UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2007

Commission File Number 1-04129

Zale Corporation

A Delaware Corporation

IRS Employer Identification No. 75-0675400

901 W. Walnut Hill Lane

Irving, Texas 75038-1003

(972) 580-4000

Zale Corporation (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Zale Corporation is a large accelerated filer.

Zale Corporation is not a shell company.

As of May 31, 2007, 49,030,127 shares of Zale Corporation’s Common Stock, par value $.01 per share, were outstanding.

ZALE CORPORATION AND SUBSIDARIES

Index

		Page
Part I.	Financial Information

Item 1.	Financial Statements (Unaudited):

	Consolidated Statements of Operations	1

	Consolidated Balance Sheets	2

	Consolidated Statements of Cash Flows	3

	Notes to Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	13

Item 4.	Controls and Procedures	13

Part II.	Other Information	13

Item 1.	Legal Proceedings	13

Item 1A.	Risk Factors	13

Item 6.	Exhibits	16

Principal Accounting Officer’s Signature		17

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2007			2006			2007		2006

Revenues	$	511,866		$	526,895		$	1,948,850	$	1,948,283

Costs and expenses:
Cost of sales	250,935			254,361			953,550		958,266
Selling, general and administrative	245,638			241,348			829,252		835,758
Cost of insurance operations	2,070			1,598			5,179		5,014
Depreciation and amortization	15,450			14,935			45,947		44,798
Benefit from settlement of retirement plan	—			(13,403		)	—		(13,403		)
Derivative (gain) loss	(155		)	—			7,072		—
Operating (loss) earnings	(2,072		)	28,056			107,850		117,850
Interest expense	4,346			2,449			15,239		7,685
(Loss) earnings before income taxes	(6,418		)	25,607			92,611		110,165
Income tax (benefit) expense	(2,468		)	8,776			34,895		29,180
Net (loss) earnings	$	(3,950	)	$	16,831		$	57,716	$	80,985

(Loss) earnings per common share:
Basic (loss) earnings per share	$	(0.08	)	$	0.35		$	1.19	$	1.65
Diluted (loss) earnings per share	$	(0.08	)	$	0.35		$	1.18	$	1.63

Weighted average number of common shares outstanding:
Basic	48,975			47,914			48,580		49,066
Diluted	48,975			48,342			48,994		49,578

See notes to consolidated financial statements.

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	April 30,			July 31,			April 30,
	2007			2006			2006
ASSETS
Current assets:
Cash and cash equivalents	$	52,621		$	42,594		$	59,920
Merchandise inventories	1,086,487			903,294			938,050
Other current assets	112,060			103,356			83,968
Total current assets	1,251,168			1,049,244			1,081,938

Property and equipment, net	301,814			283,721			290,433
Goodwill	97,901			96,339			97,014
Other assets	35,883			33,264			34,824

Total assets	$	1,686,766		$	1,462,568		$	1,504,209

LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities	$	321,791		$	341,182		$	359,356
Deferred tax liability	70,073			61,947			52,059
Total current liabilities	391,864			403,129			411,415

Long-term debt	290,050			202,813			204,859
Deferred tax liability	19,125			3,768			4,538
Other liabilities	95,121			51,609			51,791

Contingencies (See Notes 5 and 6)

Stockholders’ investment:
Common stock	492			482			538
Additional paid-in capital	136,015			108,344			107,454
Accumulated other comprehensive income	37,524			33,564			37,392
Accumulated earnings	866,575			808,859			836,222
	1,040,606			951,249			981,606
Treasury stock	(150,000		)	(150,000		)	(150,000		)
Total stockholders’ investment	890,606			801,249			831,606
Total liabilities and stockholders’ investment	$	1,686,766		$	1,462,568		$	1,504,209

See notes to consolidated financial statements.

