OVERVIEW OF THE FINANCIAL YEAR’S RESULTS We are pleased to be able to report another record result this year. This result was achieved despite difficult retail trading conditions encountered in the second half of the year and the stronger NZ dollar which also impacted negatively on translation of the Australian component of the result. During the year the company focused on finalising and consolidating the cen-tralisation changes made to the support functions of the business during the previous year.The main objective of this change was to create a simpler business model going forward to allow better growth and control of the business.

We are also pleased to report that we have realised savings of approx $500,000 before interest and tax this year as the benefits of centralisation began to wash through.These savings were achieved even though we incurred a number of additional costs and overheads associated with gearing up resources in Australia to handle the extra workload and further store expansion.

During the year the NZ warehouse was relocated to Brisbane. This was a significant achievement and now allows the replenishment of all merchandise sold in the New Zealand and Australian stores, directly from our warehouse in Brisbane. This will help deliver many benefits in the future including more effective ordering and sourcing of product from international suppliers and more effective inventory management within one warehouse.

Initially this centralisation was achieved leaving the New Zealand and Australian inventory on separate data bases; however from September 2005, both countries will merge onto a new multi-country, multi-currency version of our inventory management system.This achievement marks the completion of the long process of internationalising the company’s inventory management systems.

With the centralisation of the Australasian businesses now completed,we intend to focus our attention on Canada in the coming year. Our main priority in Canada to date has been to establish and fine tune our retail model,and to ensure it is viable in the market. As our confidence in our retail business gets stronger, it is important to now investigate whether we fully integrate our supply chain and other support functions to support more rapid growth in Canada.

In addition to this,we opened fourteen new stores across all three countries.These new stores are all trading to our expectations.We also refurbished a further 23 stores at a total cost of $2,268,000.This is inline with our strategy of lifting the brand experience for our customers.Across the group most stores are now operating in our most current design with a further 26 stores to be refurbished over the next 3 years as their leases are renewed.

This year a lot of work has also been undertaken in the human resources area.The major priority worked on during the year is to ensure we have enough people resources to meet our future growth. The result is a new talent development program for all levels of management called “Talent 2022”.

This exciting new initiative formalises the continual identification, development and monitoring of future management talent at all levels of the organization.

We have also strengthened our training resources during the year with additional personnel, and have commenced bringing identified talent from all countries into centralised assessment and development centres. This initiative will allow us to monitor the consistency of our training and development and provide a better line of sight through the different levels of our future management and their readiness. We have also recently appointed a dedicated Talent Manager in addition to our other Training and development personnel to focus entirely on this area.

SEGMENT RESULTS

This year, the company has redefined its geographical reporting segments to better reflect the financial performance of each segment.The segments now reported on reflect the performance of the companys retail operations in each segment and exclude non-core retail activities such as manufacturing,wholesale and distribution, and other general corporate expenses.The Directors believe this change will better inform the readers of the financial performance of our geographic segments. In the segment tables on the following two pages,the operating surplus numbers for 2001-2003 have not been restated to the new method of calculation.

AUSTRALIA CONTINUES GROWTH

Our Australian operation continued its strong growth trend and built even further on what was an outstanding year in 2003/04. In Australian dollars,total sales increased 10.2% to A$161,806,000 and same store sales lifted 1.6%.The operating surplus increased 12.5% to A$16,368,000 and represented 10.1% of sales. (2004 -9.9% of sales adjusted for new segment reporting).

Ten new stores were opened in Australia during the year. These stores were in the following areas:

" Bunbury Forum in Western Australia
" Casula Mall in Sydney
" Bay Village in New South Wales
" Maryborough in Queensland
" Batemans Bay in New South Wales
" Grand Central Toowoomba in Queensland
" Parkmore in Melbourne
" Raymond Terrace in New South Wales
" Mirrabooka Square in Perth
" The Pines in Melbourne.

One store was closed during the year in Canberra. In total there were 102 stores trading as at June 30 in Australia.

The company still has significant expansion opportunities left in Australia,particularly in New South Wales,Victoria,and Western Australia. Further to these,we are still to enter the South Australian market.

NEW ZEALAND'S PERFORMANCE STEADY

New Zealand faced a challenging year with total sales increasing 0.2% to $86,459,000. The Operating surplus was down slightly from $9,879,000 to $9,854,000. The surplus as a percentage of sales was even with last year at 11.4%.

