UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission file number 001-14669

CLARENDON HOUSE
CHURCH STREET
HAMILTON, BERMUDA
(Address of principal executive offices)

1 HELEN OF TROY PLAZA
EL PASO, TEXAS		79912
(Registrant’s United States Mailing Address)		(Zip Code)

Registrant’s telephone number, including area code: (915) 225-8000

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES - $.10 PAR VALUE
(Title of Class)

     Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]		Accelerated filer [X]		Non-accelerated filer [ ]

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

     The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last day of the registrant’s most recently completed second quarter was $640,758,495.

     As of May 5, 2006 there were 30,029,072 shares of Common Shares, $.10 Par Value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain information required for Part III of this annual report will be set forth in and incorporated herein by reference into Part III of this report from the Company’s definitive Proxy Statement for the 2006 Annual Meeting of Shareholders, which is anticipated to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days following the end of the Company’s fiscal year ended February 28, 2006.

Index to Exhibits - Page 99

TABLE OF CONTENTS

						PAGE
PART I		Item 1.		Business			3
		Item 1A.		Risk Factors			13
		Item 1B.		Unresolved Staff Comments			19
		Item 2.		Properties			20
		Item 3.		Legal Proceedings			21
		Item 4.		Submission of Matters to a Vote of Security Holders			23
PART II		Item 5.		Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities			24
		Item 6.		Selected Financial Data			26
		Item 7.		Management's Discussion and Analysis of Financial Condition and Results of Operations			28
		Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			49
		Item 8.		Financial Statements and Supplementary Data			51
		Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			95
		Item 9A.		Controls and Procedures			95
		Item 9B.		Other Information			97
PART III		Item 10.		Directors and Executive Officers of the Registrant			98
		Item 11.		Executive Compensation			98
		Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters			98
		Item 13.		Certain Relationships and Related Transactions			98
		Item 14.		Principal Accountant Fees and Services			98
PART IV		Item 15.		Exhibits and Financial Statement Schedules			99
				Signatures			102
Form of Limited Nonstatutory Stock Option Agreement
Form of Limited Incentive Stock Option Agreement
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     Certain written and oral statements made by our Company and subsidiaries of our Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made in this report, in other filings with the Securities and Exchange Commission (“SEC’), in press releases, and in certain other oral and written presentations. Generally, the words “anticipates”, “believes”, “expects”, “plans”, “may”, “will”, “should”, “seeks”, “estimates”, “project”, “predict”, “potential”, “continue”, “intends”, and other similar words identify forward-looking statements. All statements that address operating results, events or developments that we expect or anticipate will occur in the future, including statements related to sales, earnings per share results, and statements expressing general expectations about future operating results, are forward-looking statements and are based upon the Company’s current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and assumptions, but there can be no assurance that the Company will realize its expectations or that the Company’s assumptions will prove correct. Forward-looking statements are subject to risks that could cause them to differ materially from actual results. Accordingly, the Company cautions readers not to place undue reliance on forward-looking statements. We believe that these risks include but are not limited to the risks described in this report under “Item 1A. Risk Factors” and that are otherwise described from time to time in our SEC reports filed after this report. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

many of our product lines. As we extend our product lines and enter new product categories, we intend to expand our business in our existing customer base while attracting new customers.

     As part of our overarching objective to grow our business and increase shareholder value, we have established five core initiatives. These initiatives and their key elements are outlined below:

	•		Maximize high growth potential branded products. We seek to maximize high growth potential products by selectively investing in consumer marketing propositions that offer the best opportunities to capture market share and increase growth.
	•		Accelerate our new product pipeline. We will strive to accelerate the time required to develop and introduce new products to meet changing consumer preferences and take advantage of opportunities sooner.
	•		Leverage innovation. We intend to enhance and extend our existing products and develop new products to grow our business. We believe that new innovative products will permit us to generate higher margins and increase the value of our brand base.
	•		Broaden our growth opportunities. We plan to continue to seek opportunities to acquire brands and product categories through aggressive external development and strategic joint ventures and acquisitions.
	•		Reduce cost and increase productivity. We intend to seek to control our expenses and strengthen operating margins by eliminating unnecessary spending and cost redundancy in the short term, and by making other tools and productivity drivers the cornerstone and fabric of our Company.

     We present financial information for each of our operating segments in Note (13) of the consolidated financial statements. The matters discussed in this Item 1. “Business,” pertain to all existing operating segments, unless otherwise specified.

     We use outside manufacturers to produce our goods. Both our Personal Care and Housewares segments sell their products primarily through mass merchandisers, drug chains, warehouse clubs, catalogs, grocery stores, specialty stores, and beauty supply retailers and wholesalers.

     We sell certain of our products under licenses from third parties. Our licensed trademarks, among others, include:

	•		Vidal Sassoon ® , licensed from The Procter & Gamble Company;
	•		Revlon ® licensed from Revlon Consumer Products Corporation;
	•		Dr. Scholl’s ® , licensed from Schering-Plough HealthCare Products, Inc.;
	•		Scholl ® (in areas other than North America), licensed from Scholl Ltd.;
	•		Sunbeam ® , Health at Home ® and Health o meter ® licensed from Sunbeam Products, Inc.;
	•		Sea Breeze ® , licensed from Shiseido Company Ltd.;
	•		Vitapointe ® , licensed from Sara Lee Household and Body Care UK Limited; and
	•		Toni & Guy ® , licensed from Mascolo Brothers Ltd. (acquired March 27, 2006)

     We own and actively market under a number of trademarks, including:

     We also market hair and beauty care products under the following trademarks to the professional beauty salon industry:

     We were incorporated as Helen of Troy Corporation in Texas in 1968 and reincorporated as Helen of Troy Limited in Bermuda in 1994.

     We continue to develop new products, respond to market innovations and enhance existing products with the objective of improving our position in the personal care and housewares markets.

     During fiscal 2006, building on the success of our ionic technology, we developed a line of tourmaline based hair care appliances for both the retail and professional markets under the Vidal Sassoon and Revlon brand names. Tourmaline is a semi-precious stone that produces a high level of negative ions, as well as infrared heat, which gently dries hair from the inside-out. Many of our new hair care products also feature a patented variable-ion technology that allows consumers to select the exact amount of ions best suited for their individual needs.

     In our skin care product line, during fiscal 2006, we extended the Sea Breeze brand by adding “Actives” and “Naturals” line extensions of the product. The “Actives” formulation is designed to appeal to teens and young adults and has been formulated to provide a stronger, deeper and longer lasting skin cleansing treatment. The “Naturals” formulation is designed to appeal to a more mature consumer and contains sea minerals and nutrients to help the skin function in a normal and healthy manner.

     In our Housewares division, during fiscal 2006, we introduced a new line of hand tools featuring our highly desired non-slip Good Grips ^® comfort and ergonomic design. We also expanded our tea kettle line and introduced a line of unique silicone based textile kitchen mitts and trivets. During fiscal 2007, we plan to introduce a line of food storage containers.

     Overall, in fiscal 2006 we introduced 474 new products across all our categories versus 426 new products introduced in fiscal 2005. Currently, 488 additional products are in our product development pipeline for fiscal 2007.

     You can learn more about our currently marketed products at the following Internet address:

www.hotus.com

The information contained on the Company’s website is not included as a part of, or incorporated by reference into, this report.

SALES AND MARKETING

     We market our products primarily within the United States. Sales within the United States comprised approximately 83, 82 and 84 percent of total net sales in fiscal 2006, 2005, and 2004, respectively. Both our North American and International operations sell their products primarily through mass merchandisers, drug chains, warehouse clubs, catalogs, grocery stores, specialty stores, and beauty supply retailers and wholesalers. We market products through a combination of outside sales representatives and our own internal sales staff.

     The companies from whom we license many of our brand names promote those names extensively. The Revlon ^® , Vidal Sassoon ^® , Dr. Scholl’s ^® and Sunbeam ^® trademarks are widely recognized because of advertising and the sale of a variety of products. We believe we benefit from the name recognition associated with a number of our licensed trademarks and seek to further improve the name recognition and perceived quality of all trademarks under which we sell products through our own advertising and product development efforts. We also promote our products through television advertising and through print media, including consumer and trade magazines and various industry trade shows.

     In fiscal 2004, we reached an agreement to become the title sponsor of the Sun Bowl through the December 2006 game. We will continue as the sponsor for 2006 with an option to extend our sponsorship to 2007. The Sun Bowl is one of the longest running invitational post season college football games in the United States with a history that spans over 70 years. The “Vitalis ^® Sun Bowl” became the official name of this event. In 2004 and 2005, CBS Sports broadcast the Vitalis ^® Sun Bowl to nationwide audiences.

     In January 2005, we entered into a three-year sponsorship agreement with Don Schumacher Racing, the National Hot Rod Association (NHRA), and Just Marketing, Inc. to showcase our Brut ^® products and extend the awareness of our products to target customers. We sponsor the Brut Racing team which is a “funny car” drag racing team that competes in the NHRA POWERade Drag Racing series. Each year over a 10-month period there is a series of 23 races that takes place in many major metropolitan markets, attracting an estimated 2.2 million in live attendance annually, and receiving over 150 hours of live or same-day coverage on ESPN.

MANUFACTURING AND DISTRIBUTION

     We contract with unaffiliated manufacturers in the Far East, primarily in the Peoples’ Republic of China, Thailand, Taiwan, and South Korea, to manufacture a significant portion of our products in the appliance, accessories and housewares product categories. Most of our grooming, skin care and hair care products are currently manufactured in North America. For a discussion regarding our dependency on third party manufacturers, see Item 1A., “Risk Factors”. For fiscal 2006, 2005 and 2004, goods manufactured by vendors in the Far East comprised approximately 86, 84 and 89 percent, respectively, of the dollar value of all segments’ inventory purchases.

     Manufacturers who produce our products use formulas, molds, and certain other tooling, some of which we own, in manufacturing those products. All our business segments employ numerous technical and quality control persons to assure high product quality.

     In total, we occupy approximately 2,600,000 square feet of distribution space in various locations to support our operations. We expect this square footage to decline to approximately 1,900,000 square feet during fiscal 2007 as we vacate existing facilities in Monee, Illinois and Southaven, Mississippi in order to consolidate their inventories into our new Southaven, Mississippi facility. Products that are manufactured in the Far East and sold in North America are shipped to the West Coast of the United States and Canada. The products are then shipped by truck or rail service to warehouse facilities in El Paso, Texas; Southaven, Mississippi; Toronto,

Canada; and Vancouver, Canada, or directly to customers. We ship substantially all products to North American customers from these warehouses by ground transportation services. Products sold outside the United States and Canada are shipped from manufacturers primarily in the Far East, to warehouse facilities in The Netherlands, the United Kingdom, Mexico, Brazil, or directly to customers. We ship products stored at the warehouses in The Netherlands, the United Kingdom, Mexico, and Brazil to distributors or retailers.

     Our customers seek to minimize their inventory levels and often demand that we fulfill their orders within relatively short time frames. Consequently, these inventory management practices often require us to carry substantial levels of inventory in order to meet our customers’ needs.

     Most of our products manufactured outside the countries in which they are sold are subject to import duties, which increases the amount we pay to obtain such products.

LICENSE AGREEMENTS, TRADEMARKS, AND PATENTS

     The Personal Care segment depends significantly upon the continued use of trademarks licensed under various agreements. The Vidal Sassoon ^® , Revlon ^® , Sunbeam ^® , Health o meter ^® and Dr. Scholl’s ^® trademarks are of particular importance to this segment’s business. New product introductions under licensed trademarks require approval from the respective licensors. The licensors also must approve the product packaging. Many of the license agreements require the Company to pay minimum royalties, meet minimum sales volumes, and make minimum levels of advertising expenditures. During fiscal 2006, we were in compliance with all terms of these licensing agreements. The duration of the license agreements for the Revlon ^® , Vidal Sassoon ^® , Sunbeam ^® , and Dr. Scholl’s ^® trademarks, including the renewal terms, are 57, 27, 14 and 13 years, respectively. If we decide to renew these agreements upon expiration of their current terms, we will be required to pay prescribed renewal fees at the time of that election. The discussion below covers the primary product categories that Helen of Troy currently sell under our material license agreements. The product categories discussed do not necessarily include all of the products that Helen of Troy is entitled to sell under these or other license agreements.