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	April 30,
	2007			2006

Cash Flows from Operating Activities:
Net earnings	$	57,716		$	80,985
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization	46,764			45,653
Repatriation on tax provision	—			(11,502		)
Deferred taxes	23,687			—
Loss from disposition of property and equipment	2,066			2,946
Impairment of fixed assets	579			9,730
Stock-based compensation expense	4,911			5,247
Benefit from settlement of retirement plan	—			(13,403		)
Derivative gain	(1,657		)	—
Changes in assets and liabilities:
Merchandise inventories	(181,283		)	(77,646		)
Other current assets	(8,578		)	(9,560		)
Other assets	(161		)	20
Accounts payable and accrued liabilities	(12,577		)	49,289
Other liabilities	41,451			(2,746		)
Net cash (used in) provided by operating activities	(27,082		)	79,013

Cash Flows from Investing Activities:
Payments for property and equipment	(66,157		)	(63,438		)
Purchase of available-for-sale investments	(10,948		)	(2,149		)
Proceeds from sale of available-for-sale investments	7,740			2,144
Net cash used in investing activities	(69,365		)	(63,443		)

Cash Flows from Financing Activities:
Borrowings under revolving credit agreement	2,249,743			1,083,059
Payments on revolving credit agreement	(2,162,506		)	(1,008,000		)
Proceeds from exercise of stock options	17,702			10,669
Excess tax benefit on stock options exercised	1,433			1,129
Purchase of common stock	—			(100,000		)
Net cash provided by (used in) financing activities	106,372			(13,143		)

Effect of exchange rate changes on cash	102			2,047

Net change in cash and cash equivalents	10,027			4,474
Cash and cash equivalents at beginning of period	42,594			55,446
Cash and cash equivalents at end of period	$	52,621		$	59,920

See notes to consolidated financial statements.

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

References to the “Company,” “we,” “us,” and “our” in this Form 10-Q are references to Zale Corporation and its subsidiaries. We are, through our wholly owned subsidiaries, a leading specialty retailer of fine jewelry in North America. As of April 30, 2007, we operated 1,469 specialty retail jewelry stores and 823 kiosk and cart locations primarily 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: Zales Jewelers®; Zales Outlet; Gordon’s Jewelers®; Bailey Banks & Biddle Fine Jewelers®; Peoples JewellersÒ; Mappins Jewellers®; and our e-commerce businesses which include zales.com, gordonsjewelers.com and baileybanksandbiddle.com.

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).

The All Other segment includes insurance and reinsurance operations.

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. The consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management’s opinion, all material adjustments and disclosures necessary for a fair presentation have been made. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Form 10-K for the fiscal year ended July 31, 2006.

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform with fiscal year 2007 classifications.

2. EARNINGS (LOSS) PER COMMON SHARE

Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and restricted share awards determined using the treasury stock method. We had approximately 1.7 million stock options outstanding at April 30, 2007 and 2006 which were not included in the diluted earnings per share calculation because the effect would have been antidilutive.

During the third quarter of fiscal year 2007, we incurred a net loss of $4.0 million. A net loss causes all outstanding stock options and restricted share awards to be antidilutive (that is, the potential dilution would decrease the loss per share). As a result, the basic and dilutive loss per common share are the same.

3. COMPREHENSIVE INCOME

Comprehensive income is net earnings (loss) plus certain other items that are recorded directly to stockholders’ investment and consist of currency translation adjustments and unrealized gains and losses related to investments classified as available-for-sale. Comprehensive income was $6.1 million and $19.1 million for the

three months ended April 30, 2007 and 2006, respectively, and $61.7 million and $94.3 million for the nine month periods ended April 30, 2007 and 2006, respectively.

4. SEGMENTS

We report our business under three segments: Fine Jewelry, Kiosk Jewelry and All Other. We group our brands into segments based on the similarities in commodity characteristics of the merchandise and the product mix. The All Other segment includes insurance and reinsurance operations. Segment revenues are not provided by product type or geographically as we believe such disclosure is not consistent with the manner in which we make decisions.

Operating earnings by segment are calculated before unallocated corporate overhead, interest and taxes but include an internal charge for inventory carrying cost to evaluate segment profitability. Unallocated costs are before income taxes and include corporate employee related costs, administrative costs, information technology costs, corporate facilities costs and depreciation and amortization.

