurs for any period by reason of (i) pregnancy of the individual, (ii) birth of a child of the individual, (iii) placement of a child with the individual in connection with the adoption of such child by such individual, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement and if the Participant does not return to employment immediately on the expiration of the period of absence, solely for purposes of determining a Break in Service, the Plan will credit the Participant with up to five hundred and one (501) Hours of Service which otherwise would normally have been credited to such individual during the Plan Year. However, if in the Plan Year in which the absence commences the Participant would not have incurred a Break in Service even if the preceding sentence had not applied, the Plan will credit the Participant with such Hours of Service in the following Plan Year. The Plan will not credit any Participant with any Hours of Service under this subsection (e) unless such Participant timely furnishes the Administrator information establishing (i) that the absence from the service of an Affiliated Company was for one or more reasons specified in the first sentence of this subparagraph (e), and (ii) the numbers of days for which there was an absence.
(f)	Effective December 12, 1994, each period of qualified military service (within the meaning of Chapter 43 of Title 38, United States Code) served by an Employee who is reemployed under that chapter by an Affiliated Company following such service will be considered service with an Affiliated Company for purposes of determining his Hours of Service.
(g)	Hours of Service include hours credited for an employer, the stock or assets of which are acquired by an Employer or an Affiliated Company, without regard to whether a predecessor plan was maintained.

1.38 Individual Account means an account or record to be maintained by the Trustee or the Recordkeeper reflecting the monetary value of the undivided interest in the Trust Fund of each Participant, each Former Participant and each Beneficiary and, effective as of April 1, 2006, and will include the following sub-accounts:

(a)	Catch-Up Contribution Account;
(b)	Employee After-Tax Account;
(c)	Employee Pre-Tax Matched Contribution Account;
(d)	Employee Pre-Tax Unmatched Contribution Account;

7

(e)	Matching Contribution Account;
(f)	Profit Sharing Account;
(g)	QNEC Account;
(h)	Rollover Account; and
(i)	Safe Harbor Match Account.

	The term Individual Account will also include such other additional account or accounts as the Administrator may establish from time to time.
1.39	Interactive Electronic Communication means, to the extent available under the Plan, a communication between a Participant, Former Participant or Beneficiary and the Recordkeeper pursuant to a system maintained by the Recordkeeper and communicated to each Participant, Former Participant and Beneficiary whereby each such individual may obtain financial information regarding his Individual Account and amounts available for withdrawal, and may initiate investment transfer elections and exercise options as described herein with respect to his Individual Account through the use of such system and a personal identification number assigned to the Participant, Former Participant or Beneficiary by the Recordkeeper or the Administrator. If a Participant, Former Participant or Beneficiary participates in the Plan’s Interactive Electronic Communication feature through the use of his personal identification number, the Participant, Former Participant or Beneficiary, as the case may be, will be deemed to have given his written consent and authorization to any action resulting from the use of the Interactive Electronic Communication system by the Participant, Former Participant or Beneficiary.
1.40	Investment Fund means one or more funds designated by the Administrator pursuant to Section 16.1 from time to time and maintained for the purpose of providing a vehicle for the investment of assets of the Trust Fund, in accordance with the directions of each Participant, Former Participant or Beneficiary with respect to his Individual Account, until such Investment Fund or Investment Funds will be eliminated by action of the Administrator. The Administrator may direct the Trustee to invest one or more of such funds with a specified insurance company or mutual fund, or appoint an investment advisor as provided in Section 15.5 to manage the same and may also direct the Trustee to establish new Investment Funds or delete existing Investment Funds from time to time.
1.41	Karten’s Plan means the Karten’s Jewelers, Inc. 401(k) Plan which was merged into the Plan on August 1, 1996.
1.42	Leased Employee means an individual described in section 414(n) of the Code (i.e., who has performed services for the Employer pursuant to a leasing agreement on a substantially full-time basis for at least one (1) year and who performs such services under the primary direction or control of the Employer). A Leased Employee will also include any individual who is deemed to be an Employee of an Employer under section 414(o) of the Code.
1.43	Matching Contribution means the contribution made by an Employer pursuant to Section 3.2.

8

1.44	Matching Contribution Account means the portion of the Individual Account maintained by the Trustee or the Recordkeeper for each Participant, Former Participant or Beneficiary, reflecting the monetary value of such person’s individual interest in the Trust Fund attributable to an Employer’s Matching Contributions under Section 3.2. Effective April 1, 2006, the Matching Contribution Account will also be credited with amounts attributable to Matching Contributions made on behalf of the Participant under the Karten’s Plan.
1.45	Non-Highly Compensated Employee means any Employee who is not a Highly Compensated Employee. The determination of an Employee’s status as a Non-Highly Compensated Employee for a Plan Year will be determined based on the definition of Highly Compensated Employee in Section 1.36 that is applicable for that Plan Year.
1.46	Normal Retirement Date means the later of a Participant’s or Former Participant’s 65th birthday or the fifth (5th) anniversary of the date he commenced participation in the Plan. The Normal Retirement Date for a Participant or Former Participant who previously participated in the Karten’s Plan and had amounts transferred from the Karten’s Plan to the Plan means the date the Participant attains age sixty-five (65).
1.47	Participant means an Eligible Employee who has met the eligibility requirements of the Plan as provided in Article II and has begun participating in the Plan. An Eligible Employee who elects to make a Rollover Contribution but who has not yet met the eligibility requirements of the Plan (i.e., has not completed one (1) Year of Service or attained age twenty-one (21)) will be considered a Participant only for purposes of applying the relevant provisions of the Plan relating to the investment and distribution of such Employee’s Rollover Account and his rights and responsibilities under ERISA with respect to such Rollover Contribution. For purposes of Section 4.2 (regarding the actual deferral percentage test) and Section 5.1 (regarding the actual contribution percentage test), the term “Participant” includes any Eligible Employee who has met the eligibility requirements of the Plan (i.e., attained age twenty-one (21) and completed one (1) Year of Service) regardless of whether he has elected to make Pre-Tax Contributions to the Plan.
1.48	Plan means the plan embodied herein, as the same may be amended from time to time, and will be known as the “Zale Corporation Savings & Investment Plan.”
1.49	Plan Year means, initially, the twelve (12)-month period from August 1 of each calendar year to the next following July 31. Effective January 1, 2007, the Plan Year will change to the calendar year. Accordingly, the Plan Year that begins August 1, 2006 will be a short Plan Year that ends December 31, 2006; and, thereafter, Plan Year will mean the calendar year.
1.50	Pre-Tax Contribution means contributions made by an Employer on behalf of each Participant pursuant to a salary reduction agreement described in Section 3.1. Those Pre-Tax Contributions which are eligible for a Matching Contribution pursuant to Section 3.2 will be referred to as Pre-Tax Matched Contributions. Those Pre-Tax Contributions which are not eligible for a Matching Contribution pursuant to Section 3.2 will be referred to as Pre-Tax Unmatched Contributions.
1.51	Pre-Tax Contribution Accounts means the Participant’s Employee Pre-Tax Matched Contribution Account and Employee Pre-Tax Unmatched Contribution Account.

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1.52

Profit Sharing Account means the portion of the Individual Account maintained by the Trustee or the Recordkeeper for each Participant, Former Participant or Beneficiary, reflecting the monetary value of such person’s individual interest in the Trust Fund attributable to an Employer’s discretionary profit sharing contributions made to the Plan before August 1, 1998, and earnings thereon. Such Profit Sharing Account became fully vested as of July 31, 2005. Effective April 1, 2006, the Employer Profit Sharing Account will also be credited with amounts attributable to discretionary profit sharing contributions, if any, made on behalf of the Participant under the Karten’s Plan.

1.53

QDRO means a Domestic Relations Order that:

(a)	Creates or recognizes the existence of an Alternate Payee’s right, or assigns to an Alternate Payee such right, to receive all or a portion of the benefits payable with respect to a Participant under the Plan;
(b)	Does not require the Plan to provide any type or form of benefit, or any option not otherwise provided under the Plan;
(c)	Does not require the Plan to provide increased benefits (determined on the basis of actuarial value);
(d)	Does not require the payment of benefits to an Alternate Payee that are required to be paid to another Alternate Payee under another order previously determined to be a QDRO; and
(e)	Clearly specifies:

(i)	The name and last known mailing address of the Participant and the name and mailing address of each Alternate Payee covered by the order (unless such addresses are reasonably available to the Daily Administrator);
(ii)	The amount or percentage of the Participant’s benefits to be paid by the Plan to each such Alternate Payee, or the manner in which such amount or percentage is to be determined;
(iii)	The number of payments or payment periods to which such order applies; and
(iv)	That it is applicable with respect to this Plan.

	Notwithstanding the foregoing, a Domestic Relations Order will not be considered to fail to qualify as a QDRO with respect to any payment made before a Participant has separated from service solely because the order requires that payment of benefits be made to an Alternate Payee prior to the date the Participant attains age fifty (50).
1.54	QNEC Account means the portion of the Individual Account maintained by the Trustee or the Recordkeeper for each Participant, Former Participant or Beneficiary on and after April 1, 2006, reflecting the monetary value of such person’s individual interest in the Trust Fund attributable to QNECs made to the Plan and the earnings and losses thereon.

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1.55

QNECs means the qualified nonelective contributions made on an Eligible Employee’s, a Participant’s or Former Participant’s behalf under the Plan in order to satisfy the actual deferral percentage test described in Section 4.2 or the actual contribution percentage test described in Section 5.1 or to correct certain operating discrepancies pursuant to certain voluntary correction programs approved by the Internal Revenue Service. A Participant’s or Former Participant’s QNECs will be fully vested and subject to the distribution restrictions set forth in sections 401(k)(2)(B) and 401(k)(10) of the Code.

1.56

Qualified Election means the designation of any Beneficiary in addition to or other than the Participant’s Spouse, and if the Benefit Commencement Date is prior to the Participant’s Normal Retirement Date, the election of a Benefit Commencement Date. No such designation will be deemed to be a Qualified Election unless it satisfies the following rules, and such other requirements as the Administrator may prescribe:

(a)	In the case of the designation of any Beneficiary in addition to or other than the Participant’s Spouse, the Participant’s Spouse, if any, must consent to such designation and such Spouse’s consent must be witnessed by a notary public.
(b)	Notwithstanding the consent requirement set forth in Section 1.56(a) above, if the Participant warrants to the Administrator that such written consent may not be obtained because there is no Spouse or the Spouse cannot be located or for any other reason as the Administrator determines to be consistent with the requirements of section 417 of the Code, a related designation of Beneficiary without spousal consent may be deemed a Qualified Election to the extent permitted by sections 401(a)(11) and 417 of the Code; provided, however, that the Administrator may require the Participant in such case to produce such evidence of the Spouse’s unavailability or other circumstances as the Administrator deems to be appropriate.
(c)	A Qualified Election under this provision requiring consent of a Participant’s Spouse will be valid only with respect to the Spouse who consented to the Qualified Election, or in the event of a Qualified Election to which the Spouse’s consent has not been obtained, with respect to that Spouse whose consent was not obtained (e.g., that Spouse who cannot be located).
(d)	A revocation of or change in a prior designation of Beneficiary may be made by a Participant at any time before the Benefit Commencement Date but any change in a designation will be subject to the foregoing rules. Subject to the foregoing (relating to a change by a Participant), the consent by a Participant’s Spouse to a designation will be irrevocable. The number of revocations and designations or changes thereto will not be limited during any applicable election period.
(e)	A designation of Beneficiary which, by reason of a failure to obtain required spousal consent could not be given effect when made, may later be given effect if at the relevant date the Participant has no Spouse or is not then otherwise required to have spousal consent.

A designation of Beneficiary will be effective as of the date of receipt by the Administrator of a properly completed designation.

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1.57	Recordkeeper means any person or entity appointed by the Company to perform record keeping and other administrative services on behalf of the Plan. If no Recordkeeper is appointed, the Trustee will perform the duties of the Recordkeeper.
1.58	Required Beginning Date means the April 1 following the later of the calendar year in which the Participant attains age seventy and one-half (701/2) or terminates service, provided, however, that if the Participant is a “five-percent owner” within the meaning of section 401(a)(9) of the Code, the Required Beginning Date will be the April 1 following the Plan Year in which the Participant attains age seventy and one-half (701/2) regardless of whether the Participant has terminated service.
1.59	Rollover Account means the portion of the Individual Account maintained by the Trustee or the Recordkeeper for each Eligible Employee or Participant who makes a Rollover Contribution reflecting the monetary value of such person’s individual interest in the Trust Fund attributable to such Rollover Contribution.
1.60	Rollover Contribution means any amount contributed or directly transferred to the Plan which would constitute a rollover contribution within the meaning of the Code; provided, however, that effective April 1, 2006, the following amounts will not constitute Rollover Contributions under this Plan: (a) after-tax contributions, or (b) amounts held in an individual retirement account or individual retirement annuity which does not constitute a conduit account (i.e., holds money other than qualified retirement plan money).
1.61	Safe Harbor Match Account means the portion of the Individual Account maintained by the Trustee or the Recordkeeper for each Participant, Former Participant or Beneficiary effective on and after April 1, 2006, reflecting the monetary value of such person’s individual interest in the Trust Fund attributable to Matching Contributions when the Plan was a safe harbor Plan under sections 401(k) and 401(m) of the Code.
1.62	Spouse means the person to whom a Participant is legally married as of such Participant’s Benefit Commencement Date, or in the case of a Participant who dies prior to his Benefit Commencement Date, the person to whom the Participant is legally married on the date of his death. To the extent required by a QDRO pursuant to Section 9.20, a surviving Spouse or former Spouse of a Participant will be treated as the Participant’s Spouse.
1.63	Trust Agreement means the Zale Corporation Savings & Investment Trust Agreement entered into between the Company and the Trustee to carry out the purposes of the Plan and under which the Trust Fund is maintained; provided, that if such agreement be amended or supplemented, Trust Agreement, as of a particular date, will mean such agreement, as amended and supplemented and in force on such date.
1.64	Trust Fund means all assets of whatsoever kind and nature from time to time held by the Trustee pursuant to terms and conditions of the Trust Agreement out of which benefits of the Plan are provided. The Trust Fund may be divided into Investment Funds as provided in Section 16.1.
1.65	Trustee means the trustee or trustees acting at any time as Trustee under the Trust Agreement.
1.66	Valuation Date means each day of the Plan Year on which the New York Stock Exchange is open.

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1.67 Year of Service means a twelve (12)-month period commencing on the Employee’s Employment Commencement Date during which the Employee has one thousand (1,000) or more Hours of Service. Effective April 1, 2006, in the event that an Employee does not perform one thousand (1,000) Hours of Service during the twelve (12)-month period commencing on his Employment Commencement Date, subsequent Years of Service will be determined by the Plan Year, commencing with the Plan Year that begins during such Employee’s initial employment year. In connection with the change in Plan Year to the calendar year effective January 1, 2007, an Employee who does not complete one thousand (1,000) Hours of Service during his initial employment year and whose eligibility is being determined on the basis of the Plan Year, will be credited with a Year of Service if he performs one thousand (1,000) Hours of Service during either the twelve (12) month period beginning on August 1, 2006 or the twelve (12) month period beginning January 1, 2007.

End of Article I

13

ARTICLE II

ELIGIBILITY OF EMPLOYEES

2.1	Eligibility to Participate in the Plan. An Eligible Employee who was a Participant in the Plan on the Effective Date will continue to be a Participant on or after that date. An Eligible Employee who was not a Participant on the Effective Date, will become a Participant as of the Entry Date coinciding with or next following the date he will have both (a) completed one (1) Year of Service, and (b) attained age twenty-one (21), if employed by an Employer on such Entry Date. An Eligible Employee who completes the eligibility requirements but is not employed by an Employer on his Entry Date will become a Participant as provided in Section 2.2. An Employee who completes the service requirements while employed by an Affiliated Company which is not an Employer will become a Participant as of the date on which he becomes an Eligible Employee of an Employer (including, without limitation, by reason of such Affiliated Company’s adoption of the Plan as provided in Article XIV and consequent redefinition as an Employer), or the date he attains age twenty-one (21), if later. An Eligible Employee who completes the eligibility requirements but does not elect to enroll in the Plan on the first Entry Date on which he is eligible may elect to enroll as of any subsequent payroll period.
2.2	Eligibility upon Reemployment. Each Eligible Employee who has satisfied the eligibility requirements in Section 2.1 and is not employed by an Employer on the Entry Date on which he would have become a Participant in the Plan, and who returns to employment with an Employer, will be eligible to become a Plan Participant on the date on which he resumes employment as an Eligible Employee with an Employer.
	Each Eligible Employee who has attained age twenty-one (21) but has not completed one (1) Year of Service at the time of his termination of employment from the Employer and all Affiliated Companies will be eligible to become a Participant as follows: (a) if the Employee is reemployed by the Employer before incurring a Break in Service, he will have his prior Hours of Service reinstated and will be eligible to become a Participant as of the Entry Date coinciding with or next following the date he will have both (i) completed one (1) Year of Service, and (ii) attained age twenty-one (21), if employed by an Employer as an Eligible Employee on such Entry Date and (b) if the Employee is reemployed by the Employer after incurring a Break in Service, his prior Hours of Service will be disregarded and he will be eligible to become a Participant as of the Entry Date coinciding with or next following the date he will have both (A) completed one (1) Year of Service, and (B) attained age twenty-one (21), if he is employed by an Employer as an Eligible Employee on such Entry Date.
	Each Eligible Employee who has not attained age twenty-one (21) and has completed one (1) Year of Service at the time of his termination of employment from the Employer and all Affiliated Companies, will be eligible to become a Participant on the date on which he will have both resumed employment as an Eligible Employee with an Employer and attained age twenty-one (21).
2.3	Reemployment of Participant . If the employment of a Participant is terminated for any reason and he subsequently is reemployed by an Employer, he will be eligible to become a Participant on the date he resumes employment with an Employer as an Eligible Employee.

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2.4 Cessation of Participation. A Participant will immediately cease to be eligible to make Pre-Tax Contributions and to receive an allocation of Matching Contributions under the Plan upon the occurrence of either of the following events:

(a)	termination of his salary reduction agreement established pursuant to Section 3.1; or
(b)	termination of his status as an Eligible Employee with all Employers for any reason.

If a Participant is transferred to a class of employment not eligible for participation in the Plan but continues to be employed by an Affiliated Company (i.e., he is no longer an Eligible Employee), no further contributions to the Trust Fund will be made by or on behalf of the Participant under the Plan with respect to periods on and after the transfer. Any Participant described in the preceding sentence may recommence his participation in the features of the Plan for which he was eligible at the time of the transfer to an ineligible class if he is transferred back to eligible employment (i.e., he becomes an Eligible Employee) and makes the appropriate elections through the Interactive Electronic Communication system in accordance with Section 3.1. During the period of his employment in such transferred position, the Participant will continue to be (i) eligible for withdrawals (subject to the requirements of Article IX), (ii) permitted to transfer his Individual Account among the Investment Funds, and (iii) permitted to change Beneficiaries in accordance with the provisions of the Plan.

2.5

Eligibility Upon Entry or Reentry into Eligible Class of Employees. In the event a Participant is excluded because he is no longer an Eligible Employee as specified in this Article II, such Employee will be eligible to become a Participant immediately upon his return to status as an Eligible Employee. In the event that an Employee who is not a former Participant in the Plan becomes an Eligible Employee, such Employee will be eligible to become a Participant immediately if such Employee has satisfied the eligibility requirements of Section 2.1 and would have previously been eligible to become a Participant had he been an Eligible Employee.

End of Article II

15

ARTICLE III

CONTRIBUTIONS

3.1 Pre-Tax Contributions.

(a)	Amount of Pre-Tax Contributions. Effective as soon as administratively practicable on or after April 1, 2006, unless the Participant elects otherwise, upon satisfying the eligibility requirements of Article II, or upon his reemployment after satisfying such eligibility requirements, the Participant will automatically be enrolled in the Plan at a Pre-Tax Contribution level of two percent (2%) of Compensation and will be deemed to have entered into a salary reduction agreement with the Employer with respect to such Pre-Tax Contribution. Such automatic enrollment will be implemented as soon as administratively feasible after the Participant’s satisfaction of the eligibility requirements or reemployment after satisfying such eligibility requirements, as the case may be. Alternatively, such Participant or any other Eligible Employee who is eligible to participate in the Plan may enter into a salary reduction agreement electing to have the Employer make Pre-Tax Contributions to the Trust Fund on his behalf in an amount equal to at least one percent (1%) and not more than sixty percent (60%) (thirty percent (30%) if the Participant is a Highly Compensated Employee) (in whole percentages) of his Compensation each Plan Year, subject to the restrictions and limitations of Article IV.
(b)	Limit on Pre-Tax Contributions. No Participant will be permitted to have Pre-Tax Contributions made under the Plan or under any other qualified plan maintained by an Employer during any calendar year in excess of the dollar limitation contained in section 402(g) of the Code (fifteen thousand dollars ($15,000) for year 2006, with such amount to be adjusted automatically to reflect any cost-of-living adjustment authorized by section 402(g)(4) of the Code), as in effect for such calendar year, except to the extent permitted under Section 3.4 of this Article III and section 414(v) of the Code, if applicable. In the event that a Participant’s Pre-Tax Contributions exceed this dollar amount, such contributions will be disposed of in accordance with Section 4.1.
(c)	Salary Reduction Agreement.

(i) Nature of Agreement. The salary reduction agreement described in this Section 3.1 will be a legally binding agreement whereby (A) the Participant agrees that, as of the effective date of the agreement, the Compensation otherwise payable to him thereafter will be reduced by an amount (as selected or, in the case of automatic enrollment under Section 3.1(a) above, deemed selected by the Participant) not to exceed the maximum percentage permitted under Section 3.1(a), and (B) the Employer agrees to contribute the total amount of such reduction in Compensation to the Trust Fund on behalf of the Participant as a Pre-Tax Contribution under Section 3.1(a). Such contributions will be made by the Employer to the Trust Fund as soon as administratively possible after the payroll period to which such contribution relates. Subject to the provisions of Section 3.1(c)(iv) and Article IV, a Participant’s salary reduction agreement will remain in effect until modified or terminated in accordance with Section 3.1(c)(iii) or Section 3.1(c)(iv).

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(ii)	Effective Date of Agreement. The effective date of a Participant’s salary reduction agreement will be no earlier than the Entry Date following the date such agreement is made (or deemed to be made in the case of a newly eligible or rehired Eligible Employee pursuant to Section 3.1(a)).
(iii)	Amendment of Pre-Tax Contribution Elections. As of any payroll period, a Participant may amend his salary reduction agreement to stop making Pre-Tax Contributions with respect to Compensation not yet paid using the Interactive Electronic Communication system. If a Participant elects to stop making Pre-Tax Contributions, the Participant may elect to resume making Pre-Tax Contributions by so electing using the Interactive Electronic Communication system. The effective date of such new salary reduction agreement will be as soon as administratively feasible after such election but no earlier than the first day of the next payroll period beginning after the date the election is received by the Administrator through the Interactive Electronic Communication system. A Participant may increase or decrease his Pre-Tax Contributions (within the limits of Section 3.1(a)) by so electing using the Interactive Electronic Communication system. The effective date of the increase or decrease will be as soon as administratively feasible after such election but no earlier than the first day of the next payroll period beginning after the date the election is received by the Administrator through the Interactive Electronic Communication system. Effective April 1, 2006, subject to the maximum (aggregate) percentage permitted under Section 3.1(a) and the limitations on Annual Additions set forth in Article VII the Participant may elect to have the amount of his Pre-Tax Contributions automatically increased by a designated percentage each Plan Year. Such election will be made using the Interactive Electronic Communication system.
(iv)	Transfer to Ineligible Employment or Termination of Employment. A Participant’s salary reduction agreement will terminate automatically if the Participant transfers to a class of employment not eligible for participation in the Plan or if he terminates his employment as an Eligible Employee with his Employer. Upon return of the Participant to eligible employment, the Participant will be permitted to execute a new salary reduction agreement and resume having contributions made to the Trust Fund on his behalf under Section 3.1(a), provided that the effective date of the new salary reduction agreement will be no earlier than the later of (A) the first payroll period beginning after the new salary reduction agreement is received in executed form by the Administrator or (B) the date the Participant resumes eligible employment with an Employer. Transfers of Participants to different payroll systems among the Employers will be administered by procedures established by the Administrator.

3.2 Matching Contributions. Each Plan Year, the Employer will make a Matching Contribution to the Plan in an amount equal to fifty percent (50%) of the first four percent (4%) of Compensation that each eligible Participant contributes to the Plan as a Pre-Tax Contribution (i.e., a Pre-Tax Matched Contribution). In calculating the Matching Contribution, any Pre-Tax Contribution made on behalf of a Participant for a payroll period in excess of four percent (4%) of the Participant’s Compensation paid during such payroll period (i.e., a Pre-Tax Unmatched Contribution) will not be considered. A

17

	Participant will be eligible for an allocation of Matching Contributions if he is employed on the last day of the Plan Year or if the Participant retires on or after his Normal Retirement Date, dies or becomes Disabled during the Plan Year. Matching Contributions made pursuant to this Section will be subject to the limitations and restrictions of Article V.
3.3	QNECs. The Employer, in its discretion, may contribute to the Trust Fund as a QNEC for such Plan Year the amounts necessary to cause the Plan to satisfy the restrictions set forth in Section 4.2 (regarding the actual deferral percentage test) and Section 5.1 (regarding the actual contribution percentage test). QNECs will be allocated to all Participants or only to Participants who are not Highly Compensated Employees, as elected by the Employer, in the ratio in which each such Participant’s Compensation for the Plan Year bears to the total Compensation for such Participants for such Plan Year. For purposes of this allocation, an Eligible Employee will be considered a Participant regardless of whether he has elected to make Pre-Tax Contributions to the Plan. Each Plan Year an Employer will designate the portion, if any, of the QNEC that it made for the Plan Year that will be considered under Section 4.2 for the actual deferral percentage test and the portion, if any, that will be considered under Section 5.1 for the actual contribution percentage test.
3.4	Catch-Up Contributions. Each Participant who has attained age fifty (50) or who will attain age fifty (50) by the close of the then current Plan Year, may elect for such Plan Year to make Catch-Up Contributions pursuant to this Section 3.4. A Participant may make Catch-Up Contributions pursuant to a salary reduction agreement in whole percentage increments from one percent (1%) to fifty percent (50%) of his Compensation, subject to the calendar year limit on such contributions under section 414(v) of the Code, when his Pre-Tax Contributions exceed any of the following limits: (a) the Plan limit for Pre-Tax Contributions, as set forth in Section 3.1(a); (b) the statutory limit for elective deferrals under section 402(g) of the Code, as set forth in Section 3.1(b), or the statutory limit on annual additions under section 415 of the Code, as set forth in Article VII; or (c) the actual deferral percentage test limit under section 401(k)(3) of the Code, as set forth in Section 4.2.
	Such Catch-Up Contributions will be made pursuant to administrative procedures established by the Administrator. Such procedures will provide that Catch-Up Contributions will be subject to a “withholding hierarchy” for purposes of determining the amount of Catch-Up Contributions that may be contributed on behalf of a Participant. The Administrator will determine the order of withholdings taken from a Participant’s Compensation (e.g., for federal, state and local taxes, social security, wage garnishments, welfare plan contributions, 401(k) deferrals, and similar withholdings) and Catch-Up Contributions will be subject to such withholding hierarchy. As a result, Catch-Up Contributions may be effectively limited to Compensation available after the application of such withholding hierarchy. Further, to the extent applicable, all plans of the Company and its Affiliated Companies will provide for catch-up contributions in accordance with the provisions of section 414(v) of the Code and the final regulations issued thereunder.
	Catch-Up Contributions will not be subject to (i) the limits on elective deferrals under section 402(g) of the Code (as set forth in Section 3.1(b)), (ii) the actual deferral percentage limit under section 401(k)(3) of the Code (as set forth in Section 4.2), or (iii) the limits on annual additions under section 415 of the Code (as set forth in Article VII). Similarly, Catch-Up Contributions are not taken into account for purposes of section

18

	410(b) or 416 of the Code, except that Catch-Up Contributions made in prior Plan Years will be taken into account in determining whether the Plan is top-heavy for the Plan Year under Article XVII. Except as otherwise stated herein, Catch-Up Contributions will be treated as Pre-Tax Contributions for all purposes under the Plan.
3.5	Time and Form of Contributions. Payments of contributions due under Section 3.1 will be made at such time as the Employer may determine but at least as promptly as the time prescribed by regulations promulgated by the Department of Labor, and the Matching Contributions due under Section 3.2 will be made at such time as the Employer will determine, except that the Matching Contribution will be paid in full not later than the time required by law to enable the Employer to deduct such contribution on its federal income tax return with respect to its taxable year. All contributions will be made in cash (by check or wire transfer), or in Common Stock as determined by the Chief Executive Officer of the Company in his or her discretion. The Chief Executive Officer of the Company may provide that all or a portion of such contributions will be allocated by payroll period during the Plan Year. Contributions made after the last day of the Plan Year but within the time for filing an Employer’s federal income tax return (including extensions thereof) will be deemed made as of the last day of that Plan Year if so directed by the Employer, except such contributions will not share in increases, decreases, or income to the Trust Fund prior to the date actually made.
	Notwithstanding the foregoing, upon an Employer’s request, a contribution which was made upon a mistake of fact or conditioned upon initial qualification of the Plan (application for which is made by the time prescribed by law for filing the Employer’s tax return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe) or upon deductibility of the contribution will be returned to the Employer within one (1) year after payment of the contribution, denial of the qualification, or disallowance of the deduction (to the extent disallowed), as the case may be; provided, however, the amount returned to an Employer due to mistake of fact or denial of deductibility will not be increased by any earnings thereon and will be reduced by any losses attributable to such amount.
3.6	Limit on Employer Contributions. Notwithstanding the foregoing provisions of Sections 3.1, 3.2, or 3.3, the contribution of an Employer for any Plan Year (whether made pursuant to Sections 3.1, 3.2, or 3.3) will in no event exceed an amount which will, under the law then in effect, be deductible by the Employer in computing its federal taxes based on income for its taxable year. As permitted by section 401(a)(27) of the Code, any Employer may make contributions to the Plan without regard to net profits, current or accumulated.
3.7	Manner of Making Contributions. All contributions to the Trust Fund will be paid directly to the Trustee. In connection with each contribution, the Employer will provide the Recordkeeper with information that:

(a)	identifies each Participant on whose behalf the contribution is being made and the amount thereof;
(b)	states whether the amount contributed on behalf of the Participant is a Pre-Tax Matched Contribution, a Pre-Tax Unmatched Contribution, a Matching Contribution, a QNEC, a Catch-Up Contribution, or a Rollover Contribution; and
(c)	directs the investment of the amount contributed on behalf of the Participant.

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3.8	Rollover Contributions. An Employee, regardless of whether he is a Participant in the Plan, may make a Rollover Contribution to the Plan at any time pursuant to the provisions of this Section 3.8. If the Employee is not a Participant, his Rollover Account will constitute his entire interest under the Plan until such time, if any, as he satisfies the eligibility requirements under Section 2.1 and elects to make Pre-Tax Contributions to the Plan. The Recordkeeper will allocate and credit a Rollover Contribution to the Employee’s Rollover Account as of the Valuation Date immediately following the date on which the Rollover Contribution is made. An investment election which directs that such contribution be invested in one or more of the Investment Funds in accordance with Section 16.1 will be completed through the Interactive Electronic Communication system with respect to the Employee’s Rollover Contribution. In no event will the existence of a Rollover Contribution held for the benefit of an Employee be construed to entitle the Employee to any amount in the Plan to which such Employee is not otherwise entitled under the other provisions of the Plan.
3.9	Contributions with Respect to Military Leave. Notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with section 414(u) of the Code. Specifically, such Participant will be given credit for qualified military service (as defined in Chapter 43 of Title 38, United States Code) for eligibility and vesting purposes in accordance with section 414(u) of the Code and will be eligible to make additional contributions to the Plan with respect to such military service as provided under section 414(u) of the Code. Accordingly, a Participant who returns to employment with the Employer pursuant to section 414(u) of the Code will be permitted, during the period that begins on the date of reemployment and continues for five (5) years or, if less, three (3) times the period of military service, to make Pre-Tax Contributions and Catch-Up Contributions with respect to such period of military service, and the Employer will make any associated Matching Contributions with respect to such Pre-Tax Contributions. The amount of such Pre-Tax Contributions, Catch-Up Contributions and Matching Contributions will be based on the terms of the Plan in effect during such period of military service and will be calculated based on the Compensation the Participant would have received but for such military service as provided in section 414(u)(7) of the Code. Any such make-up contributions will not be taken into account for purposes of the limit on elective deferrals under section 402(g) of the Code or the limit on annual additions under section 415 of the Code for the Plan Year in which such contributions are actually made; but, rather, will be subject to such limits for the Plan Year in which such contributions relate. Further, such make-up contributions will not be subject to the actual deferral percentage test of Section 4.2 of the Plan or the actual contribution percentage test of Section 5.1 of the Plan as provided pursuant to sections 401(k) and 401(m) of the Code. Finally, a Participant who took a distribution from the Plan prior to his reemployment will be entitled to repay such distribution when he is reemployed pursuant to guidance issued under section 414(u) of the Code.
3.10	Administrative Mistake.

(a) Shortage in Contribution Amounts. If due to administrative error, the amount or the percentage of a Participant’s Pre-Tax Contributions and/or Catch-Up Contributions that is deducted from his Compensation for any pay period is less than the percentage elected by the Participant with respect to such pay period and the Participant notifies the Administrator of the payroll deduction error within

20

forty-five (45) days after the date the Participant receives his next paycheck, correction of such error will be made on a retroactive basis as follows:

(i) If the error is timely reported within forty-five (45) days after receipt of the Participant’s paycheck in which the error occurred, the Participant will be permitted to make a temporary election to increase the percentage to be deducted from his Compensation for future pay periods. Such temporary election may provide for increased contributions to the Plan in any of the following ways:

(A)	Over the remaining number of pay periods in the applicable Plan Year;
(B)	Over any number less than the remaining pay periods during the applicable Plan Year; or
(C)	As a lump sum payroll deduction in any one or more of the remaining pay periods in the Plan Year.

	The Participant’s make-up contributions with respect to Pre-Tax Contributions will, to the extent applicable, be subject to the applicable limitation on Pre-Tax Contributions under section 402(g) of the Code and will be counted for purposes of applying the limitations under Section 4.2 (regarding the actual deferral percentage test), Section 5.1 (regarding the actual contribution percentage test), and Article VII (regarding the limitations on Annual Additions) for the Plan Year during which such contributions are made. The Participant’s make-up contributions with respect to Catch-Up Contributions will be subject to the annual limit on Catch-Up Contributions under section 414(v) of the Code.
(ii)	If the error is timely reported within forty-five (45) days after receipt of the Participant’s paycheck in which the error occurred but such error relates to the preceding Plan Year, the Employer will make an additional contribution to the Plan to the extent necessary to correct the error. Such additional make-up contribution will be made in the form of a nonelective contribution with respect to errors in Pre-Tax Contributions and Catch-Up Contributions. The nonelective contributions made pursuant to this Section 3.10(a)(ii) will be fully vested and subject to the same distribution restrictions as apply to Pre-Tax Contributions. Any such nonelective contributions will not count against the applicable limitation on Pre-Tax Contributions under section 402(g) of the Code for either the Plan Year to which such contributions relate or the Plan Year in which such contributions are made; however, the nonelective contributions that are attributable to Pre-Tax Contributions will be counted for purposes of applying the limitations under Section 4.2 (regarding the actual deferral percentage test), and Article VII (regarding the limitations on Annual Additions) for the Plan Year to which the contributions relate.
	The Employer will also make a corresponding Matching Contribution with respect to such of the Pre-Tax Contributions made up by Participants or the Employer as are also Pre-Tax Matched Contributions. Such Matching Contribution(s) will be counted for purposes of applying the limitations

21

under Section 5.1 (regarding the actual contribution percentage test) and Article VII (regarding the limitations on Annual Additions) for the Plan Year to which the contributions relate.

If correction is effectuated by the Employer, earnings will be added to the Pre-Tax Contributions or Matching Contributions, as applicable, pursuant to procedures established by the Administrator, for the period commencing on the date the Pre-Tax Contributions or Matching Contributions, as applicable, should have been made, and ending on the date the make-up contribution is actually made to the Plan. Actual earnings will be credited to those make-up contributions made by Participants.

Unless the Administrator determines that unusual and extenuating circumstances warrant otherwise, no make-up contributions will be permitted or made with respect to any prior shortage in the amount of Pre-Tax Contribution or Catch-Up Contribution deductions which a Participant knew or should have known to have occurred but as to which such Participant failed to give timely notice (i.e., within forty-five (45) days after receipt of his next paycheck) to the Administrator; instead, the Participant’s Pre-Tax Contribution or Catch-Up contribution deduction amounts will only be corrected on a prospective basis. In addition, except as provided above, in no event will Participants be required or permitted to retroactively make either Pre-Tax Contributions or Catch-Up Contributions for any period for which such contributions were not made.

(b) Over-payment of Contributions. If due to an administrative error, the amount or percentage of a Participant’s Pre-Tax Contributions or Catch-Up Contributions that is deducted from his Compensation for any pay period is more than the percentage elected by the Participant with respect to such pay period, to the extent necessary to correct the error and in accordance with rules established by the Administrator, the Participant may request both a refund of the excess contributions and prospective reduction of his Pre-Tax Contribution or Catch-Up Contribution deduction amounts by notifying the Administrator of the payroll deduction error within forty-five (45) days after receipt of the Participant’s paycheck in which the error occurred. The Matching Contributions, if any, associated with any such excess Pre-Tax Contributions which are refunded to the Participant will be forfeited to the Plan. In the event that the Participant notifies the Administrator of the error more than forty-five (45) days after receiving his paycheck, such correction in Pre-Tax Contribution or Catch-Up Contribution deduction amounts will be done only on a prospective basis and no refund of the excess amounts will be permitted by reason of such mistake.

End of Article III

22

ARTICLE IV

LIMITATIONS AND RESTRICTIONS ON PRE-TAX CONTRIBUTIONS

4.1 Excess Elective Deferrals.

(a)	Determination of Excess Elective Deferrals. If the Pre-Tax Contributions made on behalf of a Participant for a calendar year exceed the annual dollar limit allowed for such Participant’s Pre-Tax Contributions for that year as set forth in Section 3.1(b), the amount of such excess will be referred to as “Excess Elective Deferrals.” Excess Elective Deferrals (as adjusted for the income or loss attributable to such Excess Elective Deferrals) will be distributed to the Participant not later than the April 15 immediately following the calendar year of the Participant for which the Excess Elective Deferrals were made to the Plan. For purposes of this Section 4.1, Pre-Tax Unmatched Contributions will first be considered as Excess Elective Deferrals and if such Pre-Tax Unmatched Contributions are not sufficient to eliminate the Excess Elective Deferrals, then Pre-Tax Matched Contributions will be considered as Excess Elective Deferrals and any Matching Contributions made in connection therewith will be forfeited in accordance with Section 4.1(c).
(b)	Income and Loss Attributable to Excess Elective Deferrals. The Administrator will reduce the amount of the Excess Elective Deferrals for a calendar year distributable to the Participant under this Section 4.1 by the amount of Excess Contributions (as determined under Section 4.2), if any, previously distributed to the Participant for the Plan Year beginning in that calendar year. Such Excess Elective Deferrals will be further adjusted for any applicable investment income or losses attributable to such amounts for the Plan Year. The Administrator will determine such net income or net loss in the same manner as described in Section 4.2(b) for Excess Contributions, except the numerator of the allocation fraction will be the amount of the Participant’s Excess Elective Deferrals for the calendar year under this Section 4.1 and the denominator of the allocation fraction will be the balance in the Participant’s Employee Pre-Tax Unmatched Contribution Account and/or Employee Pre-Tax Matched Contribution Account, as applicable, attributable to those Pre-Tax Contributions which constitute Excess Elective Deferrals as of the end of the calendar year (without regard to the net income or net loss for the calendar year on that portion of the Participant’s Employee Pre-Tax Unmatched Contribution Account and/or Employee Pre-Tax Matched Contribution Account, as applicable); provided, however, if there is a loss attributable to such excess amount, the amount of the distribution adjusted for such loss will be limited to an amount which does not exceed the lesser of (i) the balance of the Participant’s Employee Pre-Tax Unmatched Contribution Account and/or Employee Pre-Tax Matched Contribution Account, as applicable or (ii) the Pre-Tax Unmatched Contributions or Pre-Tax Matched Contributions, as applicable, made on behalf of the Participant for that calendar year.
	For periods prior to April 1, 2006, in adjusting a Participant’s Excess Elective Deferrals for the income or loss attributable to such Excess Elective Deferrals, the income or loss attributable to such Excess Elective Deferrals for the “gap period” will not be considered. For purposes of this Section 4.1, “gap period” will mean the period beginning with the first day of the calendar year next following

23

	the calendar year for which the Excess Elective Deferrals were made on behalf of the Participant and ending on the date such Excess Elective Deferrals are distributed to the Participant. Effective on and after April 1, 2006, the Administrator will adjust the Excess Elective Deferrals by the net income or loss accrued thereon during the gap period by taking ten percent (10%) of the net income or loss determined in accordance with the formula set forth in the preceding paragraph and multiplying it by the number of whole calendar months between the end of the Plan Year in which such Excess Elective Deferrals occurred and the date of distribution to the applicable Participant(s), counting the month of distribution if such distribution occurs after the fifteenth (15th) of the month.
(c)	Associated Matching Contributions. If Excess Elective Deferrals are distributed to a Participant from the Plan pursuant to this Section 4.1, the Matching Contribution, if any, to which such Excess Elective Deferrals relate (plus any income and minus any loss attributable thereto), determined after the application of Section 5.2 (regarding the actual contribution percentage test), will be forfeited at the time the Excess Elective Deferrals are distributed, and the forfeitures will be applied as provided in Section 9.1(b).
(d)	Multiple Plan Participation. If the Participant also (i) participates in one or more other qualified cash or deferred arrangements within the meaning of section 401(k) of the Code, (ii) has an employer contribution made on his behalf pursuant to a salary reduction agreement under section 408(k) of the Code, or (iii) has an employer contribution made on his behalf pursuant to a salary reduction agreement toward the purchase of an annuity contract under section 403(b) of the Code, and the sum of the elective deferrals (as defined in section 402(g)(3) of the Code) that are made for the Participant during a calendar year under such other arrangements and this Plan exceeds the annual dollar limit allowed for such Participant’s contributions for that calendar year, the Participant will, not later than the March 1 following the close of his calendar year for which the Excess Elective Deferrals have been made, notify the Administrator in writing of the portion of the Excess Elective Deferrals that he wishes to be allocated to this Plan, if any. If all plans, contracts and agreements described in section 401(k), 403(b) and 408(k) of the Code pursuant to which the Participant is able to defer amounts for a calendar year for which Excess Elective Deferrals have been made are sponsored by an Affiliated Company, the Administrator will determine to which plan, contract or agreement (including the Plan) the Excess Elective Deferrals will be allocated for that calendar year, and if the Excess Elective Deferrals are to be allocated to the Plan, the Administrator will notify the Trustee and the Participant in writing not later than March 1 following the close of that calendar year. Such notification will be deemed to be a notification by the Participant to the Administrator under this Section 4.1(d). The portion of the Excess Elective Deferrals allocated to this Plan, if any, will be adjusted for income and loss in the manner provided in Section 4.1(b) above and will then be distributed to the Participant no later than the immediately following April 15.
	If the Pre-Tax Contributions made on behalf of a Participant for a calendar year do not exceed the annual dollar limit allowed for such Participant’s contributions for that calendar year and the Administrator has not received any written Notice from the

24

Participant (or been deemed to have “received written Notice from the Participant pursuant to the provisions of this Plan”) by the March 1 immediately following that calendar year notifying the Administrator that the Participant allocates a portion of the Excess Elective Deferrals, if any, for that calendar year to the Plan, the Administrator may assume that none of the Pre-Tax Contributions made on behalf of the Participant for that calendar year constitute Excess Elective Deferrals and that no distribution is required to be made from the Participant’s Pre-Tax Contribution Accounts pursuant to this Section 4.1. Notwithstanding the fact that Excess Elective Deferrals have been (or will be) distributed to a Highly Compensated Employee as provided above, the excess amount of such Pre-Tax Contributions or the portion of such Pre-Tax Contributions that are deemed to constitute Excess Elective Deferrals by reason of the Administrator’s or Participant’s written Notice of allocation hereunder will still be treated as a Pre-Tax Contribution for purposes of applying the actual deferral percentage test described in Section 4.2 for the Plan Year in which such Excess Elective Deferrals were made, except to the extent provided under rules prescribed by the Secretary of the Treasury.