     Under an agreement with The Procter & Gamble Company, Helen of Troy is licensed to sell certain products bearing the Vidal Sassoon ^® trademark worldwide, except in Asia. Products sold under the terms of this license include hair dryers, curling irons, straightening irons, styling irons, hairsetters, hot air brushes, hair clippers and hair trimmers, mirrors, brushes, combs, and hair care accessories.

     Under agreements with Revlon Consumer Products Corporation, we are licensed to sell worldwide, except in Western Europe, hair dryers, curling irons, straightening irons, brush irons, hairsetters, brushes, combs, mirrors, functional hair accessories, personal spa products, hair clippers and trimmers, and battery-operated and electric women’s shavers bearing the Revlon ^® trademark.

     We are licensed to sell foot baths, foot massagers, hydro massagers, cushion massagers, body massagers, paraffin baths, and support pillows bearing the Dr. Scholl’s ^® trademark in the United States and Canada under an agreement with Schering-Plough HealthCare Products, Inc. We also are licensed to sell the same products under the Scholl ^® trademark in other areas of the world through an agreement with Scholl Ltd.

     Under an agreement with Sunbeam Products, Inc., we are licensed to sell hair clippers, hair trimmers, hair dryers, curling irons, hairsetters, hot air brushes, mirrors, manicure kits, hair brushes and combs, hair rollers, hair accessories, paraffin baths, foot massagers, back massagers, body massagers, memory foam products, and spa products bearing the Sunbeam ^® , Health at Home ^® and Health o meter ^® trademarks in the United States, Canada, Mexico, Central America, South America, and the Caribbean.

     Under an agreement with The Procter & Gamble Company we licensed the right to sell products under the trademark Sea Breeze ^® pursuant to a perpetual royalty free license from Shiseido Company Ltd. We currently sell a line of liquid skin care products under the Sea Breeze ^® name in the United States and Canada.

     In March 2006, we entered into an agreement with Mascolo Brothers Ltd. for the use of the Toni & Guy ^® brand name for hair care appliance products. Under the agreement, we are licensed to sell hair dryers, straighteners, stylers, tongs and a line of male grooming hair care appliances in the United Kingdom, Western Europe and portions of Asia. The duration of the initial license agreement is 5 years, expiring March 2011, which may be extended an additional 2 years upon proper notice.

     Helen of Troy has filed or obtained licenses for over 345 design and utility patents in the United States and several foreign countries. Most of these patents cover product designs in our Housewares segment. We also protect certain details about our processes, products and strategies as trade secrets, keeping confidential the information that we believe provides us with a competitive advantage. Our ability to enforce patents, copyrights, licenses, and other intellectual property is subject to general litigation risks, as well as uncertainty as to the enforceability of various intellectual property rights in various countries.

CUSTOMERS

     Sales to Wal-Mart Stores, Inc., and its affiliate, SAM’S Club, accounted for approximately 22 percent, 25 percent, and 28 percent of our net sales in fiscal 2006, 2005, and 2004, respectively. Sales to Target Corporation accounted for approximately 10 percent, 8 percent, and 9 percent of our net sales in fiscal 2006, 2005, and 2004, respectively. No other customers accounted for ten percent or more of net sales during those fiscal years. Sales to our top five customers accounted for approximately 46 percent, 44 percent and 49 percent in fiscal 2006, 2005, and 2004, respectively.

ORDER BACKLOG

     When placing orders, our retail and wholesale customers usually request that we ship the related products within a short time frame. As such, there usually are no significant backlog of orders in any of our distribution channels.

     As a result of the transition of our Housewares segment to the new systems, we experienced delays in warehouse order processing and shipments. These delays caused a backlog of orders within the Housewares segment, and, in some cases, order cancellations. We believe that the impact was immaterial in the fourth quarter of fiscal 2006; however, we do expect some impact in the first fiscal quarter of 2007 due to lost revenue and costs associated with related concessions and accommodations to certain customers, and associated start up costs of the distribution center. The extent of the impact on the first fiscal quarter of 2007 is not yet determinable. We continue to work the backlog down, and expect operations to normalize in fiscal 2007.

     In our Personal Care segment, there was no significant backlog of orders in any of our distribution channels as of the end of fiscal 2006.

COMPETITIVE CONDITIONS

     The markets in which we sell our products are very competitive and highly mature. Maintaining and gaining market share depends heavily on product development and enhancement, pricing, quality, performance, packaging and availability, brand name recognition, patents, and marketing and distribution approaches. In the Personal Care segment, our primary competitors include Conair Corporation, Applica, Inc., Spectrum Brands,

Inc., Goody Products, Inc., a division of Newell Rubbermaid, Inc., Homedics-USA, Inc., Chattem, Inc., J&J Boots, KAO Brands Company., The Proctor & Gamble Company, L’Oréal, Unilever, and Alberto-Culver Company. In the Housewares segment, the competition is highly fragmented. Our primary competitors in that segment include KitchenAid (Lifetime Brands, Inc.), Zyliss AG, Copco (Wilton Industries, Inc.), Simple Human, Casabella and Interdesign, Inc.. Some of these competitors have significantly greater financial and other resources than we do.

SEASONALITY

     Our business is somewhat seasonal. Net sales in the third fiscal quarter accounted for approximately 34, 35, and 33 percent of fiscal 2006, 2005 and 2004 net sales, respectively. As a result of the seasonality of sales, our working capital needs fluctuate during the year.

REGULATION

     Our electrical products must meet the safety standards imposed in various national, state, local, and provincial jurisdictions. Our electrical products sold in the United States are designed, manufactured, and tested to meet the safety standards of Underwriters Laboratories, Inc. or Electronic Testing Laboratories.

     Certain of our skin care products are regulated by the United States Food and Drug Administration.

EMPLOYEES

     As of fiscal year end 2006, we employed 804 full-time employees in the United States, Canada, Macao, China, Europe, Brazil, Peru, Venezuela and Mexico of which 126 are marketing and sales employees, 149 are distribution employees, 50 are engineering and development employees, and 479 are administrative personnel. We also use temporary, part time and seasonal employees as needed. None of the Company’s employees are covered by a collective bargaining agreement. We have never experienced a work stoppage and we believe that we have satisfactory working relations with our employees.

GEOGRAPHIC INFORMATION

     Note (13) to the consolidated financial statements contains geographic information concerning our net sales and long-lived assets.

AVAILABLE INFORMATION

     We maintain our Company’s main Internet site at the following address: http://www.hotus.com. The information contained on the Company’s website is not included as a part of, or incorporated by reference into, this report. We make available on or through our Internet website’s Investor Relations page under the heading “SEC Filings” certain reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”). These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, amendments to these reports and the reports required under Section 16 of the Securities Exchange Act of transactions in Company shares by directors and officers. Also on the Investor Relations page, under the heading “Corporate Governance”, are the Company’s Code of Ethics, Corporate Governance Guidelines and the Charters of the Committees of the Board of Directors. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. The public may also read and copy any of the materials we file with the SEC in accordance with the

Securities Exchange Act at the SEC’s Public Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0300. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information about our Company. The address of the SEC’s Internet site is http://www.sec.gov.

ITEM 1A. RISK FACTORS

     The ownership of our common shares involves a number of risks and uncertainties. Potential investors should carefully consider the following risk factors and uncertainties described below, together with the other information contained in this report, in evaluating us and our business before making an investment decision regarding our securities. If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. The risks listed below are not the only risks that we face. Additional risks that we do not yet know of or that we currently think are not significant may also impair our business operations.

We rely on key senior management to operate our business; the loss of any of these senior managers could have a material adverse impact on our business.

     We do not have a large group of senior executives in our business. Accordingly, we depend on a small number of key senior executives. We do not maintain “key man” life insurance on any of our key senior executives. The loss of any of these persons could have a material adverse effect on our business, financial condition and results of operations, particularly if we are unable to find, relocate and integrate adequate replacements for any of these persons. Further, in order to continue to grow our business, we will need to expand our key senior management team. We may be unable to attract or retain these persons. This could hinder our ability to grow our business and could disrupt our operations or materially adversely affect the success of our business.

We rely on our Global Enterprise Resource Planning System. Our failure to, or delays in, successfully implementing this system, including the consolidation of our inventories in our Southaven, Mississippi distribution facility could have a material adverse impact on our operations and profitability.

     Our business operations are dependent on our logistical systems, which include our order management system and our computerized warehouse network. These logistical systems depend on our new Global Enterprise Resource Planning System. On September 7, 2004, we implemented our new Global Enterprise Resource Planning System, along with other new technologies. Following the implementation of this new system, most of our businesses (other than our Housewares segment) ran under one integrated information system. We continue to closely monitor the new system and make normal and expected adjustments to improve its effectiveness. Complications resulting from process adjustments could potentially cause considerable disruptions to our business. The change to the new system continues to involve risk. Application program bugs, system conflict crashes, user error, data integrity issues, customer data conflicts and integration issues with certain remaining legacy systems all pose potential risks. Implementing new data standards and converting existing data to accommodate the new system’s requirements have required a significant effort across our entire organization.

     During the third fiscal quarter of 2005, we began the implementation and transition of our Housewares segment to the new system. The transition was completed late in the fourth fiscal quarter of 2006. We continue to implement several significant functionality enhancements related to both the Housewares segment’s and Personal Care segment’s systems. We expect this process will continue during fiscal 2007.

     This recent transition has included the:

•

building of a new 1,200,000 square foot distribution facility in Southaven, Mississippi which was completed and outfitted with new materials handling equipment and systems;

•		transitioning the warehousing, order fulfillment and shipment processes for our OXO products to our new Global Enterprise Resource Planning system;
•		the physical movement of the existing OXO inventory from its former distribution facility in Illinois to Mississippi;
•		the physical movement of other inventories from the Company’s existing distribution facilities to the new facility in Southaven, Mississippi; and
•		testing and implementation of the new distribution facility and systems.

     During the initial months after the transition of our Housewares segment to the new systems and our distribution facility in Southaven, Mississippi, we experienced warehouse order processing and shipment delays. These delays were the result of both software issues and adapting to the new equipment, new employees, and the operation of our new distribution facility. In response to these issues, management dedicated additional personnel and sent a seasoned operations management team to Southaven, Mississippi to assist local management in resolving technical and operational issues. The delays did cause a backlog in orders and in some cases, order cancellations. We continue to work this backlog down. We have addressed these issues with the affected customers and believe that over the long-term, the strength of our customer relationships will not be affected by the shipment delays. We believe that the impact was immaterial in the fourth quarter of fiscal 2006; however, we do expect some impact in the first fiscal quarter of 2007 due to lost revenue and costs associated with related concessions and accommodations to certain customers, and associated start up costs of the distribution center. The extent of the impact on the first fiscal quarter of 2007 is not yet determinable. We continue to work the backlog down, and expect operations to normalize in fiscal 2007. While we believe we have taken appropriate measures to mitigate the recent shipment disruptions arising from the transition of our Housewares segment, there can be no assurance that additional disruptions will not occur.

     We expect that this and other planned implementations and functional software enhancements will continue to strain our internal resources, could further impact our business, and may result in higher implementation costs and reallocation of human resources.

     To support these new technologies, we are continuously building and supporting a much larger and more complex information technology infrastructure. Increased computing capacity, power requirements, back-up capacities, broadband network infrastructure and increased security needs are all potential areas for failure and risk. We continue to rely substantially on outside vendors to assist us with implementation and enhancements and will continue to rely on certain vendors to assist us in maintaining some of our infrastructure. Should they fail to perform due to events outside our control, it could affect our service levels and threaten our ability to conduct business. We continue to transition many of these third party services to our in-house staff. The transition from third party services to in-house staffing of such services poses risks that could cause additional business disruptions. Finally, natural disasters may disrupt our infrastructure and our disaster recovery process may not be sufficient to protect against loss.