	Three Months Ended					Nine Months Ended
	April 30,					April 30,
	2007			2006		2007			2006
	(amounts in thousands)					(amounts in thousands)
Selected Financial Data by Segment

Revenues:
Fine Jewelry (a)	$	450,843		$	462,369	$	1,725,921		$	1,719,505
Kiosk (b)	57,434			61,126		212,685			218,901
All Other	3,589			3,400		10,244			9,877
Total revenues	$	511,866		$	526,895	$	1,948,850		$	1,948,283

Depreciation and amortization:
Fine Jewelry	$	11,207		$	10,709	$	33,449		$	32,462
Kiosk	1,398			1,416		4,237			4,085
All Other	—			—		—			—
Unallocated	2,845			2,810		8,261			8,251
Total depreciation and amortization	$	15,450		$	14,935	$	45,947		$	44,798

Operating earnings:
Fine Jewelry (c)	$	3,102		$	20,089	$	116,179		$	99,995
Kiosk	(764		)	1,548		12,330			20,438
All Other	1,519			1,803		5,065			4,863
Unallocated (d)	(5,929		)	4,616		(25,724		)	(7,446		)
Total operating (loss) earnings	$	(2,072	)	$	28,056	$	107,850		$	117,850

(a) Includes $52.0 million and $44.8 million for the three month periods ended April 30, 2007 and 2006, respectively, related to foreign operations. Includes $205.8 million and $179.6 million for the nine month periods ended April 30, 2007 and 2006, respectively, related to foreign operations.

(b) Includes $1.1 million and $1.5 million for the three month periods ended April 30, 2007 and 2006, respectively, related to foreign operations. Includes $5.7 million and $6.0 million for the nine month periods ended April 30, 2007 and 2006, respectively, related to foreign operations.

(c) Includes charges of $1.4 million and $34.1 million for the three month and nine month periods ended April 30, 2006, respectively, related to the Bailey Banks & Biddle store closings.

(d) Includes a $13.4 million benefit related to the settlement of certain retirement plan obligations and a $3.6 million charge for executive severance in the three month period ended April 30, 2006. Includes a $13.4 million benefit related to the settlement of certain retirement plan obligations and a $12.1 million charge for executive severance for the nine month period ended April 30, 2006. Also includes $155,000 in derivative gains and $7.1 million in derivative losses for the three and nine month periods ended April 30, 2007, respectively. Includes $20.3 million and

$17.6 million to offset internal carrying costs charged to the segments for the three month periods ended April 30, 2007 and 2006, respectively, and $61.3 million and $53.8 million to offset internal carrying costs charged to the segments for the nine month periods ended April 30, 2007 and 2006, respectively.

Income tax information by segment has not been included as taxes are calculated on a consolidated basis and not allocated to each segment.

5. CONTINGENCIES

We are named as a defendant in two lawsuits arising, in general, from matters that were the subject of a Securities and Exchange Commission investigation that was terminated, as we announced on September 24, 2006, with no enforcement action being recommended: In re Zale Corporation Securities Litigation No. 3:06-CV-01470-K, filed January 29, 2007, U.S. District Court for the Northern District of Texas; and Salvato v. Zale Corp., No. 3:06-CV-1124 (SAF), filed March 5, 2007, U.S. District Court for the Northern District of Texas, originally filed June 26, 2006 and consolidated with Connell v. Zale Corp., originally filed August 7, 2006, U.S. District Court for the Southern District of New York and transferred to the U.S. District Court for the Northern District of Texas. These lawsuits are the product of the consolidation of six lawsuits that were initially filed in New York and Texas. Various current and former officers and directors also are defendants.

Both lawsuits are purported class actions. In In re Zale Corporation Securities Litigation, the plaintiffs allege various violations of securities laws based upon our public disclosures. In Salvato, the plaintiffs allege various violations of the Employee Retirement Income Security Act of 1974 based upon the investment by the Zale Corporation Savings and Investment Plan in Company stock. Both lawsuits are in preliminary stages. We intend to vigorously contest both lawsuits. It is not possible at this time to reasonably estimate the possible loss or range of loss, if any, that may result from these lawsuits.