4.2 Actual Deferral Percentage Test. The Plan will satisfy one of the actual deferral percentage tests set forth in section 401(k)(3) of the Code. Such tests will be performed using the “prior year testing method” as described in section 401(k)(3) of the Code. In addition, the Plan will not be permissively aggregated with another plan for purposes of performing such tests unless such plan also uses the prior year testing method.

(a)

Prospective Reduction or Suspension of Pre-Tax Contributions. Notwithstanding any provisions of the Plan to the contrary, if the Administrator determines that a Participant’s Pre-Tax Contributions under Section 3.1(a) for any Plan Year would cause the Plan to fail to meet the nondiscrimination requirements of section 401(k) of the Code, then the Administrator may, in its sole discretion, reduce (or suspend, if necessary) the rate of future Pre-Tax Contributions of those Participants who are in the group of Highly Compensated Employees; such reduction to first apply to the highest rate on a uniform basis to all such Participants who are contributing the highest rate, and so on, in descending order from the highest rate to the lowest rate. The Administrator will establish such rules and give such directions to the Trustee as will be appropriate to carry out the above provisions of this Section 4.2(a).

(b)

Determination and Distribution of Excess Contributions. If after making the adjustments in Section 4.2(a), if any, “Excess Contributions” as determined pursuant to this Section 4.2(b) remain, such Excess Contributions will be distributed pursuant to the following provisions. In the event that the amounts of Pre-Tax Contributions made by the group of Participants who are Highly Compensated Employees for any Plan Year, when expressed as an average of the sum of the individual percentage of Compensation for such Plan Year, of each Participant who is a Highly Compensated Employee for such Plan Year (including a zero percentage (0%) for each noncontributing Participant in such group) results in an “average deferral percentage” (within the meaning of section 401(k) of the Code) for such group, when compared to the corresponding “average deferral percentage” of the group of Participants who are not Highly Compensated Employees for the prior Plan Year, in excess of the permissible “average deferral percentage” for such group under section 401(k)(3) of the Code, using the nondiscrimination test applicable to Pre-Tax Contributions

25

described in Treas. Reg. § 1.401(k)-1(b) for Plan Years beginning before August 1, 2006 and Treas. Reg. § 1.401(k)-2 for Plan Years beginning on and after August 1, 2006, then the amount of Pre-Tax Contributions that caused such excess will be deemed to be “Excess Contributions” for such Plan Year and will be distributed to Participants who are Highly Compensated Employees pursuant to this Section 4.2(b).

Excess Contributions, adjusted for any applicable Trust Fund investment income or losses attributable thereto as provided in this Section 4.2(b) for the applicable Plan Year will be distributed to the applicable Participants in the group of Highly Compensated Employees to the extent possible within two and one-half (2¹/2) months following the Plan Year in which such Excess Contributions occurred, but in no event later than the close of the Plan Year following the Plan Year in which such Excess Contributions occurred.

The Administrator will determine the net income or net loss allocable to the Participant’s Employee Pre-Tax Matched Contribution Account and/or Employee Pre-Tax Unmatched Contribution Account for the Plan Year (including, if applicable, the QNEC Account for the Plan Year) by multiplying such account(s) by a fraction, the numerator of which is such Participant’s Excess Contributions for the Plan Year and the denominator of which is the balance in the Participant’s Employee Pre-Tax Matched Contribution Account and/or Employee Pre-Tax Unmatched Contribution Account (including the QNEC Account if any of such contributions are used for purposes of the actual deferral percentage test in this Section 4.2 for the Plan Year) without regard to any income or loss occurring during such Plan Year; provided, however, if there is a loss attributable to such excess amount, the amount of the distribution adjusted for such loss will be limited to an amount which does not exceed the lesser of (i) the balance of the Participant’s Employee Pre-Tax Unmatched Contribution Account, Employee Pre-Tax Matched Contribution Account and/or QNEC Account, as applicable or (ii) the Pre-Tax Unmatched Contributions or Pre-Tax Matched Contributions, as applicable, made on behalf of the Participant for that Plan Year.

For periods prior to April 1, 2006, in adjusting a Participant’s Excess Contributions for the income or loss attributable to such Excess Contributions, the income or loss attributable to such Excess Contributions for the “gap period” (i.e., the period beginning with the first day of the Plan Year next following the Plan Year for which the Excess Contributions were made by the Participant and ending on the date the Excess Contributions are distributed to the Participant) will not be included. Effective on and after April 1, 2006, the Administrator will adjust the Excess Contributions by the net income or loss accrued thereon during the gap period by taking ten percent (10%) of the net income or loss determined in the preceding paragraph and multiplying it by the number of whole calendar months between the end of the Plan Year in which such Excess Contributions were made and the date of distribution to the applicable Participant(s), counting the month of distribution if distribution occurs after the fifteenth (15th) of the month.

The Participant’s “Excess Contributions” to be distributed in accordance with this Section 4.2(b) will be inclusive of such “Excess Contributions” previously distributed as an “Excess Elective Deferral” under Section 4.1(a) with respect to the same Plan Year.

26

For each Participant who is a Highly Compensated Employee, the sum of his Excess Contributions will be determined in the following manner. First, the Administrator will determine how much the average deferral percentage of the Highly Compensated Employee with the highest average deferral percentage would need to be reduced to satisfy one of the actual deferral percentage tests set forth in section 401(k)(3) of the Code OR equal the average deferral percentage of the Highly Compensated Employee with the next highest average deferral percentage. The amount of Excess Contributions associated with such reduction in average deferral percentage will equal the amount of such hypothetical reduction in the average deferral percentage, multiplied by the Highly Compensated Employee’s Compensation. Second, this process will be repeated until the requirements of section 401(k)(3) of the Code would be satisfied had actual average deferral percentages equaled the reduced average deferral percentage described above. The sum of the Excess Contributions resulting from such hypothetical reductions will then be distributed, using the “dollar leveling method,” commencing with the Highly Compensated Employee with the highest dollar amount of Pre-Tax Contributions. Such reductions will be done on a uniform basis to all Participants who are in the group of Participants who are Highly Compensated Employees and who are contributing the highest dollar amount, and so on, in descending order from the highest to the lowest dollar amount of Pre-Tax Contributions, until all Excess Contributions have been distributed in accordance with applicable regulations. The portion of the “Excess Contributions” applicable to each Participant in the group of Participants who are Highly Compensated Employees, adjusted in accordance with applicable regulations for any applicable Trust Fund investment income or losses, will be distributed to such Participant in a lump-sum cash amount and debited from his Pre-Tax Contribution Account as of the date it is distributed. Any such distribution will first be made from the Participant’s Pre-Tax Unmatched Contributions, and only if distribution of all of the Participant’s Pre-Tax Unmatched Contributions is not sufficient to fully distribute his Excess Contribution will distribution be made of the Participant’s Pre-Tax Matched Contributions.

Any portion of the Matching Contribution that is attributable to such distributed Excess Contributions will either be forfeited or retained in the Plan and an additional Matching Contribution will be allocated to Participants who are Non-Highly Compensated Employees in accordance with the provisions of Treas. Reg. §1.401(k)-1(f)(5)(iii) for Plan Years beginning before August 1, 2006 and Treas. Reg. § 1.401(k)-2(b)(4)(ii) for Plan Years beginning on and after August 1, 2006. In the event that all or any portion of the Matching Contribution is forfeited pursuant to the preceding sentence, such forfeiture will be used to reduce the amount of such Matching Contribution, to fund QNECs to the Plan or to pay approved administrative expenses under the Plan for the Plan Year in which the forfeiture occurs.

In the event that a Participant has elected to make Catch-Up Contributions through the Interactive Electronic Communications system and would otherwise have all or a portion of his Pre-Tax Contributions distributed from the Plan pursuant to this Section 4.2(b), then such Pre-Tax Contributions will be recharacterized as Catch-Up Contributions under the Plan in an amount equal to the lesser of (A) the amount of the excess Pre-Tax Contributions that would

27

otherwise be distributed in order to enable the Plan to satisfy the actual deferral percentage test, or (B) the statutory limit on Catch-Up Contributions under section 414(v) of the Code. The remainder of such Participant’s excess Pre-Tax Contributions which cannot be recharacterized and deferred as a Catch-Up Contribution will be distributed to the Participant pursuant to this Section 4.2(b).

4.3 Other Permissible Methods of Testing and Correction. The provisions of this Article IV are intended to conform to sections 401(k) and 402(g) of the Code. In the event that the Administrator determines, based on changes to the Code or related interpretations or guidance issued by the Internal Revenue Service, that the requirements of such Code sections may be applied in a manner different from that prescribed in this Article IV, the Administrator may make appropriate adjustments to the administration of the Plan to incorporate such changes to the Code or interpretations or guidance. If a change to the Code or interpretations or guidance issued by the Internal Revenue Service results in more than one additional option in the manner in which this Article IV may be administered, the Administrator will have the limited discretion to select the option to be used, provided that such option, when compared to the other option or options, results in the smallest adjustment to Participants’ Individual Accounts.

End of Article IV

28

ARTICLE V

LIMITATIONS AND RESTRICTIONS ON MATCHING CONTRIBUTIONS

5.1 Actual Contribution Percentage Test. The Plan will satisfy one of the actual contribution percentage tests set forth in section 401(m)(2) of the Code. Such tests will be performed using the “prior year testing method” as described in section 401(m)(2) of the Code. In addition, the Plan will not be permissively aggregated with another plan for purposes of performing such tests, unless such plan also uses the prior year testing method.

(a)	Prospective Reduction of Matching Contribution. Notwithstanding any provisions of the Plan to the contrary, if the Administrator determines that the Matching Contribution to be allocated under Section 3.2 for any Plan Year would cause the Plan to fail to meet the nondiscrimination requirements of section 401(m) of the Code, then the Employer may, in its sole discretion, reduce the amount of the Matching Contribution for the Plan Year on behalf of those Participants who are in the group of Highly Compensated Employees, such reduction to first apply to the highest rate being matched, on a uniform basis to all such Participants who are contributing the highest rate, and so on, in descending order from the highest rate to the lowest rate. The Administrator will establish such rules and give such directions to the Trustee as will be appropriate to carry out the provisions of this Section 5.1(a).
(b)	Determination and Distribution of Excess Aggregate Contributions. If, after making the adjustments required by Section 5.1(a), if any, “Excess Aggregate Contributions” as determined pursuant to this Section 5.1(b) remain, such Excess Aggregate Contributions will be distributed pursuant to the following provisions. In the event that the amounts of the Matching Contributions made to the group of Participants who are Highly Compensated Employees for any Plan Year, when expressed as an average of the sum of the individual percentage of Compensation for such Plan Year of each Participant who is a Highly Compensated Employee for such Plan Year (including a zero percentage (0%) for each noncontributing Participant in such group) result in an “average contribution percentage” (within the meaning of section 401(m) of the Code) for such group that is in excess of the permissible “average contribution percentage” for such group under section 401(m)(2) of the Code, using the nondiscrimination test applicable to Matching Contributions described in Treas. Reg. § 1.401(m)-1(b) for Plan Years beginning before August 1, 2006 and in Treas. Reg. § 1.401(m)-2(a) for Plan Years beginning on and after August 1, 2006, then the portion of the Matching Contributions that caused such excess will be deemed to be “Excess Aggregate Contributions” for such Plan Year and will be distributed to Participants who are Highly Compensated Employees pursuant to this Section 5.1(b).
	Excess Aggregate Contributions to a Participant, adjusted for any applicable Trust Fund investment income or losses attributable thereto in the manner prescribed in this Section 5.1 for the applicable Plan Year, will be debited from the Participant’s Matching Contribution Account and distributed to such Participant to the extent possible within two and one-half (21/2) months following the close of the Plan Year in which such Excess Aggregate Contributions

29

occurred but in no event later than the close of the Plan Year following the Plan Year in which such Excess Aggregate Contributions occurred.

The Administrator will determine the net income or net loss allocable to the Participant’s Matching Contribution Account for the Plan Year (including, if applicable, the QNEC Account for the Plan Year) by multiplying such account(s) by a fraction, the numerator of which is such Participant’s Excess Aggregate Contributions for the Plan Year and the denominator of which is the balance in the Participant’s Matching Contribution Account (including the QNEC Account if any of such contributions are used for purposes of the actual contribution percentage test in this Section 5.1 for the Plan Year) without regard to any income or loss occurring during such Plan Year; provided, however, if there is a loss attributable to such excess amount, the amount of the distribution adjusted for such loss will be limited to an amount which does not exceed the lesser of (i) the balance of the Participant’s Matching Contribution Account and/or QNEC Account, as applicable, or (ii) the Matching Contributions made on behalf of the Participant for that Plan Year.

For periods prior to April 1, 2006, in adjusting a Participant’s Excess Aggregate Contributions for the income or loss attributable to such Excess Aggregate Contributions, the income or loss attributable to such Excess Aggregate Contributions for the “gap period” (i.e., the period beginning with the first day of the Plan Year next following the Plan Year for which the Excess Aggregate Contributions were made to the Participant and ending on the date the Excess Aggregate Contributions are distributed to the Participant). Effective on and after April 1, 2006, the Administrator will adjust the Excess Aggregate Contributions by the net income or loss accrued thereon during the gap period by taking ten percent (10%) of the net income or loss determined in the preceding paragraph and multiplying it by the number of whole calendar months between the end of the Plan Year in which Excess Aggregate Contributions were made and the date of distribution, counting the month of distribution if distribution occurs after the fifteenth (15th) of the month.

For each Participant who is a Highly Compensated Employee, the sum of his Excess Aggregate Contributions will be determined as follows. First, the Administrator will determine how much the average contribution percentage of the Highly Compensated Employee with the highest average contribution percentage would need to be reduced to satisfy the requirements of section 401(m) of the Code or equal the average contribution percentage of the Highly Compensated Employee with the next highest average contribution percentage. The amount of Excess Aggregate Contributions associated with such reduction in the average contribution percentage will equal the amount of such hypothetical reduction in average contribution percentage, multiplied by the Highly Compensated Employee’s Compensation. Second, this process will be repeated until the requirements of section 401(m) of the Code would be satisfied had actual average contribution percentages equaled the reduced average contribution percentages described above. The sum of Excess Aggregate Contributions resulting from such hypothetical reductions will then be distributed, using the “dollar leveling method,” commencing with the Highly Compensated Employee with the highest dollar amount of Matching Contributions. Such reductions will be done on a uniform basis to all Participants who are Highly

30

Compensated Employees and who are being matched the highest dollar amount, and so on, in descending order from the highest to the lowest dollar amount in accordance with applicable Treasury Regulations. The portion of the “Excess Aggregate Contributions” applicable to each such Participant in the group of Participants who are Highly Compensated Employees, adjusted in accordance with applicable regulations for any applicable Trust Fund investment income or losses, will be distributed to the Participant in a lump sum cash payment and debited from his Matching Contribution Account as of the date it is distributed.

5.2

Testing of Pre-Tax Contributions Under Contribution Percentage Test. Notwithstanding the foregoing provisions of this Article V or of Article IV, all or a portion of the Pre-Tax Contributions made on behalf of eligible Non-Highly Compensated Employees may be treated as Matching Contributions made on behalf of such eligible Non-Highly Compensated Employees for the purpose of meeting the actual contribution percentage test set forth in Section 5.1; provided, that the actual deferral percentage test of Section 4.2 can be met, both when the Pre-Tax Contributions treated as Matching Contributions hereunder are included in performing such actual deferral percentage test and when such Pre-Tax Contributions are excluded in performing such actual deferral percentage test. Except for purposes of meeting the actual contribution percentage test of Section 5.1 to the extent described hereunder, any such Pre-Tax Contributions will continue to be treated as Pre-Tax Contributions for all other purposes of the Plan.

5.3

Other Permissible Methods of Testing and Corrections. The provisions of this Article V are intended to conform to section 401(m) of the Code. In the event that the Administrator determines, based on changes to the Code or related interpretations or guidance issued by the Internal Revenue Service, that the requirements of such Code section may be applied in a manner different from that prescribed in this Article V, the Administrator may make appropriate adjustments to the administration of the Plan to incorporate such changes to the Code or interpretations or guidance. If a change to the Code or interpretations or guidance issued by the Internal Revenue Service results in more than one additional option in the manner in which this Article V may be administered, the Administrator will have the limited discretion to select the option to be used; provided, that such option, when compared to the other option or options, results in the smallest adjustment to Participants’ Individual Accounts.

End of Article V

31

ARTICLE VI

ALLOCATION OF CONTRIBUTIONS

6.1	Establishment of Individual Accounts. The Recordkeeper will establish and maintain a separate account as a record of each Participant’s interest in the Trust Fund with respect to each Individual Account in which a Participant has an interest, including, as appropriate, sub-accounts for the Participant’s Pre-Tax Contributions, his Matching Contributions, and his Rollover Contributions. One or more sub-accounts will be maintained within each Individual Account to reflect the Participant’s investment elections among the Investment Funds.
6.2	Allocation of Pre-Tax Contributions. As of each Allocation Date, but after adjustment of the Individual Accounts as provided in Section 8.2, the Employer contributions deposited with the Trustee during the period since the last Allocation Date that were made pursuant to a salary reduction agreement entered into with a Participant pursuant to Section 3.1 will be allocated by the Recordkeeper to the Participant’s Pre-Tax Contribution Accounts; provided however, that the amount allocated hereunder will be subject to the limitations of Sections 4.1 and 4.2.
6.3	Allocation of Matching Contributions. As of each Allocation Date, but after adjustment of the Individual Accounts as provided in Section 8.2, and after applying the limitations of Section 5.1, the Administrator will, to the extent permitted by the actual contribution percentage test of Section 5.1, direct the Recordkeeper to allocate the Matching Contribution made pursuant to Section 3.2 for the period ending on such Allocation Date and any forfeitures that were applied to reduce Matching Contributions, as provided in Section 9.1(b) for said period, and will credit the same to the Matching Contribution Accounts of all Participants for whom the Matching Contributions were made.
6.4	Allocation of QNECs. As of the last day of each Plan Year, but after adjustment of the Individual Accounts as provided in Section 8.2, if an Employer made QNECs for a Plan Year under Section 3.3 on behalf of Participants who are Non-Highly Compensated Employees in order to insure that the actual deferral percentage tests described in Section 4.2 or the actual contribution percentage test described in Section 5.1 are met for such Plan Year, such QNECs will be allocated to the QNEC Accounts of the Non-Highly Compensated Employees determined by the Committee in the manner determined by the Committee.
6.5	Credit of Rollover Contributions. A Rollover Contribution made by an Employee during the period since the last Allocation Date will be credited to his Rollover Account.
6.6	Included, Individual Accounts. For the purposes of this Article VI, references to the Individual Accounts of Participants will include the Individual Accounts of those Participants who die, become Disabled, retire, or terminate their services during the Plan Year in question.

End of Article VI

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ARTICLE VII

LIMITATION ON ALLOCATIONS

7.1 Definitions. For purposes of this Article VII, the following terms and phrases will have these respective meanings.

(a) “415 Compensation” will mean the total of all amounts paid by the Employer to or for the benefit of a Participant for services rendered or labor performed for the Employer while a Participant, which are required to be reported on the Participant’s federal income tax withholding statement or statements (Form W-2 or its subsequent equivalent). Further, 415 Compensation will include:

(i)	elective deferrals (as defined in section 402(g)(3) of the Code) from compensation to be paid by the Employer to the Participant; and
(ii)	any amount which is contributed or deferred by the Employer at the election of the Participant and which is not includable in the gross income of the Participant by reason of sections 125, 132(f)(4) or 457 of the Code.

(b)	“Annual Additions” of a Participant for any Limitation Year will mean the total of (i) the Matching Contributions, Pre-Tax Contributions (excluding Catch-Up Contributions), QNECs, and forfeitures, if any, allocated to such Participant’s Accounts for such Limitation Year, (ii) the Participant’s contributions, if any, (excluding any Rollover Contributions) for such Limitation Year, and (iii) amounts referred to in sections 415(l)(1) and 419A(d)(2) of the Code (regarding certain medical benefits).
(c)	“Limitation Year” will mean the Plan Year.
(d)	“Maximum Annual Additions” of a Participant for any Limitation Year will mean the lesser of (i) forty thousand dollars ($40,000), as adjusted for cost of living changes, or (ii) one hundred percent (100%) of such Participant’s 415 Compensation during such Limitation Year, except that the limitation in this Section 7.1(d) will not apply to any contribution for medical benefits (within the meaning of section 419A(f)(2) of the Code) after a severance from service with the Employer or an Affiliated Company which is otherwise treated as an Annual Addition or to any amount otherwise treated as an Annual Addition under section 415(l)(1) of the Code.

7.2 Disposition of Excess Annual Additions. In no event will the Annual Additions credited to a Participant’s Individual Accounts for any Limitation Year exceed the Maximum Annual Additions for such Participant for such Limitation Year. If as a result of allocation of forfeitures, a reasonable error in estimating a Participant’s Compensation, a reasonable error in determining the amount of elective deferrals (within the meaning of section 402(g)(3) of the Code) that may be made with respect to any individual under the limits of section 415 of the Code, or because of other limited facts and circumstances, the Annual Additions that would be credited to a Participant’s Individual Accounts for a Limitation Year would nonetheless exceed the Maximum Annual Additions for such Participant for such Limitation Year, such excess Annual Additions will be disposed of as follows:

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(a)	First, by returning to such Participant his Pre-Tax Unmatched Contributions, adjusted for income or loss allocated thereto as set forth in Section 4.1(b);
(b)	Next, by returning to such Participant his Pre-Tax Matched Contributions, adjusted for income or loss allocated thereto as set forth in Section 4.1(b), and the Matching Contributions that would have been allocated to such Participant’s Individual Account based upon such returned Pre-Tax Matched Contributions will, to the extent such amounts would have otherwise been allocated to such Participant’s Individual Account, be treated as a forfeiture;
(c)	If any such excess Annual Additions remain, and the Participant is covered by the Plan, the excess will be used to reduce the Matching Contributions (including any allocation of forfeitures) for such Participant in the next Limitation Year and each succeeding Limitation Year if necessary; and
(d)	If any such excess Annual Additions remain and the Participant is not covered by the Plan, the excess will be held unallocated in a suspense account. The suspense account will be used to reduce future Matching Contributions (including the allocation of any forfeitures) for all Participants in the next Limitation Year and succeeding Limitation Years if necessary; provided, however, that in the event of termination of the Plan, the suspense account will revert to the Employer to the extent it may not then be allocated to any Participant’s Individual Account.

7.3

Aggregation of Plans. For purposes of determining whether the Annual Additions under this Plan exceed the limitations set forth in this Article VII, all defined contribution plans of the Employer are to be treated as one defined contribution plan. In addition, all defined contribution plans of the Employer and all Affiliated Companies will be aggregated for this purpose. If the Annual Additions credited to a Participant’s Individual Accounts for any Limitation Year under this Plan plus the additions credited on his behalf under other defined contribution plans required to be aggregated pursuant to this Section 7.3 would exceed the Maximum Annual Additions for such Participant for such Limitation Year, the Annual Additions under this Plan and the additions under such other plans will be reduced to the extent necessary to comply with this Section 7.3 and the excess, if any, will be allocated, reallocated, or returned in accordance with the provisions set forth in Section 7.2 regarding excess Annual Additions.

7.4

Prospective Reduction of Deferrals. If the limitations set forth in this Article VII would not otherwise be met for any Limitation Year, the Pre-Tax Contribution elections of affected Participants may be reduced by the Administrator on a temporary and prospective basis in such manner as the Administrator will determine.

End of Article VII

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ARTICLE VIII

ADJUSTMENT OF INDIVIDUAL ACCOUNTS

8.1	Trust Fund Valuation. The value of each Investment Fund and of the Trust Fund will be determined by the Trustee as of the close of business on each Valuation Date, or as soon thereafter as practicable, and will be the fair market value of all securities or other property held in the Investment Funds, if any, plus cash and the fair market value of other assets held by the Trust Fund, with equitable adjustments for pending trades.
	While it is contemplated that the Trust Fund will be valued by the Trustee and allocations made only on the Valuation Date, at any time that the Plan’s valuations are not performed on a daily basis, should it be necessary to make distributions under the provisions hereof and the Administrator, in good faith, determines that because of (a) an extraordinary change in general economic conditions, (b) the occurrence of some casualty materially affecting the value of the Trust Fund or a substantial part thereof, or (c) a significant fluctuation in the value of the Trust Fund has occurred since the immediately preceding Valuation Date, the Administrator may, in its sole discretion, to prevent the Participant or Former Participant from receiving a substantially greater or lesser amount than what he would be entitled to, based on current values, cause a revaluation of the Trust Fund to be made and a reallocation of the interests therein as of the date the Participant’s or Former Participant’s right of distribution becomes fixed. The Administrator’s determination to make such special valuation and the valuation of the Trust Fund as determined by the Trustee will be conclusive and binding on all persons ever interested hereunder.
	If the Administrator in good faith determines that certain expenses of administration paid by the Trustee during the Plan Year under consideration are not general, ordinary and usual and should not equitably be borne by all Participants, Former Participants and Beneficiaries, but should be borne only by one or more Participants, Former Participants or Beneficiaries, for whom or because of whom such specific expenses were incurred, the net earnings and adjustments in value of the Individual Accounts will be increased by the amounts of such expenses, and the Administrator will make suitable adjustments by debiting the particular Individual Account or Individual Accounts of such one or more Participants, Former Participants or Beneficiaries; provided, however, that any such adjustment must be nondiscriminatory and consistent with the provisions of section 401(a) of the Code.
8.2	Adjustments to Participant’s and Former Participant’s Individual Accounts. The value of a Participant’s or Former Participant’s Individual Account (including for this purpose the separate value of the sub-accounts of a Participant’s or Former Participant’s Individual Account, i.e., to the extent applicable, his Employee After-Tax Account, his Pre-Tax Contribution Account(s), his Catch-Up Contribution Account(s), his Matching Contribution Account, his QNEC Account, his Safe Harbor Match Account, his Profit Sharing Account, and his Rollover Account, if any), held in an Investment Fund maintained hereunder will be determined as of each Valuation Date by:

(a) First, allocating the Net Income or Losses, as defined in this Section 8.2, of each Investment Fund since the preceding Valuation Date to the Participant’s or Former Participant’s Individual Account in the same ratio as the value of the Participant’s or Former Participant’s Individual Account in such Investment Fund (as adjusted below), as the case may be, bears to the aggregate value of all

35

	Individual Accounts in such Investment Fund (as adjusted below), as the case may be. An Individual Account will be adjusted on the Valuation Date for purposes of allocating Net Income or Losses from fund investments by taking the value of such Individual Account as of the prior Valuation Date and (i) adding thereto (A) all contributions or loan repayments designated for investment in such Investment Fund which were made with respect to the immediately prior valuation period but were received by the Trustee after the prior Valuation Date, plus (B) any transfers from any other Investment Fund under the Plan to the Participant’s or Former Participant’s Individual Account that were made after the prior Valuation Date and were effective as of such prior Valuation Date and (ii) deducting therefrom (A) any transfers to any other Investment Fund or Investment Funds under the Plan from the Participant’s or Former Participant’s Individual Account within this Investment Fund that were made after the prior Valuation Date and were effective as of such prior Valuation Date and (B) any Participant or Former Participant loans, withdrawals, or distributions, as applicable, from the Individual Account made after, but effective as of, the preceding Valuation Date.
(b)	Second, crediting the contributions and loan repayments made by or on behalf of the Participant or Former Participant with respect to the valuation period ending on the current Valuation Date and any transfers from the other Investment Funds under the Plan to the Participant’s or Former Participant’s Individual Account within this Investment Fund made since the preceding Valuation Date.
(c)	Last, deducting any transfers to the other Investment Funds under the Plan from the Participant’s or Former Participant’s Individual Account maintained within this Investment Fund and any loans, withdrawals and distributions from his Individual Account maintained within this Investment Fund made since the preceding Valuation Date.

For the purpose of this Section, “Net Income or Losses” will mean the increase or decrease in the fair market value of the assets of the Trust or the Investment Fund, as the case may be, (and if invested in a group insurance investment contract, such value being determined in accordance with the terms of the contract) as of the current Valuation Date, compared to such value which was utilized for the prior Valuation Date, less the sum of any deposits plus the sum of any loans, withdrawals, distributions or other deductions, if any, made to pay any expenses incurred with respect to the operations of this Investment Fund. The initial Valuation Date for an Investment Fund will be the date the funds are first invested in such Investment Fund.

8.3

Statement to Participant. At least quarterly, the Administrator will advise each Participant, Former Participant and Beneficiary for whom an Individual Account is held hereunder of the then fair market value of such Individual Account.

End of Article VIII

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ARTICLE IX

DISTRIBUTIONS AND WITHDRAWALS

9.1 Vested Interest. Effective as of April 1, 2006, each Participant and Former Participant will at all times have a fully vested interest in his entire Individual Account. Upon any Participant’s or Former Participant’s attainment of his Normal Retirement Date he will continue to have a fully vested interest in such Individual Account. On and after the Effective Date and prior to April 1, 2006, the only portion of any Individual Account subject to a vesting schedule were those attributable to Employer discretionary profit sharing contributions and employer matching contributions under the Karten’s Plan. The vested interest of Participants and Former Participants who terminated employment with the Company and all Affiliated Companies on or after the Effective Date and prior to April 1, 2006 will be determined in accordance with the applicable provisions of the Plan in effect at that time, as reflected in the March 1, 2002 Plan document and the amendments thereto.

(a)

Forfeiture and Return to Service Prior to Complete Distribution. If a Participant terminated employment prior to April 1, 2006 without a fully vested interest in his Individual Account and received a distribution of his entire vested Individual Account balance such that the nonvested portion of his Individual Account balance was forfeited and such Participant is reemployed by an Affiliated Company without incurring five (5) consecutive Breaks in Service, he will have the right to restore in full the portion of his Individual Account which was forfeited upon repayment to the Plan of the full amount of the distribution from such Individual Account. Such repayment must be made not later than the earlier of (i) the fifth (5th) anniversary of his return to employment or (ii) the last day of the Plan Year in which the Participant incurs five (5) consecutive Breaks in Service after the date of his distribution. The Participant’s repayment, if any, will be returned to the account or accounts from which the distribution was made and the reinstated forfeiture will also be allocated to such account or accounts. If the Participant resumes active employment with an Affiliated Company and does not repay a prior distribution prior to the time specified above, the portion of his Individual Account which was forfeited will not be restored. If the Participant makes repayment in accordance with this Section 9.1(a) and currently unallocated forfeitures are not adequate to effect the restoration of forfeited amounts to his Individual Account, the Company or the Affiliated Company will make such additional contribution to the Plan as is necessary to restore the forfeited portion of his Individual Account.

(b)

Application of Forfeitures. Any forfeitures in the Plan will first be used to restore the account of a Former Participant who is entitled to restoration pursuant to Section 9.1(a). If additional forfeitures remain after full restorations under Section 9.1(a), then remaining forfeitures will be used to restore accounts of Former Participants who are located under Section 9.19. If additional forfeitures remain thereafter, the forfeitures for a Plan Year will be used to pay administrative expenses of the Plan and then to reduce the Matching Contributions or QNECs of any Employer.

9.2 Entitlement to Distribution. A Participant or Former Participant will be entitled to a distribution of his vested Individual Account upon his death, his termination of employment due to Disability, retirement on or after Normal Retirement Date or on

37

	account of a severance from employment, as applicable, as defined in section 401(k)(2) of the Code. No distribution of a Participant’s Individual Account will be made after the Benefit Commencement Date unless the Participant and his Spouse, if any, consent to such distribution pursuant to Section 9.3.
	A Participant’s Individual Account will be distributed on account of the Participant’s severance from employment as provided in this Section 9.2, unless the severance from employment occurs as part of a business transaction involving the Employer or assets of the Employer with respect to which the Participant is employed and the parties to the business transaction agree that the accounts of all Participants similarly situated will be transferred to a plan maintained by the acquiring entity or one of its affiliates. In such case, no distribution may be made to the Participant until he becomes entitled to such a distribution under the terms of the plan to which such account is transferred. Any distribution under this Section 9.2 will be subject to the other provisions of the Plan regarding distributions, other than provisions that require a separation from service before such amounts may be distributed.
	For purposes of this Article IX, a Participant will not be deemed to have terminated employment or incurred a severance from employment in the event of a change in his employment status from a common law employee to a Leased Employee. However, as provided in Section 1.21 such Participant will no longer be an Eligible Employee for purposes of making Pre-Tax Contributions or receiving an Employer Matching Contribution.
9.3	Timing of Distribution. A Participant who becomes entitled to a distribution of his vested Individual Account pursuant to Section 9.2 may elect to receive such distribution as soon as administratively practicable following such entitlement by filing an application with the Administrator. Alternatively, he may elect to defer distribution of such vested Individual Account until a later date; provided, however, that regardless of such an election, distribution of the Participant’s vested Individual Account will be made not later than the Participant’s Required Beginning Date. A Participant who defers the distribution of his vested Individual Account in accordance with this Section 9.3 will continue to have the right to direct the investment of his individual Account among the Investment Funds as provided in Section 16.1.
	The value of a Participant’s vested Individual Account under this Section 9.3 will, except as provided in Section 9.6 (regarding minimum distributions) or Section 9.10 (regarding automatic cashouts), be valued as of the most recent Valuation Date for which Participant Individual Account values have been determined prior to the date the Participant’s payment is processed.
	The payment of a Participant’s vested Individual Account under this Article IX is conditioned upon the Administrator’s ability to locate such Participant. In the event that the Administrator is unable to locate such Participant within a reasonable period of time after the date payments would otherwise commence, the provisions of Section 9.19 regarding the conditional forfeiture of unclaimed benefits will apply.
9.4	Qualified Election. Unless the Participant’s vested Individual Account is payable in the applicable normal form specified in Section 9.7 or the automatic cashout provisions of Section 9.10 apply, a Participant’s election pursuant to Section 9.3 to have his vested Individual Account distributed before his Required Beginning Date will be made in the

38

	form of a Qualified Election, and such Qualified Election will acknowledge that benefits will be made in accordance with such election.
9.5	Limitations on Timing of Distributions. Irrespective of a Participant’s distribution election or lack thereof, distribution of the Participant’s vested Individual Account will be made no later than sixty (60) days after the end of the Plan Year following the later of:

(a)	The earlier of the date the Participant attains age sixty-five (65) or his Normal Retirement Date;
(b)	The date of termination of the Participant’s service with the Employer or an Affiliated Company; or
(c)	The tenth (10th) anniversary of the year in which the Participant commenced participation in the Plan;

	provided, however, that distribution of the Participant’s vested Individual Account will be made by the Required Beginning Date.
9.6	Minimum Distribution Requirements. To the extent required to comply with the minimum distribution requirements of section 401(a)(9) of the Code, including the minimum distribution and incidental benefit requirements of section 401(a)(9) of the Code and the regulations issued thereunder which are expressly incorporated herein by this reference, distribution of a Participant’s vested Individual Account will be made or commence to be made by his Required Beginning Date as provided in this Section 9.6. The provisions of this Section 9.6 will override any other inconsistent distribution provisions of the Plan.
	The Plan will apply the minimum distribution requirements in accordance with the final and temporary regulations under section 401(a)(9) of the Code that were published on April 17, 2002 (the “Final Minimum Distribution Regulations”) and all distributions required under this Section 9.6 will be determined and made in accordance with such Final Minimum Distribution Regulations.

(a)

Current Minimum Distribution Payments. If minimum distribution payments have commenced with respect to a Participant, such payments will continue to be made regardless of whether the Participant has attained the Required Beginning Date, provided, however, that (i) such payments may be modified to the extent necessary to comply with the Final Minimum Distribution Regulations or (ii) the Participant may elect to stop receiving such payments if such minimum distribution payments had commenced prior to January 1, 1997 and the Participant is not a “five percent owner” as defined under section 416 of the Code.

(b)

Death of Participant Before Distributions Begin. If the Participant dies before distribution of his vested Individual Account has been made, the Participant’s entire interest will be distributed in full by December 31 of the calendar year immediately following the calendar year in which the Participant died. Such distribution will automatically satisfy the one (1) year rule of section 401(a)(9)(B)(iii) of the Code and Treasury Regulation sections 1.401(a)(9)-3, Q&A-1 and Q&A-4.

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(c)

Amount of Minimum Distribution For Each Distribution Calendar Year. In the event a Participant who is a five percent (5%) owner is required to begin receiving minimum distribution payments while in service under the provisions of this Section 9.6, the Participant will receive one lump sum payment on or before the Participant’s Required Beginning Date equal to his entire vested Individual Account balance and annual lump sum payments thereafter of any additional Pre-Tax Contributions, Catch-Up Contributions or Matching Contributions made with respect to such Participant during each subsequent calendar year. Such distributions will be made up to and including the calendar year that includes the Participant’s date of death. Distributions made pursuant to this Section 9.6(c) will automatically satisfy the requirements of section 1.401(a)(9)-2, Q&A-2 and the minimum distribution incidental death benefit requirement as provided in Treasury Regulation section 1.401(a)(9)-5, Q&A-1(d).

(d)

Death On or After Date Minimum Distributions Begin. If a Participant who is receiving minimum required distributions pursuant to Section 9.6(a) (regarding minimum distribution payments being made prior to the Effective Date) or Section 9.6(c) (regarding five percent (5%) owners) dies, then the remainder of his vested Individual Account will be paid in the form of a lump sum payment to his Surviving Spouse or Beneficiary in accordance with Section 10.1 as soon as administratively practicable following the Participant’s date of death, but no later than December 31 of the year in which the Participant died. If the Participant’s Spouse is his Beneficiary such Spouse may be eligible to elect to receive such distribution in the form of a Direct Rollover. Such distribution will automatically satisfy the requirement of section 401(a)(9)(B)(i) of the Code and Treasury Regulation section 1.401(a)(9)-2, Q&A-5 that distributions following the Participant’s death be paid to his Beneficiary at least as rapidly as such distributions were being paid to the Participant prior to his death.

	Notwithstanding any other provision of this Article IX, all distributions from this Plan shall be made in accordance with (i) sections 1.401(a)(9)-2 through 1.401(a)(9)-9 of the Final Minimum Distribution Regulations, and (ii) the incidental death benefit requirement of section 401(a)(9)(G) of the Code. Further, such Final Minimum Distribution Regulations shall override any Plan provision that is inconsistent with section 401(a)(9) of the Code.
9.7	Normal Form of Benefits. The vested Individual Account of a Participant will be paid in a single lump sum cash payment; provided, however, that such Participant may elect to receive all or a portion of such Individual Account in the form of a Direct Rollover pursuant to Section 9.9. In addition, to the extent a Participant’s vested Individual Account is invested in the Common Stock Fund, distribution of that portion of his Individual Account may be made in shares of Common Stock as provided in Section 9.8.
9.8	Distributions from Common Stock Fund. Any distributions from the Common Stock Fund will be paid at the election of the Participant, either in cash or in shares of Common Stock, except that fractional shares will in all events be payable in cash. Any cash dividends declared with respect to such Participant’s shares prior to the date of distribution will similarly be paid in cash. Stock dividends declared prior to the distribution to the Participant will be treated as part of his Individual Account, subject to his election to receive either cash or Common Stock. In the event that the Participant elects a distribution of his balance in the Common Stock Fund in cash, the value of his Individual Account in the Common Stock Fund will be based on the current market value of a share of Common Stock on the date as of which the amount payable is calculated. The

40

	Administrator’s determination with respect to such valuation will be conclusive and binding on the Participant and on the Trustee.
9.9	Optional Forms of Benefits. In accordance with procedures adopted by the Administrator, a Participant may waive payment of his vested Individual Account in the form of a lump sum and, pursuant to a Qualified Election, elect an optional form of benefit, as follows:

(a) Direct Rollover. To receive his vested Individual Account in the form of a Direct Rollover to an Eligible Retirement Plan, provided that the distribution qualifies as an Eligible Rollover Distribution. Any portion of the Participant’s distribution which does not qualify as an Eligible Rollover Distribution will be payable to the Participant in accordance with this Section 9.9 or Section 9.7 (regarding normal forms of benefit) or Section 9.10 (regarding automatic cashouts), as applicable.

