OVERVIEW OF THE FINANCIAL YEAR’S RESULTS

The group's net profit after tax of $25.232m was up on the previous year by 20.1%. This result was achieved by a continued focus on improving margins and controlling costs. In an environment where sales growth proved to be difficult, due to rising interest rates and fuel prices, this strategy paid dividends and allowed the company to grow the bottom line profit despite the difficult conditions. Overall the performance for the year was pleasing as previous year's initiatives including improved buying and supply chain processes, continued to deliver benefits.

Inventory levels surged somewhat during the year impacting on the balance sheet and reducing net operating cash flows. The lift in inventory levels was due to several reasons. There was an increase of $14 million on inventory levels due to the impact of the exchange rate on the conversion of Australian and Canadian stock levels. Secondly the addition of 17 new stores added approximately $8.5 million to last year's inventory levels. The remainder of the increased value was due to the company not reaching budgeted sales levels, especially over the high volume Christmas period, the higher gold price and the permanent increase in inventory levels on a comparative basis due to the company's increased focus on the diamond category. In the coming year we see an opportunity to finetune these levels as we gain more experience with our merchandise planning systems.

Our continued strategy to evolve Michael Hill into a brand is providing Michael Hill with increased differentiation within the industry. This has allowed the company to achieve a higher average sale and to improve margins at a time when much of the industry is still very price and discount focused. Our Michael Hill watch brand has transformd our watch category allowing us to respond to international trends, and develop our own designs, which are not comparable or available else where. This has invigorated this category and boosted margins.

SEGMENT RESULTS
The segments reported on reflect the performance of the company's retail operations in each geographic segment and exclude non-core retail activities such as manufacturing, wholesale and distribution, as well as other general corporate expenses.

AUSTRALIA
In Australian dollars, total sales increased 7.6% to AUD212.095 and same store sales grew by 0.1%. The operating surplus increased 30.5% to AUD$21.053m and represented 9.9% of sales (2007 - 9.2% of sales).

Thirteen new stores were opened in Australia during the year and three stores were closed. The thirteen stores opened were:

• Winston Hills, New South Wales
• Rouse Hill, New South Wales
• Lake Macquarie, New South Wales
• Fig Tree Plaza, New South Wales
• Dapto Mall, New South Wales
• Forest Hill, Victoria
• Plenty Valley, Victoria
• Calamvale, Queensland
• Garden City, Queensland
• West Lakes, South Australia
• Gateways, Western Australia
• Armadale, Western Australia
• Joondalup, Western Australia

Three stores were closed during the period giving a total of 136 stores operating in Australia at 30 June 2008.

The company still has significant expansion opportunities left in Australia. Strong population growth particularly in states such as Queensland along with a resilient economy, and expanding infrastructure, seems to present an increasing number of opportunities every year. With this growth comes investment in new malls and the refurbishment and expansion of existing ones. After further assessment of the opportunities we feel confident that at least 170 Michael Hill stores can be operated in Australia which provides the group with excellent growth prospects in the future.

Our priority in the coming year is to continue working to lift "same store" sales while identifying and opening a further 12 locations across the country.

CANADA
Total Sales in Canadian dollars grew by 28.6% to C$24,855m and same store sales decreased by 1.8%. There was an operating deficit of NZ$0.044m for the twelve months compared to a deficit of NZ$0.005m for the previous corresponding period. The company, however, entered the Ontario market in East Canada in July 2007 and established a separate retail management team to open this market. This has added some infrastructure and one off start up costs to the Canadian operation this year. The 5 stores opened in Ontario during the twelve months did not contribute fully for the period.

The existing West Canada operation experienced solid growth for the twelve months with an operating profit of C$0.890m compared to $0.028m for the corresponding period last year, which was very pleasing. Many of the stores are now achieving our minimum return on investment criteria.

During the year we opened one further new store in Alberta. This number was short of expectation however we have experienced a very tight real estate market in Canada over the past twelve months. Five new stores were opened in Ontario near and around Toronto. The six new stores opened during the period were:

• West Edmonton Mall, Alberta
• Fairview Park, Ontario
• Burlington Mall, Ontario
• Pen Centre, Ontario
• White Oaks, Ontario
• Masonville, Ontario

There were 22 stores open as at 30 June 2008.

NEW ZEALAND

New Zealand's performance during the year was steady with total sales slightly down on last year. The operating surplus, however, was up 8.3% to $14,697m which was very pleasing. The surplus as a percentage of sales increased to 15.1% up from 13.9% last year. Two new stores opened in New Zealand during the year at Trentham, Upper Hutt and South City, Christchurch.

In 2008/09 our main objectives will be to continue to drive same store sales and improving the existing business. We plan to open one further store in NZ during the year.

ENTRY TO THE US MARKET
Recently the company announced the acquisition of 17 stores in the US from the Chapter 11 bankruptcy of Whitehall Jewelers Holdings Inc. One of the positive things about a tough period in any economic cycle is the opportunities that such a shake out creates. This case was no exception. The Whitehall acquisition was a rare chance for Michael Hill to enter the US market and assemble a small group of very prime locations, largely grouped in the greater Chicago and St Louis areas. The Whitehall model also had many similarities to Michael Hill, including the size of the stores, the fact they were typically located in malls on prime centre court locations, the size of the store teams, product mix etc. The opportunity also allowed us to assess the performance of an existing jewellery operator in these locations, thereby reducing the risk somewhat in choosing the sites. For an overall purchase price of 80% of the closing inventory value, this will provide the opportunity to test Michael Hill in the US market with relatively low risk.

We expect there will be some costs involved in establishing these stores under the Michael Hill name and given the fact we are unknown as a brand in the US, combined with the economic climate, we may incur losses for several years. However the positive side is we could not ask for a better portfolio of stores to trial our US business with.

OUR PRIORITIES
Our main priorities for the 2008-09 financial year are:

• To deliver a return on average shareholders funds in excess of 26%
• To open a further 25 stores across the established three markets
• To drive increases in same store sales and EBIT performance
• To successfully enter the US market via the recent acquisition of 17 stores.

THANKS TO AN INCREDIBLE TEAM
With a simple focus and a huge amount of dedication and hard work our team has delivered a fantastic result this year.

I would like to acknowledge each and every one of them for sharing our vision and making it a reality. I would also like to congratulate them all on an amazing effort this year and for their contribution to the continued success of the company.

M.R. Parsell
Chief Executive Officer