     Any interruption in our logistical systems would impact our ability to procure our products from our factories and suppliers, transport them to our distribution facilities, and store and deliver them to our customers on time and in the correct amounts. These and other factors described above could have a material and adverse affect our business, financial condition and results of operations.

Acquisitions and partnerships may be more costly or less profitable than anticipated and may adversely affect the price of our common shares.

     We are constantly looking for opportunities to make additional complementary strategic business and/or brand acquisitions. To the extent that these acquisitions are not favorably received by consumers, shareholders, analysts, and others in the investment community, the price of our common shares could be adversely affected. In addition, acquisitions involve numerous risks, including:

•		difficulties in the assimilation of the operations, technologies, products and personnel associated with the acquisitions,
•		the diversion of management’s attention from other business concerns,
•		risks of entering markets in which we have no or limited prior experience, and
•		the potential loss of key employees associated with the acquisitions.

     If we are unable to successfully integrate the operations, technologies, products, or personnel that we have acquired, our business, results of operations, and financial condition could be materially adversely affected.

Our sales are dependent on sales from several large customers and the loss of, or substantial decline in sales to, a top customer could have a material adverse effect on our revenues and profitability.

     A few customers account for a substantial percentage of our sales. Our financial condition and results of operations could suffer if we lost all or a portion of the sales to these customers. In particular, sales to Wal-Mart Stores, Inc., and its affiliate, SAM’S Club, and sales to Target Corporation accounted for approximately 22 percent and 10 percent, respectively, of our net sales in fiscal 2006. While no other customers accounted for ten percent or more of net sales, our top 5 customers accounted for approximately 46 percent of fiscal 2006 net sales. Although we have long-standing relationships with our major customers, no contracts require these customers to buy from us, or to purchase a minimum amount of our products. A substantial decrease in sales to any of our major customers could have a material adverse effect on our financial condition and results of operations.

     With the growing trend towards retail trade consolidation, we are increasingly dependent upon key customers whose bargaining strength is growing. We may be negatively affected by changes in the policies of our customers, such as on-hand inventory reductions, limitations on access to shelf space, use of private label brands, price demands and other conditions, which could negatively impact our financial condition and results of operations.

     A significant deterioration in the financial condition of our major customers could have a material adverse effect on our sales and profitability. We regularly monitor and evaluate the credit status of our customers and attempt to adjust sales terms as appropriate. Despite these efforts, a bankruptcy filing by a key customer could have a material adverse effect on our business, financial condition and results of operations.

Our projections of sales and earnings are highly subjective and our future sales and earnings could vary in a material amount from our projections.

     Most of our major customers purchase our products electronically through electronic data interchange and expect us to promptly deliver products from our existing inventories to the customers’ retail stores or distribution centers. This method of ordering products allows our customers to immediately respond to changes in demands of their retail customers. From time to time, we provide projections to our shareholders and the investment community of our future sales and earnings. Since we do not require long-term purchase commitments from our major customers and the customer order and ship process is very short, it is difficult for us to accurately predict the amount of our sales and related earnings. Our projections are based on management’s best estimate of sales using historical sales data and other information deemed relevant. These projections are highly subjective since sales to our customers can fluctuate substantially based on the demands of their retail customers and due to other risks described in this report. Additionally, changes in retailer inventory management strategies could make inventory management more difficult. Because our ability to forecast sales is highly subjective, there is a risk that our future sales and earnings could vary materially from our projections.

We are dependent on third party manufacturers, most of which are located in the Far East and any inability to obtain products from such manufacturers could have a material adverse effect on our business, financial condition and results of operations.

     All of our products are manufactured by unaffiliated companies, most of which are in the Far East. Risks associated with such foreign manufacturing include: changing international political relations; changes in laws, including tax laws, regulations and treaties; changes in labor laws, regulations, and policies; changes in customs duties and other trade barriers; changes in shipping costs; currency exchange fluctuations; local political unrest; an extended and complex transportation cycle; and the availability and cost of raw materials and merchandise. To date, these factors have not significantly affected our production in the Far East. However, any change that impairs our ability to obtain products from such manufacturers, or to obtain products at marketable rates, could have a material adverse effect on our business, financial condition and results of operations.

     With most of our manufacturers located in the Far East, our production lead times are relatively long. Therefore, we must commit to production in advance of customer orders. If we fail to forecast customer or consumer demand accurately, we may encounter difficulties in filling customer orders or in liquidating excess inventories. We may also find that customers are canceling orders or returning products. Distribution difficulties may have an adverse effect on our business by increasing the amount of inventory and the cost of storing inventory. Any of these results could have a material adverse effect on our business, financial condition and results of operations.

We have incurred substantial debt to fund acquisitions and capital expenditures, which could have an adverse impact on our business and profitability.

     During the second quarter of fiscal 2005, we incurred substantial debt. We incurred additional debt in fiscal 2006. The terms of all our debt agreements are more fully described in Notes (5) and (7) to the consolidated financial statements. As a result of these agreements, we are now operating under substantially more leverage and have begun to incur higher interest costs. This substantial increase in debt has added new constraints on our ability to operate our business, including but not limited to:

•

our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes, or other purposes,

•		an increased portion of our cash flow from operations will be required to pay interest on our debt, which will reduce the funds available to us for our operations,
•		a significant portion of our debt has been issued at variable rates of interest, which may result in higher interest expense in the event of increases in market interest rates,
•		our level of indebtedness will increase our vulnerability to general economic downturns and adverse industry conditions,
•		our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and conditions in the industries in which we operate,
•		the debt agreements contain financial and restrictive covenants, and our failure to comply with them could result in an event of default, which if not cured or waived, could have a material adverse effect on us. Significant restrictive covenants include limitations on, among other things, our ability under certain circumstances to:

	•		incur additional debt, including guarantees;
	•		incur certain types of liens;
	•		sell or otherwise dispose of assets;
	•		engage in mergers or consolidations;
	•		enter into substantial new lines of business; and
	•		enter into certain types of transactions with our affiliates.

Our disagreements with taxing authorities, tax compliance and the impact of changes in tax law could have an adverse impact on our business.

     As further discussed under Item 3. “Legal Proceedings,” and Note (8) to the accompanying consolidated financial statements, we are involved in various tax audits and related disputes over tax issues with the Inland Revenue Department (the “IRD”) in Hong Kong and the United States Internal Revenue Service (the “IRS”). We believe that we have complied with all applicable reporting and tax payment obligations and disagree with the taxing authorities’ positions on these various issues. We are vigorously defending our tax positions through all available administrative and judicial avenues.

     Although the final resolution of these disputes is uncertain and involves unsettled areas of the law, based on currently available information, we have provided for our best estimate of the probable tax liability for these matters. While the resolution of the issues may result in tax liabilities that are significantly higher or lower than the reserves established for these matters, management currently believes that any resolution will not have a material effect on our consolidated financial position or liquidity. However, an unfavorable resolution on any matter could have a material effect on our consolidated results of operations or cash flows in the quarter in which an adjustment is recorded or the tax is due or paid. See Note 18 to the consolidated financial statements for subsequent developments regarding the pending settlement of Hong Kong tax liabilities for fiscal years 1995 through 1997.

     The future impact of tax legislation, regulations or treaties, including any future legislation in the United States or abroad that would affect the companies or subsidiaries that comprise our consolidated group is always uncertain. Our ability to respond to such changes so that we maintain favorable tax treatment, the cost and

complexity of such compliance, and its impact on our ability to operate in jurisdictions flexibly always poses a risk.

Favorable tax treatment of our non-U.S. earnings is dependent on our ability to avoid classification as a Controlled Foreign Corporation. Changes in the composition of our shareholdings could have an impact on our classification. If our classification were to change, it could have a material negative effect on the largest U.S. shareholders and, in turn on the Company’s business.

     Because our company is a foreign corporation, we incur risks associated with our ability to avoid classification as a Controlled Foreign Corporation. In order for us to preserve our current tax treatment of our non-U.S. earnings, it is critical that we avoid Controlled Foreign Corporation status. A Controlled Foreign Corporation is a non-U.S. corporation whose largest U.S. shareholders (i.e., those owning 10 percent or more of its shares) together own more than 50 percent of the shares in such corporation. If a change of ownership of the Company were to occur such that the company became a Controlled Foreign Corporation, such a change could have a material negative effect on the largest U.S. shareholders and, in turn, on the Company’s business.

We materially rely on licensed trademarks, the loss of which could have a material adverse effect on our revenues and profitability.

     We are materially dependent on our licensed trademarks as a substantial portion of our sales revenue comes from selling products under licensed trademarks. As a result, we are materially dependent upon the continued use of such trademarks, particularly the Vidal Sassoon ^® and Revlon ^® trademarks. Actions taken by licensors and other third parties could diminish greatly the value of any of our licensed trademarks. If we were unable to sell products under these licensed trademarks or the value of the trademarks were diminished by the licensor due to their continuing long-term financial capability to perform under the terms of the agreements or other reasons, or due to the actions of third parties, the effect on our business, financial condition and results of operations could be both negative and material.

We have recently become involved in securities class action litigation which could have a material adverse effect on our business, consolidated financial position, results of operations and cash flows.

     As further discussed under Item 3. “Legal Proceedings,” and Note 10 to the accompanying consolidated financial statements, two class action lawsuits have been filed and consolidated into one action against the Company and certain officers on behalf of purchasers of publicly-traded securities of the Company alleging violations under the Securities Exchange Act. The lawsuit was brought in the United States District Court for the Western District of Texas and is still in the preliminary stages. The Company intends to defend the foregoing lawsuit vigorously, but, because the lawsuit has been recently filed, the Company cannot predict the outcome and is not currently able to evaluate the likelihood of success or the range of potential loss, if any, that might be incurred in connection with the action. The Company carries insurance that provides an aggregate coverage of $20,000 ($20 million) after a self-insured retention $500 ($500 thousand) for the period during which the claims were filed, but we cannot evaluate at this time whether such coverage will be adequate to cover losses, if any, arising out of the lawsuit. There is a risk that such litigation could result in substantial costs and divert management attention and resources from its business, which could adversely affect the Company’s business. If the Company were to lose on any issues connected with the lawsuit or if the lawsuit is not settled on favorable terms, the judgement or settlement may have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.

ITEM 1B. UNRESOLVED STAFF COMMENTS

     Not Applicable.

ITEM 2. PROPERTIES

* Facilities intended to be replaced in fiscal 2007 by the new 1,200,000 square foot distribution facility in Southaven, Mississippi.

ITEM 3. LEGAL PROCEEDINGS

      Hong Kong Income Taxes - The Inland Revenue Department (the “IRD”) in Hong Kong has assessed a total of $32,086 (U.S.) in tax on certain profits of our foreign subsidiaries for the fiscal years 1995 through 2003. Hong Kong levies taxes on income earned from certain activities previously conducted in Hong Kong. We are vigorously defending our position that we conducted the activities that produced the profits in question outside of Hong Kong. We also assert that we have complied with all applicable reporting and tax payment obligations.

     In connection with the IRD’s tax assessment for the fiscal years 1995 through 2003, we have purchased tax reserve certificates in Hong Kong totaling $28,425. Tax reserve certificates represent the prepayment by a taxpayer of potential tax liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve certificates exceeds the related tax liability. These certificates are denominated in Hong Kong dollars and are subject to the risks associated with foreign currency fluctuations.

     On May 10, 2006, the IRD and the Company reached a settlement regarding tax liabilities for the fiscal years 1995 through 1997. For those tax years, we have agreed to an assessment of approximately $4,019 including estimated penalties and interest. This agreement has been presented to the IRD’s Board of Review and is subject to their approval. Our consolidated financial statements at February 28, 2006 include adequate provisions for this liability. We expect the liability to be paid with $3,282 of tax reserve certificates and $737 in cash. If this settlement is approved, we have approximately $25,143 remaining in available tax reserve certificates for future settlement of any potential tax liability.

     If the IRD were to successfully assert the same position for fiscal years after fiscal year 2003, the resulting assessment could total $18,673 (U.S.) in taxes for fiscal years 2004 and 2005. We would vigorously disagree with the proposed adjustments and would aggressively contest this matter through applicable taxing authority and judicial procedures, as appropriate.