(i)	Form of Election. A Participant’s Direct Rollover election under this Section 9.9 will be in form, manner and time satisfactory to the Administrator and in accordance with rules and procedures established by the Administrator. Such election will specify the dollar or percentage amount of the Participant’s vested Individual Account to be rolled over, the name of the Eligible Retirement Plan selected by the Participant, and such additional information as the Administrator deems necessary or appropriate in order to implement the election. It will be the Participant’s responsibility to confirm that the Eligible Retirement Plan designated in his Direct Rollover election will accept the Direct Rollover of his vested Individual Account. The Administrator will be entitled to implement a Direct Rollover election based on its reasonable reliance on information provided by the Participant, and will not be required to independently verify such information, unless it is clearly unreasonable not to do so.
(ii)	Notice of Direct Rollover Rights. The Participant will be given written notice of any right he may have to elect a Direct Rollover of the taxable portion of his vested Individual Account to an Eligible Retirement Plan at least (A) thirty (30) and no more than ninety (90) days prior to the Benefit Commencement Date; or (B) on or after the Benefit Commencement Date; provided the Participant is given at least thirty (30) days to consider such notice and make the election described in this Section 9.9(a). The Participant may elect to receive a Direct Rollover before expiration of the thirty (30) day election period described above if: (1) the Administrator clearly informs the Participant that he has a right to a period of at least thirty (30) days after receiving the written explanation to consider the decision of whether or not to elect a Direct Rollover; (2) the Participant, after receiving the notice, affirmatively elects a Direct Rollover; and (3) the Direct Rollover is made more than seven (7) days after the notice is given.
(iii)	Spousal Rights. To the extent required by section 401(a)(31) of the Code, if all or a portion of a Participant’s vested Individual Account is payable to the Participant’s surviving Spouse, or to a former Spouse in accordance with a QDRO, such surviving Spouse or former Spouse will be entitled to elect a Direct Rollover of all or a portion of such distribution to an Eligible Retirement Plan.

41

(b) Combination. By a combination of a single lump sum cash payment and Direct Rollover to an Eligible Retirement Plan.

9.10	Automatic Cashouts. If the value of the Participant’s vested Individual Account does not exceed one thousand dollars ($1,000), determined as of the Participant’s Benefit Commencement Date, the Administrator will direct that such Individual Account be paid in a single lump sum cash payment as soon as practicable following such Benefit Commencement Date, without regard to whether the Participant and/or Spouse consent either to payment in such form or to payment prior to the Participant’s attainment of the Required Beginning Date. Alternatively, in lieu of such lump sum cash payment, the Participant may elect to receive distribution of his vested Individual Account in the form of a Direct Rollover pursuant to Section 9.9(a). No distribution will be made in accordance with this Section 9.10 after the Participant’s Benefit Commencement Date unless the Participant and his Spouse (or if the Participant has died, his surviving Spouse) consent in writing to such distribution. Likewise, no distribution will be made pursuant to this Section 9.10 if the Participant’s vested Individual Account exceeds one thousand dollars ($1,000) on the Benefit Commencement Date.
9.11	Facility of Payment. If any payee under the Plan is a minor, or if the Administrator reasonably believes that any payee is legally incapable of giving a valid receipt and discharge for any payment due him, the Administrator may have such payment, or any part of such payment, made to the person (or persons or institution) whom it reasonably believes is caring for or supporting such payee, unless it has received due notice of claim therefor from a duly appointed guardian of such payee. Any such payment will be a payment for the account of such payee and will, to the extent of such payment, be a complete discharge of any liability under the Plan to such payee.
9.12	Hardship Withdrawals.

(a) Conditions for Hardship Withdrawal. A Participant who has not separated from service with the Employer or an Affiliated Company may make a Qualified Election to receive a hardship withdrawal from his vested Individual Account effective as of April 1, 2006. The withdrawal made pursuant to such Qualified Election will be made from the sub-accounts maintained under his Individual Account in the following order: (i) Rollover Account, (ii) Employee After-Tax Account, (iii) Employee Pre-Tax Unmatched Contribution Account; (iv) Employee Pre-Tax Matched Contribution Account and (v) Catch-Up Contribution Account, subject to the following restrictions:

(A)	All withdrawals are subject to the Participant having filed an application with the Administrator prior to the date on which the withdrawal is to be made.
(B)	All withdrawals will be in the form of a lump-sum cash payment and will be debited from the Participant’s Rollover Account, Employee After-Tax Account, Employee Pre-Tax Unmatched Contribution Account, Employee Pre-Tax Matched Contribution Account or Catch-Up Contribution Account, as applicable, as of the date the payment is made.
(C)	A Participant may make a withdrawal only in the event that he furnishes satisfactory evidence to the Administrator that the withdrawal is to

42

alleviate his Financial Hardship (as defined in Section 9.12(b) and is for one of the following reasons:

(1)	Expenses for (or necessary to obtain) medical care that would be deductible by Participant under section 213(d) of the Code (determined without regard to whether the expenses exceed seven and one-half percent (7.5%) of Participant’s adjusted gross income) for the Participant, the Participant’s Spouse or the Participant’s dependents (as defined in section 152 of the Code without regard to the change in definition of dependent under the Working Families Tax Relief Act of 2004 (i.e., determined without regard to sections 152(b)(1), 152(b)(2) and 152(d)(1)(B) of the Code) and including a non-custodial child of divorced or legally separated parents as described in section 152(e) of the Code; provided, however, that any hardship withdrawal for such child will exclude amounts for the payment of nonprescription drugs or medicine (other than insulin)) ;
(2)	Costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments);
(3)	Payment of tuition, related educational fees, and room and board expenses, for the next twelve (12) months of post-secondary education for the Participant, his Spouse, children, or his dependents (as defined in section 152 of the Code (determined without regard to section 152(b)(1), (b)(2), and (d)(1)(B) of the Code));
(4)	Payments necessary to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant’s principal residence;
(5)	Effective April 1, 2006, payments necessary to reimburse the Participant for unreimbursed expenses related to a federally declared natural disaster;
(6)	Effective April 1, 2006, payments necessary to reimburse the Participant for funeral expenses for the Participant’s deceased parent, Spouse, children or dependents (as defined in section 152 of the Code) (determined without regard to section 152(d)(1)(B) of the Code); or
(7)	Such other immediate and heavy financial needs as the Administrator, or its delegate, approves from time to time based on rulings, regulations or other guidance issued by the Internal Revenue Service.

(b) Financial Hardship. As used herein, Financial Hardship will mean an immediate and heavy financial need that, based on the facts and circumstances, cannot be met from other resources that are reasonably available to the Participant. For this purpose, the Participant’s resources are deemed to include those assets of the Participant’s Spouse and minor children that are reasonably

43

available to the Participant. A distribution will be deemed to satisfy an immediate and heavy financial need of the Participant if the Participant represents in writing to the Administrator that the distribution is necessary to satisfy an immediate and heavy financial need and all of the following requirements are satisfied:

(i)	The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant; provided, however, that the amount of such distribution may include the amount of any federal, state or local taxes or penalties reasonably anticipated to result from the withdrawal;
(ii)	The Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available to Participant from commercial sources and under the Plan and all of the plans maintained by the Employer or any other employer;
(iii)	Such need cannot reasonably be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the Participant’s assets, or by cessation of Pre-Tax Contributions to the Plan.
(iv)	The Participant is precluded from making Pre-Tax Contributions to the Plan (and to any other qualified or non-qualified retirement plan of the Employer or an Affiliated Company) following the hardship withdrawal for a period of six (6) months for hardship withdrawals made before April 1, 2006, and one hundred and eighty three (183) days effective for hardship withdrawals made on and after April 1, 2006.

(c)

Limitation on Amount Withdrawn. There is no minimum amount that must be withdrawn. However, the maximum amount that may be withdrawn is the maximum available for withdrawals under this Section 9.12(c). The amount of a hardship withdrawal from the Participant’s Pre-Tax Contribution Accounts will not include any earnings credited to such accounts after December 31, 1988. The amount of a hardship withdrawal from any of the Participant’s Rollover Account, Employee After-Tax Account, and Catch-Up Contribution Account will not exceed the net credit balance in such account as of the date of the withdrawal. In the event that a Participant has an outstanding loan from his Pre-Tax Contribution Accounts or Catch-Up Contribution Account at the time of his withdrawal, such loan will not be reflected in the Participant’s Individual Account balance and the amount of the withdrawal may not exceed the amount that the Participant would otherwise be entitled to withdraw from such Account.

(d)

Rules and Procedures. The Administrator will establish such rules and give such directions to the Trustee as will be appropriate to effectuate the withdrawal in accordance with the terms this Plan.

9.13	Withdrawal of After-Tax Savings Contributions. A Participant may make a Qualified Election to receive all or any portion of his Employee After-Tax Account at any time while he is in the service of the Employer or an Affiliated Company.
9.14	Withdrawal at Age 591/2. Effective April 1, 2006, any Participant who attains the age of fifty-nine and one-half (591/2) may, in accordance with such policies and procedures as the Administrator may establish, make a Qualified Election to receive a withdrawal of all

44

	or a portion of the value of his vested Individual Account balance in the Plan. Such withdrawal will be made from the sub-accounts comprising the Participant’s Individual Account in the following order: (i) Employee After-Tax Account; (ii) Rollover Account; (iii) Profit Sharing Account; (iv) Safe Harbor Match Account; (v) Matching Contribution Account; (vi) Employee Pre-Tax Unmatched Contribution Account; (vii) Employee Pre-Tax Matched Contribution Account; (viii) Catch-Up Contribution Account; and (ix) QNEC Account.
9.15	Withdrawal of Rollover Account. A Participant may make a Qualified Election to receive all or any portion of his Rollover Account at any time while he is in the service of the Employer or an Affiliated Company.
9.16	Qualified Hurricane Katrina Distributions. A Participant whose principal place of abode on August 25, 2005 was located in the Hurricane Katrina disaster area and who sustained an economic loss by reason of Hurricane Katrina may elect during the period beginning on August 1, 2005 and ending December 31, 2006 to receive from the Plan a “qualified Hurricane Katrina distribution” of up to one hundred thousand dollars ($100,000) in the aggregate. Such distribution will be made in the form of a lump sum from the sub-accounts maintained under the Participant’s vested Individual Account in the order prescribed by the Administrator. The ten percent (10%) early withdrawal penalty for distributions from qualified plans prior to age fifty nine and one-half (591/2) will not apply to any qualified Hurricane Katrina distribution and the mandatory twenty percent (20%) income tax withholding applicable to Eligible Rollover Distributions will not apply. The Administrator is not required to allow the Participant to elect a Direct Rollover with respect to a qualified Hurricane Katrina distribution or to provide a section 402(f) notice with respect to any such distribution. However, a qualified Hurricane Katrina distribution is subject to the voluntary withholding requirements of section 3405 of the Code and Treas. Reg. § 35.3405-1T. Further, a special rule allows income inclusion with respect to a qualified Hurricane Katrina distribution to be spread over a three (3) year period. Any such Participant who receives a qualified Hurricane Katrina distribution may elect to recontribute all or part of such distribution to the Plan in one or more contributions over the three (3) year period following the date on which such distribution is made as provided in Internal Revenue Service Notice 2005-92.
	In addition, a Participant or Beneficiary whose principal place of abode on August 25, 2005 was located in the Hurricane Katrina disaster area and who sustained an economic loss by reason of Hurricane Katrina may elect to designate as a “qualified Hurricane Katrina distribution” any distribution from the Plan that was made to such Participant or Beneficiary during the period beginning on August 1, 2005 and ending on December 31, 2006 which does not exceed one hundred thousand dollars ($100,000) in the aggregate. Such designation may be made with respect to any distribution that satisfies the requirements for a qualified Hurricane Katrina distribution regardless if such distribution was made on account of Hurricane Katrina (e.g. an in-service withdrawal). However, the following distributions may not be designated as qualified Hurricane Katrina distributions: (a) corrective distributions of excess Annual Additions under section 415 of the Code as described in Section 7.2, (b) distributions of Excess Elective Deferrals under section 402(g) of the Code as described in Section 4.1, (c) distributions of Excess Contributions under section 401(k) of the Code as described in Section 4.2, (d) distributions of Excess Aggregate Contributions under section 401(m) of the Code as described in Section 5.1 and (e) deemed distributions of outstanding Plan loans pursuant to Section 9.17. In addition, a Participant will not be permitted to repay any designated qualified Hurricane

45

	Katrina distribution which is a required minimum distribution or part of a series of systematic withdrawal payments being paid over a period of more than ten (10) years. Likewise, any qualified Hurricane Katrina distribution made to a Beneficiary may not be recontributed to the Plan.
	In making a qualified Hurricane Katrina distribution, the Administrator may rely on the Participant’s or Beneficiary’s reasonable representations as to his principal place of abode on August 25, 2005, and whether he suffered an economic loss, unless the Administrator has actual knowledge to the contrary.
9.17	Loans to Participants. The Administrator may, in its sole discretion and in accordance with a uniform and nondiscriminatory policy established by it, permit loans to be made to a Participant; provided that, effective April 1, 2006, no such loan may be made with respect to amounts invested in the Common Stock Fund. Loans (a) will be made available to Participants on a reasonably equivalent basis; (b) not be made available to Highly Compensated Employees in an amount greater than the amount made available to other Participants; (c) bear a reasonable rate of interest; (d) be adequately secured; and (e) provide for periodic repayment over a reasonable period of time. In addition, when such loans are repaid, such repayment will be allocated to the Investment Funds in accordance with the Participant’s investment elections in effect at the time of repayment. In addition, a Participant who terminates employment with the Employer and all Affiliated Companies on or after April 1, 2006 may elect to continue to repay an outstanding Plan loan following such termination as provided in the written loan policy established by the Administrator. All loans granted pursuant to this Section 9.17 will be granted in accordance with the written loan policy to be established as set forth above (which policy, when properly adopted, is hereby incorporated by reference and made a part of this Plan). Such written loan policy, once established, may be modified or amended in writing from time to time without the necessity of amending this Section 9.17. The loan policy established by the Administrator will comply with the applicable provisions of ERISA and regulations promulgated pursuant thereto and with any limitations imposed by the Code and regulations promulgated pursuant thereto to prevent the loan from being deemed to be a taxable distribution to the Participant.
9.18	Duty to Keep Administrator Informed of Distributee’s Current Address. Each Participant, Former Participant and Beneficiary must file with the Administrator from time to time in writing his post office address and each change of post office address. Any communication, statement or notice addressed to a Participant, Former Participant or Beneficiary at his last post office address filed with the Administrator or, if no address is filed with the Administrator, then at his last post office address as shown on an Employer’s records, will be binding on the Participant or Former Participant, and his Beneficiary, for all purposes of the Plan. Neither the Administrator nor the Trustee will be required to search for or locate a Participant, Former Participant or Beneficiary.
9.19	Failure to Claim Benefits. If the Administrator notifies the Participant, Former Participant or Beneficiary by registered or certified mail at his last known address that he is entitled to a distribution and also notifies him of the provisions of this Section 9.19, and the Participant, Former Participant or Beneficiary fails to claim his benefits under the Plan or make his current address known to the Administrator within a reasonable period of time after such notification, the Administrator will direct that all unpaid amounts which would have been payable to such Participant, Former Participant or Beneficiary will be forfeited and applied as provided in Section 9.1(b). In the event that the Participant, Former Participant or Beneficiary is subsequently located, the amounts which were

46

forfeited, without adjustment for earnings and losses, will be restored and distributed to the Participant, Former Participant or Beneficiary. The Employer for whom the Participant last worked will contribute an amount to the Plan which is equal to the amount distributed under the terms of this Section 9.19 to the extent that such amount cannot be reinstated through forfeitures. Notwithstanding the preceding sentences, if the Administrator is trying to locate a Participant, Former Participant or Beneficiary in connection with (a) a minimum required distribution under Section 9.6, or (b) a return of Excess Elective Deferrals under Section 4.1, Excess Contributions under Section 4.2, or Excess Aggregate Contributions under Section 5.1, and the Administrator determines that such Participant, Former Participant or Beneficiary cannot be located, the Administrator will establish an escrow account outside of the Plan in the name of that Participant, Former Participant or Beneficiary and direct the Trustee to distribute such amount to that account.

9.20

Distribution Pursuant to a QDRO. The Administrator will establish policies and procedures for reviewing Domestic Relations Orders relating to a Participant’s interest in the Plan. The Administrator or its delegate will determine whether any such Domestic Relations Order is a QDRO. If the provisions of a QDRO provide for an immediate distribution to an Alternate Payee, the Administrator will direct the Trustee to commence payments to the Alternate Payee as soon as administratively practicable, following the later of (a) the receipt of such QDRO by the Administrator or (b) the date the Administrator receives the Alternate Payee’s written consent to such distribution. Until such time as payment is made to an Alternate Payee pursuant to this Section 9.20, the Alternate Payee will have no rights under the Plan other than the rights of a Beneficiary and the right to direct the investment of amounts awarded to the Alternate Payee. If an Alternate Payee does not receive an immediate distribution pursuant to this Section 9.20, the Administrator will direct the Recordkeeper to identify the Alternate Payee’s interest in the Trust Fund pending a distribution to the Alternate Payee and the Alternate Payee may direct the investment of the Alternate Payee’s interest in the Trust Fund pursuant the provisions of Section 16.1.

End of Article IX

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ARTICLE X

DISTRIBUTIONS UPON DEATH;
DESIGNATIONS OF BENEFICIARIES

10.1 Death Prior to Benefit Commencement Date.

(a)	Form of Death Benefits. In the case of a Participant or Former Participant who dies before his Benefit Commencement Date, his vested Individual Account will be paid to his surviving Spouse or Beneficiary, as applicable, in the form of a single lump sum cash payment or Direct Rollover, to the extent applicable and elected.
(b)	Timing of Payment of Death Benefit. Payment of the vested Individual Account of a Participant or Former Participant who dies before his Benefit Commencement Date will be paid as soon as administratively practicable after the Administrator receives the necessary documentation of the Participant’s Death, but no later than December 31 of the calendar year following the Participant’s death.
	The payment of death benefits under this Article X is conditioned upon the Administrator’s ability to locate the appropriate person to whom such benefits should be paid. In the event that the Administrator is unable to locate such person within a reasonable period of time after the date such benefits would otherwise be payable, the provisions of Section 9.19 regarding the conditional forfeiture of unclaimed benefits will apply.
(c)	Valuation of Death Benefits. The value of a Participant’s or Former Participant’s vested Individual Account which become payable by reason of the Participant’s or Former Participant’s death will be determined as of the Valuation Date immediately preceding the date of distribution.

10.2 Designation of Beneficiary.

(a)

Designation or Revocation. Subject to the provisions of Section 9.9 (regarding optional forms of benefit), whenever a Participant may be permitted to designate a Beneficiary to receive benefits under this Plan, such designation will be made, pursuant to a Qualified Election, by the execution and delivery to the Administrator of an instrument in a form satisfactory to the Administrator. A Participant may designate one or more Beneficiaries and may designate primary and secondary Beneficiaries. A Participant will have the right to change or revoke any such Beneficiary designation by filing a new designation and notice of revocation with the Administrator, and, subject to the rules governing a Qualified Election and the requirement for the consent of a Spouse to a change in a Participant’s Beneficiary designation, no notice to any Beneficiary or consent by any Beneficiary will be required to effect any such change or revocation.

(b)

Failure to Designate Beneficiary or Death of Beneficiary. If a deceased Participant or Former Participant fails to properly designate a Beneficiary, or if the Administrator receives no response from a designated Beneficiary after giving notice to such Beneficiary by certified mail to such person at his last known address as shown in the Plan’s records (or if the certified letter is returned

48

to the Administrator by the United States Postal Service as undeliverable), or if for any reason the designations will be legally ineffective, or if all Beneficiaries (both primary and secondary) predecease the Participant or Former Participant, any distribution required to be made under the provisions of this Plan from the Trust Fund will be made by payment: (i) to his Spouse, in the form of a lump sum cash payment or Direct Rollover; or (ii) if no such Spouse survives, in a single sum cash payment to the qualified representative of the Participant’s or Former Participant’s estate; provided, however, that if no qualified representative of the deceased Participant’s or Former Participant’s estate can be located within a reasonable period of time following the Participant’s or Former Participant’s death, the Administrator in its discretion may (A) make the distribution under this Section 10.2(b) to such persons who establish to the satisfaction of the Administrator that they are heirs at law of the Participant or Former Participant, or (B) conditionally forfeit the entire balance of the Participant’s or Former Participant’s Individual Account pursuant to Section 9.19.

(c)

Administrator’s Determination Binding. The determination by the Administrator as to which persons are entitled to payment of a Participant’s or Former Participant’s interest in the Plan upon his death or the death of his Spouse or Beneficiary, will be final and conclusive upon all persons.

10.3 Death After Benefit Commencement Date. In the case of a Participant who dies after his Benefit Commencement Date, no benefits will be payable except to the extent required under the form of benefit as in effect on the date of the Participant’s death.

End of Article X

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ARTICLE XI

AMENDMENT OF PLAN

11.1	Right to Amend. Subject to Section 11.2 and any other limitations contained in ERISA or the Code, the Company may from time to time amend, in whole or in part, any or all of the provisions of the Plan on behalf of the Company and all Employers. Specifically, but not by way of limitation, the Company may make any amendment necessary to acquire and maintain a qualified status for the Plan under the Code, whether or not retroactive. In addition, effective April 1, 2006, the Chief Executive Officer of the Company will have the authority to amend the Plan to comply with changes in the law, adopt changes to the Plan recommended by the Committee, or make other changes that will not materially increase the cost of maintaining the Plan to the Employers.
11.2	Limitation on Amendments. No amendment of the Plan will be made that would vest in any Employer, directly or indirectly, any interest in or control of the Trust Fund. No amendment will be made that would vary the Plan’s exclusive purpose of providing benefits to Participants, Former Participants and their Beneficiaries and of defraying reasonable expenses of administering the Plan or that would permit the diversion of any part of the Trust Fund from that exclusive purpose. No amendment will be made that would reduce any then vested interest of a Participant or Former Participant in his Individual Account. No amendment will increase the duties or responsibilities of the Trustee unless the Trustee consents thereto in writing.
	No amendment to the Plan will reduce or restrict, either directly or indirectly, the benefit provided under this Plan to any Participant or Former Participant prior to the amendment. Further, no amendment to the vesting schedule will deprive a Participant or Former Participant of his vested interest in his Individual Account as of the date of the amendment. Further, if the vesting schedule of this Plan is amended, or if the Plan is amended in any way that directly or indirectly affects the computation of a Participant’s or Former Participant’s vested interest, each such person with at least three (3) Years of Service as of the last day of the election period described below may elect, within a reasonable period after the adoption of the amendment, to have his vested interest computed under the Plan without regard to such amendment. The period during which such election may be made will commence with the date the amendment is adopted and will end sixty (60) days after the latest of:

(a)	the date the amendment is adopted;
(b)	the date the amendment becomes effective; or
(c)	the date the Participant or Former Participant is issued written notice of the amendment by the Employer.

End of Article XI

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ARTICLE XII

TERMINATION OF PLAN

12.1 Right to Discontinue Contributions, Terminate, or Partially Terminate. The Company has established the Plan with the bona fide intention and expectation that from year to year it will be able to, and will deem it advisable to, make its contributions thereto as provided in this Plan document. However, the Company realizes that circumstances not now foreseen, or circumstances beyond its control, may make it either impossible or inadvisable for the Company to continue to make such contributions to the Plan. Therefore, the Company will have the power to discontinue contributions to the Plan, terminate the Plan, or partially terminate the Plan at any time hereafter. Each Employer, each Participant and Former Participant, the Administrator, the Committee, the Daily Administrator and the Trustee will be notified of such discontinuance, termination, or partial termination.

12.2 Procedure in the Event of Discontinuance of Contributions, Termination, or Partial Termination.

(a)	Permanent Discontinuance of Contributions. If the Plan is amended so as to permanently discontinue Employer contributions, or if Employer contributions are in fact permanently discontinued, each affected Participant will continue to be one hundred percent (100%) vested in his Individual Account. In case of such discontinuance, the Administrator will remain in existence and all other provisions of the Plan that are necessary, in the opinion of the Administrator, for equitable operation of the Plan will remain in force.
(b)	Partial or Complete Termination. If the Plan is terminated or partially terminated, each affected Participant will continue to be one hundred percent (100%) vested in his Individual Account. Unless the Plan is otherwise amended prior to dissolution of the Company, the Plan will terminate as of the date of dissolution of the Company.
(c)	Allocation of Contributions, Forfeitures, Income and Losses. Upon discontinuance of contributions, termination, or partial termination, any previously unallocated contributions, forfeitures, and net income (or net loss) will be allocated according to the provisions of Article III. To the extent that a suspense account is in existence pursuant to Article VII, such suspense account will be allocated to the Individual Accounts of Participants to the extent permitted by section 415 of the Code, with any excess remaining after such allocation being paid to the Employer. Thereafter, the net income (or net loss) of the Trust Fund will continue to be allocated to the Individual Accounts of the Participants until the balances of such accounts are distributed.
(d)	Distribution of Individual Accounts. In the case of a termination or partial termination of the Plan, and in the absence of a Plan amendment to the contrary, the Trustee will pay the balance of the Individual Account of a Participant for whom the Plan is so terminated, or who is affected by such partial termination, to such Participant, subject to the time of payment, form of payment, and consent provisions of Article IX.

12.3 Merger, Consolidation, or Transfer. This Plan and Trust Fund may not merge or consolidate with, or transfer its assets or liabilities to, any other plan, unless immediately

51

thereafter each Participant would, in the event such other plan terminated, be entitled to a benefit which is equal to or greater than the benefit to which he would have been entitled if the Plan were terminated immediately before the merger, consolidation, or transfer. Further, no transfer of assets or liabilities will be made from this Plan to another plan, unless such other plan will impose the same distribution restrictions on Pre-Tax Contributions and QNECs as this Plan.

12.4

Reversion of Contributions to Employer. Except as provided in Section 3.5 and Section 12.2 under no circumstances or conditions will the Trust Fund or any portion thereof revert to any Employer or be used for or diverted to the benefit of anyone other than Participants, Former Participants and Beneficiaries, it being understood that the Trust Fund will be for the exclusive benefit of Participants, Former Participants and Beneficiaries.

End of Article XII

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ARTICLE XIII

PLAN ADMINISTRATION

13.1

The Administrator. The overall administration of the Plan will be the responsibility of the Administrator who will be appointed by formal action of the Company. The Company may appoint a Committee to serve as Administrator consisting of any number of members as determined by the Company. The Company may remove any member of the Committee at any time and a member may resign by written notice to the Company. Any vacancy in the membership of the Committee will be filled by appointment of the Board of Directors or the Chief Executive Officer of the Company, but pending the filling of any such vacancy the then members of the Committee may act hereunder as though they alone constitute the full Committee. As of the Effective Date, the Committee has been appointed as Administrator.

13.2

Action by Committee. The following rules apply with respect to actions of the Committee:

(a)	Majority. Any and all acts and decisions of the Committee will be by at least a majority of the then members, but the Committee may delegate to any one or more of its members the authority to sign notices or other documents on its behalf or to perform ministerial acts for it, in which event the Trustee, the Recordkeeper and any other person may accept such notice, document or act without question as having been authorized by the Committee.
(b)	Committee Procedure. The Committee may, but need not, call or hold formal meetings and any decisions made or action taken pursuant to written approval of a majority of the then members will be sufficient to constitute an act thereof. The Committee will maintain adequate records of its decisions, which records will be subject to inspection by the Company, any Employer, any Participant, Former Participant, Beneficiary, and any other person to the extent required by law, but only to the extent that they apply to such person. Also, the Committee may designate one of its members as Chairman and one of its members as Secretary and may establish policies and procedures governing it as long as the same are not inconsistent with the terms of the Plan.
(c)	Delegation to Committee and Company’s Duty to Furnish Information. The Committee will perform the duties and may exercise the powers and discretion given to it in this Plan and its decisions and actions may be relied upon by all persons affected thereby. The Trustee and the Recordkeeper may rely without question upon any notices, directions, or other documents received from the Committee. The Company and each Employer will furnish the Committee with all data and information available to the Company and such Employer which the Committee may reasonably require in order to perform its duties. The Committee may rely without question upon any such data or information furnished by the Company and each Employer.
(d)	Limitation on Committee Action. A member of the Committee may not vote or decide upon any matter relating solely to himself or vote in any case in which his individual right or claim to any benefit under the Plan is particularly involved. In any case in which any Committee member is so disqualified to act, the remaining

53

members will exercise all of the powers of a qualified member concerning the matter in which the disqualified member is not qualified to act.

(e)

Construction of Plan and Trustee’s and Recordkeeper’s Reliance. Any and all matters involving the Plan, including but not limited to any and all disputes which may arise involving Participants, Former Participants, and Beneficiaries and/or the Trustee or the Recordkeeper will be referred to the Committee. The Committee has the exclusive discretionary authority to construe the terms of the Plan and the exclusive discretionary authority to determine eligibility for all benefits hereunder. Any such determinations or interpretations of the Plan adopted by the Committee will be final and conclusive and will bind all parties. The Trustee and the Recordkeeper may rely upon the decision of the Committee with respect to any question concerning the meaning, interpretation, or application of any provision of the Plan.

13.3

Rules and Regulations of Administrator. The Administrator will have the authority to make such rules and regulations and to take such action as may be necessary to carry out the provisions of the Plan and will, subject to the provisions of the Plan, decide any questions arising in the administration, interpretation and application of the Plan, which decisions will be conclusive and binding on all parties. The Administrator may allocate or delegate any part of its authority and duties as it deems expedient.

13.4

Powers of Administrator. In order to effectuate the purposes of the Plan, the Administrator will have the following powers:

(a)	To appoint the Daily Administrator;
(b)	To determine all questions with regard to rights of Eligible Employees, Employees, Participants, Former Participants and Beneficiaries under the Plan including, but not limited to, questions involving eligibility of an Employee to participate in the Plan and the value of a Participant’s or Former Participant’s vested Individual Account;
(c)	To make all determinations and computations concerning the benefits, credits and debits to which any Participant, Former Participant or other Beneficiary, is entitled under the Plan;
(d)	To review and render decisions respecting a denial of a claim for benefits under the Plan;
(e)	To construe the Plan and to make equitable adjustments for any mistakes or errors made in the administration of the Plan;
(f)	To receive from the Employer and from Employees such information as is necessary for the proper administration of the Plan;
(g)	To receive and review reports from the Trustee of the financial condition and receipts of and disbursements from the Trust Fund;
(h)	To determine and resolve in its sole and absolute discretion all questions relating to the administration of the Plan and Trust Fund (i) when differences of opinion arise between the Employer, the Daily Administrator, the Trustee, a Participant,

54

	or any of them, and (ii) whenever it is deemed advisable to determine such questions in order to promote the uniform and nondiscriminatory administration of the Plan for the greatest benefit of all parties concerned;
(i)	To select the Investment Funds under the Plan;
(j)	To direct the Trustee as to the investment of any Participant’s Individual Account and the crediting and distribution of the Trust Fund, as more specifically provided in this Plan and the Trust Agreement;
(k)	To give the Trustee specific directions in writing with respect to:

(i)	the making of distribution payments, giving the names of the payees, the amounts to be paid and the time or times when payments will be made; and
(ii)	the making of any other payments which the Trustee is not by the terms of the Trust Agreement authorized to make without a direction in writing by the Administrator;

(l)	To comply (or transfer responsibility for compliance to the Trustee) with all applicable Federal income tax withholding requirements for benefit distributions;
(m)	To appoint, in its discretion, in accordance with the provisions of the Trust Agreement, one or more Investment Managers (as defined under section 3(38) of ERISA) to manage, including the power to acquire or dispose of, all or any portion of the assets of the Plan and Trust Fund;
(n)	To engage the service of counsel (who may, if appropriate, be counsel for the Employer), actuaries, and agents whom it may deem advisable to assist it with the performance of its duties; and
(o)	To amend the Plan pursuant to Section 11.1.

	The foregoing list of express powers is not intended to be either complete or conclusive, and the Administrator will, in addition, have such powers as it may reasonably determine to be necessary or appropriate in the performance of its powers and duties under the Plan.
13.5	Appointment of Daily Administrator. The Administrator will appoint the Daily Administrator who will serve in a ministerial capacity with respect to the daily operation of the Plan. The Administrator may remove the Daily Administrator with or without cause at any time. The Daily Administrator may resign upon written notice to the Administrator. As of the Effective Date, the Administrator has appointed the Employee Benefits Department of the Company as the Daily Administrator.
13.6	Duties of Daily Administrator. The Daily Administrator will have the following duties:

(a) To carry out the administration of the Plan in accordance with the provisions herein set forth;

55

(b)	To adopt rules of procedure and regulations necessary for the administration of the Plan, provided such rules are not inconsistent with the terms of the Plan;
(c)	To enforce the terms of the Plan and any rules and regulations adopted by the Plan Administrator;
(d)	To furnish the Employer with information which the Employer may require for tax or other purposes;
(e)	To establish and maintain, or cause to be maintained, the Individual Accounts described in Article I;
(f)	To prescribe procedures to be followed by distributees in obtaining benefits;
(g)	To create and maintain such records and forms as are required for the efficient administration of the Plan;
(h)	To prepare, or cause to be prepared, an annual report for the Employer, as of the last day of each Plan Year, in such form as may be required by the Employer;
(i)	To determine and maintain records of the age and amount of Compensation, Hours of Service, Years of Service of each Employee;
(j)	To comply with all applicable lawful reporting and disclosure requirements of ERISA; and
(k)	To construe the Plan, in its sole and absolute discretion, and make equitable adjustments for any mistakes and errors made in the administration of the Plan.

	The foregoing list of express duties is not intended to be either complete or conclusive, and the Daily Administrator will, in addition, exercise such other powers and perform such other duties as it may deem necessary, desirable, advisable or proper for the supervision and administration of the Plan.
13.7	Indemnification of the Administrator and Daily Administrator. To the extent not covered by insurance, or if there is a failure to provide full insurance coverage for any reason, and to the extent permissible under corporate by-laws and other applicable laws and regulations, the Company hereby indemnifies and agrees to defend and hold harmless the Administrator, each member of the Committee, and the Daily Administrator, and their respective successors, assigns, heirs, legatees, and beneficiaries, as the case may be, against any and all loss, cost liability claims, and causes of action by or on behalf of any and all parties whomsoever, and all losses therefrom, including, without limitation, costs of defense and attorneys’ fees, based upon or arising out of any act or omission relating to or in connection with the Plan and Trust Agreement other than losses resulting from any such person’s fraud or willful misconduct.
13.8	Plan Fiduciaries.

(a) Named Fiduciary. The Trustee is the named fiduciary hereunder with respect to the powers, duties and responsibilities of investment of the Trust Fund and the Administrator is the named fiduciary hereunder with respect to the powers, duties

56

	and responsibilities of the administration of the Plan. Certain powers, duties and responsibilities of each of said named fiduciaries are specifically delegated to others under the provisions of the Plan and Trust Agreement and other powers, duties and responsibilities of any fiduciaries may be delegated by written agreement to others to the extent permitted under the provisions of the Plan and Trust Agreement.
(b)	Scope of Fiduciary Responsibility. The powers and duties of each fiduciary hereunder, whether or not a named fiduciary, will be limited to those specifically delegated to each of them under the terms of the Plan and Trust Agreement. It is intended that the provisions of the Plan and Trust Agreement allocate to each fiduciary the individual responsibilities for the prudent execution of the functions assigned to each fiduciary. None of the allocated responsibilities or any other responsibilities will be shared by two or more fiduciaries unless such sharing will be provided by a specific provision in the Plan or the Trust Agreement. Whenever one fiduciary is required by the Plan or the Trust Agreement to follow the directions of another fiduciary, the two fiduciaries will not be deemed to have been assigned a share of any responsibility, but the responsibility of the fiduciary giving the directions will be deemed to be his sole responsibility and the responsibility of the fiduciary receiving those directions will be to follow same insofar as such instructions on their face are proper under applicable law. Any fiduciary may employ one or more persons to render advice with respect to any responsibility such fiduciary has under the Plan or Trust Agreement.
(c)	Multiple Capacity of Fiduciaries. Each fiduciary may, but need not, be a director, officer or employee of the Employer. Nothing in the Plan will be construed to prohibit any fiduciary from;

(i)	Serving in more than one fiduciary capacity with respect to the Plan and Trust Agreement;
(ii)	Receiving any benefit to which he may be entitled as a Participant or Beneficiary in the Plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the Plan as applied to all other Participants, Former Participants and Beneficiaries; or
(iii)	Receiving any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred in the performance of his duties with respect to the Plan, except that no person so serving who already receives full-time pay from the Employer will receive compensation from the Plan, except for reimbursement of expenses properly and actually incurred.

(d) Bonding of Fiduciaries. Each fiduciary will be bonded as required by applicable law or statute of the United States, or of any state having appropriate jurisdiction, unless such bond may under such law or statute be waived by the parties to the Trust Agreement. The Employer will pay the cost of bonding any fiduciary who is an employee of the Employer.

13.9 Action Taken in Good Faith. To the extent permitted by ERISA, the members of the Committee and each employee, officer and director of an Affiliated Company who are fiduciaries with respect to the Plan will be entitled to rely on, and be fully protected with

57

	respect to any action taken or suffered by them in good faith in reliance on, all tables, valuations, certificates, reports and opinions furnished by the Recordkeeper, the Trustee, or any accountant, attorney, insurance company, investment manager or other advisor acting at any time hereunder.
13.10	Expenses of Administration. Except to the extent paid by an Employer, the Administrator will cause the Trustee to pay all expenses incurred in the administration of the Plan, including expenses of the Committee, the Recordkeeper and the Administrator, and expenses and compensation of the Trustee and the expenses of counsel.
13.11	Claims Procedure. For purposes of this Section 13.11, a reference to the claimant includes the Participant, Former Participant, Spouse, Alternate Payee or Beneficiary, as applicable, and the authorized representative of any such person.

(a)	Filing of Claim. A claimant who feels he is being denied any benefit or right provided under the Plan must file a claim with the Administrator or its designee. All such claims must be submitted in the form and manner specified by the Administrator and will be considered filed on the date the claim is received by the Administrator.
(b)	Notice of Disposition of Claim. Upon the receipt of such a claim and in the event the claim is denied, the Administrator will, within a reasonable period of time, provide such claimant a written statement which will be delivered or mailed to the claimant by certified or registered mail to his last known address, which statement will contain the following:

(i)	The specific reason or reasons for the denial of benefits;
(ii)	A specific reference to the pertinent provisions of the Plan upon which the denial is based;
(iii)	A description of any additional material or information which is necessary for the claimant to perfect his claim and an explanation of why such material or information is necessary; and
(iv)	An explanation of the Plan’s claim review procedure and the time limits applicable to such procedure, including the claimant’s right to file a suit under section 502(a) of ERISA following an adverse benefit determination on review as provided below;

provided, however, in the event that special circumstances require an extension of time for processing the claim, the Administrator will provide such claimant with such written statement described above not later than one hundred eighty (180) days after receipt of the claimant’s claim, but, in such event, the Daily Administrator, or its delegate, will furnish the claimant, within ninety (90) days after its receipt of such claim, written notification of the extension explaining the circumstances requiring such extension and the date that it is anticipated that such written statement will be furnished.

(c)

Request for Review. Within ninety (90) days after receipt of a notice of a denial of benefits as provided above, the claimant may file a written request with the Committee for a review of his claim. In conducting its review, the Committee will

58

	consider any written statement or other evidence presented by the claimant in support of his claim. The Committee will give the claimant upon request, and free of charge, reasonable access to and copies of all pertinent documents necessary for the preparation of his claim.
(d)	Decision on Review. After receipt by the Committee of a written application for review of his claim, the Committee will review the claim taking into account all comments, documents, records and other information submitted by the claimant regarding the claim without regard to whether such information was considered in the initial benefit determination. The Committee will notify the claimant of its decision by delivery or by certified or registered mail to his last known address.
	Such decision will be made no later than the date of the meeting of the Committee which immediately follows the Administrator’s receipt of the request for review, unless the request for review was received by the Committee within thirty (30) days before such meeting, in which case a decision will be made by no later than the second meeting of the Committee following the Committee’s receipt of the request for review. If special circumstances require a further extension of time for processing such request for review, a decision will be made not later than the third meeting of the Committee following the Committee’s receipt of the request for review and the claimant will be advised in advance of the need for the extension. The decision of the Committee will be provided to the claimant as soon as possible but no later than five (5) days after the benefit determination is made.
	The decision of the Committee will be in writing and will include the specific reasons for the decision presented in a manner calculated to be understood by the claimant and will contain references to all relevant Plan provisions on which the decision was based. Such decision will also advise the claimant that he may receive upon request, and free of charge, reasonable access to and copies of all documents, records and other information relevant to his claim and will inform the claimant of his right to file an action under section 502(a) of ERISA in the case of an adverse decision regarding his appeal. The decision of the Committee will be final and conclusive.

End of Article XIII

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ARTICLE XIV

ADOPTION BY AFFILIATED COMPANIES

14.1 Adoption by and Designation of Other Employers.

(a)	Adoption by or Designation of Participating Employers. With the permission of the Company, as evidenced by a resolution of the board of directors of the Company, any Affiliated Company may become an Employer by either (i) commencing Pre-Tax Contributions on behalf of its Eligible Employees or (ii) delivering a written instrument to the Administrator specifying its intent to participate in the Plan and the effective date of such participation. Such written instrument may, but need not, also supply specific provisions relating to the operation of the Plan that will apply to the designated Employer only and that will become, as to such designated Employer and its Eligible Employees, a part of the Plan and the Trust Agreement.
(b)	Consent of Designation. Each Affiliated Company that becomes an Employer will be conclusively presumed to agree to be bound by the terms of the Plan and any and all amendments thereto upon (i) its submission of information to the Administrator required by the terms of or with respect to the Plan, (ii) making a contribution to the Trust Fund pursuant to the terms of the Plan, or (iii) adopting a resolution of its board of directors or other appropriate written authorization; provided, however, that the terms of the Plan may be modified so as to increase the obligations of an Employer only with the consent of such Employer, which consent will be conclusively presumed to have been given by such Employer upon the occurrence of an event described in (i) or (ii) above, following notice of such modification.
(c)	Effect of Adoption by Employer. Any entity or organization that adopts the Plan will be deemed to be an Employer for all purposes under the Plan unless otherwise specified in a written instrument adopted by the Company or such Employer. In addition, such written instrument may provide, in the discretion of the Company or such Employer, that the Eligible Employees of such Employer will receive credit for their employment with such entity or organization prior to the date it became an Employer for purposes of determining the eligibility of such Employees to participate in the Plan and/or the vested and nonforfeitable interest of such Employees as Participants.
(d)	Application of Plan to Each Employer. Except as otherwise provided in an Appendix attached hereto, the provisions of the Plan will apply separately and equally to each Employer and its Employees in the same manner as is expressly provided with respect to the Company and its Employees; provided, however, that the power to appoint or otherwise affect the Administrator, the Committee, the Daily Administrator or the Trustee and the power to amend or terminate the Plan will be exercised by the Company alone.
(e)	Transfer Among Employers. A Participant’s transfer of employment among Employers will not be considered a termination of employment under this Plan, and his service with one will be considered as service with all others.
(f)	Termination of Participation. Any Employer may, by appropriate action of its board of directors or noncorporate counterpart that is communicated in writing to

60

the Company and to the Administrator, terminate its participation in the Plan and the Trust. The Company may, in its discretion, terminate an Employer’s Plan and Trust participation at any time by written instrument delivered to the Administrator and the designated Employer.

