Dear Shareholders,

Michael Hill International delivered a 33.2% increase in net after tax profit of $21,017,000 for the 2006/07 fiancial year. The Groups operating revenues of $350,184,000 were 13.2% up on the previous year.

The profit achieved represents an excellent 28.5% return on average shareholders funds, with our average return over the past 5 years being 27.5%.

Over the past year our strategy to increase gross margin contributed strongly to our result. The Michael Hill watch range was launched and has been well received internationally by our customers. Our corporate identity was also reviewed resulting in a new logo that dropped the word jeweller, giving us a platform from which to launch further international brand initiatives.

We opened 18 new stores during the year (12 in Australia, 2 in New Zealand and 4 in Canada) and had 3 closures. We commenced our expansion into other provinces in Canada, and now have 3 stores operating in Alberta in addition to the 13 operating in British Columbia as at 30 June 2007. We are currently opening stores in Toronto, Ontario which marks the next expansion phase into the eastern states of Canada. At this stage we see the potential for opening in excess of 120 stores across Canada.

The Group had 192 stores operating at 30 June 2007, and this coming year will see the opening of our 200th store, another milestone in the history of the company.

The Group continues to have a strong balance sheet. Our equity ratio at 30 June 2007 was 47.0% compared to 42.9% in 2006 and operating cash flows improved from a net outflow in 2005/06 of $2.360m to a net inflow of $41.114m. This was impacted by a large reduction in inventories held by the group at 30 June 2007.

On the 26th March 2007, the company announced its intention to buy back up to 1.9 million of it shares on market to take advantage of a strong balance sheet and the tax effective manner of returning contributed equity to shareholders up to $13.858m. As a result of the buyback program, 956,876 shares had been bought back by the company (as at 30 June) and were held as Treasury stock as at balance date. Since balance date a further 246,405 shares were bought back The buyback process was completed on 30 August 2007 and all shares bought back have now been cancelled.

For shareholders, we have increased our dividend for the year by 13% to 26 cents (fully imputed), with the final dividend of 16 cents being paid on the 15th October, 2007.

The 2006/07 year has been a very good year for the company with considerable progress made in many areas. The focus on same store revenue growth and margin management has resulted in a very healthy profit increase for the year. Our philosophy of controlled profitable growth will continue with further new stores being evaluated for all three countries as opportunities arise.

A special thank you to the board for the wise advice that gives us direction and confidence to pursue our goals and vision and a warm welcome to Emma Hill as a director. Finally and most importantly are the over 2000 associates who pull together with an amazing spirit to make MHI what it is today. I applaud you.

 Michael Hill
 Chairman