     Although the final resolution of the proposed adjustments is uncertain and involves unsettled areas of the law, based on currently available information, we have provided for our best estimate of the probable tax liability for this matter. While the resolution of the issue may result in tax liabilities which are significantly higher or lower than the reserves established for this matter, management currently believes that the resolution will not have a material effect on our consolidated financial position or liquidity. However, an unfavorable resolution could have a material effect on our consolidated results of operations or cash flows in the quarter in which an adjustment is recorded or the tax is due or paid.

      United States Income Taxes - The Internal Revenue Service (the “IRS”) has completed its audits of the U.S. consolidated federal tax returns for fiscal years 2000, 2001 and 2002. We previously disclosed that the IRS provided notice of proposed adjustments to taxes of approximately $13,424 for the three years under audit. We have resolved the various tax issues and reached an agreement on additional tax in the amount of $3,568. The resulting tax liability had already been provided for in our tax reserves and we have decreased our tax accruals related to the IRS audits for fiscal years 2000, 2001 and 2002, accordingly. This additional tax liability and associated interest of $914 were settled in the fourth quarter of fiscal 2006. The IRS is auditing the U.S. consolidated federal tax returns for fiscal years 2003 and 2004. Although the ultimate outcome of the examination cannot be predicted with certainty, management is of the opinion that adequate provisions for taxes in those years have been made in the Company’s consolidated financial statements.

      Securities Class Action Litigation - Class action lawsuits have been filed and consolidated into one action against the Company, Gerald J. Rubin, the Company’s Chairman of the Board, President and Chief Executive Officer, and Thomas J. Benson, the Company’s Chief Financial Officer, on behalf of purchasers of publicly-traded securities of the Company. The Company understands that the plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 thereunder, on the grounds that the Company and the two officers engaged in a scheme to defraud the Company’s shareholders through the issuance of positive earnings guidance intended to artificially inflate the Company’s share price so that Mr. Rubin could sell almost 400,000 of the Company’s common shares at an inflated price. The plaintiffs are seeking unspecified damages, interest, fees, costs, an accounting of the insider trading proceeds, and injunctive relief, including an accounting of and the imposition of a constructive trust and/or asset freeze on the defendant’s insider trading proceeds. The class period stated in the complaint was October 12, 2004 through October 10, 2005.

     The lawsuit was filed in the United States District Court for the Western District of Texas in November, 2005 and is still in the preliminary stages. The Company intends to defend the foregoing lawsuit vigorously, but, because the lawsuit has been recently filed, the Company cannot predict the outcome and is not currently able to evaluate the likelihood of success or the range of potential loss, if any, that might be incurred in connection with the action. However, if the Company were to lose on any issues connected with the lawsuit or if the lawsuit is not settled on favorable terms, the judgement or settlement may have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows. There is a risk that such litigation could result in substantial costs and divert management attention and resources from its business, which could adversely affect the Company’s business. The Company carries insurance that provides an aggregate coverage of $20,000 ($20 million) after a self-insured retention $500 ($500 thousand) for the period during which the claims were filed, but cannot evaluate at this time whether such coverage will be adequate to cover losses, if any, arising out of the lawsuit.

      Other Matters - We are involved in various other legal claims and proceedings in the normal course of operations. In the opinion of management, the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2006.

PART II

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

     The following table summarizes information about our equity compensation plans as of February 28, 2006. All outstanding awards relate to our common shares. All our equity compensation plans have been approved by shareholder vote.

(1)

Includes 331,716 shares authorized and available for issuance in connection with the Helen of Troy Limited 1998 Employee Stock Purchase Plan and 555,286 shares under the 1998 Employee Stock Option and Restricted Stock Plan.

PURCHASES OF HELEN OF TROY COMMON SHARES

     During the quarter ended August 31, 2003, our Board of Directors approved a resolution authorizing the purchase, in open market or through private transactions, of up to 3,000,000 shares of our common shares over a period extending through May 31, 2006. On April 25, 2006, our Board of Directors approved a resolution to extend the existing plan for three more years through May 31, 2009.

     We did not repurchase any common shares during fiscal 2006. We repurchased 757,710 and 806,126 shares at a total cost of $25,039 and $20,572, or an average price per share of $33.05 and $25.52 in fiscal 2005 and 2004, respectively. An additional 1,436,164 shares remain authorized for purchase under this plan.

ITEM 6. SELECTED FINANCIAL DATA

     The selected consolidated financial information set forth below has been summarized from our consolidated financial statements. This information contains certain reclassifications necessary to restate prior years’ operations of Tactica as a discontinued segment. This information should be read in conjunction with the consolidated financial statements and the related notes to consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” All currency amounts in this document are denominated in U.S. dollars.

For the year ended the last day of February,
(in thousands, except per share data)

(1)		Fiscal year 2005, 2004, 2003 and 2002 results presented include 100 percent of the results of Tactica under the line item, “Income (loss) from discontinued segment’s operations and impairment of related assets, net of tax.” We acquired a 55 percent interest in Tactica in March 2000. On April 29, 2004 we completed the sale of our interest in Tactica back to certain of its key operating manager-shareholders. Accordingly, the results of operations of Tactica have been reclassified out of income from continuing operations and working capital has been restated to eliminate the impact of Tactica’s current assets and current liabilities. Also, in the fourth fiscal quarter of 2004, we recorded a loss of $5,699 from the impairment of Tactica goodwill, net of $1,938 of related tax benefits. Our consolidated financial statements for fiscal 2005 (for the period of time we owned Tactica), 2004, 2003, 2002 and 2001, as restated include 100 percent of Tactica’s net income or loss because Tactica had accumulated a net deficit at the time that we acquired our ownership interest, and because the minority shareholders of Tactica had not adequately guaranteed their portion of the accumulated deficit.
(2)		In fiscal 2003, we adopted Emerging Issues Task Force Abstract 01-9 (“EITF 01-9”). EITF 01-9 requires that certain vendors record certain consideration given to customers as reductions of sales, rather than as selling, general, and administrative expenses. Items totaling $3,930 in fiscal 2002, were classified as selling, general, and administrative expenses have been reclassified as reductions to net sales.
(3)		No common shares were repurchased during the fiscal years ended 2006, 2003 and 2002. In fiscal 2005, we repurchased 757,710 common shares at a cost of $25,039. In fiscal 2004, we repurchased 806,126 common shares at a cost of $20,572.

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This discussion contains a number of forward-looking statements, all of which are based on management’s current expectations. Actual results may differ materially due to a number of factors, including those discussed on Page 4 of this report in the section entitled “Disclosure Regarding Forward-Looking Statements,” Item 1A. “Risk Factors,” and in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”

OVERVIEW OF THE YEAR’S ACTIVITIES

     We have grown our brand portfolio by acquiring well-recognized brands from larger consumer products companies, as well as other brands from smaller private companies. The brands we have purchased from larger consumer products companies have long histories of support and brand development. We believe that at the time we acquired them they were considered “non-core” by their previous owners and did not benefit from focused management or strong marketing support. When we acquire brands from smaller private companies, we usually do so because we believe they have been constrained by the limited resources of their prior owners. After acquiring a brand, we seek to increase its sales, market share and distribution in both existing and new channels. We pursue this growth through increased spending on advertising and promotion, new marketing strategies, improved packaging and formulations and innovative new products.

     In fiscal 2006, we continued to focus attention on growth opportunities on the international side of our business. We have reconfigured sales and distribution arrangements in certain key European and Latin American markets. Over the past year we have also set up distribution arrangements in a number of countries where we previously have not done significant business. We believe this has staged us to continue to extend the reach of our existing product portfolio abroad.

     Recently, in certain European and Asian Markets, we secured the rights to introduce a line of hair care appliances under the Toni & Guy ^® brand name. Toni & Guy ^® is an international chain of hundreds of hair salons throughout Europe that has expanded operations into certain key urban markets in the United States. We believe our association with Toni & Guy ^® will create a new sales opportunities for our products in Europe.

     Domestically, our core business continues to present challenges as we operate in mature markets where we already own significant market share. Our Company and industry are also facing challenges — sharply rising energy costs, reduced sales and increased costs due to the economic impact from hurricanes, and domestic and international marketplace pressures. Continued consolidation and growth in the largest of retailers has created a very competitive environment that requires careful target pricing, superb customer service, operational excellence in order to maintain deliveries and continuous product and process innovation. In this environment, we believe that a key way we will grow is by becoming highly operationally effective and efficient.

     We are now in the second year after the implementation of our global information system (which became operational for most of our Personal Care segment in September 2004). We continue to devote substantial internal resources to extending the functionality and performance of the system. We believe that timely and effective change and evolution in our systems will increase the total value proposition we offer to our customers and consumers, and thus increase our competitive advantage.

     Over the last year, we pursued two key initiatives to extend the reach of our business information systems. First, we converted our Housewares division to our new systems. Our Housewares segment distribution and logistics requirements differ significantly from our traditional Personal Care segment business. In our Housewares segment, we were required to improve our ability to deliver larger, more complex

assortments in smaller individual item volumes to a much more diverse group of retailers, as compared to our Personal Care segment. The systems change-over for the Housewares segment occurred in mid-February 2006. Conversions of this nature involve extremely complex processes, characterized by interruptions and the diversion of management’s attention for a period of time after the conversion as the organization adapts to the new system and seeks to respond quickly to its day-to-day operations requirements. During the initial months after the transition, we experienced some warehouse order processing and shipment delays resulting from software issues and adapting to the new equipment, new employees, and the operation of the new distribution facility. We continue to implement several significant functionality enhancements related to the Housewares segment’s systems, and expect this process to continue during fiscal 2007.

     Our second key initiative over the past year has been to consolidate and rationalize our U.S. domestic distribution capability. In the second quarter of fiscal 2006, we began construction of a 1,200,000 square foot distribution facility in Southaven, Mississippi. In November 2005, we took possession of the completed facility. Since then we have been transferring inventories to the new facility in stages. We now ship our houseware, grooming, skin care, and hair care products out of the new facility.

     Our next transition will be to move the balance of our domestic hair care appliance inventory from our existing 619,000 square foot facility in Southaven to the new 1,200,000 square foot facility. The new facility represents a complete, state-of-the-art distribution system and a significant additional technology investment for the Company. When fully matured, the new facility will become a seamless physical extension of our information technology system, and significantly extend our flexibility and effectiveness in serving our customers by delivering the right product, in the right quantities, at the right price and the right time.

     We believe these efforts and investments continue to stage us for the next level of growth as we now have an infrastructure well poised to handle additional shipment volume. Over the next fiscal year, our internal focus will be to integrate our Latin American operations into our operating system, and to look at additional opportunities to increase the efficiency of our supply chain through improved systems and processes. Our Housewares and Personal Care products businesses have begun to benefit from each segment’s industry specific expertise as we select best practices from each segment’s business on how to bring new product to market. We believe there are continued opportunities for increasing our efficiency and eliminating cost from our processes through streamlining and careful process consolidation of both segment’s supply chain operations.

Financial Highlights from Fiscal 2006

•		Consolidated net sales increased 1.4 percent, or $8,198, to $589,747 in fiscal 2006 versus $581,549 in fiscal 2005. Our Housewares segment provided 8.2 percentage points of consolidated net sales growth, or $47,657 over a full year of operations. Our Personal Care segment experienced a decline in sales of 7.9 percent, or $39,459, which is a 6.8 percentage point reduction based on consolidated net sales.
•		From a geographic perspective, net sales in the United States grew 2.6 percent, or $12,408, Latin America grew 27.1 percent, or $6,767, Canada grew 7.8 percent, or $1,624, and European and other international operations (principally the United Kingdom) experienced an overall 20.8 percent decline in net sales, or $12,601.
•		Our net sales growth includes the benefit of a net positive foreign exchange impact of $1,204.