14.2 Single Plan. The Plan is a single plan with respect to all Employers, except to the extent required by section 413 of the Code and unless the Company specifically provides that the Plan will be a separate plan with respect to the Company and each Employer. The contributions of any Employer that is a member of a group of employers with respect to which the Plan represents a single plan will be available for allocation on behalf of any Participants who are Employees of any other Employers that are members of such group but will not be available for allocation on behalf of any Participants who are Employees of any Employer that is not a member of such group. Conversely, the contributions of any Employer with respect to which the Plan represents a separate plan for only that Employer will be available for allocation on behalf of Participants who are its Employees but will not be available for allocation on behalf of Participants who are Employees of any other Employers. Likewise, contributions under each such plan will be tested separately pursuant to sections 401(k), 401(m), and 415 of the Code, and the minimum participation requirements of section 410(b) of the Code will be applied separately with respect to each such plan. However, service with all Employers will count for eligibility and vesting purposes under the Plan and a transfer between Employers will not be treated as a separation from service for distribution purposes under the Plan.

End of Article XIV

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ARTICLE XV

THE TRUSTEE

15.1	Trust Fund. A Trust Fund has been created and will be maintained for the purposes of the Plan, and the monies thereof will be invested in accordance with the terms of the Trust Agreement which forms a part of the Plan. All Pre-Tax Contributions, Matching Contributions, Catch-Up Contributions, QNECs and Rollover Contributions will be paid into the Trust Fund, and all benefits under the Plan will be paid from the Trust Fund.
15.2	Trustee’s Duties. Except as otherwise specifically provided in the Trust Agreement, the Trustee’s obligations, duties and responsibilities are governed solely by the terms of the Trust Agreement, reference to which is hereby made for all purposes.
15.3	Benefits Only from Trust Fund. Any person having any claim under the Plan will look solely to the assets of the Trust Fund for satisfaction. In no event will the Company, any other Employer or any of their respective officers, Employees, agents, members of the board of directors, the Trustee, any successor trustee, the Administrator, the Daily Administrator, the Recordkeeper or any member of the Committee, be liable in their individual capacities to any person whomsoever, under the provisions of the Plan or Trust Agreement, absent a breach of fiduciary responsibility determined pursuant to the applicable provisions of ERISA.
15.4	Trust Fund Applicable Only to Payment of Benefits. The Trust Fund will be used and applied only in accordance with the provisions of the Plan, to provide the benefits thereof, except as provided in Section 13.10 regarding payment of administrative expenses, and no part of the corpus or income of the Trust Fund will be used for, or diverted to, purposes other than for the exclusive benefit of Participants and other persons thereunder entitled to benefits.
15.5	Appointment of Investment Advisor. The Administrator may appoint an investment advisor as permitted by Section 402(c)(3) of ERISA to direct the Trustee with regard to the investment of the assets held under the Plan. For purposes of this Section 15.5, “investment advisor” will mean a fiduciary of the Plan who (a) is registered as an investment advisor under the Investment Advisors Act of 1940, (b) is a bank, as defined in the Investment Advisors Act of 1940, or (c) is an insurance company qualified under the laws of more than one state to manage, acquire, or dispose of any asset of the Plan. If such an investment advisor be so appointed, the Trustee will invest the assets held under the Plan in accordance with the written directions received from such investment advisor. The Trustee will not be obligated to accept direction from the investment advisor until such investment advisor acknowledges in writing that it is a fiduciary of the Plan.

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15.6 Administrator’s Duty to Trustee. The Administrator will notify the Trustee at the appropriate time of all facts which may be necessary hereunder for the proper allocation of increases, decreases, expenses, and contributions for Participants, the proper payment or distribution of benefits, or the proper performance of any other act required of the Trustee hereunder. The Administrator will notify the Trustee of such facts as are needed by the Trustee to perform its functions under the Plan. The Administrator will secure appropriate elections, directions, and designations for Participants, Former Participants and Beneficiaries provided for in the Plan.

End of Article XV

63

ARTICLE XVI

PARTICIPANT INVESTMENT OPTIONS

16.1

Investments of Contributions. Contributions by and on behalf of a Participant will be invested in accordance with the Participant’s investment designations in one or more Investment Funds established from time to time for this purpose. The Administrator, in its sole discretion, without the necessity of Plan amendment, may authorize the Trustee to include additional Investment Funds or may direct the Trustee to change to different Investment Funds or fund managers among which the Participants may elect to have their Individual Account invested. A separate sub-account will be established and maintained under each Participant’s Individual Account to reflect the portion of such account which is invested in each Investment Fund. Each sub-account represents a separate Investment Fund.

16.2

Participant Direction of Investment. The Plan is intended to comply with the requirements of section 404(c) of ERISA and will be operated in accordance with such requirements. The Administrator will establish rules that operate in a nondiscriminatory manner which will provide each Participant with the right to direct the investment of amounts credited to his Individual Account.

(a)

Nature of Election. A separate election may be made by each Participant or, as applicable, Former Participant with respect to the investment of (i) future contributions, and (ii) existing Individual Account balances. A Participant’s election as to future contributions will be applied to all future contributions made by or on behalf of the Participant, regardless of any change that occurs in the amount of such contributions. A Participant’s or Former Participant’s election as to existing Individual Account balances will be applied to his entire Individual Account under the Plan.

(b)

Rules Regarding Elections. The Administrator may from time to time establish rules regarding the manner in which elections by a Participant or Former Participant, as the case may be, as to the investment of future contributions or existing account balances, or both, may be made. Such rules may include, without limitation, rules pertaining to the use of Interactive Electronic Communications. To the extent deemed appropriate by the Administrator, special rules may be established in the event of the introduction of new Investment Funds or the substitution of one or more Investment Funds for one or more other Investment Funds, in order to facilitate and promote an orderly transition. Participants will have the right to direct the investment, in whole percentage increments from one percent (1%) to one hundred percent (100%), of their Pre-Tax Unmatched Contributions, Pre-Tax Matched Contributions, Catch-Up Contributions, Matching Contributions, and, if applicable, any QNECs, or Rollover Contributions credited to the Plan on their behalf among the Investment Funds as of each calendar quarter; provided, however, that not more than twenty-five percent (25%) of such contributions may be invested in the Common Stock Fund. Similarly, Participants or Former Participants may elect to direct the investment of their Individual Account balances provided that no more than twenty-five percent (25%) of such Individual Account balances may be invested in the Common Stock Fund.

64

(c)	Investment of Matching Contributions. Matching Contributions may be made in cash or in Common Stock as elected by the Chief Executive Officer of the Company. Matching Contributions made in Common Stock will be invested in the Common Stock Fund until otherwise directed by the Participant after the Matching Contribution is made. If Matching Contributions are made in Common Stock and the Participant directs that his Matching Contribution Account be invested in an Investment Fund or Investment Funds other than the Common Stock Fund, the Trustee will transfer the Participant’s Matching Contribution Account from the Common Stock Fund as soon as administratively feasible after each Matching Contribution is made. Earnings from the Common Stock Fund will be used to purchase Common Stock at prevailing market prices directly from the Company, on the open market, or in privately negotiated transactions. The Trustee will not pay any commissions in connection with the acquisition of Common Stock if such payment would cause the acquisition to be a prohibited transaction under ERISA. Funds in the Common Stock Fund will not be commingled with funds in other Investment Funds. Matching Contributions made in cash will be invested in the Investment Fund options selected by the Participant in the same percentages as the investment direction in effect for the Participant’s Pre-Tax Contributions, or in the default Investment Fund or Investment Funds selected by the Administrator pursuant to Section 16.2(d), if the Participant has not made an investment election.
(d)	Default Investment Fund. In accordance with rules which the Administrator may adopt, in the case of any Participant who fails to elect one of the permitted Investment Funds under the Plan, the Administrator will invest all amounts for which no such fund has been elected and the Participant will be advised of the selected Investment Funds. Notwithstanding the preceding provisions of this Section 16.2(d), an investment election, once implemented pursuant to the Participant’s election or by default in accordance with the preceding sentence, will be deemed to be a continuing election until changed by the Participant in accordance with this Plan, and the Administrator will have no obligation to remind any Participant regarding the opportunity to change any investment election in effect, nor will the Administrator have any responsibility to evaluate the suitability of any investment election to the individual circumstance of any Participant.
(e)	Refusal to Implement Participant Directions. The Administrator may decline to implement any Participant investment directions, or changes in investment directions, to the extent such directions, if implemented:

(i)	Would not be in accordance with the terms of the Plan to the extent such terms are consistent with the provisions of Title I of ERISA;
(ii)	Would cause the Administrator to maintain the indicia of ownership of any Plan assets outside the jurisdiction of the district courts of the United States, other than as permitted by section 404(b) of ERISA and DOL Reg. § 2550.404(b)-1;
(iii)	Would result in taxable income to the Plan or jeopardize the Plan’s tax qualified status under the Code;
(iv)	Could result in a loss in excess of the balance of the Participant’s Individual Account; or

65

(v) Would result in a prohibited transaction under section 406 of ERISA or section 4975 of the Code.

	The Administrator or the Recordkeeper will provide Participants with such information required by rules and regulations promulgated by the Department of Labor under section 404(c) of ERISA in the manner and at the time prescribed therein.
(f)	Valuation of Investment Funds. The value of the assets held in the Trust Fund in each of the Investment Funds as of each Valuation Date will be determined on the basis of the fair market value of the assets of such fund as of such Valuation Date as appraised by the Trustee plus or minus accruals and other appropriate accounting adjustments. Each such Investment Fund will be segregated from and completely independent of the other Investment Funds and the valuation procedures described in Section 8.1 will apply separately with respect to each such fund.
(g)	Administrative Mistake. If a Participant’s change in investment directive or election for redistribution of investments is inadvertently overlooked and discovery of such oversight is made within forty-five (45) days after the date the Participant receives confirmation of such investment election, the change or redistribution will be made as soon as administratively feasible and the Participant’s Individual Account will be retroactively changed or redistributed and treated in the same manner as though his directive to change or redistribute had not been overlooked. If discovery of such oversight is made more than forty-five (45) days after the date the Participant receives confirmation of such investment election, no retroactive correction will be made in the Participant’s Individual Account.

16.3	Investments in Individual Loans to Participants. Subject to the provisions of Section 9.17, the Trust Fund may be invested in individual loans to the Participants. A separate sub-account will be established and maintained under each applicable Participant’s individual Account to reflect his interest in the Trust Fund that is invested in an individual loan.
16.4	Voting Rights. The Trustee will exercise all voting rights pertaining to each Participant’s pro rata share of Common Stock held in the Common Stock Fund in accordance with the terms of the Trust Agreement.

End of Article XVI

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ARTICLE XVII

TOP HEAVY PROVISIONS

17.1 Applicability. The provisions of this Article XVII will apply in the unlikely event that the Plan is determined to be a Top-Heavy Plan for the Plan Year under the rules of Section 17.3. Further, except as is expressly provided to the contrary, the rules of this Article XVII will be applied after the application of the Affiliated Company rules of Section 1.2. As of the Effective Date, the Plan is the only qualified retirement plan maintained by the Company and the Affiliated Companies. Accordingly, the top heavy rules of section 416 of the Code as described in this Article XVII are limited to the Plan. In the event that the Company or an Affiliated Company adopts another qualified retirement plan, this Article XVII will be updated accordingly.

17.2 Definitions.

(a)

Five Percent Owner means any person who owns (or is considered as owning within the meaning of section 318 of the Code) more than five percent (5%) of the outstanding stock of an Employer or Affiliated Company or stock possessing more than five percent (5%) of the total combined voting power of all stock of an Employer or Affiliated Company. The rules of sections 414(b), (c) and (m) of the Code will not apply for purposes of applying these ownership rules. Thus, this ownership test will be applied separately with respect to each Affiliated Company.

(b)

Key Employee means any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year was:

(i)	An officer of an Employer having 415 Compensation (as defined in Section 7.1) greater than one hundred thirty thousand dollars ($130,000) (as adjusted under section 416(i)(1) of the Code for Plan Years beginning after December 31, 2002);
(ii)	A Five Percent Owner of the Employer; or
(iii)	A One Percent Owner of the Employer having 415 Compensation (as defined in Section 7.1) of more than one hundred fifty thousand dollars ($150,000).

	The determination of who is a Key Employee will be made in accordance with section 416(i)(1) of the Code and other guidance of general applicability issued thereunder.
(c)	Non-Key Employee means any Employee or Beneficiary who is not a Key Employee.
(d)	One Percent Owner any person who would be described in Section 17.2(a) if “one percent (1%)” were substituted for “five percent (5%)” each place where it appears therein.

17.3 Top-Heavy Status.

(a) Top-Heavy Plan Defined. The Plan will be a “Top-Heavy Plan” with respect to any Plan Year if, as of the last day of the Plan Year the aggregate of the Individual Accounts of Key Employees under the Plan exceeds sixty percent

67

	(60%) of the present value of the aggregate of the Individual Accounts of all Employees under the Plan. For purposes of making this determination, the present value of Individual Accounts will be determined as of the most recent valuation date that falls within a twelve (12) month period ending on the last day of the Plan Year.
(b)	Treatment of Non-Key Employee. If any individual is a Non-Key Employee with respect to the Plan for any Plan Year, but the individual was a Key Employee with respect to the Plan for any prior Plan Year, the Individual Account of the individual will not be taken into account for purposes of this Section 17.3.
(c)	Treatment of Persons Not Performing Services. If any individual has not performed any services for the Employer at any time during the one (1) year period ending on the last day of the Plan Year, the Individual Account of the individual will not be taken into account for purposes of this Section 17.3.

17.4 Minimum Contributions. For each Plan Year in which the Plan is a Top-Heavy Plan, the minimum contributions for that Plan Year will be determined in accordance with the rules of this Section 17.4.

(a)	General Rule. Except as provided below, the minimum Employer contribution (excluding Pre-Tax Contributions for each Non-Key Employee who satisfies the requirements of Article III to be a Participant in the Plan (including but not limited to the age and service requirements of Article III, but without regard to any requirements (i) that a Participant complete a minimum number of Hours of Service in order to share in an allocation of Matching Contributions for a year, (ii) that a Participant make contributions to the Plan, or (iii) relating to the Non-Key Employee’s level of Compensation)) will be not less than three percent (3%) of his 415 Compensation (as defined in Section 7.1). Matching Contributions under the Plan will be taken into account for purposes of satisfying the minimum contribution requirements of section 416(c)(2) of the Code and this Section 17.4. Such Matching Contributions will be treated as matching contributions for purposes of the actual contribution percentage test and other requirements under section 401(m) of the Code.
(b)	Adjustment of Contribution. Subject to the following rules of this Section 17.4(b), the percentage set forth in Section 17.4(a) above will not be required to exceed the percentage at which contributions (including Pre-Tax Contributions and Matching Contributions under this Plan) are made (or are required to be made) under the Plan for the Plan Year for the Key Employee for whom the percentage is the highest for such Plan Year. This determination will be made by dividing the contributions for each Key Employee by his 415 Compensation (as defined in Section 7.1) for the Plan Year.
(c)	Limitation. The requirements of this Section 17.4 must be satisfied without taking into account contributions under chapters 2 or 21 of the Code, Title Il of the Social Security Act, or any other federal or state law.

End of Article XVII

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ARTICLE XVIII

MISCELLANEOUS

18.1	No Employment or Compensation Agreement. Nothing contained in the Plan will be construed as giving any person or entity any legal or equitable right against the Company, any other Employer, any Affiliated Company, their respective stockholders or partners, officers or directors, the Administrator, the Daily Administrator, the Committee, the Trustee or the Recordkeeper, except as the same will be specifically provided in the Plan. Nor will anything in the Plan give any Participant or other Employee the right to be retained in the service of an Employer. The employment of all persons by an Employer will remain subject to termination by such Employer to the same extent as if the Plan had never been executed.
18.2	Spendthrift Provision. Except as provided by the terms of Domestic Relations Order which is determined to be qualified under section 414(p) of the Code, no Participant, Former Participant, or Beneficiary will have the right to assign or transfer his interest hereunder, nor will his interest be subject to claims of his creditors or others, it being understood that all provisions of the Plan will be for the exclusive benefit of those designated herein.
18.3	Construction. It is the intention of each Employer that the Plan be qualified under section 401 of the Code, and comply with the applicable provisions of ERISA, and all provisions hereof should be construed to that result.
18.4	Gender and Number. Except as otherwise indicated by the context, any masculine terminology used herein also includes the feminine and neuter, and vice versa, and the definition of any term herein in a singular will also include the plural, and vice versa.
18.5	Titles. Titles of Articles and Sections hereof are for convenience only and will not be considered in construing the Plan.
18.6	Texas Law Applicable. The Plan and each of its provisions will be construed and their validity determined by the laws of the State of Texas.
18.7	Successors and Assigns. The Plan will be binding upon the successors and assigns of the Company and each Employer and the Trustee and upon the heirs and personal representatives of those individuals who become Participants hereunder.
18.8	Plan Controls. Except as provided in Section 15.2, in the event of any conflict between the terms of the Plan and any summary thereof or other document relating thereto, from whatever source, the terms of the Plan will govern.

End of Article XVIII

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IN WITNESS WHEREOF, Zale Corporation, the Company, acting by and through its duly authorized officers, has caused this Agreement to be executed as of the day and year first above written.

ZALE CORPORATION
By:	/s/ Mary E. Burton
Its:	Chief Executive Officer

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EX-10.4(A)

Exhibit 10.4a

ZALE CORPORATION
2003 STOCK INCENTIVE PLAN
(As Amended Through August 2006)

1. PREAMBLE

     This Zale Corporation 2003 Stock Incentive Plan, as it may be amended from time to time (the “Plan”), is intended to promote the interests of Zale Corporation, a Delaware corporation (together with its Subsidiaries, the “Company”), and its stockholders by providing officers and other employees (including directors who are employees) of the Company with appropriate incentives and rewards to encourage them to enter into and continue in the employ of the Company and to acquire a proprietary interest in the long-term success of the Company.

2. DEFINITIONS

     As used in the Plan, the following definitions apply to the terms indicated below:

     (a) “Board of Directors” shall mean the Board of Directors of the Company.

     (b) “Cause,” when used in connection with the termination of a Participant’s (as defined herein) employment by the Company, shall mean (i) the willful and continued failure by the Participant substantially to perform his or her duties and obligations to the Company (other than any such failure resulting from his or her incapacity due to physical or mental illness) or (ii) the willful engaging by the Participant in misconduct which is materially injurious to the Company. For purposes of this Section 2(b), no act, or failure to act, on a Participant’s part shall be considered “willful” unless done, or omitted to be done, by the Participant in bad faith and without reasonable belief that his or her action or omission was in the best interests of the Company. The Company shall determine whether a termination of employment is for Cause and shall notify the Committee of such a determination.

     (c) “Change in Control” shall mean any of the following occurrences:

     (1) any “person,” as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company), is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities;

     (2) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (1), (3) or (4) of this definition) whose election by the Board of Directors or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the

period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof;

     (3) the stockholders of the Company approve a merger or consolidation of the Company with any other entity, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “person” (as hereinabove defined) acquires more than 50% of the combined voting power of the Company’s then outstanding securities; or

     (4) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.

     (d) “Code” shall mean the Internal Revenue Code of 1986, as amended.

     (e) “Committee” shall mean the Compensation Committee of the Board of Directors or such other committee as the Board of Directors shall appoint from time to time to administer the Plan; provided, that the Committee shall at all times consist of two or more persons, each of whom shall be a member of the Board of Directors. To the extent required for transactions under the Plan to qualify for the exemptions available under Rule 16b-3 (as defined herein), members of the Committee (or any subcommittee thereof) shall be “non-employee directors” within the meaning of Rule 16b-3. To the extent required for compensation realized from Incentive Awards (as defined herein) under the Plan to be deductible by the Company pursuant to Section 162(m) of the Code, members of the Committee (or any subcommittee thereof) shall be “outside directors” within the meaning of such section.

     (f) “Company Stock” shall mean the common stock, par value $.01 per share, of the Company.

     (g) “Disability” shall mean: (1) any physical or mental condition that would qualify a Participant for a disability benefit under the long-term disability plan maintained by the Company and applicable to him or her or (2) when used in connection with the exercise of an Incentive Stock Option (as defined herein) following termination of employment, disability within the meaning of Section 422(e)(3) of the Code.

     (h) “Effective Date” shall mean November 6, 2003.

     (i) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

     (j) The “Fair Market Value” of a share of Company Stock shall be the price at which the Company Stock was last sold in the principal United States market for the Company Stock as of the date for which the Fair Market Value is determined or, in the event that the price of a

share of Company Stock shall not be so reported, the Fair Market Value of a share of Company Stock shall be determined by the Committee in its absolute discretion.

     (k) “Incentive Award” shall mean an Option, Tandem SAR, Stand-Alone SAR, share of Restricted Stock, share of Phantom Stock, Stock Bonus, or a Restricted Stock Unit (each defined herein) granted pursuant to the terms of the Plan.”

     (l) “Incentive Stock Option” shall mean an Option that is an “incentive stock option” within the meaning of Section 422 of the Code.

     (m) “Issue Date” shall mean the date established by the Committee on which Certificates representing shares of Restricted Stock shall be issued by the Company pursuant to the terms of Section 10(e).

     (n) “Non-Qualified Stock Option” shall mean an Option that is not an Incentive Stock Option.

     (o) “Option” shall mean an option to purchase shares of Company Stock granted pursuant to Section 7.

     (p) “Participant” shall mean an employee of the Company to whom an Incentive Award is granted pursuant to the Plan and, upon his or her death, his or her successors, heirs, executors and administrators, as the case may be.

     (q) A share of “Phantom Stock” shall mean the right, granted pursuant to Section 11, to receive in cash the Fair Market Value of a share of Company Stock.

     (r) “Plan Agreement” shall mean the written agreement between the Company and a Participant or other document approved by the Committee evidencing an Incentive Award.

     (s) A share of “Restricted Stock” shall mean a share of Company Stock which is granted pursuant to the terms of Section 10 hereof and which is subject to the restrictions set forth in Section 10(c).

     (t) “Rule 16b-3” shall mean the rule thus designated as promulgated under the Exchange Act.

     (u) “Stand-Alone SAR” shall mean a stock appreciation right granted pursuant to Section 9 which is not related to any Option.

     (v) “Stock Bonus” shall mean a bonus payable in shares of Company Stock granted pursuant to Section 12.

     (w) “Subsidiary” shall mean any corporation or other entity in which, at the time of reference, the Company owns, directly or indirectly, stock or similar interests comprising more than 50 percent of the combined voting power of all outstanding securities of such entity.

          (x) “Tandem SAR” shall mean a stock appreciation right granted pursuant to Section 8 which is related to an Option.

          (y) “Vesting Date” shall mean the date established by the Committee on which a share of Restricted Stock or Phantom Stock may vest.

          (z) “Performance Goals” means the measurable performance objectives, if any, established by the Committee for a Performance Period that are to be achieved with respect to an Incentive Award granted to a Participant under the Plan. Performance Goals may be described in terms of Company-wide objectives or in terms of objectives that are related to performance of the division, department or function within the Company in which the Participant receiving the Incentive Award is employed or on which the Participant’s efforts have the most influence. The achievement of the Performance Goals established by the Committee for any Performance Period will be determined without regard to the effect on such Performance Goals of any acquisition or disposition by the Company of a trade or business, or of substantially all of the assets of a trade or business, during the Performance Period and without regard to any change in accounting standards by the Financial Accounting Standards Board or any successor entity. The Performance Goals established by the Committee for any Performance Period under the Plan will consist of one or more of the following:

(i)	earnings per share and/or growth in earnings per share in relation to target objectives;
(ii)	operating cash flow and/or growth in operating cash flow in relation to target objectives;
(iii)	cash available in relation to target objectives;
(iv)	net income and/or growth in net income in relation to target objectives;
(v)	revenue and/or growth in revenue in relation to target objectives;
(vi)	total shareholder return (measured as the total of the appreciation of and dividends declared on the Common Stock) in relation to target objectives;
(vii)	return on invested capital in relation to target objectives;
(viii)	return on shareholder equity in relation to target objectives;
(ix)	return on assets in relation to target objectives;
(x)	return on common book equity in relation to target objectives;
(xi)	economic value added (relative or absolute); and
(xiv)	working capital targets.

If the Committee determines that, as a result of a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which the Company conducts its business, or any other events or circumstances, the Performance Goals are no longer suitable, the Committee may in its discretion modify such Performance Goals or the related minimum acceptable level of achievement, in whole or in part, with respect to a period as the Committee deems appropriate and equitable, except where such action would result in the loss of the otherwise available exemption of the Incentive Award under Section 162(m) of the Code. In such case, the Committee will not make any modification of the Performance Goals or minimum acceptable level of achievement.

     (aa) “Performance Period” means, with respect to an Incentive Award, a period of time within which the Performance Goals relating to such Incentive Award are to be measured. The Performance Period will be established by the Committee at the time the Incentive Award is granted.

     (bb) “Restricted Stock Unit” refers to a restricted stock unit as described in Section 10A.

     (cc) “Stock Incentive Program” means a written program established by the Committee, pursuant to which Incentive Awards are awarded under the Plan under terms, conditions and restrictions set forth in such written program.

3. STOCK SUBJECT TO THE PLAN

     (a) Shares Available for Awards

     The total number of shares of Company Stock with respect to which Incentive Awards may be granted shall not exceed 6,000,000 shares. Such shares may be authorized but unissued Company Stock or authorized and issued Company Stock held in the Company’s treasury or acquired by the Company for the purposes of the Plan. The Committee may direct that any stock certificate evidencing shares issued pursuant to the Plan shall bear a legend setting forth such restrictions on transferability as may apply to such shares pursuant to the Plan.

     The grant of a Tandem SAR shall not reduce the number of shares of Company Stock with respect to which Incentive Awards may be granted pursuant to the Plan.

     (b) Individual Limitation

     The total number of shares of Company Stock subject to Options and to Stand-Alone SARS, awarded to any one employee during any fiscal year of the Company, shall not exceed 1,200,000 shares. Determinations under the preceding sentence shall be made in a manner that is consistent with Section 162(m) of the Code and regulations promulgated thereunder. The provisions of this Section 3(b) shall not apply in any circumstance with respect to which the Committee determines that compliance with Section 162(m) of the Code is not necessary.

     (c) Adjustment for Change in Capitalization

     If there is any change in the outstanding shares of Company Stock by reason of a stock dividend or distribution, stock split-up, recapitalization, combination or exchange of shares, or by reason of any merger, consolidation, spinoff or other corporate reorganization in which the Company is the surviving corporation, the number of shares available for issuance both in the aggregate and with respect to each outstanding Incentive Award, the price per share under each outstanding Incentive Award, and the limitation set forth in Section 3(b), shall be proportionately adjusted by the Committee, whose determination shall be final and binding. After any adjustment made pursuant to this Section 3(c), the number of shares subject to each outstanding Incentive Award shall be rounded to the nearest whole number.

     (d) Re-use of Shares

     The following shares of Company Stock shall again become available for Incentive Awards: any shares subject to an Incentive Award that remain unissued upon the cancellation or termination of such Award for any reason whatsoever; any shares of Restricted Stock forfeited, provided that any dividends paid on such shares are also forfeited; and any shares in respect of which a stock appreciation right is settled for cash.

     (e) Total Grants for Awards Other than Options

     The total number of shares of Common Stock with respect to which Tandem SARs, Stand Alone SARs, shares of Restricted Stock, Restricted Stock Units, shares of Phantom Stock and Stock Bonuses may collectively be granted shall not exceed 30% of the total number of shares of Common Stock with respect to which all Incentive Awards have been or may be granted under the Plan.

     (f) No Repricing

     Absent stockholder approval, neither the Committee nor the Board of Directors shall have any authority, with or without the consent of the affected holders of Incentive Awards, to “reprice” an Incentive Award after the date of its initial grant with a lower exercise price in substitution for the original exercise price. This paragraph may not be amended, altered or repealed by the Board of Directors or the Committee without approval of the stockholders of the Company.

4. ADMINISTRATION OF THE PLAN

     The Plan shall be administered by the Committee. The Committee shall from time to time designate the employees of the Company who shall be granted Incentive Awards and the amount, type and other features of each Incentive Award.

     The Committee shall have full authority to administer the Plan, including authority to interpret and construe any provision of the Plan and the terms of any Incentive Award issued under it and to adopt such rules and regulations for administering the Plan as it may deem necessary or appropriate. The Committee shall determine whether an authorized leave of absence shall constitute termination of employment. Decisions of the Committee shall be final

and binding on all parties. Notwithstanding anything to the contrary contained herein, the Board of Directors may, in its sole discretion, at any time and from time to time, resolve to administer the Plan, in which case the term “Committee” as used herein shall be deemed to mean the Board of Directors.

     The Committee may, in its absolute discretion, without amendment to the Plan, (i) accelerate the date on which any Option or Stand-Alone SAR granted under the Plan becomes exercisable, (ii) waive or amend the operation of Plan provisions respecting exercise after termination of employment or otherwise adjust any of the terms of such Option or Stand-Alone SAR and (iii) accelerate the Vesting Date or Issue Date, or waive any condition imposed hereunder, with respect to any share of Restricted Stock or Phantom Stock or otherwise adjust any of the terms applicable to such share.

     No member of the Committee shall be liable for any action, omission or determination relating to the Plan, and the Company shall indemnify and hold harmless each member of the Committee and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee) arising out of any action, omission or determination relating to the Plan, unless, in either case, such action, omission or determination was taken or made by such member, director or employee in bad faith and without reasonable belief that it was in the best interests of the Company.

5. ELIGIBILITY

     The persons who shall be eligible to receive Incentive Awards pursuant to the Plan shall be such employees of the Company (including officers of the Company, whether or not they are directors of the Company) as the Committee shall designate from time to time. Directors who are not employees or officers of the Company shall not be eligible to receive Incentive Awards under the Plan.

6. AWARDS UNDER THE PLAN; PLAN AGREEMENTS

     The Committee may grant Options, Tandem SARS, Stand-Alone SARS, shares of Restricted Stock, shares of Phantom Stock, Stock Bonuses, and Restricted Stock Units in such amounts and with such terms and conditions as the Committee shall determine, subject to the provisions of the Plan.

     Each Incentive Award granted under the Plan (except an unconditional Stock Bonus) shall be evidenced by a Plan Agreement which shall contain such provisions as the Committee may in its sole discretion deem necessary or desirable. By accepting an Incentive Award, a Participant thereby agrees that the Incentive Award shall be subject to all of the terms and provisions of the Plan and the applicable Plan Agreement.

     7. OPTIONS

     (a) Identification of Options

     Each Option shall be clearly identified in the applicable Plan Agreement as either an Incentive Stock Option or a Non-Qualified Stock Option.

     (b) Exercise Price

     Each Plan Agreement with respect to an Option shall set forth the amount (the “exercise price”) payable by the holder to the Company upon exercise of the Option. The exercise price per share shall be determined by the Committee but shall in no event be less than the Fair Market Value of a share of Company Stock on the date the Option is granted.

     (c) Term and Exercise of Options

     (1) Unless the applicable Plan Agreement provides otherwise, an Option shall become cumulatively exercisable as to 25% of the shares covered thereby on each of the first, second, third and fourth anniversaries of the date of grant. The Committee shall determine the expiration date of each Option; provided, however, that no Incentive Stock Option shall be exercisable more than ten years after the date of grant. Unless the applicable Plan Agreement provides otherwise, no Option shall be exercisable prior to the first anniversary of the date of grant.

     (2) An Option may be exercised for all or any portion of the shares as to which it is exercisable; provided, that no partial exercise of an Option shall be for an aggregate exercise price of less than $1,000. The partial exercise of an Option shall not cause the expiration, termination or cancellation of the remaining portion thereof.

     (3) An Option shall be exercised by delivering notice to the Company’s principal office, to the attention of its Secretary (or the Secretary’s designee), no less than one business day in advance of the effective date of the proposed exercise. Such notice shall be accompanied by the applicable Plan Agreement, shall specify the number of shares of Company Stock with respect to which the Option is being exercised and the effective date of the proposed exercise and shall be signed by the Participant or other person then having the right to exercise the Option. Such notice may be withdrawn at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise. Payment for shares of Company Stock purchased upon the exercise of an Option shall be made on the effective date of such exercise by one or a combination of the following means: (i) in cash, by certified check, bank cashier’s check or wire transfer; (ii) subject to the approval of the Committee, in shares of Company Stock owned by the Participant for at least six months prior to the date of exercise and valued at their Fair Market Value on the effective date of such exercise; or (iii) subject to the approval of the Committee, by such other provision as the Committee may from time to time authorize. Any payment in shares of Company Stock shall be effected by the delivery of such shares to the Secretary (or the Secretary’s designee) of the Company, duly endorsed in blank or accompanied by stock powers duly executed in blank, together with any other documents and evidences as the Secretary (or the Secretary’s designee) of the Company shall require.

     (4) Certificates for shares of Company Stock purchased upon the exercise of an Option shall be issued in the name of the Participant or other person entitled to receive such shares, and delivered to the Participant or such other person as soon as practicable following the effective date on which the Option is exercised.

     (d) Limitations on Incentive Stock Options

     (1) To the extent that the aggregate Fair Market Value of shares of Company Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year under the Plan and any other stock option plan of the Company (or any “subsidiary corporation” of the Company within the meaning of Section 424 of the Code) shall exceed $100,000, or such higher value as may be permitted under Section 422 of the Code, such Options shall be treated as Non-Qualified Stock Options. Such Fair Market Value shall be determined as of the date on which each such Incentive Stock Option is granted.

     (2) No Incentive Stock Option may be granted to an individual if, at the time of the proposed grant, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or any “subsidiary corporation” of the Company within the meaning of Section 424 of the Code), unless (i) the exercise price of such Incentive Stock Option is at least 110% of the Fair Market Value of a share of Company Stock at the time such Incentive Stock Option is granted and (ii) such Incentive Stock Option is not exercisable after the expiration of five years from the date such Incentive Stock Option is granted.

     (e) Effect of Termination of Employment

     (1) Unless the applicable Plan Agreement provides or the Committee shall determine otherwise, in the event that the employment of a Participant with the Company shall terminate for any reason other than Cause, Disability or death: (i) Options granted to such Participant, to the extent that they were exercisable at the time of such termination, shall remain exercisable until the date that is three months after such termination, on which date they shall expire; and (ii) Options granted to such Participant, to the extent that they were not exercisable at the time of such termination, shall expire at the close of business on the date of such termination. The three-month period described in this Section 7(e)(1) shall be extended to one year in the event of the Participant’s death during such three-month period. Notwithstanding the foregoing, no Option shall be exercisable after the expiration of its term.

     (2) Unless the applicable Plan Agreement provides or the Committee shall determine otherwise, in the event that the employment of a Participant with the Company shall terminate on account of the Disability or death of the Participant: (i) Options granted to such Participant, to the extent that they were exercisable at the time of such termination, shall remain exercisable until the first anniversary of such termination, on which date they shall expire; and (ii) Options granted to such Participant, to the extent that they were not exercisable at the time of such termination, shall expire at the close of business on the date of such termination. Notwithstanding the foregoing, no Option shall be exercisable after the expiration of its term.

     (3) In the event of the termination of a Participant’s employment for Cause, all outstanding Options granted to such Participant shall expire at the commencement of business on the date of such termination.

(f) Acceleration of Exercise Date Upon Change in Control

     Upon the occurrence of a Change in Control, each Option granted under the Plan and outstanding at such time shall become fully and immediately exercisable and shall remain exercisable until its expiration, termination or cancellation pursuant to the terms of the Plan. In addition, in the event of a potential Change in Control, the Committee may in its discretion, cancel any outstanding Options and pay to the holders thereof, in cash or stock, or any combination thereof, the value of such Options based upon the price per share of Common Stock to be received by other shareholders of the Company in the Change in Control less the exercise price of each Option.

8. TANDEM SARS

     The Committee may grant in connection with any Option granted hereunder one or more Tandem SARS relating to a number of shares of Company Stock less than or equal to the number of shares of Company Stock subject to the related Option. A Tandem SAR may be granted at the same time as, or, in the case of a Non-Qualified Stock Option, subsequent to the time that its related Option is granted.

     (a) Benefit Upon Exercise

     The exercise of a Tandem SAR with respect to any number of shares of Company Stock shall entitle the Participant to a cash payment, for each such share, equal to the excess of (i) the Fair Market Value of a share of Company Stock on the exercise date over (ii) the option exercise price of the related Option. Such payment shall be made as soon as practicable after the effective date of such exercise.

     (b) Term and Exercise of Tandem SAR

     (1) A Tandem SAR shall be exercisable only if and to the extent that its related Option is exercisable.

     (2) The exercise of a Tandem SAR with respect to a number of shares of Company Stock shall cause the immediate and automatic cancellation of its related Option with respect to an equal number of shares. The exercise of an Option, or the cancellation, termination or expiration of an Option (other than pursuant to this Section 8(b)(2)), with respect to a number of shares of Company Stock shall cause the automatic and immediate cancellation of any related Tandem SARS to the extent that the number of shares of Company Stock remaining subject to such Option is less than the number of shares subject to such Tandem SARS.

     Tandem SARS shall be cancelled in the order in which they became exercisable.

     (3) A Tandem SAR may be exercised for all or any portion of the shares as to which it is exercisable; provided, that no partial exercise of a Tandem SAR shall be for an aggregate exercise price of the related Option of less than $1,000. The partial exercise of a Tandem SAR shall not cause the expiration, termination or cancellation of the remaining portion thereof.

     (4) No Tandem SAR shall be assignable or transferable otherwise than together with its related Option.

     (5) A Tandem SAR shall be exercised by delivering notice to the Company’s principal office, to the attention of its Secretary (or the Secretary’s designee), no less than one business day in advance of the effective date of the proposed exercise. Such notice shall be accompanied by the applicable Plan Agreement, shall specify the number of shares of Company Stock with respect to which the Tandem SAR is being exercised and the effective date of the proposed exercise and shall be signed by the Participant or other person then having the right to exercise the Option to which the Tandem SAR is related. Such notice may be withdrawn at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise.

9. STAND-ALONE SARS

     (a) Exercise Price

     The exercise price per share of a Stand-Alone SAR shall be determined by the Committee at the time of grant, but shall in no event be less than the Fair Market Value of a share of Company Stock on the date of grant.

     (b) Benefit Upon Exercise

     The exercise of a Stand-Alone SAR with respect to any number of shares of Company Stock shall entitle the Participant to a cash payment, for each such share, equal to the excess of (i) the Fair Market Value of a share of Company Stock on the exercise date over (ii) the exercise price of the Stand-Alone SAR. Such payments shall be made as soon as practicable.

     (c) Term and Exercise of Stand-Alone SARS

     (1) Unless the applicable Plan Agreement provides otherwise, a Stand-Alone SAR shall become cumulatively exercisable as to 25 percent of the shares covered thereby on each of the first, second, third and fourth anniversaries of the date of grant. The Committee shall determine the expiration date of each Stand-Alone SAR. Unless the applicable Plan Agreement provides otherwise, no Stand-Alone SAR shall be exercisable prior to the first anniversary of the date of grant.

     (2) A Stand-Alone SAR may be exercised for all or any portion of the shares as to which it is exercisable; provided, that no partial exercise of a Stand-Alone SAR shall be for an aggregate exercise price of less than $1,000. The partial exercise of a Stand-Alone SAR shall not cause the expiration, termination or cancellation of the remaining portion thereof.

     (3) A Stand-Alone SAR shall be exercised by delivering notice to the Company’s principal office, to the attention of its Secretary (or the Secretary’s designee), no less than one business day in advance of the effective date of the proposed exercise. Such notice shall be accompanied by the applicable Plan Agreement, shall specify the number of shares of Company Stock with respect to which the Stand-Alone SAR is being exercised, and the effective date of the proposed exercise, and shall be signed by the Participant. The Participant may withdraw such notice at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise.

     (d) Effect of Termination of Employment

     The provisions set forth in Section 7(e) with respect to the exercise of Options following termination of employment shall apply as well to such exercise of Stand-Alone SARS.

     (e) Acceleration of Exercise Date Upon Change in Control

     Upon the occurrence of a Change in Control, any Stand-Alone SAR granted under the Plan and outstanding at such time shall become fully and immediately exercisable and shall remain exercisable until its expiration, termination or cancellation pursuant to the terms of the Plan.

10. RESTRICTED STOCK

     (a) Issue Date and Vesting Date

     At the time of the grant of shares of Restricted Stock, the Committee shall establish an Issue Date or Issue Dates and a Vesting Date or Vesting Dates with respect to such shares. The Committee may divide such shares into classes and assign a different Issue Date and/or Vesting Date for each class. If the grantee is employed by the Company on an Issue Date (which may be the date of grant), the specified number of shares of Restricted Stock shall be issued in accordance with the provisions of Section 10(e). Provided that all conditions to the vesting of a share of Restricted Stock imposed pursuant to Section 10(b) are satisfied, and except as provided in Section 10(g), upon the occurrence of the Vesting Date with respect to a share of Restricted Stock, such share shall vest and the restrictions of Section 10(c) shall cease to apply to such share.

     (b) Conditions to Vesting

     At the time of the grant of shares of Restricted Stock, the Committee may impose such restrictions or conditions to the vesting of such shares as it, in its absolute discretion, deems appropriate. By way of example and not by way of limitation, the Committee may require, as a condition to the vesting of any class or classes of shares of Restricted Stock, that the Participant or the Company achieves such performance goals as the Committee may specify.