In June 2007, we agreed to settle a California wage and hour dispute that was filed against us in Sacramento County Superior Court as a purported class action by certain current and former employees. The settlement totals $3.8 million and requires us to make payments on a claims-made basis, subject to a minimum payout. The settlement is subject to court approval. As a result of the settlement, we recorded an additional charge of $1.5 million in selling, general and administrative expenses during the third quarter of fiscal year 2007.

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

6. GUARANTEES

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 the Company 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, the Company 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 no material losses for the three month and nine month periods ended April 30, 2007, and we believe that future losses will not have a material impact on our financial position or results of operations.

Product Warranty Programs. We offer our customers two-year and lifetime jewelry protection plans (“JPPs”) that cover sizing and breakage on certain products and a diamond commitment program (“DCP”) that offers a traditional warranty to cover sizing, breakage and theft replacement for a 12-month period. The revenue from the lifetime JPPs and DCP is recognized on a straight-line basis over a five-year and 12-month period, respectively. The revenue from the two-year JPPs is recognized over the service period at the rates the related costs have historically been incurred in performing the services covered under the agreements.

The change in deferred revenue associated with the sale of the JPPs and DCPs is as follows (in thousands):

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2007			2006			2007			2006

Deferred revenue, beginning of period	$	60,239		$	33,018		$	31,784		$	28,264
JPPs and DCPs sold	27,068			17,545			85,357			61,108
Revenue recognized	(8,550		)	(17,996		)	(38,384		)	(56,805		)
Deferred revenue, end of period	$	78,757		$	32,567		$	78,757		$	32,567

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements of the Company (and the related notes thereto) which preceded this report and the audited consolidated financial statements of the Company (and the related notes thereto) and Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Form 10-K for the fiscal year ended July 31, 2006.

Overview

We are a leading specialty retailer of fine jewelry in North America. At April 30, 2007, we operated 1,469 fine jewelry stores and 823 kiosk and cart locations primarily in shopping malls throughout the United States of America, Canada and Puerto Rico. Our operations are divided into three business segments: Fine Jewelry, Kiosk Jewelry and All Other.

The Fine Jewelry segment focuses on diamond product, but differentiates its six brands through merchandise assortments, store design and marketing. The Kiosk Jewelry segment reaches the opening price point fine jewelry customer primarily through mall-based kiosks under the name Piercing Pagoda in the United States of America, and carts under the name Peoples II in Canada. The All Other segment consists primarily of our insurance operations, which provide insurance and reinsurance facilities for various types of insurance coverage offered primarily to our private label credit card customers.

Comparable store sales exclude revenue recognized from jewelry protection plans (“JPPs”), internet sales and insurance premiums related to credit insurance policies sold to customers who purchase merchandise under our proprietary credit program. The sales results of new stores are included 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.

In fiscal year 2007, our focus has been on improving gross margins through direct sourcing and repositioning the Zales Jewelers brand inventory assortments. In addition, during the second quarter we introduced lifetime JPPs which were positively received by the customer. While the revenue recognized related to JPPs negatively impacts total revenues in the short-term, the sales of JPPs have increased over prior years. The increased sales have generated over $10 million in incremental cash for the third quarter and over $25 million in incremental cash year-to-date. As part of the inventory repositioning in the Zales Jewelers brand, we aggressively moved out discontinued merchandise in order to make way for increased investments in diamond fashion and bridal categories. Continued reductions in inventory will be accomplished primarily through sales, inventory sharing initiatives across brands and scaling back the replenishment of certain inventory. While the increased inventory investments negatively impacted our cash flow, the impact was partially offset by the incremental cash generated by JPPs. Moving into the fourth quarter and into fiscal year 2008, we expect to continue to face several challenges, including the impact of higher fuel costs on the moderate customer and reducing excess inventory.

From time to time, we include non-GAAP measurements of financial information in Management’s Discussion and Analysis of Financial Condition and Results of Operations, including information relating to the lifetime JPPs we began selling during the second quarter of fiscal year 2007 and charges related to the closing of certain Bailey Banks & Biddle stores and executive severance in fiscal year 2006. We use these measurements as part of our evaluation of the performance of the Company. In addition, we believe these measures provide useful information to investors, particularly in evaluating the performance of the Company in fiscal year 2007 as compared to prior periods.

