Dear Shareholders,

Michael Hill International delivered a net after tax profit of $15,774,000 for the 2005/06 financial
year, which was 4.1% down on the previous year. The Group's revenues of $306,374,000 were 12.2% up on the previous year.

The profit achieved represents an excellent 23.2% return on average shareholders' funds, with our average return over the past 3 years being 27.0%.

During the year, we have undertaken a restructuring of our I.T. systems, merchandising has been centralised, accounting systems upgraded and manufacturing streamlined to become globally competitive. Our Head Office in Brisbane, which includes our manufacturing operation will double in size this coming year and a lot of planning has been done on how this will function efficiently.

We opened 23 new stores during the year (16 in Australia, 2 in New Zealand and 5 in Canada). We commenced our expansion into other provinces in Canada, with the opening of our first store in Sunridge Mall in Calgary,Alberta. Since the end of the financial year, we have also opened a further store in Edmonton, 3 hours north of Calgary, and at this stage the move into Alberta province looks very promising indeed.

Although it has been a challenging year with difficult trading conditions and rising gold prices, we feel we are in a good position to benefit in a weaker market by increasing our stock holdings in diamond rings. We will remain focused on exemplary salesmanship and begin branding our own products under the Michael Hill name.

The Group continues to have a strong balance sheet. Gearing (net debt/equity) at 30 June 2006 of 77.6% was up from 53.9% last year as a result of an increase in our diamond ring range to be more competitive, the opening of 23 new stores and stock holdings for stores that will be opened in 2006/07.

Operating cash outflows in 2005/06 of $2,360,000 (2004/05 inflow of $10,221,000) were impacted by increases in working capital requirements explained previously.

For shareholders, we have maintained our dividend at 23 cents for the year (fully imputed), with the final dividend of 14 cents being paid on the 16th October, 2006.

The full imputation of dividends for our New Zealand shareholder base may not be possible in future years due to the continued growth in company profits in markets outside New Zealand. This is difficult to predict due to the dynamics of international transfer pricing and the unpredictability of each market's contribution to the Group's profits. However it is inevitable under current tax legislation that full imputation will not continue far beyond the 2005/06 financial year.

We are confident that our philosophy of controlled profitable growth, combined with our unique proven retail formula, will strengthen the group as we gain experience in different markets.

Thanks to a great Board and an inspirational team at MHJ.

 Michael Hill
 Chairman