     (c) Restrictions on Transfer Prior to Vesting

     Prior to the vesting of a share of Restricted Stock, no transfer of a Participant’s rights with respect to such share, whether voluntary or involuntary, by operation of law or otherwise, shall be permitted. Immediately upon any attempt to transfer such rights, such share, and all of the rights related thereto, shall be forfeited by the Participant.

     (d) Dividends on Restricted Stock

     The Committee in its discretion may require that any dividends paid on shares of Restricted Stock shall be held in escrow until all restrictions on such shares have lapsed.

     (e) Issuance of Certificates

     (1) Reasonably promptly after the Issue Date with respect to shares of Restricted Stock, the Company shall cause to be issued a stock certificate, registered in the name of the Participant to whom such shares were granted, evidencing such shares; provided, that the Company shall not cause such a stock certificate to be issued unless it has received a stock power duly endorsed in blank with respect to such shares. Each such stock certificate shall bear the following legend:

The transferability of this certificate and the shares of stock represented hereby are subject to the restrictions, terms and conditions (including forfeiture provisions and restrictions against transfer) contained in the Zale Corporation 2003 Stock Incentive Plan and related Plan Agreement, and such rules, regulations and interpretations as the Zale Corporation Compensation Committee may adopt. Copies of the Plan, Plan Agreement and, if any, rules, regulations and interpretations are on file in the office of the Secretary of Zale Corporation, 901 West Walnut Hill Lane, Irving, Texas 75038-1003.

Such legend shall not be removed until such shares vest pursuant to the terms hereof.

     (2) Each certificate issued pursuant to this Section 10(e), together with the stock powers relating to the shares of Restricted Stock evidenced by such certificate, shall be held by the Company unless the Committee determines otherwise.

     (f) Consequences of Vesting

     Upon the vesting of a share of Restricted Stock pursuant to the terms of the Plan and the applicable Plan Agreement, the restrictions of Section 10(c) shall cease to apply to such share. Reasonably promptly after a share of Restricted Stock vests, the Company shall cause to be delivered to the Participant to whom such shares were granted, a certificate evidencing such share, free of the legend set forth in Section 10(e). Notwithstanding the foregoing, such share still may be subject to restrictions on transfer as a result of applicable securities laws.

     (g) Effect of Termination of Employment

     (1) Unless the applicable Plan Agreement or the Committee provides otherwise, during the 90 days following termination of a Participant’s employment for any reason other than Cause, the Company shall have the right to require the return of any shares to which restrictions

on transferability apply, in exchange for which the Company shall repay to the Participant (or the Participant’s estate) any amount paid by the Participant for such shares. In the event that the Company requires such a return of shares, it also shall have the right to require the return of all dividends paid on such shares, whether by termination of any escrow arrangement under which such dividends are held or otherwise.

     (2) In the event of the termination of a Participant’s employment for Cause, all shares of Restricted Stock granted to such Participant which have not vested as of the date of such termination shall immediately be returned to the Company, together with any dividends paid on such shares, in return for which the Company shall repay to the Participant any amount paid for such shares.

     (h) Effect of Change in Control

     Upon the occurrence of a Change in Control, all outstanding shares of Restricted Stock which have not theretofore vested shall immediately vest.

10A. TERMS AND CONDITIONS OF RESTRICTED STOCK UNITS

     A Restricted Stock Unit shall entitle the Participant to receive, at a specified future date, a number of shares of Company Stock equal to a specified or determinable number of Restricted Stock Units granted by the Committee, or, in the Committee’s sole discretion at the time thereof, an amount equal to the then Fair Market Value of such shares. At the time of the grant, the Committee must determine the target number of Restricted Stock Units subject to a Restricted Stock Units Incentive Award and (i) the period over which such Restricted Stock Unit shall vest and in what proportions or (ii) the Performance Period and the Performance Goals applicable to the determination of the ultimate settlement of the Restricted Stock Unit.

     (a) Settlement.

     Settlement with respect to Restricted Stock Units may be made by the Company in shares of Company Stock, or in cash, as provided in the applicable Plan Agreement or Stock Incentive Program or, in the absence of such provision, as the Committee may determine in its sole discretion.

     (b) Conditions to Settlement.

     Each Restricted Stock Unit granted under the Plan shall be settled at the end of the vesting period or Performance Period or upon the occurrence of an event, and in such number of shares or amount, as the Committee shall specify in the applicable Plan Agreement or Stock Incentive Program; provided, however, that in no event will payment occur later than two and one-half (2 ¹/2) months after the later of (i) the end of the Participant’s first taxable year in which the amount is no longer subject to a substantial risk of forfeiture, or (ii) the end of the Company’s first taxable year in which the amount is no longer subject to a substantial risk of forfeiture.

11. PHANTOM STOCK

     (a) Vesting Date

     At the time of the grant of shares of Phantom Stock, the Committee shall establish a Vesting Date or Vesting Dates with respect to such shares. The Committee may divide such shares into classes and assign a different Vesting Date for each class. Provided that all conditions to the vesting of a share of Phantom Stock imposed pursuant to Section 11(c) are satisfied, and except as provided in Section 11(d), upon the occurrence of the Vesting Date with respect to a share of Phantom Stock, such share shall vest.

     (b) Benefit Upon Vesting

     Upon the vesting of a share of Phantom Stock, the Participant shall be entitled to receive in cash, within 30 days of the date on which such share vests, an amount equal to the sum of (i) the Fair Market Value of a share of Company Stock on the date on which such share of Phantom Stock vests and (ii) the aggregate amount of cash dividends paid with respect to a share of Company Stock during the period commencing on the date on which the share of Phantom Stock was granted and terminating on the date on which such share vests.

     (c) Conditions to Vesting

     At the time of the grant of shares of Phantom Stock, the Committee may impose such restrictions or conditions to the vesting of such shares as it, in its absolute discretion, deems appropriate. By way of example and not by way of limitation, the Committee may require, as a condition to the vesting of any class or classes of shares of Phantom Stock, that the Participant or the Company achieves such performance goals as the Committee may specify.

     (d) Effect of Termination of Employment

     (1) Unless the applicable Plan Agreement or the Committee provides otherwise, shares of Phantom Stock that have not vested, together with any dividends credited on such shares, shall be forfeited upon the Participant’s termination of employment for any reason other than Cause.

     (2) In the event of the termination of a Participant’s employment for Cause, all shares of Phantom Stock granted to such Participant which have not vested as of the date of such termination shall immediately be forfeited, together with any dividends credited on such shares.

     (e) Effect of Change in Control

     Upon the occurrence of a Change in Control all outstanding shares of Phantom Stock which have not theretofore vested shall immediately vest.

     12. STOCK BONUSES

     In the event that the Committee grants a Stock Bonus, a certificate for the shares of Company Stock comprising such Stock Bonus shall be issued in the name of the Participant to whom such grant was made and delivered to such Participant as soon as practicable after the date on which such Stock Bonus is payable.

13. RIGHTS AS A STOCKHOLDER

     No person shall have any rights as a stockholder with respect to any shares of Company Stock covered by or relating to any Incentive Award until the date of issuance of a stock certificate with respect to such shares.

     Except as otherwise expressly provided in Section 3(c), no adjustment to any Incentive Award shall be made for dividends or other rights for which the record date occurs prior to the date such stock certificate is issued.

14. NO SPECIAL EMPLOYMENT RIGHTS; NO RIGHT TO INCENTIVE AWARD

     Nothing contained in the Plan or any Plan Agreement shall confer upon any Participant any right with respect to the continuation of employment by the Company or interfere in any way with the right of the Company, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Participant.

     No person shall have any claim or right to receive an Incentive Award hereunder. The Committee’s granting of an Incentive Award to a Participant at any time shall neither require the Committee to grant any other Incentive Award to such Participant or other person at any time nor preclude the Committee from making subsequent grants to such Participant or any other person.

15. SECURITIES MATTERS

     (a) The Company shall be under no obligation to affect the registration pursuant to the Securities Act of 1933 of any interests in the Plan or any shares of Company Stock to be issued hereunder or to effect similar compliance under any state laws. Notwithstanding anything herein to the contrary, the Company shall not be obligated to cause to be issued or delivered any certificates evidencing shares of Company Stock pursuant to the Plan unless and until the Company is advised by its counsel that the issuance and delivery of such certificates is in compliance with all applicable laws, regulations of governmental authority and the requirements of the New York Stock Exchange and any other securities exchange on which shares of Company Stock are traded. Certificates evidencing shares of Company Stock issued pursuant to the terms hereof, may bear such legends, as the Committee or the Company, in its sole discretion, deems necessary or desirable to insure compliance with applicable securities laws.

     (b) The transfer of any shares of Company Stock hereunder shall be effective only at such time as counsel to the Company shall have determined that the issuance and delivery of such shares is in compliance with all applicable laws, regulations of governmental authority and the requirements of the New York Stock Exchange and any other securities exchange on which

shares of Company Stock are traded. The Committee may, in its sole discretion, defer the effectiveness of any transfer of shares of Company stock hereunder in order to allow the issuance of such shares to be made pursuant to registration or an exemption from registration or other methods for compliance available under federal or state securities laws. The Company shall inform the Participant in writing of the Committee’s decision to defer the effectiveness of a transfer. During the period of such a deferral in connection with the exercise of an Option, the Participant may, by written notice, withdraw such exercise and obtain the refund of any amount paid with respect thereto.

16. WITHHOLDING TAXES

     Whenever cash is to be paid pursuant to an Incentive Award, the Company shall have the right to deduct therefrom an amount sufficient to satisfy any federal, state and local withholding tax requirements related thereto.

     Whenever shares of Company Stock are to be delivered pursuant to an Incentive Award, the Company shall have the right to require the Participant to remit to the Company in cash an amount sufficient to satisfy any federal, state and local withholding tax requirements related thereto. With the approval of the Committee, which it shall have sole discretion to grant, a Participant may satisfy the foregoing requirement by electing to have the Company withhold from delivery shares of Company Stock having a value equal to the amount of tax to be withheld. Such shares shall be valued at their Fair Market Value on the date as of which the amount of tax to be withheld is determined (the “Tax Date”). Fractional share amounts shall be settled in cash. Such a withholding election may be made with respect to all or any portion of the shares to be delivered pursuant to an Incentive Award. To the extent required for such a withholding of stock to qualify for the exemption available under Rule 16b-3, such an election by a grantee whose transactions in Company Stock are subject to Section 16(b) of the Exchange Act shall be: (i) subject to the approval of the Committee in its sole discretion; (ii) irrevocable; (iii) made no sooner than six months after the grant of the award with respect to which the election is made; and (iv) made at least six months prior to the Tax Date unless such withholding election is in connection with exercise of an Option and both the election and the exercise occur prior to the Tax Date in a “window period” of ten business days beginning on the third day following release of the Company’s quarterly or annual summary statement of sales and earnings.

17. NOTIFICATION OF ELECTION UNDER SECTION 83(b) OF THE CODE

     If any Participant shall, in connection with the acquisition of shares of Company Stock under the Plan, make the election permitted under Section 83(b) of the Code (i.e., an election to include in gross income in the year of transfer the amounts specified in Section 83(b)), such Participant shall notify the Company of such election within ten days of filing notice of the election with the Internal Revenue Service, in addition to any filing and notification required pursuant to regulations issued under the authority of Code Section 83(b).

18. NOTIFICATION UPON DISQUALIFYING DISPOSITION UNDER SECTION 421(b) OF THE CODE

     Each Plan Agreement with respect to an Incentive Stock Option shall require the Participant to notify the Company of any disposition of shares of Company Stock issued pursuant to the exercise of such Option under the circumstances described in Section 421(b) of the Code (relating to certain disqualifying dispositions) within ten days of such disposition.

19. AMENDMENT OR TERMINATION OF THE PLAN

     The Board of Directors may, at any time, suspend or terminate the Plan or revise or amend it in any respect whatsoever; provided, however, that stockholder approval shall be required if and to the extent required by Rule 16b-3 or by any comparable or successor exemption under which the Board of Directors believes it is appropriate for the Plan to qualify, or if and to the extent the Board of Directors determines that such approval is appropriate for purposes of satisfying Section 162(m) or Section 422 of the Code. Nothing herein shall restrict the Committee’s ability to exercise its discretionary authority pursuant to Section 4, which discretion may be exercised without amendment to the Plan. No action hereunder may, without the consent of a Participant, reduce the Participant’s rights under any outstanding Incentive Award.

20. NO OBLIGATION TO EXERCISE

     The grant to a Participant of an Option, Tandem SAR or Stand-Alone SAR shall impose no obligation upon such Participant to exercise such Option, Tandem SAR or Stand-Alone SAR.

21. TRANSFERS UPON DEATH; NONASSIGNABILITY

     Upon the death of a Participant outstanding Incentive Awards granted to such Participant may be exercised only by the executor or administrator of the Participant’s estate or by a person who shall have acquired the right to such exercise by will or by the laws of descent and distribution. No transfer of an Incentive Award by will or the laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with (a) written notice thereof and with a copy of the will and/or such evidence as the Committee may deem necessary to establish the validity of the transfer and (b) an agreement by the transferee to comply with all the terms and conditions of the Incentive Award that are or would have been applicable to the Participant and to be bound by the acknowledgments made by the Participant in connection with the grant of the Incentive Award.

     During a Participant’s lifetime, the Committee may permit the transfer, assignment or other encumbrance of an outstanding Option or outstanding shares of Restricted Stock unless (i) such Option is an Incentive Stock Option and the Committee and the Participant intend that it shall retain such status or (ii) the award is meant to qualify for the exemptions available under Rule 16b-3 and the Committee and the Participant intend that it shall continue to so qualify.

22. EXPENSES AND RECEIPTS

     The expenses of the Plan shall be paid by the Company. Any proceeds received by the Company in connection with any Incentive Award will be used for general corporate purpose

23. FAILURE TO COMPLY

     In addition to the remedies of the Company elsewhere provided for herein, failure by a Participant (or beneficiary) to comply with any of the terms and conditions of the Plan or the applicable Plan Agreement, unless such failure is remedied by such Participant (or beneficiary) within ten days after notice of such failure by the Committee, shall be grounds for the cancellation and forfeiture of such Incentive Award, in whole or in part, as the Committee, in its sole discretion, may determine.

24. EFFECTIVE DATE AND TERM OF PLAN

     The Plan shall be effective as of the Effective Date. Unless earlier terminated by the Board of Directors, the right to grant Incentive Awards under the Plan will terminate on the tenth anniversary of the Effective Date. Incentive Awards outstanding at Plan termination will remain in effect according to their terms and the provisions of the Plan.

25. APPLICABLE LAW

     Except to the extent preempted by any applicable federal law, the Plan will be construed and administered in accordance with the laws of the State of Delaware, without reference to the principles of conflicts of laws thereunder.

EX-10.6(A)

Exhibit 10.6a

ZALE CORPORATION
OUTSIDE DIRECTORS’ 2005
STOCK INCENTIVE PLAN
(As Amended Through August 2006)

     1. PREAMBLE

     This Zale Corporation Outside Directors’ 2005 Stock Incentive Plan, as it may be amended from time to time (the “Plan”), is intended to promote the interests of Zale Corporation, a Delaware corporation (the “Company”), and its stockholders by providing directors of the Company who are not employees of the Company with appropriate incentives and rewards to serve on the board of directors of the Company and to acquire a proprietary interest in the long-term success of the Company.

     2. DEFINITIONS

     As used in the Plan, the following definitions apply to the terms indicated below:

     (a) “Board of Directors” shall mean the Board of Directors of the Company.

     (b) “Cause,” when used in connection with a Participant’s removal or resignation as a member of the Board of Directors, shall mean (i) the willful and continued failure by the Participant substantially to perform his or her duties and obligations to the Company (other than any such failure resulting from his or her incapacity due to physical or mental illness) or (ii) the willful engaging by the Participant in misconduct which is materially injurious to the Company. For purposes of this Section 2(b), no act, or failure to act, on a Participant’s part shall be considered “willful” unless done, or omitted to be done, by the Participant in bad faith and without reasonable belief that his or her action or omission was in the best interests of the Company. The Board of Directors shall determine whether a Participant’s removal or resignation as a member of the Board of Directors is for Cause.

     (c) “Change in Control” shall mean the first to occur of the following:

     (i) any “person,” as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company), is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities;

     (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this definition) whose election by the Board of Directors or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of

the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof;

     (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other entity, other than (i) a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “person” (as hereinabove defined) acquires more than 50% of the combined voting power of the Company’s then outstanding securities; or

     (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.

     (d) “Code” shall mean the Internal Revenue Code of 1986, as amended.

     (e) “Company Stock” shall mean the common stock, par value $.01 per share, of the Company.

     (f) “Disability” shall mean any physical or mental condition that would qualify a Participant for a disability benefit under the long-term disability plan maintained by the Company and applicable to him or her.

     (g) “Effective Date” shall mean November 11, 2005.

     (h) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

     (i) The “Fair Market Value” of a share of Company Stock shall be the price at which the Company Stock was last sold in the principal United States market for the Company Stock as of the date for which the Fair Market Value is determined or, in the event that the price of a share of Company Stock shall not be so reported, the Fair Market Value of a share of Company Stock shall be determined by the Committee in its absolute discretion.

     (j) “Incentive Award” shall mean an Option or a share of Restricted Stock granted pursuant to the terms of the Plan.

     (k) “Issue Date” shall mean the date established by the Board of Directors on which certificates representing shares of Restricted Stock shall be issued by the Company pursuant to the terms of Section 8(e).

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     (l) “Option” shall mean an option to purchase shares of Company Stock granted pursuant to Section 6(a) and as described in Section 7.

     (m) “Participant” shall mean a member of the Board of Directors who is not an employee of the Company or a Subsidiary.

     (n) A share of “Restricted Stock” shall mean a share of Company Stock which is granted pursuant to the terms of Section 6(b) and as described in Section 8.

     (o) “Rule 16b-3” shall mean the rule thus designated as promulgated under the Exchange Act.

     (p) “Subsidiary” shall mean any corporation or other entity in which, at the time of reference, the Company owns, directly or indirectly, stock or similar interests comprising more than 50 percent of the combined voting power of all outstanding securities of such entity.

     (q) “Vesting Date” shall mean the date established by the Board of Directors on which a share of Restricted Stock may vest.

     3. STOCK SUBJECT TO THE PLAN

     (a) Shares Available for Option or Restricted Stock Awards

     The total number of shares of Company Stock with respect to which Incentive Awards may be granted shall not exceed 250,000 shares, with not more than 100,000 shares to be granted as Restricted Stock awards. Such shares may be authorized but unissued Company Stock or authorized and issued Company Stock held in the Company’s treasury or acquired by the Company for the purposes of the Plan. The Board of Directors may direct that any stock certificate evidencing shares of Company Stock issued pursuant to the Plan shall bear a legend setting forth such restrictions on transferability as may apply to such shares pursuant to the Plan.

     (b) Adjustment for Change in Capitalization

     If there is any change in the outstanding shares of Company Stock by reason of a stock dividend or distribution, stock split-up, recapitalization, combination or exchange of shares, or by reason of any merger, consolidation, spin-off or other corporate reorganization in which the Company is the surviving corporation, the number of shares available for issuance both in the aggregate and with respect to each outstanding Incentive Award, and the price per share under each outstanding Option, shall be proportionately adjusted by the Board of Directors, whose determination shall be final and binding. After any adjustment made pursuant to this Section 3(b), the number of shares subject to each outstanding Incentive Award shall be rounded to the nearest whole number.

     (c) Re-use of Shares

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     Any shares subject to an Incentive Award that remain unissued upon the cancellation or termination of such Incentive Award for any reason whatsoever shall again become available for Incentive Awards under the Plan.

     (d) No Repricing

     Absent stockholder approval, the Board of Directors shall not have any authority, with or without the consent of the affected holders of Options, to “reprice” an Option after the date of its initial grant with a lower exercise price in substitution for the original exercise price. This paragraph may not be amended, altered or repealed by the Board of Directors without approval of the stockholders of the Company.

     4. ADMINISTRATION OF THE PLAN

     The Plan shall be administered by the Board of Directors. The Board of Directors shall have full authority to administer the Plan, including authority to interpret and construe any provision of the Plan and the terms of any Incentive Awards issued under it and to adopt such rules and regulations for administering the Plan as it may deem necessary or appropriate. Decisions of the Board of Directors shall be final and binding on all parties. Unless determined otherwise by the Board of Directors, the authority of the Board of Directors to administer the Plan is delegated to the Compensation Committee of the Board of Directors.

     No member of the Board of Directors shall be liable for any action, omission or determination relating to the Plan, and the Company shall indemnify and hold harmless each member of the Board of Directors and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Board of Directors) arising out of any action, omission or determination relating to the Plan, unless, in either case, such action, omission or determination was taken or made by such member, director or employee in bad faith and without reasonable belief that it was in the best interests of the Company.

     5. ELIGIBILITY

     The persons who shall be eligible to receive Options or Restricted Stock awards pursuant to the Plan shall be such members of the Board of Directors who are not employees of the Company or a Subsidiary.

     6. INCENTIVE AWARDS UNDER THE PLAN

     Incentive Awards granted under the Plan shall be subject to the terms and conditions set forth in the Plan, and shall be evidenced by an Incentive Award Agreement which shall not be inconsistent with the provisions of the Plan. The Board of Directors shall be entitled to increase or decrease the number of Incentive Awards Participants receive.

     (a) Annual Awards. Annually, Participants shall receive the following Incentive Awards:

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     (i) 3,800 Options; and

     (ii) 1,500 shares of Restricted Stock.

     (b) Other Awards

     Upon the initial election to the Board of Directors of any person who is a Participant (other than through an initial election by the Company’s stockholders at an annual meeting of stockholders), such person shall be granted:

     (i) Options to purchase such number of shares of Company Stock as shall be determined by multiplying (1) 308 by (2) the number of full calendar months remaining before the next annual meeting of stockholders of the Company at which directors will be elected (if no date has been set for the next annual meeting of stockholders such date shall be presumed to be November 1); and

     (ii) Restricted Stock in such number of shares as shall be determined by multiplying (1) 104 by (2) the number of full calendar months remaining before the next annual meeting of stockholders of the Company at which directors will be elected (if no date has been set for the next annual meeting of stockholders such date shall be presumed to be November 1).

     The Board of Directors shall be entitled to increase or decrease these pro rata amounts in order to reflect any adjustment on the annual awards.

     7. OPTIONS

     (a) Exercise Price

     The exercise price per share of an Option shall be the Fair Market Value of a share of Company Stock on the date the Option is granted.

     (b) Term and Exercise of Options

     (i) Unless the Board, in its discretion, determines otherwise, each Option shall become cumulatively exercisable as to 25% of the shares covered thereby on each of the first, second, third and fourth anniversaries of the date of grant. The expiration date of each Option shall be ten years after the date of grant; provided, however, that if the expiration date would occur during a period in which the Participant is prohibited from trading in the Company Stock pursuant to the provisions of the Company’s insider trading policy, then the expiration date shall be extended and such Option shall expire on the 30^th day after the prohibition against trading under the Company’s insider trading policy has ceased to be in effect.

     (ii) An Option may be exercised for all or any portion of the shares as to which it is exercisable; provided, that no partial exercise of an Option shall be for an aggregate exercise price of less than $1,000. The partial exercise of an

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Option shall not cause the expiration, termination or cancellation of the remaining portion thereof.

     (iii) An Option shall be exercised by delivering notice to the Company’s principal office, to the attention of its Secretary (or the Secretary’s designee), no less than one business day in advance of the effective date of the proposed exercise. Such notice shall specify the number of shares of Company Stock with respect to which the Option is being exercised and the effective date of the proposed exercise and shall be signed by the Participant or other person then having the right to exercise the Option. Such notice may be withdrawn at any time prior to the close of business on the business day immediately preceding the effective date of the proposed exercise. Payment for shares of Company Stock purchased upon the exercise of an Option shall be made on the effective date of such exercise by one or a combination of the following means: (i) in cash, by certified check, bank cashier’s check or wire transfer; (ii) subject to the approval of the Board of Directors, in shares of Company Stock owned by the Participant for at least six months prior to the date of exercise and valued at their Fair Market Value on the effective date of such exercise; or (iii) subject to the approval of the Board of Directors, by such other provision as the Board of Directors may from time to time authorize. Any payment in shares of Company Stock shall be effected by the delivery of such shares to the Secretary (or the Secretary’s designee) of the Company, duly endorsed in blank or accompanied by stock powers duly executed in blank, together with any other documents and evidences as the Secretary (or the Secretary’s designee) of the Company shall require.

     (iv) Certificates for shares of Company Stock purchased upon the exercise of an Option shall be issued in the name of the Participant or other person entitled to receive such shares, and delivered to the Participant or such other person as soon as practicable following the effective date on which the Option is exercised.

     (c) Effect of Termination of Directorship

     (i) Unless the Board of Directors shall determine otherwise, in the event of a Participant’s removal or resignation as a member of the Board of Directors for any reason other than Cause, Disability or death: (i) Options granted to such Participant, to the extent that they were exercisable at the time of such removal or resignation, shall remain exercisable until the date that is three months after such removal or resignation, on which date they shall expire; and (ii) Options granted to such Participant, to the extent that they were not exercisable at the time of such removal or resignation, shall expire at the close of business on the date of such removal or resignation. The three-month period described in this Section 7(c)(i) shall be extended to one year in the event of the Participant’s death during such three-month period. Notwithstanding the foregoing, no Option shall be exercisable after the expiration of its term.

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     (ii) Unless the Board of Directors shall determine otherwise, in the event of a Participant’s removal or resignation as a member of the Board of Directors on account of the Disability or death of the Participant: (i) Options granted to such Participant, to the extent that they were exercisable at the time of such removal or resignation, shall remain exercisable until the first anniversary of such removal or resignation, on which date they shall expire; and (ii) Options granted to such Participant, to the extent that they were not exercisable at the time of such removal or resignation, shall expire at the close of business on the date of such removal or resignation. Notwithstanding the foregoing, no Option shall be exercisable after the expiration of its term.

     (iii) In the event of a Participant’s removal or resignation as a member of the Board of Directors for Cause, all outstanding Options granted to such Participant shall expire at the commencement of business on the date of such removal or resignation.

     (d) Acceleration of Exercise Date Upon Change in Control

     Upon the occurrence of a Change in Control, each Option granted under the Plan and outstanding at such time shall become fully and immediately exercisable and shall remain exercisable until its expiration, termination or cancellation pursuant to the terms of the Plan. In addition, in the event of a potential Change in Control, the Board of Directors may in its discretion, cancel any outstanding Options and pay to the holders thereof, in cash or stock, or any combination thereof, the value of such Options based upon the price per share of Company Stock to be received by shareholders of the Company in the transaction giving rise to the Change in Control less the exercise price of each Option.

     8. RESTRICTED STOCK

     (a) Issue Date and Vesting Date

     At the time of the grant of shares of Restricted Stock, the Board of Directors shall establish an Issue Date or Issue Dates and a Vesting Date or Vesting Dates with respect to such shares. Provided that all conditions to the vesting of a share of Restricted Stock imposed pursuant to Section 8(b) are satisfied, upon the occurrence of the Vesting Date with respect to a share of Restricted Stock, such share shall vest and the restrictions of Section 8(b) shall cease to apply to such share. Unless the Board of Directors determines otherwise, shares of Restricted Stock issued under the Plan vest on the first anniversary of the Issue Date.

     (b) Conditions to Vesting

     At the time of the grant of shares of Restricted Stock, the Board of Directors may impose such restrictions or conditions to the vesting of such shares as it, in its absolute discretion, deems appropriate. By way of example and not by way of limitation, the Board of Directors may require, as a condition to the vesting of any class or classes of shares of Restricted Stock, that the Participant or the Company achieves such performance goals as the Board of Directors may specify.

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     (c) Restrictions on Transfer Prior to Vesting

     Prior to the vesting of a share of Restricted Stock, no transfer of a Participant’s rights with respect to such share, whether voluntary or involuntary, by operation of law or otherwise, shall be permitted. Immediately upon any attempt to transfer such rights, such share, and all of the rights related thereto, shall be forfeited by the Participant.

     (d) Dividends on Restricted Stock

     The Board of Directors in its discretion may require that any dividends paid on shares of Restricted Stock shall be held in escrow until all restrictions on such shares have lapsed.

     (e) Issuance of Certificates

     Reasonably promptly after the Issue Date with respect to shares of Restricted Stock, the Company shall cause to be issued a stock certificate, registered in the name of the Participant to whom such shares were granted, evidencing such shares; provided, that the Company shall not cause such a stock certificate to be issued unless it has received a stock power duly endorsed in blank with respect to such shares. Each such stock certificate shall bear the following legend:

The transferability of this certificate and the shares of stock represented hereby are subject to the restrictions, terms and conditions (including forfeiture provisions and restrictions against transfer) contained in the Zale Corporation Outside Directors’ 2005 Stock Incentive Plan, and such rules, regulations and interpretations as the Zale Corporation Board of Directors may adopt. Copies of the Plan and, if any, rules, regulations and interpretations are on file in the office of the Secretary of Zale Corporation, 901 West Walnut Hill Lane, Irving, Texas 75038-1003.

     Such legend shall not be removed until such shares vest pursuant to the terms hereof.

     Each certificate issued pursuant to this Section 8(e), together with the stock powers relating to the shares of Restricted Stock evidenced by such certificate, shall be held by the Company unless the Board of Directors determines otherwise.

     (f) Voting Rights of Restricted Stock

     During the restricted period, Participants holding shares of Restricted Stock may exercise full voting rights with respect to the shares.

     (g) Consequences of Vesting

     Upon the vesting of a share of Restricted Stock pursuant to the terms of the Plan, the restrictions of Section 8(c) shall cease to apply to such share. Reasonably promptly after a share of Restricted Stock vests, the Company shall cause to be delivered to the Participant to whom such shares were granted, a certificate evidencing such share, free of the legend set forth in

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Section 8(e). Notwithstanding the foregoing, such share still may be subject to restrictions on transfer as a result of applicable securities laws.

     (h) Effect of Termination of Directorship

     (i) Unless the Board of Directors provides otherwise, during the 90 days following a Participant’s removal or resignation as a member of the Board of Directors for any reason other than Cause, the Company shall have the right to require the return of any shares to which restrictions on transferability apply, in exchange for which the Company shall repay to the Participant (or the Participant’s estate) any amount paid by the Participant for such shares. In the event that the Company requires such a return of shares, it also shall have the right to require the return of all dividends paid on such shares, whether by termination of any escrow arrangement under which such dividends are held or otherwise.

     (ii) In the event of a Participant’s removal or resignation as a member of the Board of Directors for Cause, all shares of Restricted Stock granted to such Participant which have not vested as of the date of such removal or resignation shall immediately be returned to the Company, together with any dividends paid on such shares, in return for which the Company shall repay to the Participant any amount paid for such shares.

     (i) Effect of Change in Control

     Upon the occurrence of a Change in Control, all outstanding shares of Restricted Stock which have not theretofore vested shall immediately vest.

     9. RIGHTS AS A STOCKHOLDER

     No person shall have any rights as a stockholder with respect to any shares of Company Stock covered by or relating to any Option until the date of issuance of a stock certificate with respect to such shares of Company Stock. Except as otherwise expressly provided in Section 3(b), no adjustment to any Option shall be made for dividends or other rights for which the record date occurs prior to the date such stock certificate is issued.

     10. NO RIGHT TO INCENTIVE AWARD

     Other than as specifically provided in the Plan, no person shall have any claim or right to receive an Incentive Award hereunder. The Board of Director’s granting of an Incentive Award to a Participant at any time shall neither require the Board of Directors to grant any other Incentive Award to such Participant or other person at any time nor preclude the Board of Directors from making subsequent grants to such Participant or any other person.

     11. SECURITIES MATTERS

     The Company shall be under no obligation to effect the registration pursuant to the Securities Act of 1933 of any interests in the Plan or any shares of Company Stock to be issued

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hereunder or to effect similar compliance under any state laws. Notwithstanding anything herein to the contrary, the Company shall not be obligated to cause to be issued or delivered any certificates evidencing shares of Company Stock pursuant to the Plan unless and until the Company is advised by its counsel that the issuance and delivery of such certificates is in compliance with all applicable laws, regulations of governmental authority and the requirements of the New York Stock Exchange and any other securities exchange on which shares of Company Stock are traded. Certificates evidencing shares of Company Stock issued pursuant to the terms hereof, may bear such legends, as the Board of Directors, in its sole discretion, deems necessary or desirable to insure compliance with applicable securities laws.

     The transfer of any shares of Company Stock hereunder shall be effective only at such time as counsel to the Company shall have determined that the issuance and delivery of such shares is in compliance with all applicable laws, regulations of governmental authority and the requirements of the New York Stock Exchange and any other securities exchange on which shares of Company Stock are traded. The Board of Directors may, in its sole discretion, defer the effectiveness of any transfer of shares of Company stock hereunder in order to allow the issuance of such shares to be made pursuant to registration or an exemption from registration or other methods for compliance available under federal or state securities laws. The Company shall inform the Participant in writing of the Board of Director’s decision to defer the effectiveness of a transfer. During the period of such a deferral in connection with the exercise of an Option, the Participant may, by written notice, withdraw such exercise and obtain the refund of any amount paid with respect thereto.

     12. NOTIFICATION OF ELECTION UNDER SECTION 83(b) OF THE CODE

     If any Participant shall, in connection with the acquisition of shares of Company Stock under the Plan, make the election permitted under Section 83(b) of the Code (i.e., an election to include in gross income in the year of transfer the amounts specified in Section 83(b)), such Participant shall notify the Company of such election within ten days of filing notice of the election with the Internal Revenue Service, in addition to any filing and notification required pursuant to regulations issued under the authority of Code Section 83(b).

     13. WITHHOLDING TAXES

     Whenever cash is to be paid pursuant to an Option or share of Restricted Stock, the Company shall have the right to deduct therefrom an amount sufficient to satisfy any federal, state and local withholding tax requirements related thereto.

     Whenever shares of Company Stock are to be delivered either pursuant to an Option or as Restricted Stock, the Company shall have the right to require the Participant to remit to the Company in cash an amount sufficient to satisfy any federal, state and local withholding tax requirements related thereto. With the approval of the Board of Directors, which it shall have sole discretion to grant, a Participant may satisfy the foregoing requirement by electing to have the Company withhold from delivery shares of Company Stock having a value equal to the amount of tax to be withheld. Such shares shall be valued at their Fair Market Value on the date as of which the amount of tax to be withheld is determined (the “Tax Date”). Fractional share amounts shall be settled in cash. Such a withholding election may be made with respect to all or

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any portion of the shares to be delivered pursuant to an Option or as Restricted Stock. To the extent required for such a withholding of stock to qualify for the exemption available under Rule 16b-3, such an election by a grantee whose transactions in Company Stock are subject to Section 16(b) of the Exchange Act shall be: (i) subject to the approval of the Board of Directors in its sole discretion; (ii) irrevocable; (iii) made no sooner than six months after the grant of the award with respect to which the election is made; and (iv) made at least six months prior to the Tax Date unless such withholding election is in connection with exercise of an Option and both the election and the exercise occur prior to the Tax Date in a “window period” of ten business days beginning on the third day following release of the Company’s quarterly or annual summary statement of sales and earnings.

     14. AMENDMENT OR TERMINATION OF THE PLAN

     Except as provided in Section 3(d), the Board of Directors may, at any time, suspend or terminate the Plan or revise or amend it in any respect whatsoever; provided, however, that stockholder approval shall be required if and to the extent required by Rule 16b-3 or the New York Stock Exchange or any other securities exchange on which shares of the Company Stock are traded. Nothing herein shall restrict the Board of Director’s ability to exercise its discretionary authority pursuant to Section 4, which discretion may be exercised without amendment to the Plan. No action hereunder may, without the consent of a Participant, reduce the Participant’s rights under any outstanding Incentive Award.

     15. NO OBLIGATION TO EXERCISE

     The grant to a Participant of an Option shall impose no obligation upon such Participant to exercise such Option.

     16. TRANSFERS UPON DEATH; NONASSIGNABILITY

     Upon the death of a Participant outstanding Options granted to such Participant may be exercised only by the executor or administrator of the Participant’s estate or by a person who shall have acquired the right to such exercise by will or by the laws of descent and distribution. No transfer of an Incentive Award by will or the laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with (a) written notice thereof and with a copy of the will and/or such evidence as the Board of Directors may deem necessary to establish the validity of the transfer and (b) an agreement by the transferee to comply with all the terms and conditions of the Incentive Award that are or would have been applicable to the Participant and to be bound by the acknowledgments made by the Participant in connection with the grant of the Incentive Award.

     During a Participant’s lifetime, the Board of Directors may permit the transfer, assignment or other encumbrance of an outstanding Incentive Award unless the award is meant to qualify for the exemptions available under Rule 16b-3 and the Board of Directors and the Participant intend that it shall continue to so qualify.

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     17. EXPENSES AND RECEIPTS

     The expenses of the Plan shall be paid by the Company. Any proceeds received by the Company in connection with the exercise of any Option by a Participant will be used for general corporate purposes.

     18. FAILURE TO COMPLY

     In addition to the remedies of the Company elsewhere provided for herein, failure by a Participant (or beneficiary) to comply with any of the terms and conditions of the Plan, unless such failure is remedied by such Participant (or beneficiary) within ten days after notice of such failure by the Board of Directors, shall be grounds for the cancellation and forfeiture of such Incentive Award, in whole or in part, as the Board of Directors, in its sole discretion, may determine.

     19. EFFECTIVE DATE AND TERM OF PLAN

     The Plan shall be effective as of the Effective Date. Unless earlier terminated by the Board of Directors, the right to grant Options under the Plan will terminate on the tenth anniversary of the Effective Date. Options outstanding at the termination of the Plan will remain in effect according to their terms and the provisions of the Plan.

     20. APPLICABLE LAW

     Except to the extent preempted by any applicable federal law, the Plan will be construed and administered in accordance with the laws of the State of Delaware, without reference to the principles of conflicts of laws thereunder.

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EX-10.8

EXHIBIT 10.8

ZALE DELAWARE, INC
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(As amended through July 31, 2006)

ARTICLE I

ESTABLISHMENT AND PURPOSE

     1.1 Establishment. Zale Delaware, Inc. (the “Company”) hereby establishes the Zale Delaware, Inc. Supplemental Executive Retirement Plan (the “Plan’), effective September 15, 1995.

     1.2 Purpose. The purpose of this Plan is to provide eligible executives with the opportunity to receive each year after retirement, payments equal to a portion of their final average pay. The Plan is meant to provide a long-term reward for executives that recognizes their contribution to the Company’s success throughout their careers.

ARTICLE II

DEFINITIONS

     Unless the context otherwise requires, the terms used herein shall have the meanings set forth below:

     2.1 “Base Salary” means the regular salary paid to a Participant by the Company, excluding bonuses, benefits under employee benefit plans, fringe benefits, and any other extra or additional payments made to or for the benefit of such Participant.

     2.2 “Benefit” means the monetary amount to be paid a vested Participant under the Plan.

     2.3 “Bonus Points” means the number of points awarded to a Participant under the formula described in Section 4.2.

     2.4 “Bonus Target” means a goal for net income established each Plan Year by the Compensation Committee.

     2.5 “Change of Control” shall be deemed to have occurred if, subsequent to the Effective Date of this Plan,

     (a) any “person” (within the meaning of Section 13(d) of the Exchange Act) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of either (I) a majority of the Company’s outstanding Common Stock or (2) securities of the Company representing a majority of

the combined voting power of the Company’s then outstanding voting securities, except that there shall be no Change of Control if such person (i) becomes such a beneficial owner solely as the result of the acquisition of the outstanding Common Stock or other outstanding voting securities by the Company or (ii) is an employee benefit plan or related trust sponsored or maintained by the Company or any corporation or other entity controlled by the Company;

     (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease, at any time after the beginning of such period, for any reason to constitute a majority of the Board of Directors of the Company, unless the election of any such new director was nominated, effected, or ratified by at least two-thirds of the directors still in office who were directors at the beginning of such two-year period or whose election was previously so nominated, effected, or ratified;

     (c) a reorganization, merger, or consolidation of the Company with one or more other corporations or other entities, unless, in any case, (1) at least a majority of the Company’s outstanding Common Stock (or the equivalent equity security of the other surviving or resulting corporation or other entity) and at least a majority of the combined voting power of the Company’s or other surviving or resulting corporation’s or other entity’s outstanding voting securities are beneficially owned, directly or indirectly, after such reorganization, merger, or consolidation by all or substantially all of the persons who were the beneficial owners, respectively, or majority of the Company’s outstanding Common Stock and a majority of the combined voting power of the Company’s then outstanding voting securities immediately before such reorganization, merger, or consolidation in substantially the same proportions as their beneficial ownership thereof immediately before such reorganization, merger or consolidation, and (2) at least a majority of the members of the board of directors or other governing body of the Company or the other corporation or other entity surviving or resulting from such reorganization, merger, or consolidation were, or were approved by at least two-thirds of the, members of the Board of Directors of the Company at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation;

     (d) the sale or other disposition of all or substantially all of the assets of the Company to one or more other corporations or other entities, unless the conditions set forth in subclauses (1) and (2) of subsection (c) above are satisfied with respect to the acquiring corporation or other entity (and, as applicable, with respect to the time of the initial agreement providing for such sale or other disposition of assets); or

     (e) the dissolution and complete liquidation of the Company.

     2.6 “Company” means Zale Delaware, Inc.

     2.7 “Compensation Committee” means the Compensation Committee of the Company.

     2.8 “Disabled” means the inability of a Participant to perform the duties of his or her position as determined by a physician approved by the Compensation Committee.

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     2.9 “Final Average Pay” means the average of the monthly Base Salary received by the Participant from the Company in the 60-month period ending immediately prior to the Participant’s retirement or other termination from the Company.

     2.10 “Maximum Bonus Target” means the highest goal for net income established each year by the Compensation Committee.

     2.11 “Participant” means an executive who participates in the Plan as provided in Article III.

     2.12 “Plan” means the Zale Delaware, Inc. Supplemental Executive Retirement Plan set forth in this document, as it may be amended from time to time.

     2.13 “Plan Year” means August 1 through July 31 except that the first Plan Year shall commence September 15, 1995 and end July 31, 1996.

     2.14 “Years of Service” means a 12-month period of continuous service by a Participant for the Company or (to the extent the Compensation Committee authorizes) an affiliate of the Company. Only service after September 14, 1995 is counted for the purpose of calculating Years of Service; provided, however, that for any Participant who was employed by the Company in an eligible position for the entire period from September 14, 1995 to July 31, 1996, that Participant shall be considered to have one full Year of Service as of July 31, 1996.