Results of Operations

The following table sets forth certain financial information from our unaudited consolidated statements of operations expressed as a percentage of total revenues.

	Three Months Ended				Nine Months Ended
	April 30,				April 30,
	2007		2006		2007		2006
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Cost of sales	49.0		48.3		48.9		49.2
Selling, general and administrative	48.0		45.8		42.6		42.9
Cost of insurance operations	0.4		0.3		0.3		0.3
Depreciation and amortization	3.0		2.8		2.3		2.3
Benefit from settlement of retirement plan	—		(2.5	)	—		(0.7	)
Derivative (gain) loss	—		—		0.4		—
Operating (loss) earnings	(0.4	)	5.3		5.5		6.0
Interest expense	0.9		0.5		0.8		0.4
(Loss) earnings before income taxes	(1.3	)	4.8		4.7		5.6
Income tax (benefit) expense	(0.5	)	1.6		1.7		1.4
Net (loss) earnings	(0.8	)%	3.2	%	3.0	%	4.2	%

Three Months Ended April 30, 2007 Compared to Three Months Ended April 30, 2006

Revenues. Revenues for the three months ended April 30, 2007 were $511.9 million, a decrease of approximately 2.9 percent as compared to revenues of $526.9 million for the same period in the prior year. Comparable store sales decreased approximately $16.5 million, or 3.4 percent in the three months ended April 30, 2007 as compared to the same period in the prior year. The decrease was partially offset by new store growth in the Fine Jewelry segment. The decline in comparable store sales was driven primarily by a decrease in the number of customer transactions, partially offset by a 3.9 percent increase in the average transaction price to $185. In addition, a change in revenue recognition methodology related to JPPs resulted in decreased revenues of $8.7 million, or 1.7 percent. Prior to the second quarter of fiscal year 2007, we offered only a two-year JPP. Revenue from the two-year JPP is recognized over the service period at the rates the related costs have historically been incurred. During the second quarter of fiscal 2007, certain brands began offering a lifetime JPP. Revenue from the lifetime JPP is recognized on a straight-line basis over a period of five years.

The Fine Jewelry segment contributed $450.8 million of revenues in the three months ended April 30, 2007, compared to $462.4 million for the same period in the prior year, which represents a decrease of approximately 2.5 percent. Revenues include $57.4 million in the Kiosk Jewelry segment compared to $61.1 million in the prior year, representing a decrease of approximately 6.0 percent. The All Other segment operations provided $3.6 million in revenues for the quarter ended April 30, 2007 and $3.4 million for the same period in the prior year, which represents an increase of 5.6 percent.

During the quarter ended April 30, 2007, we opened 11 stores in the Fine Jewelry segment and one kiosk in the Kiosk Jewelry segment. In addition, we closed 13 stores in the Fine Jewelry segment and 60 locations, primarily Peoples II 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 49.0 percent for the three months ended April 30, 2007, compared to 48.3 percent for the same period in the prior year. Including the $8.7 million related to JPPs in revenues, cost of sales as a percent of revenues would have been 48.2 percent in fiscal year 2007. The decrease in cost of sales as a percent of revenues on a comparable basis is primarily due to reduced emphasis on promotional activities, clearance merchandise and increased focus on direct sourcing of product and finished goods.

Selling, General and Administrative. Included in selling, general and administrative (“SG&A”) are store operating, advertising, buying and general corporate overhead expenses. SG&A was 48.0 percent of revenues for the three months ended April 30, 2007 compared to 45.8 percent for the same period in the prior year. Including the $8.7 million related to JPPs in revenues, SG&A as a percent of revenues would have been 47.2 percent in fiscal year 2007. Excluding $5.0 million in severance and store closure costs recorded in fiscal year 2006, SG&A as a percent of revenues would have been 44.9 percent. The increase in SG&A on a comparable basis is due primarily to a 90 basis point increase in occupancy costs, a 30 basis point increase in labor costs as a result of investments in payroll, a 30 basis point increase related to the settlement of a lawsuit and a 20 basis point increase in promotional activities.