•		Consolidated operating income declined 30 percent or $30,646 under the prior year. The change was due to increased cost of goods sold and increased selling, general and administrative costs. Key elements of increased cost of goods sold were raw materials price increases and product mix changes. Key elements of increased selling, general and administrative costs were increased personnel costs partially offset by lower incentive compensation costs, higher depreciation and amortization, increased media advertising, higher warehousing costs, higher outbound freight costs, increased property rental expense, and non-recurring costs associated with the consolidation of inventories and their transition to our new 1,200,000 square foot distribution facility in Southaven, Mississippi.
•		Interest expense was $16,866 in fiscal 2006 compared to $9,870 in fiscal 2005. The increase was the result of recognizing a full year’s worth of interest cost associated with our OXO acquisition, higher variable interest rates, and $914 of IRS interest costs incurred due to the settlement of a tax audit.
•		Other income (expense), net was $1,290 in fiscal 2006 compared to ($2,575) in fiscal 2005. Significant items contributing to the fiscal 2006 amount were $463 of interest income on an income tax refund, $400 of income from a favorable litigation settlement, a gain on the sale of a distribution facility of $1,305 and a loss on a bankruptcy settlement of $1,550. Significant items in the fiscal 2005 amount included an unrealized loss on marketable securities of ($3,410), interest income of $359, and other miscellaneous income of $476.
•		Income tax expense was $6,492 in fiscal 2006, or 11.6 percent of earnings before income taxes, compared to $12,907 in fiscal 2005, or 14.4 percent of earnings before income taxes. The decrease in income tax was due to significantly lower earnings before income taxes, the trend of realizing more of our income in lower tax rate jurisdictions, and tax losses in certain higher tax rate jurisdictions. These impacts were offset by $2,792 of additional U.S. taxes arising from a repatriation of $48,554 in foreign earnings as allowed under The American Jobs Creation Act of 2004.
•		As a result of the items noted above, our net earnings decreased from $76,450 in fiscal 2005 to $49,310 in fiscal 2006 or, in percentage terms, by 35.5 percent below the prior year.
•		Our diluted earnings per share decreased from $2.35 in fiscal 2005 to $1.56 in fiscal 2006, or by 33.5 percent.

Personal Care Segment

•		Appliances . Products in this group include electronic curling irons, thermal brushes, hair straighteners, hair crimpers, hair dryers, massagers, spa products, foot baths, electric clippers and trimmers. Net sales for fiscal 2006 decreased 10.5 percent compared to fiscal 2005. The primary reason for the revenue decline was our response to competitive pricing pressures both domestically and abroad, a loss of product placement, weak market conditions in the United Kingdom where key retailers ended calendar 2005 with significant excess retail inventories, and high customer returns in the first quarter of fiscal 2006. Vidal Sassoon ® , Revlon ® , Hot Tools ® , Dr. Scholl’s ® , Sunbeam ® , and Health o Meter ® were key brands in this group.
•		Grooming, Skin Care, and Hair Products . Net sales for fiscal 2006 increased 6.3% over fiscal 2005. The gains were the result of the launch of new items and packaging in the U.S. and Latin America for our Brut ® and Sea Breeze ® brands to which we are giving focused advertising support. Latin American Brut ® growth was exceptionally strong, with sales growth up 30.8 percent for the 2006 fiscal year when compared to 2005 fiscal results. Including the U.S. and Canada, Brut ® sales grew 15.9

		percent for fiscal 2006 overall when compared to fiscal 2005 results. Our grooming, skin care, and hair care portfolio includes the following brands: Brut ® , Sea Breeze ® , Skin Milk ® , Vitalis ® , Ammens ® , Condition 3-in-1 ® , Final Net ® , Vitapointe ® , TimeBlock ® and Epil-Stop ® .
•		Brushes, Combs, and Accessories . Net sales for fiscal 2006 decreased 10.9 percent compared to fiscal 2005. The drop was primarily due to certain customers moving to other sourcing alternatives. We continue to aggressively market a new line of Revlon ® accessories and other product initiatives to reverse the sales trend. We are emphasizing promotional placements across all channels of distribution with key branded products, which we believe is helping us to secure new business in selected accounts. Vidal Sassoon ® , Revlon ® and Karina ® were key brands in this group.

Housewares Segment

•		The Housewares segment’s reported net sales were $127,800 and $80,143 for fiscal years 2006 and 2005, respectively. We acquired OXO on June 1, 2004. Therefore, our reported net sales for fiscal 2005 did not include the net sales of OXO for the three months ended May 31, 2004, which was $21,255. On a fully comparable period basis, our Housewares segment sales would be $127,800 for fiscal 2006 versus $101,398 for the comparable months in fiscal 2005, for a net sales increase of 26.0 percent. Growth was driven by continued extension of our business within existing key customers and the addition of a new line of hand tools featuring our highly desired non-slip Good Grips ® comfort and ergonomic design, which had significant initial shipments in the second half of fiscal 2006. In addition to our new line of hand tools, we expanded our tea kettle line and introduced a line of unique silicone based textile kitchen mitts and trivets which have been well received. Good Grips ® , OXO Steel™ and OXO SoftWorks ® are our key brands in this group.
•		During the third fiscal quarter of 2005, we began the implementation and transition of our Housewares segment to our own internal management system. The transition was completed late in the fourth fiscal quarter of 2006 and included a conversion of the warehousing, order fulfillment and shipment processes for our OXO products to our new Global Enterprise Resource Planning system and the physical movement of inventory from a leased managed distribution facility in Illinois to the Company’s new distribution facility in Southaven, Mississippi. We continue to implement several significant functionality enhancements related to the Housewares segment’s systems and expect this process to continue during fiscal 2007.
		During the initial months after the transition of our Housewares segment to the new systems and our distribution facility in Southaven, Mississippi, we experienced warehouse order processing and shipment delays. These delays were the result of both software issues and adapting to the new equipment, new employees, and the operation of our new distribution facility. In response to these issues, management dedicated additional personnel and sent a seasoned operations management team to Southaven, Mississippi to assist local management in resolving technical and operational issues. The delays did cause a backlog in orders and in some cases, order cancellations. We continue to work this backlog down. We believe that the impact was immaterial in the fourth quarter of fiscal 2006; however, we do expect some impact in the first fiscal quarter of 2007 due to lost revenue and costs associated with related concessions and accommodations to certain customers, and associated start up costs of the distribution center. The extent of the impact on the first fiscal quarter of 2007 is not yet determinable. We continue to work the backlog down, and expect operations to normalize in fiscal 2007. We have addressed these issues with the affected customers and believe that over the long-term, the strength of our customer relationships will not be affected by the shipment delays.

While we believe we have taken appropriate measures to mitigate the recent shipment disruptions arising from the transition of our Housewares segment, there can be no assurance that additional disruptions will not occur.

     The following table sets forth, for the periods indicated, the impact acquisitions had on our net sales.

     In the table above, the percentages shown are the changes of each component as a percentage of the prior year’s total net sales. Core business net sales change represents the change in net sales for business that we operated over the same fiscal periods in the prior year. Net sales from acquisitions are net sales arising from business acquired with no comparable sales in the prior fiscal period. The net sales from acquisitions in fiscal 2006 are the sales from our new Housewares division in the first fiscal quarter of the 2006 and the Skin Milk ^® and TimeBlock ^® lines of skin care products through September 30, 2005. The Housewares segment was acquired on June 1, 2004, accordingly, net sales for fiscal 2005 does not include Housewares sales for the first fiscal quarter.

Net Sales:

     Consolidated net sales increased 1.4 percent or $8,198 in fiscal 2006 over fiscal 2005. New product acquisitions accounted for 5.1 percentage points, or $29,475 of the sales percentage growth over fiscal 2005. Net sales from new product acquisitions included net sales for the first fiscal quarter of 2006 for our Housewares segment (OXO) and the Skin Milk ^® and TimeBlock ^® lines of skin care products through September 30, 2005. Core business growth (growth without acquisitions) showed an overall decline in fiscal 2006 of $21,277 or 3.7 percent. We experienced core business growth in our grooming, skin care and hair care products business and our Housewares segment (net sales for the last 3 fiscal quarters of 2006), which combined to provide 4.0 percentage points of net sales growth. This growth was partially offset by a negative 7.7 percentage point impact on net sales volume from declines in our appliances and our brushes, combs and hair accessories business.

     Consolidated net sales increased 22.5 percent or $106,681 in fiscal 2005 over fiscal 2004. New product acquisitions accounted for 21.8 percentage points, or $103,606 of the sales growth over fiscal 2004. New product acquisitions included all Housewares segment products, acquired in June 2004; Skin Milk ^® and TimeBlock ^® lines of skin care products, acquired in September 2004; and seven months of sales of Brut ^® men’s grooming products through September of 2004. Brut ^® was acquired on September 29, 2003, accordingly the last five months of the 2005 fiscal year’s sales is treated as core sales because we have comparable sales for the prior year. Core business growth (growth without acquisitions) in fiscal 2005 was $3,075 or 0.7 percent. Core business growth came from our appliance businesses and grooming, skin care, and hair care products

business, providing 1.7 percentage points of our overall net sales growth, partially offset by the negative 1.0 percentage point impact of net sales volume declines in our brushes, combs and hair accessories business.

Segment Net Sales:

     Net sales decreased 7.9 percent or $39,459 in our Personal Care segment in fiscal 2006 under fiscal 2005. On a percentage point basis (percent of total consolidated net sales), the net decline accounted for 6.8% of the change in overall consolidated net sales. The grooming, skin care and hair care products business provided 0.9 percentage points or $5,044 of our overall net sales growth. This was offset by declines of 7.0 percentage points, or $40,796 in our appliance business and 0.7 percentage points or $3,707 in our brushes, combs and hair accessories business. The primary reason for the revenue decline was our response to competitive pricing pressures both domestically and abroad, a loss of product placement, weak market conditions in the United Kingdom where key retailers exited calendar 2005 with significant excess retail inventories, and high customer returns in the first quarter of fiscal 2006. With the exception of the United Kingdom, we experienced net sales growth in every other European market we operate in. In fiscal 2006, appliances and brushes, combs and accessories accounted for 82 percent of the segment’s net sales while grooming, skin care and hair care products accounted for 18 percent of the Personal Care segment’s net sales.

     Net sales increased 5.6 percent or $26,538 in our Personal Care segment in fiscal 2005 over fiscal 2004.$23,463 or 4.9 percentage points of the fiscal 2005 incremental net sales growth, was due to the acquisitions of the Skin Milk ^® and TimeBlock ^® lines of skin care products in September 2004 and seven months of sales of Brut ^® men’s grooming products through September of 2004. Brut ^® was acquired on September 29, 2003. Accordingly, the last five months of fiscal 2005’s net sales was treated as core business sales because we had comparable net sales for fiscal 2004. As previously discussed, core business growth in this segment contributed $3,075 or 0.7 percentage points. Core business growth came from our appliance businesses and grooming, skin care and hair care products business, providing 1.7 percentage points of our overall sales growth, offset by the negative 1.0 percent impact of sales volume declines in our brushes, combs and hair accessories business. In fiscal 2004, we sold certain niche products through various channels of distribution that accounted for $14,300 in fiscal 2004 net sales. We evaluated the financial results and effort required for this business and decided not to continue marketing these products. We phased out of the business towards the end of fiscal 2004 and had insignificant sales activity in fiscal 2005. Additionally, fourth quarter sales for fiscal 2005 were negatively impacted by softer than expected holiday season sales across many categories of merchandise for certain retailers. This, in turn, resulted in lower sales to these retailers in late January and early February 2005 as the customers lowered their overall inventory levels. In fiscal 2005, appliances and brushes, combs and accessories accounted for 84 percent of the segment’s net sales while grooming, skin care and hair care products accounted for 16 percent of the segment’s net sales.

     The Housewares segment’s reported net sales were $127,800 and $80,143 for fiscal years 2006 and 2005, respectively. Reported net sales for fiscal 2005 excluded $21,255 of pro forma net sales for the three months ended May 31, 2004 since we did not acquire OXO until June 1, 2004. On a fully comparable period basis, our Housewares segment sales would be $127,800 for fiscal 2006 versus $101,398 for the full fiscal 2005 year, for a net sales increase of 26.0 percent.