ARTICLE III

ELIGIBILITY

     3.1 Eligibility. The classes of executives who are designated by the Company as members of the “Management Group” who hold the office of Corporate Vice President, Division Senior Vice President, and all higher executive offices, are eligible to be Participants in the Plan.

     3.2 Loss of Eligibility. If an individual ceases to be an individual listed in Section 3.1, he or she will no longer participate in the Plan. Loss of eligibility shall not result in a forfeiture of a Participant’s Benefit previously earned under the Plan and a former Participant, pursuant to the terms and conditions of the Plan, may continue to vest in such Benefit based on Years of Service after loss of eligibility.

ARTICLE IV

DETERMINATION OF BENEFITS

     4.1 Calculation of Benefit. A Participant who is vested as determined in Section 4.3 is entitled to payment of his Benefit at the time and in the form described in Article V. The Participant’s Benefit shall be monthly payments continuing over the life of the Participant commencing on the first day of the month immediately following the Participant’s 65th birthday, with the amount of each payment determined under the following formula:

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Benefit Points x Final Average Pay
100

If a Participant requests, as allowed in Article V. that his Benefit commence other than on the first day of the month immediately following the Participant’s 65th birthday, or that his Benefit be paid in a form other than monthly payments for the life of the Participant, then the Benefit to be paid to the Participant and, if applicable, his surviving spouse, shall be the actuarial equivalent of the Benefit payable to the Participant commencing on the first day of the month immediately following the Participant’s 65th birthday and ending on the last day of the month in which the Participant dies. Actuarial equivalence shall be determined using the following actuarial assumptions. The applicable interest rate shall be that of 30-year Treasury securities as of the first day of the calendar year in which the Benefits commence. The mortality assumption shall be based on the 1983 group annuity mortality tables.

     4.2 Benefit Points. Each Plan Year the Compensation Committee shall set a Bonus Target and a Maximum Bonus Target. In each Plan Year that the Company achieves at least its Bonus Target, each Participant will be credited with a number of Benefit Points based on the following schedule:

(a) No points if below Bonus Target;
(b) I point at Bonus Target;
(e) 2 points at 50% of Maximum Bonus Target; or
(d) 3 points at 100% of Maximum Bonus Target.

A Participant may accrue from 0 to 30 points, depending on Company performance and the number of Plan Years he or she participates in the Plan.

     4.3 Vesting. A Participant vests in his or her Benefit after completing five Years of Service following September 15, 1995. Service prior to September 15, 1995 does not count as Years of Service. However, in its sole and absolute discretion, the Compensation Committee may accelerate vesting for any Participant. in the event of a Change of Control, the Benefits of all Participants will automatically vest irrespective of each Participant’s Years of Service. Further, a Participant’s Benefit will become fully vested if he dies or becomes Disabled while employed by the Company.

     4.4 Transferred Liability. In addition to the amount, if any, payable to Max Brown (“Brown”) as provided in Section 4.1 of the Plan, Brown shall also be entitled to benefits calculated in the following manner: The liability assumed by the Company from Zale Corporation shall be the initial additional benefit payable under the Plan. Such amount shall be credited to a bookkeeping account maintained by the Compensation Committee for the benefit of Brown. Thereafter, on each July 31, interest shall be credited to such bookkeeping account at the prime interest rate, plus one percent. The prime interest rate to be used shall be the prime interest rate as of such July 31 or, if higher, as of the preceding August 1 as listed in The Wall Street Journal for such date or if The Wall Street Journal is not published on such date, on the immediately preceding date on which it was published. As of August 1, 1996, the benefit being assumed by the Company to be paid pursuant to the Plan was $89,948.91 to be paid in two annual installments with one half of the amount payable on August 1, 1998 and the balance of the amount (including interest earned after august 1, 1998) payable on August 1, 1999, and $102,448.00 to be paid in two annual installments with one half of the amount payable on

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August 1, 1999) payable on August 1, 2000. The payments to be made to Brown under the Plan will be paid wider the foregoing payment schedules, but the amounts payable will include interest earned under the Executive Deferred Compensation Plan through January 3, 1997, and interest earned under the Plan from January 3, 1997 to the date of payment.

ARTICLE V

PAYMENT OF BENEFITS

     5.1 Retirement. If a Participant retires on or after attaining age 65, benefits will begin on the first day of the month after the Participant’s retirement. The normal form of payment is an annuity providing monthly benefits for the life of the Participant. If the Participant retires after attaining age 62, hut before attaining age 65, the Compensation Committee, in its sole and absolute discretion, may authorize payments commencing as of the first day of any month after the Participant’s retirement.

     5.2 Death. If a Participant dies while actively employed, the Participant’s surviving spouse will be eligible to begin receiving the Participant’s Benefit in the form of monthly payments for the life of the surviving spouse, commencing on the first day of the month following the date the Participant would have attained age 65. In its sole and absolute discretion, the Compensation Committee may authorize payments to the Participant’s surviving spouse commencing on an earlier date. The Benefits payable to the surviving spouse shall have an actuarial value (calculated using the assumptions prescribed in Section 4.1) equal to the Benefits that would have been paid to the Participant commencing at age 65, based on the Participant’s Final Average Pay and Bonus Points as of the date of the Participant’s death. If the Participant has no surviving spouse, no death benefits are payable.

     5.3 Disability. If a Participant becomes Disabled, his Benefit will become payable commencing on the first day of the month after his or her Company-provided disability benefits cease.

     5.4 Other Termination of Service. If the employment of a Participant terminates for a reason other than death or Disability, prior to the date the Participant attains age 62, the payment of his or her vested Benefits, if any, will commence on the first day of the month immediately after he or she attains age 65, unless the Compensation Committee, in its sole and absolute discretion, elects to commence payments on an earlier date.

     5.5 Form of Payment. The normal form of payment of the Benefit is monthly payments for the life of the Participant. If the Participant prefers, he or she may elect to receive the Benefit in the form of a joint and survivor annuity calculated as provided in Section 4.1. A joint and survivor annuity is a form of payment providing monthly payments for the life of the Participant, followed by payments to the Participant’s surviving spouse, if any, after the Participant’s death for the remainder of the surviving spouse’s life, equal to 50% of the monthly amount payable during the life of the Participant.

     5.6 Withholding of Taxes. The Company shall withhold from payments made hereunder any taxes required to be withheld by any law or regulation of the federal, state, or local government.

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ARTICLE VI

ADMINISTRATION

     6.1 Authority of Compensation Committee. The Compensation Committee shall have sole and absolute power and authority to interpret, construe and administer the Plan. The Compensation Committee’s interpretation and construction of the Plan and actions hereunder shall be binding and conclusive on all persons and for all purposes. The Compensation Committee may designate certain Company employees to assist in the administration of the Plan. In addition, the Compensation Committee may employ attorneys, accountants, actuaries and other professional advisors to assist the Compensation Committee in its administration of the Plan. The Company shall pay the reasonable fees of any such advisor employed by the Compensation Committee. To the extent permitted by law, the Compensation Committee, the Board or any employee of the Company shall not he liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan unless attributable to his or her own willful misconduct or lack or good faith.

     6.2 Indemnification of Employees of the Company. The Company hereby agrees to indemnify, jointly and severally, the Compensation Committee and all employees of the Company against arty and all claims, losses, damages or expenses, including, counsel fees, incurred by them, and any Liability, including any amounts paid in settlement with theft approval arising from their action or failure to act with respect to any matter relating to the Plan, except when the same is judicially determined to be attributable to their willful misconduct or lack of good faith. The indemnification provided by this Section 6.2 shall survive the termination of the Plan and shall be binding on the Company’s successors and assigns.

     6.3 Cost of Administration. The cost of this Plan and the expenses of administering the Plan shall be paid by the Company.

ARTICLE VII

CLAIMS PROCEDURE

     7.1 Claim. Any person claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information under the Plan shall present the request in writing to the Compensation Committee, which shall respond in writing as soon as possible.

     7.2 Denial of Claim. If the claim or request is denied, the written notice of denial shall state:

     (a) The reasons for denial, with specific reference to the Plan provisions on which the denial is based.

     (b) A description of any additional material or information required and an explanation of why it is necessary.

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     (c) An explanation of the Plan’s claim review procedure.

     7.3 Review of Claim. Any person whose claim or request is denied or who has not received a response within thirty (30) days, may request review by notice in writing received by the Compensation Committee within seventy-five (75) days after the date of the notice of denial. The claim or request shall be reviewed by the Compensation Committee, who may, but shall not be required to, grant the claimant a hearing. On review, the claimant may have representation, examine pertinent documents and submit issues and comments in writing. The decision on review shall normally be made within sixty (60) days. If an extension of time is required for a hearing or other special circumstance, the claimant shall be notified and the time limit shall be one hundred twenty (120) days. The decision shall be in writing; shall state the reasons for denial and shall reference the relevant plan provisions.

     7.4 Appeal of Decision on Review. If the claimant does not agree with the decision of the Compensation Committee on review of the claim, the claimant may appeal the decision of the Compensation Committee to the Board of Directors of the Company by notice in writing received by the Board of Directors within seventy-five (75) days after the date of the decision on review.

     7.5 Final Decision. The decision on appeal shall normally be made within sixty (60) days. If an extension of time is required for a hearing or other special circumstance, the claimant shall be notified and the time limit shall be one hundred twenty (120) days. The decision of the Board of Directors on appeal shall be in writing and shall state the reasons for denial and shall reference the relevant Plan provisions. All decisions on appeal shall be final and bind all parties concerned.

ARTICLE VIII

AMENDMENT AND TERMINATION

     8.1 Amendment. Subject to the consent requirements of this Section 8.1, the Board of Directors of the Company, on a favorable vote of at least 75% of the directors, shall have the right to amend this Plan at any time and from time to time, including a retroactive amendment. Any such amendment shall become effective upon the date stated therein, except as otherwise provided in such amendment. No amendment shall decrease or restrict Benefits, whether vested or not, earned as of the date of execution of such amendment without the consent of the affected Participant or Participants. Further, no amendment may extend the date that nonvested benefits would otherwise become vested without the consent of the affected Participant or Participants. Any amendment approved by the Board of Directors may be signed by the Chief Executive Officer or the Secretary of the Company.

     8.2 Termination of the Plan. The Company has established this Plan with the bona fide intention and expectation that it will deem it advisable to continue it in effect. However, the Board of Directors of the Company, on a favorable vote of 75% of at least the directors, may terminate the Plan in its entirety at any time. In such event each Participant shall become fully vested in his Benefit earned as of the date of termination.

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ARTICLE IX

GENERAL PROVISIONS

     9.1 Rights Against the Company. The Plan shall not be deemed to constitute a contract between the Company and any Participant. Nothing contained in the Plan shall be deemed to interfere with the right of the Company to terminate any Participant at any time, without regard to the effect such termination may have on any rights under the Plan.

     9.2 Funding. The Company intends that the Plan shall constitute an “unfunded plan” for purposes of the Internal Revenue Code of 1986, as amended (the “Code”) and, to the extent applicable, Title I of the Employee Retirement Income Security Act of 1974, as amended, and that any employee or spouse of an employee eligible to receive benefits under the Plan shall have the status of an unsecured general creditor of the Company as to the benefits provided pursuant to the Plan or assets identified specifically by the Company as a reserve for the discharge of its obligations under the Plan.

     9.3 Payment Due to an Individual Who is Incapable of Managing His or Her Affairs. If the Compensation Committee shall find that any person to whom any payment is payable under the Plan is unable to care for his or her affairs because of mental or physical illness, accident, or death, or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, a child, a parent, a brother or sister or any person deemed by the Compensation Committee, in its sole discretion, to have incurred expenses for such person otherwise entitled to payment, in such manner and proportions as the Compensation Committee may determine. Such payments shall be a complete discharge of the liabilities of the Company under this Plan, and the Company shall have no further obligation to see to the application of any money so paid.

     9.4 Spendthrift Clause. No right, title or interest of any kind in the Plan shall be transferable or assignable by any Participant or surviving spouse of a Participant or be subject to alienation, anticipation, encumbrance, garnishment, attachment., execution or levy of any kind, whether voluntary or involuntary, nor subject to the debts, contracts, liabilities, engagements, or torts of the Participant or surviving spouse. Any attempt to alienate, anticipate, encumber, sell, transfer, assign, pledge, garnish, attach or otherwise subject to legal or equitable process or encumber or dispose of any interest in the Plan shall be void.

     9.5 Severability. In the event that any provision of this Plan shall be declared illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of this Plan but shall be fully severable and this Plan shall be construed and enforced as if said illegal or invalid provision had never been inserted herein.

     9.6 Construction. The article and section headings and numbers are included only for convenience of reference and are not to be taken as limiting or extending the meaning of any of the terms and provisions of this Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular. When used herein, the masculine gender includes the feminine gender.

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9.7 Governing Law. The validity and effect of this Plan, and the rights and obligations of all persons affected hereby, shall be construed and determined in accordance with the laws of the State of Texas.

     IN WITNESS WHEREOF, the Company has executed this Plan on the 23 day of February, 1996, effective as of the 15th day of September, 1995.

ZALE DELAWARE, INC.

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EX-10.10

EXHIBIT 10.10

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (this “Agreement”), dated October 12, 2006, but effective as of July 24, 2006 (the “Effective Date”) is by and between Zale Corporation, a Delaware corporation (the “Company”), and Mary Elizabeth Burton (“Executive”).

     WHEREAS, Executive and Company desire to enter into an employment agreement which sets forth the terms and conditions for Executive’s continued employment with the Company,

     NOW, THEREFORE, in consideration of the foregoing recital and of the mutual covenants set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Employment; Term.

(a) Executive agrees to continue in the employment of the Company, and the Company agrees to employ Executive, on the terms and conditions set forth in this Agreement. The term of Executive’s employment under this Agreement commenced on the Effective Date and, subject to its earlier termination as provided in Section 4, will continue through July 23, 2007 (the “Initial Term”).

(b) Unless earlier terminated in accordance with Section 4 of this Agreement, at the end of the Term this Agreement shall be automatically renewed and extended for subsequent one year terms (each, a “Renewal Term and collectively with the Initial Term, the “Term”) unless at least ninety (90) days prior to the end of the Term or any Renewal Term either party provides written notice of termination to the other party.

2. Position; Duties. During the Term, Executive will serve as the President and Chief Executive Officer of the Company and her duties will be those designated from time to time by the Board of Directors of the Company (the “Board”). Executive agrees during the Term to devote her full time efforts, skills and abilities to the performance of her duties as described herein and to the furtherance of the Company’s business. As consideration for this Agreement and specifically in consideration for the promises described in Section 9, the Company promises to provide Executive with confidential and proprietary information and trade secrets, the receipt and sufficiency of which Executive acknowledges, including, without limitation, Trade Secrets (as defined below) belonging to the Company for use in the performance of Executive’s duties for the Company. Executive will report directly to the Board. At the request of the Board, Executive further agrees to serve, without additional compensation, as an officer, director or both of any subsidiary, division or affiliate of the Company or any other entity in which the Company holds a controlling equity interest, provided, however, that (i) the Company

shall indemnify Executive from liabilities in connection with serving in any such position to the same extent as her indemnification rights pursuant to the Company’s Certificate of Incorporation, Bylaws and applicable Delaware law, and (ii) such service shall not materially detract from the responsibilities of Executive set forth herein or her ability to perform such responsibilities.

3. Compensation.

(a) Base Salary. During the Term, the Company will pay to Executive an annual base salary of not less than $850,000 (“Base Salary”), which will be payable in arrears in accordance with the Company’s normal payroll procedures and will be reviewed annually by the Board and will be subject to increases at the discretion of the Board or an authorized committee or representative thereof. After any such increase, the term “Base Salary” as utilized in this Agreement will thereafter refer to the adjusted amount.

(b) Incentive Bonus. During the Term, Executive will be eligible to receive an annual incentive bonus as determined under the Company’s executive bonus program, established by the Board. The annual target bonus (“Target Bonus”) for Executive will be 125% of Executive’s Base Salary. Executive’s annual incentive bonus for the fiscal year ending July 31, 2007 shall be no less than the full Target Bonus. The annual incentive bonus will be paid to Executive in accordance with the terms and conditions of the executive bonus program.

(c) Equity and Long-Term Incentive Awards. In addition to all previous grants of restricted stock or units and stock options, Executive will be entitled to participate in equity and other long-term incentive award programs of the Company, including, without limitation, the Equity Plan, on a basis generally consistent with that of other senior-level executives.

(d) Vacation. Executive will be entitled to at least four (4) paid weeks of vacation per year during each fiscal year of the Term of this Agreement.

(e) Executive Perquisites; Benefit; Expenses.

     (i) Executive will be entitled to receive executive perquisites and fringe and other benefits on a basis which is no less favorable than the basis on which such perquisites and benefits are provided to any other senior executive (including for this purpose, to the extent applicable, executive’s family) under any of the Company’s plans, policies, arrangements or programs in effect from time to time.

     (ii) The Company will reimburse Executive for such reasonable and necessary out-of-pocket business expenses as may be incurred by her in the performance of her duties hereunder upon presentation of itemized expense statements and such other supporting information as may be required by the Company. In addition, the Company will reimburse Executive for, or at Executive’s request pay directly on Executive’s behalf, the legal fees and other expenses incurred by her in connection with the negotiation and drafting of this Agreement in an amount not to exceed $25,000 upon production of receipts and/or invoices to the reasonable satisfaction of the Board, and the Company

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shall pay to Executive tax gross-up payments so that the net amount retained by Executive after payment of all applicable income and employment taxes is equal to the agreed amount to be reimbursed for such legal fees and expenses, provided, however, that a gross up payment shall not be made with respect to any reimbursement to the extent the related expense is deductible or is otherwise excludable from Executive’s taxable income.

(f) Tax Withholding. The Company has the right to deduct from any compensation payable to Executive under this Agreement social security (FICA) taxes and all Federal, state and local income taxes and charges as are required by applicable law and regulations.

4. Termination. Subject to the provisions of Section 5 hereof, the Term will terminate as specified in Section 1(b) or, if earlier, upon Executive’s termination of employment with the Company as follows:

(a) Death. Executive’s employment shall terminate upon the death of Executive.

(b) Termination for Cause. The Company may terminate Executive’s employment at any time for Cause (as hereinafter defined) by delivering a written termination notice to Executive. For purposes of this Agreement, “Cause” shall mean any of the following:

     (i) Executive’s indictment for a felony or a crime involving moral turpitude;

     (ii) Executive’s commission of an act constituting fraud, deceit, or material misrepresentation with respect to the Company;

     (iii) Executive’s recurrent use of alcohol or prescribed medications at work or otherwise such that Executive’s job performance is impaired or the use of any illegal substances or drug such that, in the Company’s sole discretion, Executive’s job performance is impaired;

     (iv) Executive’s embezzlement of Company assets or funds; or

     (v) Executive commits any negligent or willful act or omission that causes material detriment (by reason, without limitation, of financial exposure or loss, damage to reputation or goodwill, or exposure to civil damages or criminal penalties or other prosecutorial action by any governmental authority) to the Company or any parent or subsidiary corporation thereof.

(c) Termination Without Cause. The Company may terminate Executive’s employment at any time for any reason other than for Cause by delivering a written termination notice to Executive.

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(d) Termination by Executive For a Termination Reason. Executive may terminate her employment with the Company at any time for a Termination Reason (as hereinafter defined) by delivering a written termination notice to the Company. For purposes of this Agreement, “Termination Reason” shall mean any of the following:

     (i) a material reduction by the Company in Executive’s Base Salary or bonus eligibility unless similar reductions apply to senior executives of the Company and its subsidiaries generally;

     (ii) the Company’s principal executive offices shall be moved to a location outside the Dallas/Fort Worth, Texas Metroplex; or

     (iii) the assignment to Executive by the Company of duties materially inconsistent with, or the material reduction of the powers and functions associated with, Executive’s positions, duties, responsibilities and status with the Company or a material adverse change in Executive’s titles or offices, unless such action is in lieu of termination by the Company of Executive’s employment for Executive’s Disability pursuant to Section 4(f).

(e) Termination by Executive Without a Termination Reason. Executive may terminate her employment with the Company without a Termination Reason upon thirty (30) days’ prior written notice to the Company. In such instance, the Company may accelerate the effective date of such termination, but Executive shall receive all compensation and benefits under this Agreement for the full thirty (30) day notice period.

(f) Termination Following Disability. In the event that, in the Company’s sole discretion, Executive becomes mentally or physically impaired or disabled such that she is unable to perform her duties and responsibilities hereunder for a period of at least one hundred twenty (120) days in the aggregate during any one hundred fifty (150) consecutive day period (a “Disability Event”), the Company may terminate Executive’s employment under this Agreement by delivering a written termination notice to Executive.

(g) Payments/Deductions. Following any expiration or termination of the Term, and in addition to any amounts owed pursuant to Section 5 hereof, the Company shall pay Executive all amounts earned by Executive hereunder up to the date of such expiration or termination. Executive agrees that any advances to Executive by the Company outstanding at the time of the expiration or termination of the Term may be deducted from her wages, including her final paycheck and/or any severance owed to Executive.

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5. Rights of Executive Upon Termination. Subject to Executive’s adherence to the terms of this Agreement, including but not limited to the non-competition, no-hire/non-solicitation, non-disclosure and non-disparagement provisions set forth in Sections 9, 10, 11 and 12, Executive shall be entitled to receive the following benefits in the event her employment is terminated pursuant to Section 4 above or the Company terminates Executive’s employment in connection with its election not to renew this Agreement for an additional Term as specified in Section 1(b):

(a) Death. In the event that Executive’s employment is terminated upon the occurrence of her death as provided in Section 4(a), the Company shall continue to pay, in accordance with its normal payroll procedures, the Base Salary to Executive’s estate for a period of twelve (12) months after the date of Executive’s death. All unvested restricted stock or units granted to Executive will be immediately forfeited and all unvested stock options granted to Executive will be immediately terminated upon the date of Executive’s death and any vested stock options will remain exercisable for one (1) year after Executive’s date of death, subject to the earlier expiration of the term of such stock option. For purposes of this Section 5(a) and elsewhere in this Agreement, Stock Appreciation Rights shall be treated in the same manner as stock options.

(b) Termination for Cause. In the event that Executive’s employment is terminated by the Company for Cause as provided in Section 4(b) Executive shall not thereafter be entitled to any further compensation from the Company and all outstanding stock options, whether or not vested, and unvested restricted stock and units shall be immediately forfeited.

(c) Termination By Non-Renewal Prior to Age 62, Without Cause or By Executive For a Termination Reason. In the event that the Company terminates Executive’s employment in connection with the Company’s election of non-renewal of the Term as provided in Section 1(b) prior to Executive attaining age 62 or without Cause as provided in Section 4(c) or Executive terminates her employment for a Termination Reason as provided in Section 4(d), then Executive shall be entitled to the following:

     (i) Severance. The Company shall pay to Executive (or Executive’s estate if Executive dies after termination) an amount equal to the sum of two (2) times Executive’s annual Base Salary as of the date of termination and two (2) times the average of the annual incentive bonus amount earned by Executive with respect to the three fiscal year period preceding the year in which this Agreement is terminated (or such shorter period as may apply if this Agreement has been in effect for less than three years)(hereinafter, the “Severance Amount”); provided, however, that for purposes of this calculation, the guaranteed minimum bonus provided in Section 3(b) for the fiscal year ending July 31, 2007 shall not be utilized and the actual bonus that would have been earned for such year shall be utilized instead. The Severance Amount shall be payable in equal monthly installments over a twenty-four (24) month period commencing with the month following the month during which termination of Executive’s employment occurs (hereinafter, the “Severance Period”).

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     (ii) Benefits. For the duration of the Severance Period (i.e., twenty-four (24) months), Executive shall continue to receive the fringe benefits provided under Section 3(e)(i) hereof on the same basis as such benefits were provided during Executive’s employment hereunder, provided that the continued participation of Executive under any benefit plan including, without limitation, group healthcare, dental and life insurance is possible under the general terms and provisions of such plans. Such period of coverage shall count against Executive’s continuation of coverage period required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”). All premium payments paid by Executive for such continuation coverage during the Severance Period and for any subsequent COBRA period shall be paid directly to the appropriate insurer or service provider for such benefit (which may be the Company). If Executive’s participation in any such plan is barred, the Company shall arrange to provide Executive with benefits substantially similar to those which Executive would otherwise have been entitled to receive under such plan or, alternatively at the option of the Company, reimburse Executive for the reasonable actual costs of purchasing in the marketplace substantially similar benefits; provided, however, that in either case Executive shall pay to the Company, or provide a credit against the Company’s reimbursement obligation for, the amount equal to the premiums, or portion thereof, that Executive was required to pay to maintain such benefits prior to the date of termination of employment.

     (iii) Equity and Long-Term Incentive Awards. All unvested restricted stock or units granted to Executive will be immediately forfeited and all unvested stock options granted to Executive will be immediately terminated upon such termination of Executive’s employment and any vested stock options granted to Executive will remain exercisable for three months after such termination of Executive’s employment, subject to the earlier expiration of the term of such stock option.

     (iv) Offset. The payments due and payable in accordance with Section 5(c)(i) hereof shall be reduced by an amount equal to any amounts that Executive receives in connection with any other employment or consultancy during the Severance Period; provided, however, that such payments shall not be reduced by any amounts that Executive receives in connection with director fees or BB Capital, Inc. income. However, any benefits received by or available to Executive in connection with any other employment or consultancy that are reasonably comparable to the benefits then being provided by the Company pursuant to Section 5(c)(ii) hereof, shall be deemed to be the equivalent thereof and shall terminate the Company’s responsibility to continue providing the benefits then being provided by the Company pursuant to Section 5(c)(ii) hereof.

(d) Termination By Non-Renewal After Age 62. In the event that the Company terminates Executive’s employment in connection with the Company’s election of non-renewal of the Term as provided in Section 1(b) on or after Executive attaining age 62, Executive shall be entitled to fifty percent (50%) of the Severance Amount payable in equal monthly installments over a twelve (12) month period (the “Modified Severance Period”) commencing with the month following the month during which termination of Executive’s employment occurs. In addition, the provisions of Sections 4(c)(ii), 4(c)(iii) and 4(c)(iv) shall apply during the Modified Severance Period.

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(e) Termination by Executive Without a Termination Reason. In the event that Executive’s employment is terminated by Executive without a Termination Reason as provided in Section 4(e), Executive shall not thereafter be entitled to any further compensation from the Company and all outstanding unvested stock options and all unvested restricted stock and units shall be immediately forfeited.

(f) Disability. In the event that Executive’s employment is terminated due to a Disability Event as provided in Section 4(f), Executive shall be entitled to continue to receive her salary and benefits (subject to the conditions regarding such benefits specified in Section 5(c)(ii) and 5(c)(iv)) under Section 3 of this Agreement for a period of twelve (12) months after the date of such termination. All unvested restricted stock or units granted pursuant to Executive will be immediately forfeited and all unvested stock options granted to Executive will be immediately terminated upon the date of such termination of Executive’s employment and any vested stock options will remain exercisable for one (1) year after such termination of Executive’s employment, subject to the earlier expiration of the term of such stock option.

6. Effect of Change of Control.

(a) If within two (2) years following a Change of Control (as hereinafter defined), Executive terminates her employment with the Company for Good Reason (as hereinafter defined) or the Company terminates Executive’s employment for any reason other than for Cause (as defined in Section 4(b)) or a Disability Event, the Company shall pay to, and provide for, Executive the following payments and benefits:

     (i) An amount equal to three (3) times the sum of Executive’s Base Salary and Target Bonus as of the date of termination;

     (ii) All benefits under the Company’s various benefit plans, including group healthcare, dental, and life for thirty-six (36) months from the date of termination, provided that the continued participation of Executive is possible under the general terms and provisions of such plans. If Executive’s participation in any such plan is barred, the Company shall arrange to provide Executive with benefits substantially similar to those which Executive would otherwise have been entitled to receive under such plan or, alternatively at the option of the Company, reimburse Executive for the reasonable actual costs of purchasing in the marketplace substantially similar benefits; provided, however, that in either case Executive shall pay to the Company, or provide a credit against the Company’s reimbursement obligation for, the amount equal to the premiums, or portion thereof, that Executive was required to pay to maintain such benefits prior to the date of termination of employment. Further, any insurance or other benefits and benefits coverage provided pursuant hereto shall be limited and reduced to the extent reasonably comparable coverage or benefits are provided by or available from any other employer of Executive; and

     (iii) All unvested restricted stock or units granted to Executive and all unvested stock options granted to Executive will be immediately vested. Further, all vested stock options granted to Executive, including those vested by reason of the preceding sentence,

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will remain exercisable for ninety (90) days after such termination of Executive’s employment, subject to the earlier expiration of the term of such stock options.

     (b) Change of Control. For purposes of this Agreement, “Change of Control” means the earliest to occur of the following:

     (i) any “person,” as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (“Person”), becomes a “beneficial owner,” as such term is used in Rule 13d-3 promulgated under that act, of 30% or more of the Voting Stock of the Company;

     (ii) the majority of the Board consists of individuals other than “incumbent” directors, which term means the members of the Board on the Effective Date; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by two-thirds of the directors who then comprised the incumbent directors will be considered to be an incumbent director;

     (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of its assets;

     (iv) all or substantially all of the assets or business of the Company is disposed of pursuant to a merger, consolidation or other transaction (unless the stockholders of the Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of the Company, all of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Company); or

     (v) the Company combines with another company and is the surviving corporation but, immediately after the combination, the stockholders of the Company immediately prior to the combination hold, directly or indirectly, 50% or less of the Voting Stock of the combined company (there being excluded from the number of shares held by such stockholders, but not from the Voting Stock of the combined company, any shares received by affiliates of such other company in exchange for stock of such other company).

For purposes of the Change of Control definition, “Company” will include any entity that succeeds to all or substantially all, of the business of the Company and “Voting Stock” will mean securities of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation.

(c) “Good Reason” shall mean any of the following actions taken by the Company without Executive’s written consent after a Change of Control:

     (i) the assignment to Executive by the Company of duties inconsistent with, or the reduction, other than due solely to the fact that the Company no longer is a publicly traded Company, of the powers and functions associated with, Executive’s position, duties, responsibilities and status with the Company immediately prior to a Change of Control or Potential Change of Control (as defined below), or a material adverse change

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in Executive’s titles or offices as in effect immediately prior to a Change of Control or Potential Change of Control, or any removal of Executive from or any failure to re-elect Executive to any of such positions, except in connection with the termination of her employment (A) by the Company for a Disability Event or Cause or as a result of Executive’s death or (B) by Executive other than for the reasons set forth in this Section 6(c);

     (ii) a reduction by the Company in Executive’s Base Salary as in effect on the date of a Change of Control or Potential Change of Control;

     (iii) the Company’s principal executive offices shall be moved to a location outside the Dallas/Fort Worth, Texas Metroplex area;

     (iv) the Company shall require Executive to be based anywhere other than at the Company’s principal executive offices in the Dallas/Fort Worth, Texas Metroplex area, or if Executive agrees to a relocation outside the area, the Company fails to reimburse Executive for moving and all other expenses incurred with such move;

     (v) the Company shall fail to continue in effect any Company-sponsored plan that is in effect on the date of a Change of Control or Potential Change of Control (or replacement plans therefore that in the aggregate provide the same or more favorable benefits) that provides (A) incentive or bonus compensation, (B) reimbursement for reasonable expenses incurred by Executive in connection with the performance of duties with the Company, and (C) pension benefits such as Section 401(k) plan within the meaning of the Internal Revenue Code of 1986, as amended (the “Code”);

     (vi) any material breach by the Company of any provision of this Agreement; and

     (vii) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company effected in accordance with the provisions of this Section 6.

(d) “Potential Change of Control” shall mean the earliest to occur of the following events within six months prior to a Change of Control:

     (i) the Company enters into an agreement the consummation of which, or the approval by stockholders of which, would constitute a Change of Control;

     (ii) proxies for the election of members of the Board are solicited by any person other than the Company;

     (iii) any person (including, but not limited to, any individual partnership, joint venture, corporation, association or trust) publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change of Control; or

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     (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board and the Board adopts a resolution to the effect that a Potential Change of Control has occurred.

(e) Excise Tax.

     (i) Gross-Up. In the event that the “Total Payments” (defined below) would be subject to the “Excise Tax” (defined below) the Company shall pay to Executive an additional amount (the “Gross-Up Payment”) such that after payment by Executive of all taxes (including any Excise Tax) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Total Payments.

(a) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) all “excess parachute payments” within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the base amount (within the meaning of Section 280G(b)(3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (B) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. If the Auditor is prohibited by applicable law or regulation from performing the duties assigned to it hereunder, then a different auditor, acceptable to both the Company and Executive, shall be selected. The fees and expenses of Tax Counsel and the Auditor shall be paid by the Company. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive’s residence on the date of termination (or if there is no date of termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

(b) In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within five (5) business days following the time that the amount of

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such excess is finally determined. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.

     (ii) Other Terms. At the time that payments are made under Section 5(c) or 6(a) of this Agreement, if requested by Executive, the Company shall provide Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions, or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and all such opinions or advice shall be in writing, shall be attached to the statement and shall expressly state that Executive may rely thereon). Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceeding concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. Notwithstanding anything herein to the contrary, this Section 6(e) shall be interpreted (and, if determined by the Company to be necessary, reformed) to the extent necessary to fully comply with the Sarbanes-Oxley Act; provided that the Corporation agrees to maintain, to the maximum extent practicable, the original intent and economic benefit to the Executive of the applicable provision without violating the provisions of the Sarbanes-Oxley Act.

     (iii) Definitions. “Total Payments” shall mean the payments and benefits received or to be received by Executive, whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement that constitute “parachute payments” as defined in Section 280G of the Code (excluding the Gross-Up Payment) (“Parachute Payments”). For this purposes, all of the payments and benefits received by Executive or to be received by Executive in connection with a Change of Control or in connection with Executive’s termination of employment in respect of a Change of Control (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, and Person whose actions result in a Change of Control or any Person affiliated with Company or such Person shall be treated as Parachute Payments unless, in the opinion of tax counsel (“Tax Counsel”) reasonably acceptable to Executive and selected by the accounting firm which was, immediately prior to the Change of Control, the Company’s independent auditor (the “Auditor”), such payments or benefits (in whole or in part) do not constitute Parachute Payments, including by reason of Section 280G(b)(4)(A) of the Code. “Excise Tax” shall mean the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”).

7. Time of Payment; Section 409A.

(a) Unless expressly provided otherwise, all of the payments due to Executive under Sections 5 or 6 above shall be made within fifteen (15) days following the date of termination;

(b) Notwithstanding any provision in this Agreement to the contrary, if the payment of any compensation or benefit hereunder (including, without limitation, any severance benefit) would be subject to additional taxes and interest under Section 409A of the Code

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because the timing of such payment is not delayed as provided in Section 409A(a)(2)(B) of the Code, then any such payment or benefit that Executive would otherwise be entitled to during the first six months following the date of Executive’s termination of employment shall be accumulated and paid or provided, as applicable, on the date that is six months and one day after the date of Executive’s termination of employment (or if such date does not fall on a business day of the Company, the next following business day of the Company), or such earlier date upon which such amount can be paid or provided under Section 409A of the Code without being subject to such additional taxes and interest. The preceding sentence shall apply only to the extent required to avoid Executive’s incurrence of any additional tax or interest under Section 409A of the Code or the regulations or Treasury guidance promulgated thereunder; and

(c) Notwithstanding anything to the contrary in this Agreement, if any payment, distribution or provision of a benefit by the Company to or for the benefit of Executive, whether paid or payable, distributed or distributable or provided or to be provided pursuant to the terms of this Agreement or otherwise (a “Payment”), would be subject to an additional tax pursuant to Section 409A of the Code that would not have been imposed absent such Payment, or any interest or penalties with respect to such additional tax or otherwise imposed pursuant to Section 409A of the Code (such additional tax, together with any such interest or penalties, are hereinafter collectively referred to as the “Additional Taxes”), the Company shall pay to Executive an additional payment (a “409A Gross-up Payment”) in an amount such that after payment by Executive of all Additional Taxes, including any income taxes and Additional Taxes imposed on any 409A Gross-up Payment, Executive retains an amount of the 409A Gross-up Payment (taking into account any similar gross-up payments to Executive under any stock incentive or other benefit plan or program of the Company) equal to the Additional Taxes imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a 409A Gross-up Payment is required and the amount of any such 409A Gross-up Payment. Executive shall notify the Company in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a 409A Gross-up Payment (or a 409A Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within ten business days after the receipt of such claim. The Company shall notify Executive in writing at least ten business days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Additional Taxes or income tax, including interest and penalties with respect thereto, imposed as a result of the Company’s action. If, as a result of the Company’s action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive.

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8. Complete Release. Executive acknowledges and agrees that she will not receive any of the payments described in Sections 5 or 6 above unless Executive signs and returns to the Company a full and complete release of any and all claims related to her employment or termination of employment that Executive or her estate, heirs or assigns may have against the Company, its subsidiaries and affiliates and its and their officers, directors, employees and agents in a form acceptable to and provided by the Company at or around the time of Executive’s termination.

9. Non-Competition. As a material inducement for the Company’s promise to provide the trade secrets and confidential and proprietary information described in Section 11 below, Executive agrees that during the Term and for a period of three (3) years from the date of cessation or termination of Executive’s employment with the Company for any reason whatsoever, she will not, directly or indirectly, compete with the Company by providing services relating to retail sales of jewelry to any other person, partnership, association, corporation, or other entity that is in a “Competing Business.” As used herein, a “Competing Business” is any business that engages in whole or in material part in the retail sale of jewelry in the United States, Canada and/or Puerto Rico, including, but not limited to, specialty jewelry retailers and other retailers having jewelry divisions or departments. The restrictions contained in this Section 9 shall be tolled on a day-for-day basis for each day during which Executive participates in any activity in violation of such restrictions. The parties agree that the above restrictions on competition are completely severable and independent agreements supported by good and valuable consideration and, as such, shall survive the termination of this Agreement for whatever reason. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on competition shall not render invalid or unenforceable any remaining restrictions on competition. Additionally, should a court of competent jurisdiction determine that the scope of any provision of this Section 9 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

10. No Hire/Non-Solicitation of Employees. During the Term and for a period of three (3) years after the termination or cessation of her employment with the Company for any reason whatsoever, Executive shall not, on her own behalf or on behalf of any other person, partnership, association, corporation, or other entity, (a) directly, indirectly, or through a third party hire, cause to be hired or solicit any employee of the Company or its subsidiaries or affiliates or (b) in any manner attempt to influence or induce any employee of the Company or its subsidiaries or affiliates to leave the employment of the Company or its subsidiaries or affiliates, nor shall she use or disclose to any person, partnership, association, corporation or other entity any information obtained concerning the names and addresses of the Company’s employees. The restrictions contained in this Section 10 shall be tolled on a day-for-day basis for each day during which Executive participates in any activity in violation of such restrictions. The parties agree that the above restrictions on hiring and solicitation are completely severable and independent agreements supported by good and valuable consideration and, as such, shall survive the termination of this Agreement for whatever reason. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on hiring and solicitation shall not render invalid or unenforceable any remaining restrictions or hiring

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and solicitation. Additionally, should a court of competent jurisdiction determine that the scope of any provision of this Section 10 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

11. Nondisclosure of Trade Secrets. The Company promises to disclose to Executive and Executive acknowledges that in and as a result of her employment with the Company, she will receive, make use of, acquire, have access to and/or become familiar with various trade secrets and proprietary and confidential information of the Company, its subsidiaries and affiliates, including, but not limited to, processes, computer programs, compilations of information, records, financial information, sales reports, sales procedures, customer requirements, pricing techniques, customer lists, methods of doing business, identities, locations, performance and compensation levels of employees and other confidential information which are owned by the Company, its subsidiaries and/or affiliates and regularly used in the operation of its business, and as to which the Company, its subsidiaries and/or affiliates take precautions to prevent dissemination to persons other than certain directors, officers and employees (collectively, “Trade Secrets”). Executive acknowledges and agrees that the Trade Secrets:

     (i) are secret and not known in the industry;

     (ii) give the Company or its subsidiaries or affiliates an advantage over competitors who do not know or use the Trade Secrets;

     (iii) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and

     (iv) are valuable, special and unique assets of the Company or its subsidiaries or affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to the Company or its subsidiaries or affiliates.

     Executive promises not to use in any way or disclose any of the Trade Secrets, directly or indirectly, either during or after the Term, except as required in the course of her employment under this Agreement, if required in connection with a judicial or administrative proceeding, or if the information becomes public knowledge other than as a result of an unauthorized disclosure by Executive. All files, records, documents, information, data compilations and similar items containing non-public and confidential information relating to the business of the Company, whether prepared by Executive or otherwise coming into her possession, will remain the exclusive property of the Company and may not be removed from the premises of the Company under any circumstances without the prior written consent of the Company (except in the ordinary course of business during Executive’s period of active employment under this Agreement), and in any event must be promptly delivered to the Company upon termination of Executive’s employment with the Company. Executive agrees that upon her receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, whether received during or after the term of Executive’s employment with the Company, Executive shall timely notify and promptly

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provide a copy of the subpoena, process or other request to the Company. For this purpose, Executive irrevocably nominates and appoints the Company (including any attorney retained by the Company), as her true and lawful attorney-in-fact, to act in Executive’s name, place and stead to perform any reasonable and prudent act that Executive might perform to defend and protect against any disclosure of any Trade Secrets.

     The parties agree that the above restrictions on confidentiality and disclosure are completely severable and independent agreements supported by good and valuable consideration and, as such, shall survive the termination of this Agreement for whatever reason. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on confidentiality and disclosure shall not render invalid or unenforceable any remaining restrictions on confidentiality and disclosure. Additionally, should a court of competent jurisdiction determine that the scope of any provision of this Section 11 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

12. Non-Disparagement. Executive expressly acknowledges, agrees, and covenants that she will not make any public or private statements, comments, or communications in any form, oral, written, or electronic (all of the foregoing, for purposes of this paragraph, “Communications”), which in any way could constitute libel, slander, or disparagement of the Company, its subsidiaries, affiliates or parent, its and/or their employees, officers, and/or directors, or which may be considered to be derogatory or detrimental to its or their good name or business; provided, however, that the terms of this paragraph shall not (a) apply to Communications between Executive and her spouse, clergy, or attorneys, which are subject to a claim of privilege existing under common law, statute, or rule of procedure; (b) apply to Communications required by law or made in response to a valid subpoena or other lawful order compelling Executive to provide testimony or information; provided, however, that in responding to a valid subpoena or other lawful order, Executive agrees to provide the Company with advance notice and an opportunity to seek a protective order or other safeguard for its confidential information; (c) be construed to inhibit or limit Executive’s ability to initiate or cooperate with any investigation by a governmental or regulatory agency or official. Executive specifically agrees not to issue any public statement concerning her employment at Zale and/or the cessation of such employment; or (d) prohibit Executive from responding to any derogatory or inaccurate statement contained in a press release of the Company concerning Executive for the purpose of correcting such inaccuracies or defending her reputation.