One new store opened in New Zealand during the year at Glenfield Mall in Auckland. This store opened in November and is trading above expectations.

Our focus in New Zealand going forward this year is to continue to work on lifting the performance of the existing store base. We will do this through continued concentration on the basics which drive our business. This will involve increased training and development of our people and a sharper focus on customer service,sales management and coaching.

We also plan to open a further two stores during the financial year.

CANADA TAKES SHAPE

Total Sales in Canadian dollars grew by 59.5% to C$7,847,000. Same store sales increased by 5.1%. The four stores that traded for the full year reached average sales of C$1,294,000 per store,which is very encouraging. The operating loss in Canada improved from C$823,000 to C$744,720.

During the year we continued to invest in establishing the brand by spending a further one million dollars in advertising. Our brand awareness is growing with this level of expenditure and we see it as vital in creating and lifting the brands presence for the future. As we grow,this level of advertising will amortise across a larger store base and reduce as a percentage of sales.

This year we also moved to strengthen our management resources in Canada with the appointment and relocation of an experienced Regional Manager from our Australian operation.This appointment to our Canadian structure is important to support the growth of the store base in the future.

During the year we opened a further three new stores in Vancouver. These were in the following centres:

" Couquitlam Centre
" Guildford Town Centre
" Willobrook Shopping Centre.

All three stores are in large well established shopping malls and are trading well.

In the current financial year we plan to open a further six new stores in British Columbia. These will be in the Vancouver, Vancouver Island and Okanagan Valley Regions.

Although we are still progressing cautiously,we believe Canada has an exciting future.This year we will invest in organising our support functions including distribution and our supply chain so that we can source more appropriate product at more competitive prices.

International Financial Reporting Standards

Michael Hill International Ltd intends to adopt these standards early and report for the first time under these standards for the year ended 30 June 2006.

Upon adoption of NZ IFRS,comparative information presented in the financial statements will be restated to conform to the requirements of the new standards,and the financial impact of that adoption will be disclosed.

The consolidated entity has established a project team to manage the transition to NZ IRFS,including training of staff and system and internal control changes necessary to gather all the required financial information.The project team is chaired by the Chief Financial Officer, and reports to the Audit Committee.

To date, the project team has identified a number of accounting policy changes that will be required although some of these are subject to interpretation and further review before the impact on the group is fully understood.

Key differences in accounting policies identified to date include:

a)Accounting for Taxation
Under IFRS,deferred tax will be calculated using a balance sheet approach which recognizes deferred tax assets and liabilities by reference to differences between the accounting and tax values of balance sheet items rather than the accounting and tax values recognized in the Statement of Financial Performance.As a result, some timing differences previously not recognized as deferred tax may require recognition.

b)Share-based remuneration
The group issues share options to senior management personnel as a form of equity-based compensation. The groups current accounting policy does not recognize an expense in respect of these share options.

The group also issues shares to employees under their Employee Share Ownership Plan (the plan).The shares are usually offered to employees at a discount of 10% of the average market price over the two weeks prior to the invitation to purchase.

On adoption of IFRS the group will be required to determine the fair value of all share-based remuneration, including the discount on share issued by the plan,and amortise the expenses over the relevant vesting periods.

c)Accounting for derivatives
Under IFRS, derivatives must be valued and recognized on the balance sheet. Movements in the value of such instruments must be recorded either through the income statement or equity in accordance with the standard.This will result in a change to the existing accounting policy which does not currently classify financial instruments.Current measurement is at amortised cost,with certain derivative financial instruments not recognized as assets or liabilities.

The above differences from current accounting policy have not been quantified as, at this stage, the group is unable to reliably quantify the effects. Most adjustments required on transition to NZ IFRS will be made,retrospectively,against opening retained earnings as at 1 July 2004.

OUR PRIORITIES

Our main priorities for the next financial year are as follows.

" To open a further 20 stores spread over the three countries.
" To increase our same store sales and EBIT across all three markets.
" To implement the appropriate support structure and systems for Canada, and to continue growing the business towards a breakeven position by June 2007.
" To deliver an average return on shareholders funds in excess of 26%.

THANKS TO AN INCREDIBLE TEAM

I would like to thank each one of our dedicated team,now totalling 1,649 people. All of you share our vision passionately and certainly bring it to life each and every day. Congratulations on meeting the challenges we have faced head on and thank you for your contribution to another record result.

M.R. Parsell
Chief Executive Officer