     Growth has been driven by continued extension of our business within existing key customers, and the addition of a new line of hand tools featuring our highly desired non-slip Good Grips ^® comfort and ergonomic design, which had significant initial shipments in the second half of fiscal 2006. In addition to our new line of hand tools, we expanded our tea kettle line and introduced a line of unique silicone based textile kitchen mitts and trivets which have been well received. In fiscal 2006, food preparation products accounted for 76 percent

of the segment’s net sales, household cleaning tools accounted for 11 percent of the segment’s net sales, and storage, organization, garden tools and all other categories accounted for 13 percent of the segment’s net sales.

     As previously mentioned, the Housewares segment was in operation for the last nine months of fiscal 2005. The Housewares segment’s net sales during fiscal 2005 were $80,143. In fiscal 2005, food preparation products accounted for 84 percent of the segment’s net sales, household cleaning tools accounted for 11 percent of the segment’s net sales, and storage, organization, garden tools and all other categories accounted for 5 percent of the segment’s net sales.

Geographic Net Sales:

     The following table sets forth, for the periods indicated, our net sales by geographic region, in dollars, as a percentage of net sales, and as a year-over-year percentage change.

(1)

Net sales percentages by geographic region are computed as a percentage of the geographic region’s net sales to total net sales.

     In fiscal 2006, the United States accounted for 2.1 percentage points (percent of total consolidated net sales), of our consolidated net sales growth, or $12,408, while international operations experienced an overall 0.7 percentage point decline, or $4,210 of our consolidated net sales growth. Latin American operations accounted for 1.1 percentage points of our consolidated net sales growth, or $6,767. Canadian operations accounted for 0.3 percentage points of our consolidated net sales growth, or $1,624. Europe and other country operations accounted for a 2.1 percentage point decline, or a $12,601 consolidated net sales decline. Net sales in the United Kingdom accounted for $16,209 of the European and other consolidated net sales decline due to weak retail market conditions in most of our Personal Care segment product categories exacerbated by key retailers ending calendar 2005 with significant excess retail inventories. With the exception of the United Kingdom, we saw net sales growth in remaining European and other foreign markets in which we operate. Our net sales growth included the benefit of a net positive foreign exchange impact of $1,204 in fiscal 2006. In fiscal 2006 Canada, Europe and other, and Latin American regions accounted for approximately 22, 47 and 31 percent of international net sales, respectively.

     In fiscal 2005, the United States accounted for 16.3 percent of our consolidated net sales growth, or $77,356 while international operations provided 6.2 percent or $29,325 of our consolidated net sales growth. Our net sales growth includes the benefit of a net positive foreign exchange impact of $4,260 in fiscal 2005. Canada, Europe and other, and Latin American regions accounted for approximately 20, 57 and 23 percent of international net sales, respectively.

Gross Profit Margins:

     Gross profit, as a percentage of net sales, decreased to 45.2 percent in fiscal 2006 from 47.2 percent in fiscal 2005. The 2.0 percent decrease in gross profit was due to:

•		a combination of the higher costs of customer promotion programs which reduced net sales;
•		a reduction in sales prices on certain key items in order to maintain our competitive position; and
•		price increases on raw materials used in our grooming, skin care, and hair products.

     Overall, margins benefited from favorable currency exchange rates; however, exchange rates were not as favorable in 2006 as they were in 2005. The Canadian Dollar, Brazil Real and Mexican Peso were all a source of exchange rate gains. These gains where somewhat offset by unfavorable exchange rates for the British Pound and Euro in the second half of fiscal 2006. In fiscal 2006, almost all of our products were purchased in U.S. dollars.

     Gross profit, as a percentage of net sales, increased to 47.2 percent in fiscal 2005 from 45.7 percent in fiscal 2004. The increase was primarily due to:

•		a combination of sales mix changes to higher margin items resulting from the acquisition of six liquid and powder hair and skin care brands from The Procter & Gamble Company in October 2002, the Brut ® acquisition in September 2003 and the OXO acquisition in June 2004;
•		selected product cost decreases; and
•		new item introductions at higher margins, all of which were partially offset by selling price decreases on selected items.

     Favorable currency exchange rates for the British Pound and Euro also helped improve margins in fiscal 2005 and fiscal 2004. During fiscal 2005, 41.3 percent of International sales were in British Pounds or Euros. In fiscal 2005, almost all of our products were purchased in U.S. dollars.

Selling, general, and administrative expense (“SG&A”):

     SG&A increased to 33.1 percent of net sales in fiscal 2006 from 29.7 percent in fiscal 2005. The 3.4 percent increase in SG&A between fiscal 2006 and fiscal 2005 was principally due to:

•		increased personnel expenses partially offset by lower incentive compensation costs;
•		higher depreciation associated with our new information system;
•		increased advertising;
•		higher warehouse costs due to the use of outside third party warehouses to manage and distribute certain inventories which were consolidated into our new 1,200,000 square foot distribution facility in Mississippi (as more fully discussed in Note 2 to our consolidated financial statements);
•		non-recurring moving and start-up costs incurred in fourth fiscal quarter 2006 in connection with the physical transition to the new distribution facility;
•		higher outbound freight costs (primarily from a sharp rise in fuel surcharges);

•		higher royalty costs due to the growth in the Housewares segment; and
•		increased operating rent expense and property taxes.

     SG&A increased to 29.7 percent of net sales in fiscal 2005 from 27.7 percent in fiscal 2004. The 2.0 percent increase in SG&A between fiscal 2005 and fiscal 2004 was principally due to:

•		increased personnel expenses and incentive compensation costs;
•		increased consulting fees and depreciation associated with our new information system, which was placed into service early in our third fiscal quarter of fiscal 2005;
•		increased consulting fees resulting from our compliance efforts with Section 404 of the Sarbanes-Oxley Act of 2002; and
•		an exchange rate loss of $1,142 in fiscal 2005 versus an exchange rate gain of $1,216 in fiscal 2004.

SG&A as previously discussed, accounted for the decrease in operating income in fiscal 2006 from fiscal 2005. In fiscal 2005, increases in SG&A, as previously discussed, accounted for most of the decline from fiscal 2004.

     The Housewares segment’s operating income increased $9,087 or 36.3 percent for fiscal 2006 compared to fiscal 2005. $7,388 of the increase was due to the inclusion of the first fiscal quarter’s operations in fiscal 2006, while fiscal 2005 did not include first quarter operations since we did not acquire OXO until June 1, 2004. Gross profit declined due to product mix as OXO expanded its food preparation business, adding a number of items which have lower margins, but carry higher price points. In 2005, OXO incurred price increases from certain suppliers due to increases in resin and stainless steel materials prices. The Housewares segment’s operating income as a percentage of the segment’s net sales was 26.7 and 31.2 percent for fiscal 2006 and 2005, respectively.

     The Houseware segment’s decline in operating income as a percentage of the segment’s net sales was 4.5 percent in fiscal 2006 over fiscal 2005. This was principally due to higher warehouse costs due to the use of outside third party warehouses to manage and distribute certain inventories which were consolidated into our new 1,200,000 square foot distribution facility (as more fully discussed in Note 17 to our consolidated financial statements), and one-time moving and start-up costs incurred in the fourth fiscal quarter in connection with the physical transition to the new distribution facility.

Interest expense and Other income (expense) :

     Interest expense increased to $16,866 in fiscal 2006 compared to $9,870 in fiscal 2005. The overall increase in interest expense is the result of the inclusion of a full year’s interest expense from the use of both short-term and long-term debt to fund the fiscal 2005 acquisitions, $914 of interest incurred on IRS tax payments made to settle tax disputes related to prior years (see Note (8) to our consolidated financial statements), and an increase in interest rates on our variable rate debt.

     Interest expense increased to $9,870 in fiscal 2005 compared to $4,047 in fiscal 2004. The overall increase in interest expense is the result of the use of both short-term and long-term debt to fund the acquisition of OXO business and TimeBlock ^® and Skin Milk ^® brands (see Notes (2), (4), (5), (7) and (17) to our consolidated financial statements for related discussions of new debt financings and the OXO business, and brand acquisitions).

     Other income (expense) was $1,290, ($2,575) and $4,312 in fiscal 2006, 2005 and 2004, respectively. The following schedule shows key components of other income (expense):

		Fiscal Year Ended (in thousands)												% of Net Sales (1)												% Change
		2006				2005				2004				2006				2005				2004				06/05				05/04
Other income (expense):
Interest income		$	889			$	359			$	438				0.2	%			0.1	%			0.1	%			147.6	%			-18.0	%
Realized and unrealized gain (losses) on securities			(135	)			(3,410	)			311				0.0	%			-0.6	%			0.1	%			-96.0	%			*
Litigation settlement gain, net			400				—				2,600				0.1	%			0.0	%			0.5	%			*				*
Miscellaneous other income			136				476				963				0.0	%			0.1	%			0.2	%			-71.4	%			-50.6	%
Total other income (expense)		$	1,290			$	(2,575	)		$	4,312				0.2	%			-0.4	%			0.9	%			-150.1	%			-159.7	%
* Calculation is not meaningful

(1)

Sales percentages shown are computed as a percentage of total net sales.

     Fiscal year 2006 interest income was higher than the previous year primarily due to the receipt of $463 of interest on an income tax refund. Interest income continued to trend lower in fiscal 2005 and 2004 due to lower levels of temporarily invested cash being held each year.

     Realized and unrealized losses on securities for fiscal 2006 included a $30 loss on marketable securities acquired in connection with the sale of Tactica (see Note 16 to our consolidated financial statements), and $95 of unrealized losses on other securities. The principal items comprising miscellaneous other income for fiscal 2006 includes a gain on the sale of a distribution facility of $1,304 (see Note (2) to our consolidated financial statements) offset by a loss on a bankruptcy settlement of $1,550 (see Note (16) to our consolidated financial statements).

     Realized and unrealized losses on securities for fiscal 2005 included a $2,910 loss on marketable securities acquired in connection with the sale of Tactica (see Note (16) to our consolidated financial statements). These marketable securities carried a restriction that prevented us from disposing of the stock prior to July 31, 2005, and were accordingly classified as stock available for sale. At acquisition, the securities had a market value of $3,030. At February 28, 2005, the market value of these securities was $120. Management determined the decline in market value to be other than temporary and accordingly recorded the $2,910 loss.

     We recorded other income of $400 and $2,600 in fiscal 2006 and 2004, respectively, for favorable litigation settlements. We pursued these cases in order to protect certain trademark and other intangible property rights we own.

Income tax expense:

     Our fiscal 2006 income tax expense was 11.6 percent of net income before taxes, continuing a trend towards lower rates over the past years. The current year’s rate is substantially lower than the 14.4 percent and 16.8 percent rates that we experienced in fiscal 2005 and 2004, respectively. The decline was due to the continuing trend of more of our income in fiscal 2006 and 2005 being taxed in lower tax rate jurisdictions as non-U.S. operations continue to become a larger portion of our business. The Company established a Macao offshore company (“MOC”) and began operating from Macao in the third quarter of fiscal 2005. As a MOC we have been granted an indefinite tax holiday and currently pay no taxes. In addition, in fiscal 2006 we incurred tax losses in certain higher rate jurisdictions, this impact was offset somewhat by $2,792 of additional U.S. tax arising from our fourth quarter repatriation of $48,554 in foreign earnings as allowed under The American Jobs Creation Act of 2004 (see Note (8) to our consolidated financial statements).

     In fiscal 2005 we decreased our tax accruals by $2,046 due to the settlement reached with the United States Internal Revenue Service for fiscal years 2000 through 2002. Had these accruals not been adjusted, our income tax expense for fiscal 2005 would have been 16.7 percent of net income before taxes.

DISCONTINUED OPERATIONS

     As more fully described in Note (16) to our consolidated financial statements, on April 29, 2004 we completed the sale of our 55 percent interest in Tactica back to certain shareholder-operating managers. In exchange for our 55 percent share of Tactica and the release of $16,396 of its secured debt and accrued interest owed to us, we received marketable securities, intellectual properties, and the right to certain tax refunds.

     Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) provides accounting guidance for accounting for segments to be disposed by sale and, in our circumstances, requires us to report Tactica as a discontinued operation. SFAS 144 requires us

to report Tactica’s operating results, net of taxes, as a separate summarized component after net income from continuing operations for each year presented. In fiscal 2005 we recorded a loss of $222 net of taxes in connection with the discontinued operations of Tactica. For fiscal 2004, in connection with the discontinued operations of Tactica and the impairment of its goodwill, we recorded a total loss of $11,040 net of taxes. The accompanying consolidated statements of income and consolidated statements of cash flows contain all appropriate reclassifications for each year presented.

as we consolidated our warehouse operations into our new Southaven, Mississippi distribution facility. In addition, in some product categories, we increased our purchases to take advantage of favorable current prices, which we expect may increase as a result of recent increases in petroleum prices and the prices of raw materials such as copper, steel and plastics.

     Working capital increased to $185,568 at the end of fiscal 2006 compared to $155,738 at the end of fiscal 2005. Our current ratio increased to 2.5:1 in fiscal 2006 from 2.2:1 in fiscal 2005. Our current ratio increased because our current assets grew in percentage terms faster than our current liabilities and long term debt.

Investing Activities:

     In fiscal 2006, investing activities used $35,264 of cash compared with $279,116 used in fiscal 2005. Listed below are some significant highlights of our 2006 investing activities:

•		During the second fiscal quarter of 2006, we commenced construction of a 1,200,000 square foot distribution facility in Southaven, Mississippi. On November 22, 2005 we took possession of the completed facility paying a final purchase price of $33,744. Total costs of the project, including warehouse equipment and fixtures was $45,862. The project was funded out of a combination of cash from operations, our existing revolving line of credit and draws against $15,000 of Industrial Revenue Bonds, as further discussed under Note (7) to our consolidated financial statements and the proceeds from the sale of our existing facility in Southaven, Mississippi, as discussed below.
•		On February 2, 2006, we sold a 619,000 square foot distribution facility in Southaven, Mississippi for $16,850 recording a gain on the sale of $1,304. We are currently in the process of transitioning the operations in this facility to the new distribution facility discussed above. We entered into a temporary lease agreement with the new owners through April 2006 calling for monthly rentals of $141 per month including insurance and property tax payments. After April 2006, we will pay rent for this facility on a month to month basis, as required in order for us to complete our transition of operations to our new facility.
•		For the 2006 fiscal year, we incurred capital expenditures of $267 on our Global Enterprise Resource Planning System. Capital expenditures on this system have moderated over levels of spending in the past two years. We expect to continue to invest in functionality enhancements to the new system in the quarters to follow. Also during the latest fiscal year, we spent $842 converting OXO to the new system. We currently estimate the balance of costs yet to be incurred on enhancements and the OXO conversion to be $507.
•		In fiscal 2006, we also invested $1,497 in new molds and tooling, $689 on distribution equipment and material handling systems at our existing operational facilities, $1,183 on general computer software and hardware and $1,589 for recurring additions and/or replacements of fixed assets in the normal and ordinary course of business.
•		We continue to invest in new patents. During the first three quarters of fiscal 2006 we spent $438 on new patent costs and registrations.

		Listed below are some significant highlights of our 2005 and 2004 investing activities:
•		On June 1, 2004 we spent $273,173 to acquire certain assets and liabilities of OXO International from WKI Holding Company, Inc. OXO serves as the underlying business platform for our new Housewares segment, offering home product tools in several categories including kitchen, cleaning, barbecue, barware, garden, automotive, storage and organization. During fiscal 2005, $262,228 of the purchase price and subsequent purchase price adjustments were recorded under the investing activities section of the cash flow statement for the fiscal year ended February 28, 2005.
•		On September 29, 2004, we acquired certain assets related to the worldwide production and distribution of TimeBlock ® and Skin Milk ® body and skin care products lines from Naterra International, Inc. TimeBlock ® is a line of clinically tested anti-aging skin care products. Skin Milk ® is a line of body, bath and skin care products enriched with real milk proteins, vitamins and botanical extracts. The assets consist principally of patents, trademarks and trade names, product formulations and production technology, distribution rights and customer lists. The Company paid the purchase price of $12,001 in cash funded out of the Company’s revolving line of credit. The purchase price was allocated $11,906 to trademarks and $95 to property and equipment. The entire purchase price was recorded in the investing activities section of the cash flow statement for the fiscal year ended February 28, 2005.
•		On December 15, 2004, we sold a 12,000 square foot office facility in Hong Kong for $6,726 resulting in a $22 loss. The facility was previously used as a procurement office, procurement showroom and staff training site. These functions were moved to other facilities we maintain in Macao and China. The proceeds from the sale of this facility are recorded under the investing activities section of the cash flow statement for the fiscal year ended February 28, 2005.
•		During fiscal 2005, we incurred capital expenditures of $5,760 on our Global Enterprise Resource Planning System. On September 7, 2004, we went live on the new system. Capital spending on the initial implementation was substantially complete. In fiscal 2005, we spent $198 to begin the process of converting OXO to the new system.
•		During fiscal 2005, we also invested $991 in new molds and tooling, $1,734 on land to be used for future expansion, $876 on additional computer software and hardware and $2,101 for recurring additions and/or replacements of fixed assets in the normal and ordinary course of business.
•		During fiscal 2005, we also invested an additional $374 in patent development costs primarily on behalf of our Housewares segment.
•		In fiscal 2004, we spent $55,255 to acquire from Unilever NV all marketing rights, formulas, fixed assets and production process know-how to distribute the Brut ® brands in North America, Latin America and the Caribbean. This transaction is more fully described in Note (4) to the consolidated financial statements.
•		We spent $947 in fiscal 2004 completing the outfitting and startup of our former Mississippi distribution facility, $2,142 on our new office facility in the UK, $5,523 on our global information system, and $444 for normal and recurring additions and/or replacements of fixed assets in the normal and ordinary course of business.

Financing Activities:

		During fiscal 2006, financing activities used $2,923 of cash. Highlights of those activities follow.
•		During fiscal 2006, 161,675 share option grants were exercised for common shares providing $1,798 of cash and $402 of tax benefits. Purchases through our employee stock purchase plan of 22,171 shares provided an additional $396 of cash. No common shares were repurchased during the fiscal year.
•		In August, 2005, we entered into a Loan Agreement with the Mississippi Business Finance Corporation (the “MBFC”) in connection with the issuance by the MBFC of up to $15,000 Mississippi Business Finance Corporation Taxable Industrial Development Revenue Bonds, Series 2005 (Helen of Troy LP Southaven, MS Project) (the “Bonds”). The proceeds of the Bonds are to be used for the acquisition and installation of equipment, machinery and related assets located in our new Southaven, Mississippi distribution facility then under construction. Interim draws, accumulating up to the $15,000 limit can be made through May 31, 2006, with interest paid quarterly. When all draws are completed, the outstanding principal will convert to five-year Bonds with principal paid in equal annual installments beginning May 31, 2007, and interest paid quarterly. The Bonds can be prepaid without penalty any time after August 11, 2006.
		The Bonds will bear interest at a variable rate as elected by the Company: based on either Bank of America’s prime rate, or the respective 1, 2, 3, 6, or 12-month LIBOR rate plus a margin of 0.75% to 1.25% based upon the “Leverage Ratio” at the time. The “Leverage Ratio” is defined by the Loan Agreement as the ratio of total consolidated indebtedness, including the subject funding on such date to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) for the period of the four consecutive fiscal quarters most recently ended.
		In September 2005 we made an initial draw of $4,974 under the Bonds. At that time, pursuant to the loan agreement, we elected a 12-month LIBOR rate plus a margin of 1.125 percent. As of February 28, 2006, we had principal outstanding of $4,974 under this agreement with interest payable at 5.42 percent. In connection with the new Loan Agreement, we incurred $91 of financing costs, which will be amortized over the life of the new agreement.
		As of February 28, 2006, we were in compliance with all covenants under all of our outstanding financing agreements.
		During fiscal 2005, financing activities provided $202,451 of cash. Highlights of those activities follow.
•		During fiscal 2005, we entered into a series of financing transactions that established a new five-year, $75,000 revolving credit facility, cancelled an existing $50,000 revolving credit facility, borrowed and subsequently repaid $200,000 under a Term Loan Credit Agreement, and issued $225,000 of floating rate senior debt with five, seven and ten year maturities.
		On June 1, 2004, we acquired certain assets and liabilities of OXO International for a net cash purchase price of $273,173, including the assumption of $4,040 of certain liabilities. To fund the acquisition, we entered into a five-year $75,000 Revolving Line of Credit Agreement, dated as of June 1, 2004, with Bank of America, N.A. and other lenders and a one year $200,000 Term Loan Credit Agreement, dated as of June 1, 2004, with Banc of America Mezzanine Capital, LLC. The purchase price of the OXO International acquisition was funded by borrowings of $73,173 under the Revolving Line of Credit Agreement and $200,000 under the Term Loan Credit Agreement.

		Borrowings under the Revolving Line of Credit Agreement accrue interest equal to the higher of the Federal Funds Rate plus 0.50 percent or Bank of America’s prime rate. Alternatively, upon timely election by the Company, borrowings accrue interest based on the respective 1, 2, 3, or 6-month LIBOR rate plus a margin of 0.75 percent to 1.25 percent based upon the “Leverage Ratio” at the time of the borrowing. The “Leverage Ratio” is defined by the Revolving Line of Credit Agreement as the ratio of total consolidated indebtedness, including the subject funding on such date to consolidated EBITDA for the period of the four consecutive fiscal quarters most recently ended, with EBITDA adjusted on a pro forma basis to reflect the acquisition of OXO and the disposition of Tactica. The rates paid on various draws during the period from June 1, 2004 through February 28, 2005 ranged from 2.195 percent to 5.500 percent. The new credit line allows for the issuance of letters of credit up to $10,000. Outstanding letters of credit reduce the $75,000 borrowing limit dollar for dollar. Upon the execution of this credit facility, our previous $50,000 unsecured revolving credit facility with Bank of America was cancelled. As of February 28, 2006, no borrowings or letters of credit were outstanding under the Revolving Line of Credit. All amounts are due and the facility terminates on June 1, 2009. The five, seven and ten year notes mature on June 29, 2009, 2011 and 2014, respectively. The Revolving Line of Credit Agreement requires the maintenance of certain Debt/EBITDA, fixed charge coverage ratios, and other customary covenants. The obligations under the agreement are unsecured. The agreement has been guaranteed, on a joint and several basis, by the parent company, Helen of Troy Limited, and certain U.S. subsidiaries.
		Borrowings under the $200,000 Term Loan Credit Agreement were subsequently paid off with the proceeds of the funding of $225,000 Floating Rate Senior Notes on June 29, 2004, as discussed in Notes (5) and (7) to the consolidated financial statements. For the period, outstanding borrowings under the Term Loan Credit Agreement accrued interest at LIBOR plus a margin of 1.125 percent.
		On June 29, 2004, we closed on a $225,000 Floating Rate Senior Note (“Senior Notes”) financing arranged by Banc of America Securities LLC with a group of ten financial institutions. The Senior Notes consist of $100,000 of five year notes, $50,000 of seven year notes, and $75,000 of ten year notes. Interest on the notes is payable quarterly. Interest rates are reset quarterly based on the three-month LIBOR rate plus 85 basis points for the five and seven year notes, and the three-month LIBOR rate plus 90 basis points for the ten year notes. Interest rates during the latest fiscal year on these notes ranged from 2.436 to 3.410 percent for the five and seven year notes, and 2.486 to 3.460 percent for the ten year notes. The Senior Notes allow for prepayment subject to the following terms: five year notes could be prepaid in the first year with a 2 percent penalty, thereafter there is no penalty; seven and ten year notes could be prepaid after one year with a 1 percent penalty, and after two years with no penalty. The proceeds of the Senior Notes financing were used to repay the $200,000 borrowings under the Term Loan Credit Agreement, and $25,000 of the outstanding borrowings on our $75,000 Revolving Line of Credit Agreement. The Senior Notes are unsecured and require the maintenance of certain Debt/EBITDA, fixed charge coverage ratios, consolidated net worth levels, and other customary covenants. The Senior Notes have been guaranteed, on a joint and several basis, by the parent company, Helen of Troy Limited, and certain U.S. subsidiaries.
		In connection our fiscal 2005 financing transactions, we incurred $4,429 of financing costs. These costs are being amortized over the related lives of the various notes financed, ranging from 5 to 10 years.
•		During fiscal 2005, we purchased and retired a total of 376,060 common shares on the open market at a total purchase price of $11,242. An additional 381,650 common shares were tendered by a key shareholder and retired as payment and satisfaction of $13,797 on share purchase price and federal income tax obligations arising from the exercise of 1,000,000 options by a key employee-shareholder. This transaction was valued at an average share price of $36.15 using the average of the high bid and

		low bid prices for Helen of Troy shares as reported on the NASDAQ National Market System on the day the shares were tendered.
•		Proceeds from employee option exercises and purchases through our employee stock purchase plan combined to provide $3,122 of cash and $8,320 in tax benefits in fiscal 2005.