13. Executive Representations and Agreements. Executive agrees that Executive and the Company are engaged in a highly competitive business and, due to Executive’s position with the Company and the nature of Executive’s work, Executive’s engaging in any business which is competitive with that of the Company will cause the Company great and irreparable harm. Executive represents and warrants that the time, scope and geographic area restricted by the foregoing Sections 9, 10, 11, and 12 pertaining to no hire/non-solicitation, non-competition, confidentiality and nondisclosure, and non-disparagement are reasonable, that the enforcement of the restrictions contained in

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such Sections would not be unduly burdensome to Executive, and that Executive will be able to earn a reasonable living while abiding by the terms included herein. Executive agrees that the restraints created by the covenants in Sections 9, 10, 11, and 12 pertaining to no hire/non-solicitation, non-competition, confidentiality and nondisclosure, and non-disparagement are no greater than necessary to protect the legitimate interests of the Company, including its confidential business or proprietary information and trade secrets, including but not limited to, the Trade Secrets. Similarly, Executive agrees that the need of the Company for the protection afforded by the covenants of Sections 9, 10, 11, and 12 pertaining to no hire/non-solicitation, non-competition, confidentiality and nondisclosure, and non-disparagement are not outweighed by either the hardship to Executive or any injury likely to the public. Executive agrees that any breach by her of Sections 9, 10, 11, and 12 pertaining to no hire/non-solicitation, non-competition, confidentiality and nondisclosure and non-disparagement will entitle the Company to discontinue any payments specified in Sections 3, 5 or 6 above, for which Executive might be eligible based on the terms of those Sections and to any other remedy available at law or in equity. Notwithstanding the suspension or discontinuation of any such payments, Executive agrees that the Company is entitled to insist on full compliance by Executive with the full terms, including time periods, described in her promises not to hire/solicit, compete, disclose confidential information or Trade Secrets or disparage. Any delay by the Company in discontinuing payment shall not be construed as a waiver of any rights to discontinue payment.

14. Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never constituted a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance here from. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added as part of this Agreement, a provision as similar in its terms to such illegal, invalid or enforceable provision as may be possible and be legal, valid and enforceable.

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15. Arbitration.

(a) The parties agree that any controversy or claim (including all claims pursuant to common and statutory law) relating to this Agreement or arising out of Executive’s employment with the Company, shall be resolved exclusively through arbitration pursuant to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (“AAA”). Any such arbitration proceeding shall take place in Dallas County, Texas. All disputes shall be resolved by a single arbitrator. The arbitrator will have the authority to award the same remedies, damages and costs that a court could award. The arbitrator shall issue a reasoned award explaining the decision, the reasons for the decision and any damages awarded. The arbitrator’s decision will be final and binding. The judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. This provision can be enforced under the Federal Arbitration Act.

(b) As the sole exception to the exclusive and binding nature of the arbitration commitment set forth above, Executive and the Company agree that the Company shall have the right to initiate an action in a court of competent jurisdiction in order to request temporary, preliminary and permanent injunctive or other equitable relief, including, without limitation, specific performance, to enforce the terms of Sections 9, 10, 11, 12 or 13, above, without the necessity of proving inadequacy of legal remedies or irreparable harm or posting bond. However, nothing in this section should be construed to constitute a waiver of the parties’ rights and obligations to arbitrate regarding matters other than those specifically addressed in this paragraph.

(c) Should a court of competent jurisdiction determine that the scope of any provision of this Section 15 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

16.	Survival. Executive acknowledges and agrees that this Agreement, including but not limited to Sections 9, 10, 11, 12, 13, 14, 15, 17, and 17(c), shall survive the termination of Executive’s employment under this Agreement for whatever reason. The existence of any claim or cause of action of Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants of Executive contained in this Agreement, including but not limited to those contained in Sections 9, 10, 11, 12, 13, and 15.
17.	Miscellaneous.
(a)	Notices. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other must be in writing and must be either:

     (i) personally delivered;

     (ii) mailed by registered or certified mail, postage prepaid with return receipt requested;

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     (iii) delivered by overnight express delivery service or same-day local courier service; or

     (iv) delivered by telex or facsimile transmission, to the address set forth below, or to such other address as may be designated by the parties from time to time in accordance with this Section 17:

If to the Company:	Zale Corporation
	901 W. Walnut Hill Lane
	Irving, Texas 75038
	Attention: General Counsel
If to Executive:	Mary Elizabeth Burton
	1000 Lake Carolyn Parkway, #4216
	Irving, Texas 75039

     Notices delivered personally or by overnight express delivery service or by local courier service are deemed given as of actual receipt. Notices mailed within the continental United States are deemed given three (3) business days after mailing. Notices delivered by telex or facsimile transmission are deemed given upon receipt by the sender of the answer back (in the case of a telex) or transmission confirmation (in the case of a facsimile transmission).

(b) Entire Agreement. This Agreement supersedes any and all other agreements, either oral or written, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect to the subject matter of this Agreement.

(c) Modification. No change or modification of this Agreement is valid or binding upon the parties, nor will any waiver of any term or condition in the future be so binding, unless the change or modification or waiver is in writing and signed by the parties to this Agreement.

(d) Governing Law and Venue. The parties acknowledge and agree that this Agreement and the obligations and undertakings of the parties under this Agreement will be performable in Irving, Dallas County, Texas. This Agreement is governed by, and construed in accordance with, the laws of the State of Texas. If any action is brought to enforce or interpret this Agreement, venue for the action will be in Dallas County, Texas.

(e) Counterparts. This Agreement may be executed in counterparts, each of which constitutes an original, but all of which constitutes one document.

(f) Costs. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, each party shall bear its own costs and expenses unless Executive prevails on at least one major issue, in which case Executive’s costs shall be borne by the Company.

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(g) Estate. If Executive dies prior to the expiration of the Term or during a period when monies are owing to her, any monies that may be due her from the Company under this Agreement as of the date of her death shall be paid to her estate and as when otherwise payable.

(h) Assignment. The Company shall have the right to assign this Agreement to its successors or assigns. The terms “successors” and “assigns” shall include any person, corporation, partnership or other entity that buys all or substantially all of the Company’s assets or all of its stock, or with which the Company merges or consolidates. The rights, duties and benefits to Executive hereunder are personal to her, and no such right or benefit may be assigned by her.

(i) Binding Effect. This Agreement is binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and permitted assigns.

(j) Waiver of Breach. The waiver by the Company or Executive of a breach of any provision of this Agreement by Executive or the Company may not operate or be construed as a waiver of any subsequent breach.

[Signature Page Follows]

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     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

EXECUTIVE
By:	/s/ Mary Elizabeth Burton
	Mary Elizabeth Burton
ZALE CORPORATION
By:	/s/ Hilary Molay
	Its: Hilary Molay
	Senior Vice President & General Counsel

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EX-10.13

EXHIBIT 10.13

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (“Agreement”), dated as of January 5, 2005, is by and between Zale Delaware, Inc. (the “Company”), and Gilbert P. Hollander (the “Executive”).

     WHEREAS, the Executive and the Company desire to enter into an employment agreement which sets forth the terms and conditions of the Executive’s employment with the Company.

     NOW, THEREFORE, in consideration of the foregoing recital, of the mutual covenants set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

     1. Employment. The Executive agrees to continue in the employment of the Company, and the Company agrees to employ the Executive, on the terms and conditions set forth in this Agreement. The Executive agrees during the Term (as hereinafter defined) to devote his full time efforts, skills and abilities to the performance of his duties as stated in this Agreement and to the furtherance of the Company’s business. As consideration for this Agreement and specifically in consideration for the promises described in Section 8, the Company promises to provide the Executive with confidential and proprietary information and trade secrets, the receipt and sufficiency of which the Executive acknowledges, including, without limitation, Trade Secrets (as defined below) belonging to the Company for use in the performance of the Executive’s duties for the Company. The Executive’s job title will be Senior Vice President of the Company and President of the Piercing Pagoda Division of the Company and his duties will be those designated from time to time by the Chief Executive Officer (“CEO”) and/or Board of Directors of the Company (“Board”). The Executive further agrees to serve, without additional compensation, as an officer or director, or both, of any subsidiary, division or affiliate of the Company or any other entity in which the Company holds an equity interest, provided, however, that (a) the Company shall indemnify the Executive from liabilities in connection with serving in any such position to the same extent as his indemnification rights pursuant to the Company’s Certificate of Incorporation, Bylaws and applicable Delaware law, and (b) such other position shall not materially detract from the responsibilities of the Executive pursuant to this Section 1 or his ability to perform such responsibilities.

     2. Compensation.

          (a) Base Salary. During the term of the Executive’s employment with the Company pursuant to this Agreement, the Company shall pay to the Executive as compensation for his services an annual base salary of not less than $240,000 payable bi-weekly (“Base Salary”). The Executive’s Base Salary will be payable in arrears in accordance with the Company’s normal payroll procedures and will be reviewed annually and subject to adjustment at the discretion of the CEO and/or the Board or an authorized committee or representative thereof.

          (b) Incentive Bonus. The Executive’s incentive compensation program during the term of his employment under this Agreement shall be determined under the Company’s Executive Bonus Program, established by the Board in its discretion. The Executive is eligible to receive up to 75% of his Base Salary in accordance with the terms and conditions of the Executive Bonus Program.

          (c) Vacation. The Executive shall be entitled to a reasonable vacation of four (4) paid weeks each fiscal year during the term of his employment under this Agreement in accordance with the Company’s vacation policy. Any additional vacation shall be approved in the sole discretion of the Executive’s supervisor.

          (d) Executive Perquisites. The Executive shall be entitled during the term of his employment under this Agreement to receive such executive perquisites and fringe and other benefits as are provided to similarly situated executives and their families under any of the Company’s plans and/or programs in effect from time to time and such other benefits as are customarily available to executives of the Company and their families.

          (e) Tax Withholding. The Company has the right to deduct from any compensation payable to the Executive under this Agreement social security (FICA) taxes and all federal, state, municipal or other such taxes or charges as may now be in effect or that may hereafter be enacted or required.

     3. Term. Unless sooner terminated pursuant to Section 4 of this Agreement, the term of the Executive’s employment under this Agreement shall commence as of the date hereof and shall continue for two and one half (2 1/2) years thereafter up to and including July 31, 2007 (the “Term”). Following the expiration of the Term, the Executive’s employment shall continue at-will unless a new employment agreement is negotiated and executed.

     4. Early Termination. The Term may be terminated prior to the expiration date specified in Section 3 under the following circumstances:

          (a) Death. The Executive’s employment under this Agreement shall terminate upon the death of the Executive.

          (b) Termination for Cause. The Company may terminate the Executive’s employment at any time for “Cause” (as hereinafter defined) by delivering a written termination notice to the Executive. For purposes of this Agreement, “Cause” shall mean any of the following:

          (i) the Executive is convicted of a felony or a crime involving moral turpitude;

          (ii) the Executive commits an act constituting fraud, deceit or material misrepresentation with respect to the Company;

          (iii) the Executive embezzles funds or assets from the Company;

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          (iv) the Executive’s use of any alcoholic, controlled or illegal substance or drug at work or otherwise such that, in the Company’s sole discretion, the Executive’s job performance is impaired;

          (v) in the Company’s sole discretion, the Executive commits any negligent or willful act or omission in the performance of his duties or the exercise of his responsibilities; or

          (vi) in the Company’s sole discretion, the Executive commits any negligent or willful act or omission that causes damage (by reason, without limitation, of financial exposure or loss, damage to reputation or goodwill, or exposure to civil or criminal penalties or other prosecutorial action by any governmental authority) to the Company or any parent or subsidiary corporation thereof.

          or

          (c) Termination Without Cause. The Company may also terminate the Executive’s employment at any time for any reason other than for Cause by delivering a written termination notice to the Executive.

          (d) Termination by the Executive. The Executive may terminate his employment at any time by delivering a written termination notice to the Company and such termination shall be deemed a “Termination Reason” for any of the following reasons:

          (i) a material reduction by the Company in the Executive’s Base Salary unless such reduction is the result of (A) a business judgment made by the Company in its sole discretion, or (B) the Executive’s failure to meet pre-established and objective performance criteria;

          (ii) Company’s principal executive offices shall be moved to a location outside the Dallas/Fort Worth, Texas Metroplex area or the Executive is required to be based anywhere other than the Company’s principal executive offices; and

          (iii) the assignment to the Executive by the Company of duties materially inconsistent with, or the material reduction of the powers and functions associated with, the Executive’s position, duties, responsibilities and status with the Company or a material adverse change in the Executive’s titles or offices, unless such action is the result of the Executive’s failure to meet preestablished and objective performance criteria, or in lieu of termination by the Company of the Executive’s employment for the Executive’s Disability pursuant to Section 4(e) below.

          (e) Termination Following Disability. In the event that in the Company’s sole discretion, the Executive becomes mentally or physically impaired or disabled and is unable to perform his duties and responsibilities hereunder for a period of at least one hundred twenty (120) days in the aggregate during any one hundred fifty (150) consecutive day period (a “Disability Event”), the Company may terminate the Executive’s employment under this Agreement by delivering a written termination notice to the Executive.

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          (f) Payments/Deductions. Following any expiration or termination of the Executive’s employment under this Agreement, and in addition to any amounts owed pursuant to Section 5 hereof, the Company shall pay to the Executive all amounts earned by the Executive hereunder up to the date of such expiration or termination. The Executive agrees that any advances to the Executive by the Company outstanding at the time of the expiration or termination of the Executive’s employment under this Agreement may be deducted from his wages, including his final paycheck and/or any severance owed to Executive.

     5. Rights of Executive Upon Termination. Subject to the Executive’s adherence to the terms of this Agreement, including but not limited to the non-competition, no-hire/non-solicitation and non-disclosure provisions set forth below, the Executive shall be entitled to receive the following benefits in the event his employment is terminated pursuant to Section 4 above prior to the expiration of the Term specified in Section 3 above.

          (a) Death. In the event that the Executive’s employment is terminated upon the occurrence of his death as provided in Section 4(a), the Company shall continue to pay, in accordance with its normal payroll procedures, the Base Salary to the Executive’s estate for a period of twelve (12) months after the date of the Executive’s death.

          (b) Termination for Cause. In the event that the Executive’s employment is terminated by the Company for Cause as provided in Section 4(b) or by the Executive without a “Termination Reason” as provided in Section 4(d), the Executive shall not thereafter be entitled to any further compensation from the Company.

          (c) Termination without Cause or by the Executive. In the event the Company terminates the Executive’s employment without Cause as provided in Section 4(c) or the Executive terminates his employment for a “Termination Reason” as provided in Sections 4(d)(i), 4(d)(ii) or 4(d)(iii), then the Executive shall be entitled to the following:

          (i) Severance. The Company shall continue to pay (in accordance with its normal payroll procedures) the Base Salary to the Executive (or the Executive’s estate if the Executive dies after termination of employment) for the greater of (i) the remainder of the Term or (ii) the period for which the Executive would be entitled to severance under the Company’s severance policy in existence at the time of the Executive’s termination (“Severance Period”).

          (ii) Benefits. During the first twelve (12) months of the Severance Period or if the Severance Period is less than twelve (12) months, until the end of the Severance Period, the Executive shall continue to receive the fringe benefits provided under Sections 2(b) and 2(d) hereof, provided that the continued participation of the Executive under any benefit plan including, without limitation, group healthcare, dental and life insurance is possible under the general terms and provisions of such plans. If the Executive’s participation in any such plan is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive would otherwise have been entitled to receive under such plan or, alternatively at the option of the Company, reimburse the Executive for the reasonable actual costs of purchasing in the marketplace substantially similar benefits; provided, however, that in either case the Executive shall pay to the

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Company, or provide a credit against the Company’s reimbursement obligation for, the amount equal to the premiums, or portion thereof, that the Executive was required to pay to maintain such benefits prior to the date of termination of employment. Notwithstanding anything to the contrary contained herein, the Executive shall be entitled to participate in the Company’s Executive Car Program in effect for the Executive immediately prior to the Severance Period only until the earlier of (x) the second anniversary of the Executive’s then current car lease, or (y) the end of the Severance Period. The Executive shall return any Company vehicle provided to him under the Executive Car Program to the Company or its designee upon the expiration of his Executive Car Program benefits as described in the foregoing sentence.

          (iii) Offset. The payments which would have been due and payable in accordance with Section 5(c)(i) hereof shall be reduced by an amount equal to any amounts that the Executive receives in connection with any other employment during the Severance Period. Any fringe benefits received by or available to the Executive in connection with any other employment that are reasonably comparable, but not necessarily as financially or otherwise beneficial to the Executive as the fringe benefits then being provided by the Company pursuant to Section 5(c)(ii) hereof, shall be deemed to be the equivalent thereof and shall terminate the Company’s responsibility to continue providing the fringe benefits then being provided by the Company pursuant to Section 5(c)(ii) hereof.

          (d) Termination Following Disability. In the event that the Executive’s employment is terminated due to a Disability Event as provided in Section 4(e), the Executive shall be entitled to continue to receive his salary and benefits (subject to the conditions regarding such benefits specified in Section 5(c)(ii) and 5(c)(iii) above) under Section 2 of this Agreement for a period of twelve (12) months after the date of such termination.

          (e) Complete Compensation. Except as specifically provided for in this Section 5 and Section 4(f) above, the Executive shall be entitled to no additional salary, benefits or other compensation following the termination of his employment.

     6. Effect of Change of Control.

          (a) If within two (2) years following a “Change of Control” (as hereinafter defined), the Executive terminates his employment with the Company for Good Reason (as hereinafter defined) or the Company terminates the Executive’s employment for any reason other than Cause or disability, the Company shall pay to the Executive:

          (i) an amount equal to three (3) times the Executive’s Base Salary as of the date of termination;

          (ii) an amount equal to three (3) times the average annual cash bonus paid to the Executive for the two (2) fiscal years immediately preceding the date of termination;

          (iii) all benefits under the Company’s various benefit plans, including group healthcare, dental, life and the Company’s Executive Car Program for the period equal to thirty-six (36) months from the date of termination, provided that the continued participation

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of the Executive is possible under the general terms and provisions of such plans. If the Executive’s participation in any such plan is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive would otherwise have been entitled to receive under such plan or, alternatively at the option of the Company, reimburse the Executive for the reasonable actual costs of purchasing in the marketplace substantially similar benefits; provided, however, that in either case the Executive shall pay to the Company, or provide a credit against the Company’s reimbursement obligation for, the amount equal to the premiums, or portion thereof, that the Executive was required to pay to maintain such benefits prior to the date of termination of employment. Further, any insurance or other benefits and benefits coverage provided pursuant hereto shall be limited and reduced to the extent such coverage or benefits are otherwise provided by or available from any other employer of the Executive; and

          (iv) a lump sum payment equal to the actuarial equivalent (determined by the Company in good faith with assistance of its accountants or actuaries), of the benefit which would have accrued under the Zale Delaware, Inc. Supplemental Executive Retirement Plan (“SERP”) if:

          (1) the Executive remained a participant in the SERP for the three (3) year period commencing on the first day of the SERP’s plan year (“Plan Year”) in which the Executive’s employment with the Company terminated (“Measurement Period”);

          (2) during each Plan Year in the Measurement Period the Executive earned benefit points equal to the highest number of the benefit points earned by such Executive in a Plan Year during the three (3) year period ending on the last day of the Plan Year immediately preceding the Plan Year in which his employment with the Company terminated; and

          (3) the Executive’s final average pay during the Measurement Period is the greater of his monthly Base Salary on the date of (a) a Potential Change of Control, (b) the Change of Control or (c) the date of his termination of employment.

          (b) “Change of Control” shall mean the date as of which:

          (i) there shall be consummated:

          (1) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company’s common stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company’s common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger; or

          (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company;

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          (ii) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company;

          (iii) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)), shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 30% of the Company’s outstanding common stock; or

          (iv) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the entire board of directors of the Company shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company’s stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.

          (c) “Good Reason” shall mean any of the following actions taken by the Company without the Executive’s written consent after a Change of Control:

          (i) the assignment to the Executive by the Company of duties materially inconsistent with, or the material reduction of the powers and functions associated with, the Executive’s position, duties, responsibilities and status with the Company immediately prior to a Change of Control or Potential Change of Control (as defined below), or a material adverse change in the Executive’s titles or offices as in effect immediately prior to a Change of Control or Potential Change of Control, or any removal of the Executive from or any failure to re-elect the Executive to any of such positions, except in connection with the termination of his employment (A) by the Company for Disability or Cause or as a result of the Executive’s death or (B) by the Executive other than for the reasons set forth in this section (6)(c)(i)-(vii);

          (ii) a reduction by the Company in the Executive’s Base Salary as in effect on the date of a Change of Control or Potential Change of Control;

          (iii) the Company’s principal executive offices shall be moved to a location outside the Dallas/Fort Worth, Texas Metroplex area;

          (iv) the Company shall require the Executive to be based anywhere other than at the Company’s principal executive offices or the location where the Executive is based on the date of a Change of Control or Potential Change of Control, or if the Executive agrees to such relocation, the Company fails to reimburse the Executive for moving and all other expenses incurred with such move;

          (v) the Company shall fail to continue in effect any Company-sponsored plan that is in effect on the date of a Change of Control or Potential Change of Control, that provides (A) incentive or bonus compensation, (B) reimbursement for reasonable expenses incurred by the Executive in connection with the performance of duties with the Company, and (C) pension benefits such as a Code Section 401(k) plan;

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          (vi) any material breach by the Company of any provision of this Agreement; and

          (vii) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company effected in accordance with the provisions of this Section 6.

          (d) “Potential Change of Control” shall mean the date as of which:

          (i) the Company enters into an agreement the consummation of which, or the approval by shareholders of which, would constitute a Change of Control;

          (ii) proxies for the election of Directors of the Company are solicited by anyone other than the Company;

          (iii) any person (including, but not limited to, any individual, partnership, joint venture, corporation, association or trust) publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change of Control; or

          (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board and the Board adopts a resolution to the effect that a Potential Change of Control has occurred.

          (e) In the event that:

          (i) the Executive would otherwise be entitled to the compensation and benefits described in Section 6(a) hereof (“Compensation Payments”); and

          (ii) the Company determines, based upon the advice of tax counsel selected by the Company’s independent auditors and acceptable to the Executive, that, as a result of such Compensation Payments and any other benefits or payments required to be taken into account under Code Section 280G(b)(2) (“Parachute Payments”), any of such Parachute Payments would be reportable by the Company as “excess parachute payments,” such Compensation Payments shall be reduced to the extent necessary to cause the Executive’s Parachute Payments to equal 2.99 times the “base amount” as defined in Code Section 280G(b)(3) with respect to such Executive. However, such reduction in the Compensation Payments shall be made only if, in the opinion of the Company, based upon the advice of such tax counsel, it would result in a larger Parachute Payment to the Executive than payment of the unreduced Parachute Payments after deduction of tax imposed on and payable by the Executive under Section 4999 of the Code (“Excise Tax”). The value of any non-cash benefits or any deferred payment or benefit for purposes of this paragraph shall be determined by the Company’s independent auditors.

          (f) Unless the Company determines that any Parachute Payments made hereunder must be reported as “excess parachute payments” in accordance with Section 6(e) above, neither party shall file any return taking the position that the payment of such benefits constitutes an “excess parachute payment” within the meaning of Section 280G(b)(1) of the Code.

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          (g) The parties hereto agree that the payments provided under Section 6(a), as may be adjusted pursuant to Section 6(e), are reasonable compensation in light of the Executive’s services rendered to the Company.

     7. Complete Release. The Executive acknowledges and agrees that he will not receive any of the payments described in Sections 5 and 6 above unless the Executive signs and returns to the Company a full and complete release of any and all claims that the Executive or his estate, heirs or assigns may have against the Company, its subsidiaries and affiliates and its and their officers, directors, employees and agents in a form acceptable to and provided by the Company at or around the time of the Executive’s termination.

     8. Non-Competition. As a material inducement for the Company’s promise to provide the trade secrets and confidential and proprietary information described in Section 10 below, the Executive agrees that during the Term and for a period of three (3) years from the date of cessation or termination of the Executive’s employment with the Company for any reason whatsoever, he will not, directly or indirectly, compete with the Company by providing services to any other person, partnership, association, corporation, or other entity that is in a “Competing Business.” As used herein, a “Competing Business” is any business that engages in whole or in part in the retail sale of jewelry in the United States and/or Puerto Rico, including, but not limited to, specialty jewelry retailers and other retailers having jewelry divisions or departments, and the Executive’s employment function or affiliation with the Competing Business is directly or indirectly related to such business of jewelry. The restrictions contained in this Section 8 shall be tolled on a day-for-day basis for each day during which the Executive participates in any activity in violation of such restrictions. The parties agree that the above restrictions on competition are completely severable and independent agreements supported by good and valuable consideration and, as such, shall survive the termination of this Agreement for whatever reason. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on competition shall not render invalid or unenforceable any remaining restrictions on competition. Additionally, should a court of competent jurisdiction determine that the scope of any provision of this Section 8 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

     9. No Hire/Non-Solicitation of Employees. During the Term and for a period of three (3) years after the termination or cessation of his employment with the Company for any reason whatsoever, the Executive shall not, on his own behalf or on behalf of any other person, partnership, association, corporation, or other entity, (a) directly, indirectly, or through a third party hire or cause to be hired; (b) directly, indirectly or through a third party solicit; or (c) in any manner attempt to influence or induce any employee of the Company or its subsidiaries or affiliates to leave the employment of the Company or its subsidiaries or affiliates, nor shall he use or disclose to any person, partnership, association, corporation or other entity any information obtained concerning the names and addresses of the Company’s employees. The restrictions contained in this Section 9 shall be tolled on a day-for-day basis for each day during which the Executive participates in any activity in violation of such restrictions. The parties agree that the above restrictions on hiring and solicitation are completely severable and independent agreements supported by good and valuable consideration and, as such, shall survive the termination of this Agreement for whatever reason. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on

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hiring and solicitation shall not render invalid or unenforceable any remaining restrictions or hiring and solicitation. Additionally, should a court of competent jurisdiction determine that the scope of any provision of this Section 9 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

     10. Nondisclosure of Trade Secrets. The Company promises to disclose to the Executive and the Executive acknowledges that in and as a result of his employment by the Company, he will receive, make use of, acquire, have access to and/or become familiar with various trade secrets and proprietary and confidential information of the Company, its subsidiaries and affiliates, including, but not limited to, processes, computer programs, compilations of information, records, financial information, sales reports, sales procedures, customer requirements, pricing techniques, customer lists, methods of doing business, identities, locations, performance and compensation levels of employees and other confidential information (collectively, “Trade Secrets”) which are owned by the Company, its subsidiaries and/or affiliates and regularly used in the operation of its business, and as to which the Company, its subsidiaries and/or affiliates take precautions to prevent dissemination to persons other than certain directors, officers and employees. The Executive acknowledges and agrees that the Trade Secrets:

          (a) are secret and not known in the industry;

          (b) give the Company or its subsidiaries or affiliates an advantage over competitors who do not know or use the Trade Secrets;

          (c) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and

          (d) are valuable, special and unique assets of the Company or its subsidiaries or affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to the Company or its subsidiaries or affiliates.

          The Executive promises not to use in any way or disclose any of the Trade Secrets and confidential and proprietary information, directly or indirectly, either during or after the Term, except as required in the course of his employment under this Agreement, if required in connection with a judicial or administrative proceeding, or if the information becomes public knowledge other than as a result of an unauthorized disclosure by the Executive. All files, records, documents, information, data and similar items relating to the business of the Company, whether prepared by the Executive or otherwise coming into his possession, will remain the exclusive property of the Company and may not be removed from the premises of the Company under any circumstances without the prior written consent of the Company (except in the ordinary course of business during the Executive’s period of active employment under this Agreement), and in any event must be promptly delivered to the Company upon termination of the Executive’s employment with the Company. The Executive agrees that upon his receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, whether received during or after the term of the Executive’s employment with the Company, the Executive shall timely notify and promptly hand deliver a copy of the subpoena, process or other request to the Company. For this purpose, the Executive irrevocably nominates and appoints the Company (including any attorney retained by the Company), as his true and lawful attorney-in-fact,

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to act in the Executive’s name, place and stead to perform any act that the Executive might perform to defend and protect against any disclosure of any Trade Secrets.

     The parties agree that the above restrictions on confidentiality and disclosure are completely severable and independent agreements supported by good and valuable consideration and, as such, shall survive the termination of this Agreement for whatever reason. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on confidentiality and disclosure shall not render invalid or unenforceable any remaining restrictions on confidentiality and disclosure. Additionally, should a court of competent jurisdiction determine that the scope of any provision of this Section 10 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

     11. Executive Representations and Agreements. The Executive agrees that the Executive and the Company are engaged in a highly competitive business and, due to the Executive’s position with the Company and the nature of the Executive’s work, the Executive’s engaging in any business which is competitive with that of the Company will cause the Company great and irreparable harm. The Executive represents and warrants that the time, scope and geographic area restricted by the foregoing paragraph(s) pertaining to no hire/non-solicitation, non-competition, confidentiality and nondisclosure are reasonable, that the enforcement of the restrictions contained in the foregoing paragraphs would not be unduly burdensome to the Executive, and that the Executive will be able to earn a reasonable living while abiding by the terms included herein. The Executive agrees that the restraints created by the covenants in the foregoing paragraph(s) pertaining to no hire/non-solicitation, non-competition, confidentiality and nondisclosure are no greater than necessary to protect the legitimate interests of the Company, including its confidential business or proprietary information and trade secrets, including but not limited to, the Trade Secrets. Similarly, the Executive agrees that the need of the Company for the protection afforded by the covenants of the foregoing paragraphs pertaining to no hire/non-solicitation, non-competition, confidentiality and nondisclosure are not outweighed by either the hardship to the Executive or any injury likely to the public. The Executive agrees that any breach by him of the foregoing provisions pertaining to no hire/non-solicitation, non-competition, confidentiality and nondisclosure will entitle the Company to discontinue any payments specified in Sections 2, 5 or 6, above, for which the Executive might be eligible based on the terms of those Sections. Notwithstanding the suspension or discontinuation of any such payments, the Executive agrees that the Company is entitled to insist on full compliance by the Executive with the full terms, including time periods, described in his promises not to hire/solicit, compete or disclose confidential information or Trade Secrets. Any delay by the Company in discontinuing payment shall not be construed as a waiver of any rights to discontinue payment.

     12. Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never constituted a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance here from. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added as part of this Agreement, a

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provision as similar in its terms to such illegal, invalid or enforceable provision as may be possible and be legal, valid and enforceable.

     13. Arbitration.

          (a) The parties agree that any controversy or claim (including all claims pursuant to common and statutory law) relating to this Agreement or arising out of the Executive’s employment with the Company, shall be resolved exclusively through arbitration pursuant to the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (“AAA”). Any such arbitration proceeding shall take place in Dallas County, Texas. All disputes shall be resolved by a single arbitrator. The arbitrator will have the authority to award the same remedies, damages and costs that a court could award. The arbitrator shall issue a reasoned award explaining the decision, the reasons for the decision and any damages awarded. The arbitrator’s decision will be final and binding. The judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. This provision can be enforced under the Federal Arbitration Act.

          (b) As the sole exception to the exclusive and binding nature of the arbitration commitment set forth above, the Executive and the Company agree that the Company shall have the right to initiate an action in a court of competent jurisdiction in order to request temporary, preliminary and permanent injunctive or other equitable relief, including, without limitation, specific performance, to enforce the terms of Sections 8, 9, 10 or 11 or above without the necessity of proving inadequacy of legal remedies or irreparable harm or posting bond. However, nothing in this section should be construed to constitute a waiver of the parties’ rights and obligations to arbitrate regarding matters other than those specifically addressed in this paragraph.

          (c) Should a court of competent jurisdiction determine that the scope of any provision of this Section 13 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

     14. Survival. The Executive acknowledges and agrees that this Agreement, including but not limited to Sections 8, 9, 10, 11, 12, 13, 15(a) and 15(d), shall survive the termination of the Executive’s employment under this Agreement for whatever reason. The existence of any claim or cause of action of the Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants of the Executive contained in this Agreement, including but not limited to those contained in Sections 8, 9, 10, 11 and 13.

     15. Miscellaneous.

          (a) Notices. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other must be in writing and must be either:

          (i) personally delivered;

          (ii) mailed by registered or certified mail, postage prepaid with return receipt requested;

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          (iii) delivered by overnight express delivery service or same-day local courier service; or

          (iv) delivered by telex or facsimile transmission, to the address set forth below, or to such other address as may be designated by the parties from time to time in accordance with this Section 15(a):

If to the Company:	Zale Delaware, Inc.
	901 W. Walnut Hill Lane
	Irving, Texas 75038
	Attention:Chief Executive Officer
with a copy to:	General Counsel
If to Executive:	Mr. Gilbert P. Hollander
	4528 Banyan Lane
	Dallas, Texas 75287

     Notices delivered personally or by overnight express delivery service or by local courier service are deemed given as of actual receipt. Notices mailed within the continental United States are deemed given three business days after mailing. Notices delivered by telex or facsimile transmission are deemed given upon receipt by the sender of the answer back (in the case of a telex) or transmission confirmation (in the case of a facsimile transmission).

          (b) Entire Agreement. This Agreement supersedes any and all other agreements, either oral or written, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect to the subject matter of this Agreement.

          (c) Modification. No change or modification of this Agreement is valid or binding upon the parties, nor will any waiver of any term or condition in the future be so binding, unless the change or modification or waiver is in writing and signed by the parties to this Agreement.

          (d) Governing Law and Venue. The parties acknowledge and agree that this Agreement and the obligations and undertakings of the parties under this Agreement will be performable in Irving, Dallas County, Texas. This Agreement is governed by, and construed in accordance with, the laws of the State of Texas. If any action is brought to enforce or interpret this Agreement, venue for the action will be in Dallas County, Texas.

          (e) Counterparts. This Agreement may be executed in counterparts, each of which constitutes an original, but all of which constitutes one document.

          (f) Costs. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, each party shall bear its own costs and expenses.

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          (g) Estate. If the Executive dies prior to the expiration of the Term or during a period when monies are owing to him, any monies that may be due him from the Company under this Agreement as of the date of his death shall be paid to his estate and as when otherwise payable.

          (h) Assignment. The Company shall have the right to assign this Agreement to its successors or assigns. The terms “successors” and “assigns” shall include any person, corporation, partnership or other entity that buys all or substantially all of the Company’s assets or all of its stock, or with which the Company merges or consolidates. The rights, duties and benefits to the Executive hereunder are personal to him, and no such right or benefit may be assigned by him.

          (i) Binding Effect. This Agreement is binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and permitted assigns.

          (j) Waiver of Breach. The waiver by the Company or the Executive of a breach of any provision of this Agreement by the Executive or the Company may not operate or be construed as a waiver of any subsequent breach.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

By:	/s/Gilbert P. Hollander
	Gilbert P. Hollander
	ZALE DELAWARE, INC.
	By:	/s/Mary L. Forté
	Its:	Chief Executive Officer

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EX-10.14

EXHIBIT 10.14

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (“Agreement”), dated as of August 1, 2006, is by and between Zale Delaware, Inc. (the “Company”), and Frank C. Mroczka (the “Executive”).

     WHEREAS, the Executive and the Company desire to enter into an employment agreement which sets forth the terms and conditions of the Executive’s employment with the Company.

     NOW, THEREFORE, in consideration of the foregoing recital, of the mutual covenants set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

     1. Employment. The Executive agrees to continue in the employment of the Company, and the Company agrees to employ the Executive, on the terms and conditions set forth in this Agreement. The Executive agrees during the Term (as hereinafter defined) to devote his full time efforts, skills and abilities to the performance of his duties as stated in this Agreement and to the furtherance of the Company’s business. As consideration for this Agreement and specifically in consideration for the promises described in Section 9, the Company promises to provide the Executive with confidential and proprietary information and trade secrets, the receipt and sufficiency of which the Executive acknowledges, including, without limitation, Trade Secrets (as defined below) belonging to the Company for use in the performance of the Executive’s duties for the Company. The Executive’s job title will be Senior Vice President of the Company and President of the Gordon’s Jewelers Division of the Company and his duties will be those designated from time to time by the Chief Executive Officer (“CEO”) and/or Board of Directors of the Company (“Board”). The Executive further agrees to serve, without additional compensation, as an officer or director, or both, of any subsidiary, division or affiliate of the Company or any other entity in which the Company holds an equity interest, provided, however, that (a) the Company shall indemnify the Executive from liabilities in connection with serving in any such position to the same extent as his indemnification rights pursuant to the Company’s Certificate of Incorporation, Bylaws and applicable Delaware law, and (b) such other position shall not materially detract from the responsibilities of the Executive pursuant to this Section 1 or his ability to perform such responsibilities.

     2. Compensation.

          (a) Base Salary. During the term of the Executive’s employment with the Company pursuant to this Agreement, the Company shall pay to the Executive as compensation for his services an annual base salary of not less than $300,000 payable bi-weekly (“Base Salary”). The Executive’s Base Salary will be payable in arrears in accordance with the Company’s normal payroll procedures.

          (b) Incentive Bonus. The Executive’s incentive compensation program during the term of his employment under this Agreement shall be determined under the Company’s Executive

Bonus Program, established by the Board in its discretion. The Executive is eligible to receive up to 90% of his Base Salary in accordance with the terms and conditions of the Executive Bonus Program then in effect at the Company.

          (c) Vacation. The Executive shall be entitled to a reasonable vacation of three (3) paid weeks each fiscal year during the term of his employment under this Agreement in accordance with the Company’s vacation policy. Any additional vacation shall be approved in the sole discretion of the Executive’s supervisor.

          (d) Executive Perquisites. The Executive shall be entitled during the term of his employment under this Agreement to receive such executive perquisites and fringe and other benefits as are provided to similarly situated executives and their families under any of the Company’s plans and/or programs in effect from time to time and such other benefits as are customarily available to executives of the Company and their families.

          (e) Tax Withholding. The Company has the right to deduct from any compensation payable to the Executive under this Agreement social security (FICA) taxes and all federal, state, municipal or other such taxes or charges as may now be in effect or that may hereafter be enacted or required.

     3. Term. Unless sooner terminated pursuant to Section 4 of this Agreement, the term of the Executive’s employment under this Agreement shall commence as of the date hereof and shall continue for twelve (12) months thereafter up to and including July 31, 2007 (the “Term”). Following the expiration of the Term, the Executive’s employment shall continue at-will unless a new employment agreement is negotiated and executed.

     4. Early Termination. The Term may be terminated prior to the expiration date specified in Section 3 under the following circumstances:

          (a) Death. The Executive’s employment under this Agreement shall terminate upon the death of the Executive.

          (b) Termination for Cause. The Company may terminate the Executive’s employment at any time for “Cause” (as hereinafter defined) by delivering a written termination notice to the Executive. For purposes of this Agreement, “Cause” shall mean any of the following:

          (i) the Executive is convicted of a felony or a crime involving moral turpitude;

          (ii) the Executive commits an act constituting fraud, deceit or material misrepresentation with respect to the Company;

          (iii) the Executive embezzles funds or assets from the Company;

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          (iv) the Executive’s use of any alcoholic, controlled or illegal substance or drug at work or otherwise such that, in the Company’s sole discretion, the Executive’s job performance is impaired;

          (v) in the Company’s sole discretion, the Executive commits any negligent or willful act or omission in the performance of his duties or the exercise of his responsibilities; or

          (vi) in the Company’s sole discretion, the Executive commits any negligent or willful act or omission that causes damage (by reason, without limitation, of financial exposure or loss, damage to reputation or goodwill, or exposure to civil or criminal penalties or other prosecutorial action by any governmental authority) to the Company or any parent or subsidiary corporation thereof.

          (c) Termination Without Cause. The Company may also terminate the Executive’s employment at any time for any reason other than for Cause by delivering a written termination notice to the Executive.

          (d) Termination by the Executive. The Executive may terminate his employment at any time by delivering a written termination notice to the Company and such termination shall be deemed a “Termination Reason” for any of the following reasons:

          (i) a material reduction by the Company in the Executive’s Base Salary unless such reduction is the result of (A) a business judgment made by the Company in its sole discretion, or (B) the Executive’s failure to meet pre-established and objective performance criteria;

          (ii) Company’s principal executive offices shall be moved to a location outside the Dallas/Fort Worth, Texas Metroplex area or the Executive is required to be based anywhere other than the Company’s principal executive offices; and

          (iii) the assignment to the Executive by the Company of duties materially inconsistent with, or the material reduction of the powers and functions associated with, the Executive’s position, duties, responsibilities and status with the Company or a material adverse change in the Executive’s titles or offices, unless such action is the result of the Executive’s failure to meet preestablished and objective performance criteria, or in lieu of termination by the Company of the Executive’s employment for the Executive’s Disability pursuant to Section 4(e) below.

          (e) Termination Following Disability. In the event that in the Company’s sole discretion, the Executive becomes mentally or physically impaired or disabled and is unable to perform his duties and responsibilities hereunder for a period of at least one hundred twenty (120) days in the aggregate during any one hundred fifty (150) consecutive day period (a “Disability Event”), the Company may terminate the Executive’s employment under this Agreement by delivering a written termination notice to the Executive.

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          (f) Payments/Deductions. Following any expiration or termination of the Executive’s employment under this Agreement, and in addition to any amounts owed pursuant to Section 5 hereof, the Company shall pay to the Executive all amounts earned by the Executive hereunder up to the date of such expiration or termination. The Executive agrees that any advances to the Executive by the Company outstanding at the time of the expiration or termination of the Executive’s employment under this Agreement may be deducted from his wages, including his final paycheck and/or any severance owed to Executive.

     5. Rights of Executive Upon Termination. Subject to the Executive’s adherence to the terms of this Agreement, including but not limited to the non-competition, no-hire/non-solicitation and non-disclosure provisions set forth below, the Executive shall be entitled to receive the following benefits in the event his employment is terminated pursuant to Section 4 above prior to the expiration of the Term specified in Section 3 above.

          (a) Death. In the event that the Executive’s employment is terminated upon the occurrence of his death as provided in Section 4(a), the Company shall continue to pay, in accordance with its normal payroll procedures, the Base Salary to the Executive’s estate for a period of twelve (12) months after the date of the Executive’s death.

          (b) Termination for Cause. In the event that the Executive’s employment is terminated by the Company for Cause as provided in Section 4(b) or by the Executive without a “Termination Reason” as provided in Section 4(d), the Executive shall not thereafter be entitled to any further compensation from the Company.

          (c) Termination without Cause or by the Executive. In the event the Company terminates the Executive’s employment without Cause as provided in Section 4(c) or the Executive terminates his employment for a “Termination Reason” as provided in Sections 4(d)(i), 4(d)(ii) or 4(d)(iii), then the Executive shall be entitled to the following:

          (i) Severance. The Company shall continue to pay (in accordance with its normal payroll procedures) the Base Salary to the Executive (or the Executive’s estate if the Executive dies after termination of employment) for the greater of (i) the remainder of the Term or (ii) the period for which the Executive would be entitled to severance under the Company’s severance policy in existence at the time of the Executive’s termination (“Severance Period”).

          (ii) Benefits. During the first twelve (12) months of the Severance Period or if the Severance Period is less than twelve (12) months, until the end of the Severance Period, the Executive shall continue to receive the fringe benefits provided under Section 2(d) hereof, provided that the continued participation of the Executive under any benefit plan including, without limitation, group healthcare, dental and life insurance is possible under the general terms and provisions of such plans. Such twelve (12) months or shorter period of coverage shall count against Executive’s eligibility period under COBRA. If the Executive’s participation in any such plan is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive would otherwise have been entitled to receive under such plan or, alternatively at the option of the Company, reimburse

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the Executive for the reasonable actual costs of purchasing in the marketplace substantially similar benefits; provided, however, that in either case the Executive shall pay to the Company, or provide a credit against the Company’s reimbursement obligation for, the amount equal to the premiums, or portion thereof, that the Executive was required to pay to maintain such benefits prior to the date of termination of employment. Notwithstanding anything to the contrary contained herein, the Executive shall be entitled to participate in the Company’s Executive Car Program in effect for the Executive immediately prior to the Severance Period only until the earlier of (x) the second anniversary of the Executive’s then current car lease, or (y) the end of the Severance Period. The Executive shall return any Company vehicle provided to him under the Executive Car Program to the Company or its designee upon the expiration of his Executive Car Program benefits as described in the foregoing sentence.

          (iii) Offset. The payments which would have been due and payable in accordance with Section 5(c)(i) hereof shall be reduced by an amount equal to any amounts that the Executive receives in connection with any other employment, consultancy arrangement or similar source of income (each, an “Income Source”) during the Severance Period. Any fringe benefits received by or available to the Executive from or in connection with any Income Source that are reasonably comparable, but not necessarily as financially or otherwise beneficial to the Executive as the fringe benefits then being provided by the Company pursuant to Section 5(c)(ii) hereof, shall be deemed to be the equivalent thereof and shall terminate the Company’s responsibility to continue providing the fringe benefits then being provided by the Company pursuant to Section 5(c)(ii) hereof.

          (d) Termination Following Disability. In the event that the Executive’s employment is terminated due to a Disability Event as provided in Section 4(e), the Executive shall be entitled to continue to receive his salary and benefits (subject to the conditions regarding such benefits specified in Section 5(c)(ii) and 5(c)(iii) above) under Section 2 of this Agreement for a period of twelve (12) months after the date of such termination.

          (e) Complete Compensation. Except as specifically provided for in this Section 5 and Section 4(f) above, the Executive shall be entitled to no additional salary, benefits or other compensation following the termination of his employment.

     6. Effect of Change of Control.

          (a) If within two (2) years following a “Change of Control” (as hereinafter defined), the Executive terminates his employment with the Company for Good Reason (as hereinafter defined) or the Company terminates the Executive’s employment for any reason other than Cause or a Disability Event, the Company shall pay to the Executive, in the case of clauses (i), (ii) and (iv), and make available to the Executive, in the case of clause (iii):

          (i) an amount equal to three (3) times the Executive’s Base Salary as of the date of termination;

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          (ii) an amount equal to three (3) times the average annual cash bonus paid to the Executive for the two (2) fiscal years immediately preceding the date of termination;

          (iii) all benefits under the Company’s various benefit plans, including group healthcare, dental, life and the Company’s Executive Car Program for the period equal to thirty-six (36) months from the date of termination, provided that the continued participation of the Executive is possible under the general terms and provisions of such plans. If the Executive’s participation in any such plan is barred, the Company shall arrange to provide the Executive with benefits substantially similar to those which the Executive would otherwise have been entitled to receive under such plan or, alternatively at the option of the Company, reimburse the Executive for the reasonable actual costs of purchasing in the marketplace substantially similar benefits; provided, however, that in either case the Executive shall pay to the Company, or provide a credit against the Company’s reimbursement obligation for, the amount equal to the premiums, or portion thereof, that the Executive was required to pay to maintain such benefits prior to the date of termination of employment. Further, any insurance or other benefits and benefits coverage provided pursuant hereto shall be limited and reduced to the extent such coverage or benefits are otherwise provided by or available to the Executive from or in connection with any Income Source; and

          (iv) a lump sum payment equal to the actuarial equivalent (determined by the Company in good faith with assistance of its accountants or actuaries), of the benefit which would have accrued under the Zale Delaware, Inc. Supplemental Executive Retirement Plan (“SERP”) if:

               (1) the Executive remained a participant in the SERP for the three (3) year period commencing on the first day of the SERP’s plan year (“Plan Year”) in which the Executive’s employment with the Company terminated (“Measurement Period”);

               (2) during each Plan Year in the Measurement Period the Executive earned benefit points equal to the highest number of the benefit points earned by such Executive in a Plan Year during the three (3) year period ending on the last day of the Plan Year immediately preceding the Plan Year in which his employment with the Company terminated; and

               (3) the Executive’s final average pay during the Measurement Period is the greater of his monthly Base Salary on the date of (a) a Potential Change of Control, (b) the Change of Control or (c) the date of his termination of employment;

provided, however, that the amount paid to Executive pursuant to this clause (iv) shall not exceed his accrued benefit under the SERP as of December 31, 2004, except to the extent that such excess is pursuant to a new supplemental executive retirement plan adopted by the Company subsequent to such date.

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          (b) “Change of Control” shall mean the date as of which:

          (i) there shall be consummated:

               (1) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company’s common stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company’s common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger; or

               (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company;

          (ii) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company;

          (iii) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)), shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 30% of the Company’s outstanding common stock; or

          (iv) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the entire board of directors of the Company shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company’s stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.

          (c) “Good Reason” shall mean any of the following actions taken by the Company without the Executive’s written consent after a Change of Control:

          (i) the assignment to the Executive by the Company of duties materially inconsistent with, or the material reduction, other than due solely to the fact that the Company no longer is a publicly traded company, of the powers and functions associated with, the Executive’s position, duties, responsibilities and status with the Company immediately prior to a Change of Control or Potential Change of Control (as defined below), or a material adverse change in the Executive’s titles or offices as in effect immediately prior to a Change of Control or Potential Change of Control, or any removal of the Executive from or any failure to re-elect the Executive to any of such positions, except in connection with the termination of his employment (A) by the Company for a Disability Event or Cause or as a result of the Executive’s death or (B) by the Executive other than for the reasons set forth in this section (6)(c)(i)-(vii);

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          (ii) a reduction by the Company in the Executive’s Base Salary as in effect on the date of a Change of Control or Potential Change of Control;

          (iii) the Company’s principal executive offices shall be moved to a location outside the Dallas/Fort Worth, Texas Metroplex area;

          (iv) the Company shall require the Executive to be based anywhere other than at the Company’s principal executive offices or the location where the Executive is based on the date of a Change of Control or Potential Change of Control, or if the Executive agrees to such relocation, the Company fails to reimburse the Executive for moving and all other expenses incurred with such move;

          (v) the Company shall fail to continue in effect any Company-sponsored plan that is in effect on the date of a Change of Control or Potential Change of Control (or one or more replacement plans therefor that in the aggregate provide the same or more favorable benefits), that provides (A) incentive or bonus compensation, (B) reimbursement for reasonable expenses incurred by the Executive in connection with the performance of duties with the Company, and (C) pension benefits such as a Code Section 401(k) plan;

          (vi) any material breach by the Company of any provision of this Agreement; and

          (vii) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company effected in accordance with the provisions of this Section 6.

          (d) “Potential Change of Control” shall mean the date as of which:

          (i) the Company enters into an agreement the consummation of which, or the approval by stockholders of which, would constitute a Change of Control;

          (ii) proxies for the election of Directors of the Company are solicited by anyone other than the Company;

          (iii) any person (including, but not limited to, any individual, partnership, joint venture, corporation, association or trust) publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change of Control; or

          (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board and the Board adopts a resolution to the effect that a Potential Change of Control has occurred.

          (e) In the event that:

          (i) the Executive would otherwise be entitled to the compensation and benefits described in Section 6(a) hereof (“Compensation Payments”); and

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          (ii) the Company determines, based upon the advice of tax counsel selected by the Company’s independent auditors and acceptable to the Executive, that, as a result of such Compensation Payments and any other benefits or payments required to be taken into account under Code Section 280G(b)(2) (“Parachute Payments”), any of such Parachute Payments would be reportable by the Company as “excess parachute payments,” such Compensation Payments shall be reduced to the extent necessary to cause the Executive’s Parachute Payments to equal 2.99 times the “base amount” as defined in Code Section 280G(b)(3) with respect to such Executive. However, such reduction in the Compensation Payments shall be made only if, in the opinion of the Company, based upon the advice of such tax counsel, it would result in a larger Parachute Payment to the Executive than payment of the unreduced Parachute Payments after deduction of tax imposed on and payable by the Executive under Section 4999 of the Code (“Excise Tax”). The value of any non-cash benefits or any deferred payment or benefit for purposes of this paragraph shall be determined by the Company’s independent auditors.

          (f) Unless the Company determines that any Parachute Payments made hereunder must be reported as “excess parachute payments” in accordance with Section 6(e) above, neither party shall file any return taking the position that the payment of such benefits constitutes an “excess parachute payment” within the meaning of Section 280G(b)(1) of the Code.

          (g) The parties hereto agree that the payments provided under Section 6(a), as may be adjusted pursuant to Section 6(e), are reasonable compensation in light of the Executive’s services rendered to the Company.

     7. Section 409A. It is expressly contemplated by the parties that this Agreement will conform to, and be interpreted to comply with, Section 409A of the Code. Unless expressly provided otherwise, all of the payments due to Executive under Sections 5 or 6 will be made within fifteen (15) days following the date of termination; provided, however, that if, under Section 409A of the Code, such payments must be delayed to conform with the applicable tax rules, the Company will defer any such payment until no later than one day following the first date upon which such payment may be made without incurring the tax imposed thereunder; provided, further, that if Executive incurs any additional tax, interest or penalties under Section 409A despite such deferral, the Company will pay Executive an additional amount so that, after all taxes on such amount, Executive has an amount equal to such additional tax.

     8. Complete Release. The Executive acknowledges and agrees that he will not receive any of the payments described in Sections 5 and 6 above unless the Executive signs and returns to the Company a full and complete release of any and all claims that the Executive or his estate, heirs or assigns may have against the Company, its subsidiaries and affiliates and its and their officers, directors, employees and agents in a form acceptable to and provided by the Company at or around the time of the Executive’s termination.

     9. Non-Competition. As a material inducement for the Company’s promise to provide the trade secrets and confidential and proprietary information described in Section 11 below, the Executive agrees that during the Term and for a period of three (3) years from the date of cessation or termination of the Executive’s employment with the Company for any reason whatsoever, he will

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not, directly or indirectly, compete with the Company by providing services to any other person, partnership, association, corporation, or other entity that is in a “Competing Business.” As used herein, a “Competing Business” is any business that engages in whole or in part in the retail sale of jewelry in the United States and/or Puerto Rico, including, but not limited to, specialty jewelry retailers and other retailers having jewelry divisions or departments, and the Executive’s employment function or affiliation with the Competing Business is directly or indirectly related to such business of jewelry. The restrictions contained in this Section 9 shall be tolled on a day-for-day basis for each day during which the Executive participates in any activity in violation of such restrictions. The parties agree that the above restrictions on competition are completely severable and independent agreements supported by good and valuable consideration and, as such, shall survive the termination of this Agreement for whatever reason. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on competition shall not render invalid or unenforceable any remaining restrictions on competition. Additionally, should a court of competent jurisdiction determine that the scope of any provision of this Section 9 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

     10. No Hire/Non-Solicitation of Employees. During the Term and for a period of three (3) years after the termination or cessation of his employment with the Company for any reason whatsoever, the Executive shall not, on his own behalf or on behalf of any other person, partnership, association, corporation, or other entity, (a) directly, indirectly, or through a third party hire or cause to be hired; (b) directly, indirectly or through a third party solicit; or (c) in any manner attempt to influence or induce any employee of the Company or its subsidiaries or affiliates to leave the employment of the Company or its subsidiaries or affiliates, nor shall he use or disclose to any person, partnership, association, corporation or other entity any information obtained concerning the names and addresses of the Company’s employees. The restrictions contained in this Section 10 shall be tolled on a day-for-day basis for each day during which the Executive participates in any activity in violation of such restrictions. The parties agree that the above restrictions on hiring and solicitation are completely severable and independent agreements supported by good and valuable consideration and, as such, shall survive the termination of this Agreement for whatever reason. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on hiring and solicitation shall not render invalid or unenforceable any remaining restrictions or hiring and solicitation. Additionally, should a court of competent jurisdiction determine that the scope of any provision of this Section 10 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

     11. Nondisclosure of Trade Secrets. The Company promises to disclose to the Executive and the Executive acknowledges that in and as a result of his employment by the Company, he will receive, make use of, acquire, have access to and/or become familiar with various trade secrets and proprietary and confidential information of the Company, its subsidiaries and affiliates, including, but not limited to, processes, computer programs, compilations of information, records, financial information, sales reports, sales procedures, customer requirements, pricing techniques, customer lists, methods of doing business, identities, locations, performance and compensation levels of employees and other confidential information (collectively, “Trade Secrets”) which are owned by

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the Company, its subsidiaries and/or affiliates and regularly used in the operation of its business, and as to which the Company, its subsidiaries and/or affiliates take precautions to prevent dissemination to persons other than certain directors, officers and employees. The Executive acknowledges and agrees that the Trade Secrets:

          (a) are secret and not known in the industry;

          (b) give the Company or its subsidiaries or affiliates an advantage over competitors who do not know or use the Trade Secrets;

          (c) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and

          (d) are valuable, special and unique assets of the Company or its subsidiaries or affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to the Company or its subsidiaries or affiliates.

          The Executive promises not to use in any way or disclose any of the Trade Secrets and confidential and proprietary information, directly or indirectly, either during or after the Term, except as required in the course of his employment under this Agreement, if required in connection with a judicial or administrative proceeding, or if the information becomes public knowledge other than as a result of an unauthorized disclosure by the Executive. All files, records, documents, information, data and similar items relating to the business of the Company, whether prepared by the Executive or otherwise coming into his possession, will remain the exclusive property of the Company and may not be removed from the premises of the Company under any circumstances without the prior written consent of the Company (except in the ordinary course of business during the Executive’s period of active employment under this Agreement), and in any event must be promptly delivered to the Company upon termination of the Executive’s employment with the Company. The Executive agrees that upon his receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, whether received during or after the term of the Executive’s employment with the Company, the Executive shall timely notify and promptly hand deliver a copy of the subpoena, process or other request to the Company. For this purpose, the Executive irrevocably nominates and appoints the Company (including any attorney retained by the Company), as his true and lawful attorney-in-fact, to act in the Executive’s name, place and stead to perform any act that the Executive might perform to defend and protect against any disclosure of any Trade Secrets.

     The parties agree that the above restrictions on confidentiality and disclosure are completely severable and independent agreements supported by good and valuable consideration and, as such, shall survive the termination of this Agreement for whatever reason. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on confidentiality and disclosure shall not render invalid or unenforceable any remaining restrictions on confidentiality and disclosure. Additionally, should a court of competent jurisdiction determine that the scope of any provision of this Section 11 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

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     12. Non-Disparagement. The Executive expressly acknowledges, agrees, and covenants that he will not make any public or private statements, comments, or communications in any form, oral, written, or electronic (all of the foregoing, for purposes of this paragraph, “Communications”), which in any way could constitute libel, slander, or disparagement of the Company, its subsidiaries, affiliates or parent, its and/or their employees, officers, and/or directors, or which may be considered to be derogatory or detrimental to its or their good name or business; provided, however, that the terms of this paragraph shall not (a) apply to Communications between the Executive and his spouse, clergy, or attorneys, which are subject to a claim of privilege existing under common law, statute, or rule of procedure; (b) apply to Communications required by law or made in response to a valid subpoena or other lawful order compelling the Executive to provide testimony or information; provided, however, that in responding to a valid subpoena or other lawful order, the Executive agrees to provide the Company with advance notice and an opportunity to seek a protective order or other safeguard for its confidential information; or (c) be construed to inhibit or limit the Executive’s ability to initiate or cooperate with any investigation by a governmental or regulatory agency or official. The Executive specifically agrees not to issue any public statement concerning his employment at Zale and/or the cessation of such employment.

     13. Executive Representations and Agreements. The Executive agrees that the Executive and the Company are engaged in a highly competitive business and, due to the Executive’s position with the Company and the nature of the Executive’s work, the Executive’s engaging in any business which is competitive with that of the Company will cause the Company great and irreparable harm. The Executive represents and warrants that the time, scope and geographic area restricted by the foregoing paragraph(s) pertaining to no hire/non-solicitation, non-competition, confidentiality and nondisclosure, and non-disparagement are reasonable, that the enforcement of the restrictions contained in the foregoing paragraphs would not be unduly burdensome to the Executive, and that the Executive will be able to earn a reasonable living while abiding by the terms included herein. The Executive agrees that the restraints created by the covenants in the foregoing paragraph(s) pertaining to no hire/non-solicitation, non-competition, confidentiality and nondisclosure, and non-disparagement are no greater than necessary to protect the legitimate interests of the Company, including its confidential business or proprietary information and trade secrets, including but not limited to, the Trade Secrets. Similarly, the Executive agrees that the need of the Company for the protection afforded by the covenants of the foregoing paragraphs pertaining to no hire/non-solicitation, non-competition, confidentiality and nondisclosure, and non-disparagement are not outweighed by either the hardship to the Executive or any injury likely to the public. The Executive agrees that any breach by him of the foregoing provisions pertaining to no hire/non-solicitation, non-competition, confidentiality and nondisclosure, and non-disparagement will entitle the Company to discontinue any payments specified in Sections 2, 5 or 6, above, for which the Executive might be eligible based on the terms of those Sections. Notwithstanding the suspension or discontinuation of any such payments, the Executive agrees that the Company is entitled to insist on full compliance by the Executive with the full terms, including time periods, described in his promises not to hire/solicit, compete, disclose confidential information or Trade Secrets or disparage. Any delay by the Company in discontinuing payment shall not be construed as a waiver of any rights to discontinue payment. Executive consents to the freezing of his benefits under the SERP as of December 31, 2004.

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     14. Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never constituted a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance here from. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added as part of this Agreement, a provision as similar in its terms to such illegal, invalid or enforceable provision as may be possible and be legal, valid and enforceable.

     15. Arbitration.

          (a) The Parties agree that any controversy or claim (including all claims pursuant to common and statutory law) relating to this Agreement or arising out of or relating to the subject matter of this Agreement shall be resolved exclusively through binding arbitration. Subject to the terms and any exceptions provided in this Agreement, the parties each waive the right to a jury trial and waive the right to adjudicate their disputes under this Agreement outside the arbitration forum provided for in this Agreement. The arbitration shall be administered by a single neutral arbitrator, specializing in employment law and admitted to practice law in Texas for ten (10) years or more with JAMS in accordance with its then-current applicable rules and procedures. Any such arbitration proceeding shall take place in Dallas County, Texas and shall be administered by the JAMS Dallas office. The arbitrator will have the authority to award the same remedies, damages and costs that a court could award. The arbitrator shall issue a reasoned award explaining the decision, the reasons for the decision and any damages awarded. The arbitrator’s decision will be final and binding. The judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. This provision can be enforced under the Federal Arbitration Act.

          (b) As the sole exception to the exclusive and binding nature of the arbitration commitment set forth above, the Executive and the Company agree that the Company shall have the right to initiate an action in a court of competent jurisdiction in order to request temporary, preliminary and permanent injunctive or other equitable relief, including, without limitation, specific performance, to enforce the terms of Sections 9, 10, 11, 12 or 13 or above without the necessity of proving inadequacy of legal remedies or irreparable harm or posting bond. However, nothing in this section should be construed to constitute a waiver of the parties’ rights and obligations to arbitrate regarding matters other than those specifically addressed in this paragraph.

          (c) Should a court of competent jurisdiction determine that the scope of any provision of this Section 15 is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

     16. Survival. The Executive acknowledges and agrees that this Agreement, including but not limited to Sections 9, 10, 11, 12, 13, 14, 15, 17(a) and 17(d), shall survive the termination of the Executive’s employment under this Agreement for whatever reason. The existence of any claim or cause of action of the Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the

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covenants of the Executive contained in this Agreement, including but not limited to those contained in Sections 9, 10, 11, 12, 13 and 15.

     17. Miscellaneous.

          (a) Notices. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other must be in writing and must be either:

          (i) personally delivered;

          (ii) mailed by registered or certified mail, postage prepaid with return receipt requested;

          (iii) delivered by overnight express delivery service or same-day local courier service; or

          (iv) delivered by telex or facsimile transmission, to the address set forth below, or to such other address as may be designated by the parties from time to time in accordance with this Section 17(a):

If to the Company:	Zale Delaware, Inc.
	901 W. Walnut Hill Lane
	Irving, Texas 75038
	Attention:Chief Executive Officer
with a copy to:	General Counsel
If to Executive:	Mr. Frank C. Mroczka
	2705 Wisdom Creek Drive Flower Mound, Texas 75022

     Notices delivered personally or by overnight express delivery service or by local courier service are deemed given as of actual receipt. Notices mailed within the continental United States are deemed given three business days after mailing. Notices delivered by telex or facsimile transmission are deemed given upon receipt by the sender of the answer back (in the case of a telex) or transmission confirmation (in the case of a facsimile transmission).

          (b) Entire Agreement. This Agreement supersedes any and all other agreements, either oral or written, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect to the subject matter of this Agreement.

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          (c) Modification. No change or modification of this Agreement is valid or binding upon the parties, nor will any waiver of any term or condition in the future be so binding, unless the change or modification or waiver is in writing and signed by the parties to this Agreement.

          (d) Governing Law and Venue. The parties acknowledge and agree that this Agreement and the obligations and undertakings of the parties under this Agreement will be performable in Irving, Dallas County, Texas. This Agreement is governed by, and construed in accordance with, the laws of the State of Texas. If any action is brought to enforce or interpret this Agreement, venue for the action will be in Dallas County, Texas.

          (e) Counterparts. This Agreement may be executed in counterparts, each of which constitutes an original, but all of which constitutes one document.

          (f) Costs. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, each party shall bear its own costs and expenses.

          (g) Estate. If the Executive dies prior to the expiration of the Term or during a period when monies are owing to him, any monies that may be due him from the Company under this Agreement as of the date of his death shall be paid to his estate and as when otherwise payable.

          (h) Assignment. The Company shall have the right to assign this Agreement to its successors or assigns. The terms “successors” and “assigns” shall include any person, corporation, partnership or other entity that buys all or substantially all of the Company’s assets or all of its stock, or with which the Company merges or consolidates. The rights, duties and benefits to the Executive hereunder are personal to him, and no such right or benefit may be assigned by him.

          (i) Binding Effect. This Agreement is binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and permitted assigns.

          (j) Waiver of Breach. The waiver by the Company or the Executive of a breach of any provision of this Agreement by the Executive or the Company may not operate or be construed as a waiver of any subsequent breach.

[Remainder of page intentionally blank]

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     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

By:	/s/ Frank C. Mroczka
		Frank C. Mroczka
	ZALE DELAWARE, INC.
	By:	/s/Betsy Burton
	Its:	CEO

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EX-10.18

EXHIBIT 10.18

Zale Corporation has requested confidential treatment for certain portions of this document pursuant to an application for confidential treatment sent to the Securities and Exchange Commission. Zale Corporation has omitted such portions from this filing and filed them separately with the Securities and Exchange Commission. Such omissions are designated “[**].”

ZALE CORPORATION BONUS PLAN
(As of August 1, 2006)

Zale Corporation is committed to building and maintaining quality management and to encouraging maximum focus on business environment. This Plan has been developed to allow all eligible management the opportunity to receive an annual bonus based on our success.

Payouts under this Plan are intended to constitute “qualified performance-based compensation” for purposes of Section 162(m) of the Internal Revenue Code.

ELIGIBILITY	Management of Zale Corporation, as selected by the Compensation Committee.
MEASURES	The Management Bonus Plan has three Components:
AND WEIGHTING	1. Annual Company Performance Bonus is based on the following performance measures:

	Consolidated	Brand
Organization	Net Income	Operating Earnings
Corporate	50%	50%
Brand	20%	80%

Consolidated net income and Brand operating earnings targets shall be established by the Compensation Committee of Zale Corporation’s Board of Directors (the “Compensation Committee”) on an annual basis prior to the commencement of a fiscal year, except to the extent permitted by Section 162(m) to be established subsequently.

Following are the payout percentages:

•	Threshold/minimum	50	%
•	Target/Plan	100	%
•	Stretch	200	%

2.   The Quarterly Comparable Store Sales Bonus performance measures are:

[**]

	3. Stretch Achievement Pool
	• 10% Net Income over Stretch will be pooled and distributed based on individual percent payout
BONUS OPPORTUNITY	The Compensation Committee shall establish one or more bonus opportunities between 5% and 150%. The bonus opportunities may be applicable either to classes of employees, such as Brand Presidents or to individual employees, as the Compensation Committee may determine.
MAXIMUM PAYOUT	No employee shall be entitled to receive a bonus of more than $2,000,000 with respect to a fiscal year.

ADDITIONAL ELIGIBILITY REQUIREMENTS	•	Must have joined Zale Corporation in a bonus eligible position on or before February 1st of the applicable fiscal year. A pro-rated payout will be based on earnings in the eligible position through July 31st of the applicable fiscal year.
	•	Must be actively on payroll, or on an approved leave of absence, on July 31st of the applicable fiscal year.
	•	If promoted to bonus eligible position on or before February 1st of a fiscal year, bonus will be pro-rated based on earnings in the eligible position through July 31st of the applicable year.
	•	If changed to non-bonus eligible position after February 1st of a fiscal year, but on active payroll on July 31st of the applicable fiscal year, bonus will be pro-rated based upon earnings in the eligible position.
	•	Participants terminated due to a broadly based reduction in force after February 1st of a fiscal year will be eligible for a pro-rated payout based upon earnings in a bonus eligible position. Those terminated due to a broadly based reduction in force before February 1st of a fiscal year and those terminated for any other reason during the fiscal year will not be eligible to receive a bonus payout.
	•	In the event of death, approved long-term disability or approved retirement prior to February 1st of a fiscal year, a pro-rated payment will be made to the participant or the participant’s estate based upon earnings in a bonus eligible position.
	•	Participants will be notified of their eligibility level at the beginning of the fiscal year or when they become bonus eligible. A Bonus Participant Agreement in such form as Zale Corporation shall approve must be signed at that time.
	•	A participant who received an overall “IR” rating for the previous fiscal year will not be eligible. The last performance rating on file will determine eligibility to receive the Management Bonus.

ADMINISTRATION	•	Management, for purposes of eligibility for participation in this plan, shall include the Chief Executive Officer, President, any vice president, any director level, and any manager level employee (or the equivalents thereto even if designated by a different title) of Zale Corporation and its subsidiaries.
	•	The Compensation Committee may, at its sole discretion, adjust bonus awards to reflect special or unusual circumstances of any individual or individuals
	•	Any employee on an approved leave of absence may, at the Compensation Committee’s sole discretion, have his or her bonus reduced, pro rata, to reflect the period of absence.
	•	All bonuses pursuant to this plan must be approved by the Compensation Committee.
	•	Payouts will occur within 60 days following the end of the fiscal year to which the bonuses were earned.
	•	At its election, prior, during or following completion of a fiscal year, the Compensation Committee may pay bonuses with respect to such fiscal year in Zale Corporation common stock.
	•	This plan may be implemented using one or more documents designated for classes of employees or individual employees
	•	This plan shall be interpreted and administered in a manner consistent with the awards hereunder constituting “qualified performance-based compensation” for purposes of Section 162(m) of the Internal Revenue Code.
	Zale Corporation reserves the right to amend, modify, suspend or terminate this plan and payouts hereunder in its sole discretion, provided that stockholder approval shall be sought with respect to any amendment that, absent stockholder approval, would negatively impact the status of payouts under this plan for purposes of Section 162(m) of the Internal Revenue Code.
	Nothing in this plan shall be construed as a contract of employment.

EX-10.21

Exhibit 10.21

BASE SALARY AND TARGET BONUS
FOR THE NAMED EXECUTIVE OFFICERS

     The following table sets forth the annual base salaries and of the Chief Executive Officer and the four other most highly compensated executive officers of Zale Corporation (the “Company”) for the fiscal year ending July 31, 2006, and the target bonus for each such executive officer under the Company’s executive bonus program as a percentage of annual base salary.

Name	Base Salary		Target Bonus %
Mary E. Burton	$	850,000		125	%
President and Chief Executive Officer
George R. Mihalko, Jr.	$	650,000		0	%
Acting Chief Administrative Officer and Acting Chief Financial Officer
John A. Zimmermann	$	400,000		75	%
Group President and President, Zale North America
Gilbert P. Hollander	$	300,000		60	%
Group Senior Vice President and President, Corporate Sourcing/Piercing Pagoda
Frank C. Mroczka	$	300,000		45	%
Senior Vice President and President, Gordon’s Jewelers

     For additional information regarding the compensation of the Company’s executive officers, please refer to the information under the heading “Executive and Director Compensation” in the Company’s Definitive Proxy Statement on Schedule 14A, which has been filed with the Securities and Exchange Commission

EX-21

EXHIBIT 21

SUBSIDIARIES OF THE COMPANY

The following companies are subsidiaries of Zale Corporation (1):

Zale Delaware, Inc. (1)

Zale International, Inc. (1)

The following are subsidiaries of Zale Delaware, Inc.:

Zale Puerto Rico, Inc. (2)

Dobbins Jewelers, Inc. (3)

Jewelers Financial Services, Inc. (1)

Zale Life Insurance Company (4)

Zale Indemnity Company (5)

Jewel Re-Insurance Ltd. (6)

Zale Employees Child Care Association, Inc. (5)

Jewelers Credit Corporation (1)

ZAP, Inc. (1)

TXDC, LP (DDCC, Inc. Limited Partner) (5)

DDCC, Inc. (1)

The following companies are subsidiaries of Zale International, Inc.:

Zale Canada Holding, LP (Zale Corporation, Limited Partner) (7)

FINCO Holding, LP (Zale Canada Holding LP, Limited Partner) (7)

FINCO Partnership, LP (FINCO Holding LP, Limited Partner) (7)

The following company is a subsidiary of FINCO Holding, LP:

Zale Canada Co. (8)

The following company is a subsidiary of Zale Canada Co.:

Zale Canada Diamond Sourcing, Inc. (8)

State / Province / Country of Organization:
(1) Delaware
(2) Puerto Rico
(3) Guam
(4) Arizona
(5) Texas
(6) Barbados
(7) New Brunswick, Canada
(8) Nova Scotia, Canada

EX-23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Zale Corporation:

We consent to the incorporation by reference in the registration statement (No. 333-67527, 333-51607, 333-20673, 333-01789, 333-87782, 333-53802, 333-53804, 333-117249, and 333-130246) on Form S-8 of Zale Corporation and subsidiaries of our report dated October 12, 2006, with respect to the consolidated balance sheets of Zale Corporation and subsidiaries as of July 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ investment, and cash flows for each of the years in the three-year period ended July 31, 2006, which report appears in the July 31, 2006, annual report on Form 10-K of Zale Corporation. Our report refers to the adoption of Statement of Financial Accounting Standard No. 123 (revised 2004), Share Based Payment.

Our report dated October 12, 2006, on management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting as of July 31, 2006, expresses our opinion that the Company did not maintain effective internal control over financial reporting as of July 31, 2006, because of the effect of material weaknesses on the achievement of the objectives of the control criteria and contains an explanatory paragraph that states that the following material weakness has been identified and included in management’s assessment as of July 31,2006:

• The Company did not maintain effective internal controls to ensure the accounting for certain derivative financial instrument in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). Specifically, the Company had inadequate policies and procedures in place to ensure compliance with the documentation requirements of SFAS 133 at inception of the hedge relationship and failed to properly assess effectiveness and measure ineffectiveness at inception and on a quarterly basis. In addition, the Company did not have resources with sufficient technical experience related to the application of the provisions of SFAS 133. These deficiencies resulted in errors related to the recognition and classification of gains and losses on certain derivative financial instruments in the Company’s financial statements. This deficiency results in more than a remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected.

KPMG LLP

Dallas, Texas
October 12, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Mary E. Burton, certify that:

1.	I have reviewed this annual report on Form 10-K of Zale Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 12, 2006	By:	/s/ Mary E. Burton
		Mary E. Burton President and Chief Executive Officer, Director (principal executive officer of the registrant)

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, George R. Mihalko, Jr., certify that:

1.	I have reviewed this annual report on Form 10-K of Zale Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ George R. Mihalko, Jr.
Date: October 12, 2006		George R. Mihalko, Jr.
		Chief Financial Officer, Chief Administrative Officer, and Director (principal financial officer of the registrant)

EX-32.1

EXHIBIT 32.1

Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

     The undersigned, as the Chief Executive Officer of Zale Corporation, certifies, to the best of her knowledge, that the Annual Report on Form 10-K for the fiscal year ended July 31, 2006, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Zale Corporation at the dates and for the periods indicated. The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose.

This 12th day of October, 2006	By:	/s/ Mary E. Burton
		Mary E. Burton President and Chief Executive Officer, Director (principal executive officer of the registrant)

EX-32.2

EXHIBIT 32.2

Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

     The undersigned, as the Chief Financial Officer of Zale Corporation, certifies, to the best of his knowledge, that the Annual Report on Form 10-K for the fiscal year ended July 31, 2006, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Zale Corporation at the dates and for the periods indicated. The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose.

This 12th day of October, 2006.	By:	/s/ George R. Mihalko, Jr.
		George R. Mihalko, Jr Chief Financial Officer, Chief Administrative Officer, and Director (principal financial officer of the registrant)

EX-99.2

EXHIBIT 99.2

ZALE CORPORATION
COMPENSATION COMMITTEE CHARTER
(As of August 2006)

Purposes

     The primary purposes of the Compensation Committee are to (1) oversee the compensation of the Company’s officers, (2) approve and recommend to the Board the Company’s policies, programs, procedures and objectives for compensating its officers and key employees and (3) administer the Company’s equity based incentive compensation plans. Its responsibilities in that regard include:

• Monitoring compensation practices at other companies generally and in the retail industry in particular;

• Establishing corporate goals and objectives with respect to compensation; and

• Overseeing the Company’s compensation setting practices.

     In discharging its duties, the Committee is empowered to investigate any matter brought to its attention with full access to all Company books, records, facilities, personnel, legal counsel and independent auditors, along with the sole power to retain and terminate outside counsel or other experts for this purpose and to approve their fees and other retention terms.

     The Committee shall review the adequacy of this charter on an annual basis and recommend any appropriate changes to the Board for consideration.

Membership

     Appointment and Removal. The Committee shall be appointed by the Board and shall serve at the pleasure of the Board for such term as the Board may decide or, with respect to an individual Committee member, until such Committee member is no longer a Board member. The Board shall designate the chairperson of the Committee.

     Number and Meetings. The Committee shall be comprised of not less than three members of the Board. The Committee shall meet as often as necessary to fulfill its responsibilities.

     Independence. The Committee members will each qualify as (1) an “independent director” under the rules of the New York Stock Exchange, (2) an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code of 1986 and (3) a “non-employee director” within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, in each case as such requirements may be interpreted or amended from time-to-time by the promulgating authority. These requirements as currently in effect are summarized in Annex A hereto. Accordingly, the members of the Committee will be directors who the Board affirmatively concludes have no material relationship to the Company, as determined by the Board, either

directly or as a partner, shareholder or officer of any organization that has a relationship with the Company.

     The failure of the Committee to satisfy the independence requirements set forth above shall not invalidate any actions taken by the Committee.

Responsibilities

     The following functions shall be the common, recurring activities of the Committee in carrying out its duties.

     1. Executive Compensation Policies and Programs. The Committee shall review, approve and administer the Company’s compensation policies and programs for officers and key employees.

     2. Director Compensation. The Committee shall periodically review the status of Board compensation policies and shall discuss the results of such review with the Board. The Committee shall not, however, have the authority to approve or determine director compensation.

     3. Approval of Newly-Hired and Promoted Officers. The Committee shall review and approve the hiring of officers and the promotion of employees to officer positions. Notwithstanding the foregoing, the Board must approve the hiring of a Chief Executive Officer or the promotion of an individual to that position.

     4. Chief Executive Officer Compensation. The Committee, acting together with any other independent directors who have advised the Chairperson of the Committee that they would like to participate, shall (a) review and approve any employment agreements or arrangements with the Chief Executive Officer of the Company, (b) review and approve, at least annually, corporate goals and objectives relevant to the compensation of the Chief Executive Officer, (c) evaluate the performance of the Chief Executive Officer in light of those corporate goals and objectives, and (d) have sole authority to determine and approve the compensation level of the Chief Executive Officer. The Committee shall report the determination of the Chief Executive Officer’s compensation to the Board.

     5. Non-CEO Compensation. The Committee shall (a) review and approve any employment agreements or arrangements with the non-CEO officers of the Company, and (b) review and approve the compensation levels of non-CEO officers. The Committee shall report the determination of the non-CEO officers’ compensation to the Board.

     6. Incentive Compensation Plans. The Committee shall review and approve incentive compensation plans (including the guidelines and rules thereunder) and the grants thereunder. The Committee shall report the determination of the incentive compensation plans and the grants thereunder to the Board.

     7. Equity-Based Plans. The Committee shall review and approve equity based plans (including the guidelines and rules thereunder) and the grants thereunder. The Committee shall report the determination of the equity based plans and the grants thereunder to the Board.

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     8. Certain Other Plans. Unless expressly provided otherwise, the Committee shall administer the Company’s equity based incentive compensation plans and other plans adopted by the Board that contemplate administration by a Board committee; provided, however, that, absent express approval of the Board, the Committee will not administer or have oversight of the administration of any employee benefit plan subject to the Employee Retirement Income Security Act.

     9. Regulatory Compliance. The Committee shall, in consultation with appropriate officers of the Company, oversee regulatory compliance with respect to compensation matters, including overseeing any compensation programs intended to preserve tax deductibility and, as may be required, establishing performance goals and determining whether performance goals have been attained for purposes of Section 162(m) of the Internal Revenue Code.

     10. Proxy Statement Report. The Committee shall prepare any report by the Committee required by the rules of the Securities and Exchange Commission to be included in the Company’s annual proxy statement or annual report on Form 10-K.

     11. Review of Other Matters. The Committee shall review and discuss such other matters that relate to the accounting, auditing and financial reporting practices and procedures of the Company as the Committee may, in its own discretion, deem desirable in connection with the review functions described above.

     12. Other Duties. The Committee shall perform any other duties or responsibilities delegated to the Committee by the Board from time to time.

     13. Reports to the Board. The Committee shall report regularly to the Board.

     14. Annual Evaluation. The Committee shall conduct and review with the Board annually an evaluation of the Committee’s performance.

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Annex A
Compensation Committee
Independence Requirements

     NYSE Rules. No director qualifies as “independent” unless the Board affirmatively determines that the director has no material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company). In addition, the following directors shall not satisfy the definition of “independent”:

(i)	A director who is an employee, or whose immediate family member is an executive officer, of the Company is not independent until three years after the end of such employment relationship.
(ii)	A director who receives, or whose immediate family member receives, more than $100,000 per year in direct compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service), is not independent until three years after he or she ceases to receive more than $100,000 per year in such compensation.
(iii)	A director who is affiliated with or employed by, or whose immediate family member is affiliated with or employed in a professional capacity by, a present or former internal or external auditor of the Company is not “independent” until three years after the end of the affiliation or the employment or auditing relationship.
(iv)	A director who is employed, or whose immediate family member is employed, as an executive officer of another company where any of the Company’s present executives serve on that company’s compensation committee is not “independent” until three years after the end of such service or the employment relationship.
(v)	A director who is an executive officer or an employee, or whose immediate family member is an executive officer, of a company that makes payments to, or receives payments from, the Company for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million or 2% of such other company’s consolidated gross revenues, is not “independent” until three years after falling below such threshold.

     Internal Revenue Code. For purposes of Section 162(m) of the Internal Revenue Code, a member cannot (1) be a current employee of the Company or an affiliate, (2) be a former employee of the Company or an affiliate who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, (3) be a former officer of the Company or an affiliate or (4) receive remuneration from the Company or an affiliate, either directly or indirectly, in any capacity other than as a director. (For this purpose, remuneration includes any payment in exchange for goods or services). The foregoing four requirements shall be interpreted consistent with Treas. Reg. §1.162-27(e)(3).

     SEC Section 16. For purposes of Rule 16b-3 of the Exchange Act, no member of the Committee can (1) currently be an officer (as defined in Rule 16a-1(f) of the Exchange Act) of the Company or a subsidiary of the Company, or otherwise be currently employed by the Company or a subsidiary of the Company, (2) receive compensation, either directly or indirectly,

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from the Company or a subsidiary of the Company, for services rendered as a consultant or in any capacity other than as a director, except for an amount that does not exceed the dollar amount for which disclosure would be required pursuant to Reg. S-K, Item 404(a) of the Exchange Act, (3) possess an interest in any other transaction for which disclosure would be required pursuant to Rule 404(a) or (4) engage in a business relationship for which disclosure would be required pursuant to Rule 404(b) of the Exchange Act.

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