Depreciation and Amortization. Depreciation and amortization as a percent of revenues for the three month periods ended April 30, 2007 and 2006 was 3.0 percent and 2.8 percent, respectively.

Derivative (Gain) Loss. We recognize all derivative instruments measured at fair value, as either assets or liabilities in the accompanying consolidated balance sheets. Any changes in the fair value of derivative instruments are reported in derivative (gain) loss in the consolidated statements of operations. The fair market value of these instruments is subject to the changes in the underlying commodity. During the quarter ended April 30, 2007, we recognized a derivative gain before taxes in the amount of $155,000. The gain on derivatives consisted of a decrease in fair value of $219,000 offset by gains on the settlement of contracts in the amount of $374,000.

Interest Expense. Interest expense as a percent of revenues for the three month periods ended April 30, 2007 and 2006 was 0.9 percent and 0.5 percent, respectively. The increase in interest expense was a result of an increase in the weighted average effective interest rate from 6.2 percent last year to 6.7 percent this year and increased average borrowings during the quarter.

Income Tax (Benefit) Expense. The effective tax rate for the three month periods ended April 30, 2007 and 2006 was 38.5 percent and 34.3 percent, respectively. The increase is due to tax benefits recognized in fiscal year 2006 associated with the repatriation of undistributed Canadian earnings and the release of certain tax reserves related to state and local audits that were resolved during the third quarter of fiscal year 2006.

Nine Months Ended April 30, 2007 Compared to Nine Months Ended April 30, 2006

Revenues. Revenues for the nine months ended April 30, 2007 were $1.95 billion, flat compared to the same period in the prior year. Excluding revenues of $24.3 million related to the Bailey Banks & Biddle stores closed in fiscal year 2006, revenues increased approximately 1.3 percent over the same period last year due primarily to growth in the Fine Jewelry segment. The increase in revenues was partially offset by $18.7 million, or 1.0 percent, impact of JPPs. Comparable store sales decreased approximately $2.0 million, or 0.1 percent in the nine months ended April 30, 2007 as compared to the same period in the prior year. The decline in comparable store sales was driven primarily by a decrease in the number of customer transactions, partially offset by a 4.3 percent increase in the average transaction price to $193.

The Fine Jewelry segment contributed $1.726 billion of revenues in the nine months ended April 30, 2007, compared to $1.720 billion for the same period in the prior year, which represents an increase of approximately 0.4 percent. Excluding the impact of $24.3 million of sales in the Bailey Banks & Biddle stores closed in fiscal year 2006, the Fine Jewelry segment had increased revenues of approximately 1.8 percent. Revenues include $212.7 million in the Kiosk Jewelry segment compared to $218.9 million in the prior year, representing a decrease of approximately 2.8 percent. All Other segment operations provided approximately $10.2 million and $9.9 million in revenues for the nine month periods ended April 30, 2007 and 2006, respectively.

During the nine month period ended April 30, 2007, we opened 42 stores in the Fine Jewelry segment and 12 kiosks in the Kiosk Jewelry segment. In addition we closed 29 stores in the Fine Jewelry segment and 82 locations, primarily Peoples II carts, in the Kiosk Jewelry segment during the nine month 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 48.9 percent for the nine months ended April 30, 2007, compared to

49.2 percent for the same period in the prior year. Including the $18.7 million related to JPPs in revenues, cost of sales as a percent of revenues would have been 48.5 percent in fiscal year 2007. Excluding $6.3 million of charges related to the Bailey Banks & Biddle store closings in fiscal year 2006, cost of sales as a percent of revenues would have been 48.9 percent. The decrease in cost of sales as a percent of revenues on a comparable basis is primarily due to our continued focus on direct sourcing of product and finished goods across the Company and enhanced markdown control procedures during the third quarter.

Selling, General and Administrative. Included in SG&A are store operating, advertising, buying and general corporate overhead expenses. SG&A was 42.6 percent of revenues for the nine months ended April 30, 2007 compared to 42.9 percent for the same period in the prior year. Including the $18.7 million related to JPPs in revenues, SG&A as a percent of revenues would have been 42.1 percent in fiscal year 2007. Excluding a $27.8 million charge related to the Bailey Banks & Biddle store closures and executive severance of $12.1 million in fiscal year 2006, SG&A as a percent of revenues would have been 40.9 percent. The increase in SG&A on a comparable basis is due to an 80 basis point increase in labor costs as a result of investments in payroll and a 50 basis point increase in occupancy costs.

Depreciation and Amortization. Depreciation and amortization as a percent of revenues for the nine month periods ended April 30, 2007 and 2006 was 2.3 percent.

Derivative (Gain) Loss. We recognize all derivative instruments measured at fair value, as either assets or liabilities in the accompanying consolidated balance sheets. Any changes in the fair value of derivative instruments are reported in derivative (gain) loss on the consolidated statements of operations. The fair market value of these instruments is subject to the changes in the underlying commodity. During the nine month period ended April 30, 2007, we recognized a derivative loss before taxes in the amount of $7.1 million, representing 0.4 percent of revenues. The net loss consists of an increase in the fair market value of $1.7 million and settlement losses of $8.8 million.

Interest Expense. Interest expense as a percent of revenues for the nine month periods ended April 30, 2007 and 2006 was 0.8 percent and 0.4 percent, respectively. The increase in interest expense was a result of an increase in the weighted average effective interest rate from 5.6 percent last year to 6.7 percent this year and increased average borrowings.

Income Tax (Benefit) Expense. The effective tax rate for the nine month period ended April 30, 2007 was 37.7 percent compared to 26.5 percent for the same period in the prior year. The increase is primarily due to the tax benefit related to repatriated Canadian earnings in fiscal year 2006 and the release of certain tax reserves in the third quarter of fiscal year 2006.

Liquidity and Capital Resources

Our cash requirements consist primarily of funding ongoing operations, including inventory requirements, capital expenditures for new stores, renovations of existing stores, upgrades to our information technology systems and distribution facilities, and debt service. In addition, from time-to-time in the past we have repurchased shares of our common stock.

Our business is highly seasonal, with a disproportionate amount of sales (approximately 41 percent) and substantially all of our operating income occurring in November and December of each year, the Holiday season. Other important periods include Valentine’s Day and Mother’s Day. We purchase inventory in anticipation of these periods and, as a result, have higher inventory and inventory financing needs immediately prior to these periods. Our maximum inventory level typically occurs prior to the Holiday season. Owned inventory at April 30, 2007 was $1.1 billion, an increase of $183 million and $148 million compared to inventory levels at July 31, 2006 and April 30, 2006, respectively. The increases were primarily due to remaining clearance inventory, increased inventory in our internal assembly organization and inventory investments made to reposition the assortments.

Net cash provided by operating activities decreased from $79.0 million for the nine months ended April 30, 2006 to a deficit of $27.1 million for the nine months ended April 30, 2007. The decrease in cash is primarily

due to an increase in inventory of $103.6 million, a decrease in merchandise payables and decreased profitability. The decrease was partially offset by a $25.6 million increase in cash received related to deferred revenues for JPPs.

Our cash requirements are funded through cash flows from operations, funds available under our revolving credit facilities, and vendor payment terms. Under our revolving credit facilities we may borrow an aggregate of approximately $530 million. In the third quarter of fiscal year 2007, we amended our U.S. revolving credit facility to increase our seasonal borrowing capabilities by an additional $100 million. In addition, the amendment reduces the current interest rate from LIBOR plus 1.25 percent to LIBOR plus 1.0 percent and extends the maturity date by two years to August 2011. Vendor purchase order terms typically require payment within 60 days.

As of April 30, 2007, we had cash and cash equivalents of $52.6 million and had approximately $240 million available under our revolving credit facilities. We believe that we have sufficient capacity under our revolving credit facilities to meet our foreseeable financing needs.

We are currently evaluating whether to indefinitely reinvest certain of our undistributed foreign earnings outside the United States. As such, we may make a future representation in accordance with Accounting Principles Board No. 23, “Accounting for Income Taxes – Special Areas” which would result in the release of the deferred tax liability associated with such undistributed earnings. At this time, we estimate that such a release would result in a tax benefit of $5 million to $9 million in the fourth quarter. The evaluation of whether to indefinitely reinvest foreign earnings should be completed by the fourth quarter of fiscal year 2007.

Capital Expenditures

In fiscal year 2007, we have invested a total of approximately $17 million in capital expenditures to open approximately 42 new stores in the Fine Jewelry segment, and approximately 12 new kiosks in the Kiosk Jewelry segment. We have invested approximately $22 million to remodel, relocate and refurbish approximately 72 locations in our Fine Jewelry segment and approximately 46 additional locations in our Kiosk Jewelry segment. We also estimate that, through the fourth quarter, we will incur capital expenditures of approximately $31 million for enhancements to our information technology portfolio, infrastructure expansion and other support services, and an additional $21 million to open 9 stores and remodel, relocate and refurbish an additional 29 locations.

New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 requires companies to determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. This interpretation also provides guidance on derecognition, classification, accounting in interim periods and expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently in the process of assessing the impact that FIN 48 will have on our consolidated financial statements. At this time, we do not anticipate this will result in a material adjustment to the Company’s financial condition, results of operations or liquidity.

In June 2006, the Emerging Issues Task Force reached a consensus on Issue No. 06-3 (“EITF 06-3”) “Disclosure Requirements for Taxes Assessed by a Governmental Authority on Revenue-Producing Transactions.” The consensus allows an entity to choose between two acceptable methods of collecting taxes from customers on behalf of a governmental authority, such as sales taxes. Under the gross method, taxes collected are accounted for as revenue with an offsetting amount in operating expenses. Under the net method, taxes are excluded from revenues and instead are recorded as a liability until they are remitted to the appropriate taxing authority. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The Company has presented revenue net of taxes collected and will disclose this policy in its future annual financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is

effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 157 is not expected to have a material impact on the Company’s financial condition, results of operations or liquidity.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This standard permits entities to choose to value certain financial instruments at fair value. Entities shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material impact on the Company’s financial condition, results of operations or liquidity.

Inflation

In management’s opinion, changes in revenues, net (loss) earnings, and inventory valuation that have resulted from inflation and changing prices 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 inventory. Historically, we have hedged a portion of our gold and silver purchases through forward contracts. There is no assurance that inflation will not materially affect us in the future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At April 30, 2007, there had not been a material change in any of the market risk information disclosed by us in our Annual Report on Form 10-K for the fiscal year ended July 31, 2006. More detailed information concerning market risk can be found under the sub-caption “Quantitative and Qualitative Disclosures about Market Risk” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 35 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2006.

Item 4. 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. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in the Company’s periodic SEC filings within the required time period, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. There have been no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding legal proceedings is incorporated by reference from Note 5 to our consolidated financial statements set forth in Part I of this report.

Item 1A. Risk Factors

Cautionary Notice Regarding Forward-Looking Statements

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 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.

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. Fluctuations in the availability and pricing of commodities could impact our ability to obtain and produce products at favorable prices, and consumer awareness regarding the issue of “conflict diamonds” may affect consumer demand for diamonds.

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.

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 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.

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.

Item 6. Exhibits

10.1	Settlement of Release Agreement, dated as of February 7, 2007, between the Company and Mark R. Lenz
10.2	Settlement of Release Agreement, dated as of February 21, 2007, between the Company and Frank C. Mroczka
10.3	Fourth Amendment to Credit Agreement, dated April 6, 2007 (incorporated by reference to the Company’s Current Report on Form 8-K filed April 11, 2007)
10.4	409A Supplemental Executive Retirement Plans as amended and restated effective January 1, 2005
10.5	Pre-409A Supplemental Executive Retirement Plan as amended and restated effective January 1, 2005
10.6	Pre-409A Supplemental Executive Retirement Plan as amended and restated effective March 1, 2007
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

SIGNATURE

Pursuant to the requirements 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.

	Zale Corporation
	(Registrant)


Date: June 11, 2007	/s/ Cynthia T. Gordon
	Cynthia T. Gordon
	Senior Vice President, Controller
	(principal accounting officer of the registrant)