     During fiscal 2004, we funded our activities with internally generated cash flow. While we borrowed from time to time against certain revolving credit facilities, all borrowings were short-term and were repaid within months of the initial advances. Highlights of our 2004 financing activities follow.

•		On September 22, 2003, certain of our subsidiaries entered into a $50,000 unsecured revolving credit facility with Bank of America to facilitate short-term borrowings and the issuance of letters of credit. All borrowings accrued interest equal to the higher of the Federal Funds Rate plus 0.50 percent or Bank of America’s prime rate. Alternatively, upon our timely election, borrowings accrued interest based on the respective 1, 2, 3, or 6 month LIBOR rate plus 0.75 percent (based upon the term of the borrowing). The credit facility was cancelled on June 1, 2004.
•		During the second fiscal quarter of fiscal 2004, our Board of Directors approved a resolution to purchase, in open market or through private transactions, up to 3,000,000 of our common shares. During fiscal 2004, we purchased and retired a total of 344,000 common shares on the open market at a total purchase price of $7,877. An additional 462,126 common shares were tendered by a key shareholder and retired as payment and satisfaction of $12,695 of share purchase price and federal income tax obligations arising from the exercise of 1,200,000 options by a key employee-shareholder. This transaction was valued at an average share price of $27.47 using the average of the high bid and low bid prices for Helen of Troy shares as reported on the NASDAQ National Market System on the day the shares were tendered.
•		Proceeds from employee option exercises and purchases through our employee stock purchase plan combined to provide $8,026 of cash and $8,044 in tax benefits in fiscal 2004.

*		The future obligation for interest on our variable rate debt is estimated assuming the rates in effect as of February 28, 2006. This is only an estimate as actual rates will vary over time. For instance, a 1 percent increase in interest rates could add $2,300 per year to floating rate interest expense over the next year.

Off-Balance Sheet Arrangements:

     We have no existing activities involving special purpose entities or off-balance sheet financing.

Current and Future Capital Needs:

     Based on our current financial condition and current operations, we believe that cash flows from operations and available financing sources will continue to provide sufficient capital resources to fund the Company’s foreseeable short and long-term liquidity requirements. We expect our capital needs to stem primarily from the need to purchase sufficient levels of inventory and to carry normal levels of accounts receivable on our balance sheet. In addition, we continue to evaluate acquisition opportunities on a regular basis and may augment our internal growth with acquisitions of complementary businesses or product lines. We may finance acquisition activity with available cash, the issuance of common shares, or with additional debt, depending upon the size and nature of any such transaction and the status of the capital markets at the time of such acquisition.

Non-monetary Transactions:

     We occasionally enter into barter transactions in which we exchange inventory for various services, usually advertising. During fiscal 2005, we entered into two such transactions in which we exchanged inventory with a book value of $1,011 for certain advertising credits. As a result of these transactions, we recorded both sales and cost of goods sold equal to the exchanged inventory’s net book value, which approximated their fair value. At the end of 2005, the remaining credits were valued at $915 on our consolidated balance sheets, and were included in the line item entitled “Prepaid Assets.” As of February 28,

2006 all credits from the non-monetary transactions had been utilized. We have used $915, $1,196 and $1,400 of barter related advertising credits during fiscal 2006, 2005 and 2004, respectively.

CRITICAL ACCOUNTING POLICIES

     The SEC defines critical accounting policies as “those that are both most important to the portrayal of a company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.” We consider the following policies to meet this definition.

      Allowance for accounts receivable - We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. That estimate is based on historical collection experience, current economic and market conditions, and a review of the current status of each customer’s trade accounts receivable. If the financial condition of our customers were to deteriorate or our judgment regarding their financial condition was to change negatively, additional allowances may be required resulting in a charge to income in the period such determination was made. Conversely, if the financial condition of our customers were to improve or our judgment regarding their financial condition was to change positively, a reduction in the allowances may be required resulting in an increase in income in the period such determination was made.

      Income Taxes - We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments must be used in the calculation of certain tax assets and liabilities because of differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. As changes occur in our assessments regarding our ability to recover our deferred tax assets, our tax provision is increased in any period in which we determine that the recovery is not probable.

     In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of other complex tax regulations. We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts are unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.

      Estimates of credits to be issued to customers - We regularly receive requests for credits from retailers for returned products or in connection with sales incentives, such as cooperative advertising and volume rebate agreements. We reduce sales or increase selling, general, and administrative expenses, depending on the nature of the credits, for estimated future credits to customers. Our estimates of these amounts are based either on historical information about credits issued, relative to total sales, or on specific knowledge of incentives offered to retailers. This process entails a significant amount of inherent subjectivity and uncertainty.

      Valuation of inventory - We account for our inventory using a first-in-first-out system in which we record inventory on our balance sheet at the lower of its average cost or its net realizable value. Determination of net realizable value requires us to estimate the point in time at which an item’s net realizable value drops below its cost. We regularly review our inventory for slow-moving items and for items that we are unable to sell at prices above their original cost. When we identify such an item, we reduce its book value to the net amount

that we expect to realize upon its sale. This process entails a significant amount of inherent subjectivity and uncertainty.

      Carrying value of long-lived assets - We apply the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) in assessing the carrying values of our long-lived assets. SFAS 142 and SFAS 144 both require that we consider whether circumstances or conditions exist which suggest that the carrying value of a long-lived asset might be impaired. If such circumstances or conditions exist, further steps are required in order to determine whether the carrying value of the asset exceeds its fair market value. If analyses indicate that the asset’s carrying value does exceed its fair market value, the next step is to record a loss equal to the excess of the asset’s carrying value over its fair value. The steps required by SFAS 142 and SFAS 144 entail significant amounts of judgment and subjectivity. We completed our analysis of the carrying value of our goodwill and other intangible assets during the first quarter of fiscal 2006, and accordingly, recorded no impairment.

      Economic useful life of intangible assets - We apply Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), in determining the useful economic lives of intangible assets that we acquire and that we report on our consolidated balance sheets. SFAS 142 requires that we amortize intangible assets, such as licenses and trademarks, over their economic useful lives, unless those assets’ economic useful lives are indefinite. If an intangible asset’s economic useful life is deemed to be indefinite, that asset is not amortized. When we acquire an intangible asset, we consider factors such as the asset’s history, our plans for that asset, and the market for products associated with the asset. We consider these same factors when reviewing the economic useful lives of our previously acquired intangible assets as well. We review the economic useful lives of our intangible assets at least annually. The determination of the economic useful life of an intangible asset requires a significant amount of judgment and entails significant subjectivity and uncertainty. We have completed our analysis of the remaining useful economic lives of our intangible assets during the first quarter of fiscal 2007 and determined that the useful lives currently being used to determine amortization of each asset are appropriate.

     For a more comprehensive list of our accounting policies, we encourage you to read Note (1) included in the accompanying consolidated financial statements. Note (1) contains several other policies, including policies governing the timing of revenue recognition, that are important to the preparation of our consolidated financial statements, but do not meet the SEC’s definition of critical accounting policies because they do not involve subjective or complex judgments.

NEW ACCOUNTING GUIDANCE

     Refer to Note (1) of the notes to the consolidated financial statements for a discussion of new accounting pronouncements and the potential impact to the Company’s consolidated results of operations and financial position.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Changes in interest rates and currency exchange rates are our primary financial market risks. Fluctuation in interest rates causes variation in the amount of interest that we can earn on our available cash and the amount of interest expense we incur on our short-term and long-term borrowings. Interest on our long-term debt outstanding as of February 28, 2006 is both floating and fixed. Fixed rates are in place on $35,000 of senior notes at rates ranging from 7.01 percent to 7.24 percent. Floating rates are in place on $229,974 of senior notes. Interest rates on these notes are reset quarterly based on the three-month LIBOR rate plus 85 basis points for the five and seven year notes, and the three-month LIBOR rate plus 90 basis points for the ten year notes. Interest rates during the latest fiscal year on these notes ranged from 3.41 to 5.371 percent for the five and seven year notes, and 3.46 to 5.421 percent for the ten year notes. On March 29, 2006, the interest rates on these notes were reset for the next three months at 5.81 percent for the five and seven year notes and 5.86 percent for the ten year notes. Increases in interest rates expose us to risk on this debt. Also, with respect to $35,000 of fixed rate senior notes, as interest rates drop below the rates on this debt, our interest cost can exceed the cost of capital of companies who borrow at lower rates of interest.

     As mentioned under Note (7) to our consolidated financial statements, we have a five year, $75,000 revolving credit facility; $225,000 of floating rate senior debt with five, seven, and ten year maturities; and, have recently secured an additional equipment credit facility that will allow us to draw up to $15,000 (which will later convert to five-year Bonds when fully drawn). The credit facilities, senior debt, and Bonds bear floating rates of interest. A 1 percent increase in our base interest rates could impact us by adding up to $3,150 of additional interest cost annually (assuming we fully draw on our $15,000 equipment financing). The addition of these levels of debt exposure to our consolidated operations, and the uncertainty regarding the level of our future interest rates, substantially increases our risk profile.

     Because we purchase a majority of our inventory using U.S. Dollars, we are subject to minimal short-term foreign exchange rate risk in purchasing inventory. However, long-term declines in the value of the U.S. Dollar could subject us to higher inventory costs. Such an increase in inventory costs could occur if foreign vendors were to react to such a decline by raising prices. Sales in the United States are transacted in U.S. Dollars. The majority of our sales in the United Kingdom are transacted in British Pounds, in France and Germany are transacted in Euros, in Mexico are transacted in Pesos, in Brazil are transacted in Reals, and in Canada are transacted in Canadian Dollars. When the U.S. Dollar strengthens against other currencies in which we transact sales, we are exposed to foreign exchange losses on those sales because our foreign currency sales prices are not adjusted for currency fluctuations. When the U.S. Dollar weakens against those currencies, we could realize foreign currency gains.

     Our net sales denominated originally in currencies other than the U.S. Dollar totaled $85,692, $87,880 and $73,259 during the fiscal years ended 2006, 2005 and 2004, respectively. We incurred a foreign currency exchange gains (losses) of $105, ($1,142) and $1,216 during the fiscal years ended 2006, 2005 and 2004, respectively.

     We hedge against foreign currency exchange rate risk by entering into a series of forward contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar. For transactions designated as cash flow hedges, the effective portion of the change in the fair value (arising from the change in the spot rates from period to period) is deferred in Other Comprehensive Income. These amounts are subsequently recognized in “Selling, general, and administrative expense” in the consolidated statements of income in the same period as the forecasted transactions close out over the remaining balance of their terms. The ineffective portion of the change in fair value (arising from the change in the difference between the spot rate and the forward rate) is

recognized in the period it occurred. These amounts are also recognized in “Selling, general, and administrative expense” in the consolidated statements of income. We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes.

     The following table summarizes the various forward contracts we designated as cash flow hedges that were open at the end of fiscal 2006 and 2005: