ICON Health & Fitness, Inc., Form 10Q

Operating expenses:

Research and development

General and administrative

10-Q 1 e10q3qf05.htm REPORT FOR THE PERIOD ENDED FEB. 26, 2005 ICON Health & Fitness, Inc., Form 10Q - Fiscal 2005

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange Act Of 1934
For the fiscal quarter ended February 26, 2005

¨ Transition Report Under Section 13 Or 15(D) Of The Securities Exchange Act Of 1934
For the transition period from _____ to _____

COMMISSION FILE NUMBER: 333-93711

ICON HEALTH & FITNESS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE	87-0531206
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1500 South 1000 West

Logan, UT, 84321

(Address and zip code of principal executive offices)

(435) 750-5000
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ¨

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

ICON Health & Fitness, Inc., 1,000 shares.

ICON HEALTH & FITNESS, INC.

INDEX

		PAGE
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of February 26, 2005 (unaudited),
	May 31, 2004 (unaudited) and February 28, 2004 (unaudited)	3

	Condensed Consolidated Statements of Operations (unaudited) for the three
	months ended February 26, 2005 and February 28, 2004	4

	Condensed Consolidated Statements of Operations (unaudited) for the nine
	months ended February 26, 2005 and February 28, 2004	5

	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine
	months ended February 26, 2005 and February 28, 2004	6

	Notes to Condensed Consolidated Financial Statements (unaudited)	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4.	Controls and Procedures	27


PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Submission of Matters to a Vote of Security Holders	28

Item 5.	Other Information	28

Item 6.	Exhibits	28

Signatures		29

Certifications		31

Exhibit Index		32

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

ICON Health & Fitness, Inc.
Condensed Consolidated Balance Sheets
(expressed in thousands)

	February 26, 2005		May 31, 2004		February 28, 2004

ASSETS		(Unaudited)		(Unaudited)		(Unaudited)
Current assets:
Cash	$	8,948	$	5,122	$	12,076
Accounts receivable, net		247,912		177,871		252,147
Inventories, net:
Raw materials		69,216		63,387		71,404
Finished goods		88,535		103,868		101,976

Total inventories, net	157,751	167,255	173,380
Deferred income taxes	12,049	6,974	7,062
Income taxes receivable	21,361	-	-
Other current assets	19,991	13,067	9,852
Current assets of discontinued operations	18,075	63,165	39,509

Total current assets	486,087		433,454		494,026

Property and equipment	136,350		107,743		110,613
Less accumulated depreciation	(59,644	)	(51,080	)	(57,103	)

Property and equipment, net	76,706	56,663	53,510
Goodwill	6,463	6,292	6,292
Intangible assets, net	27,387	32,389	22,353
Deferred income taxes	11,102	6,309	5,949
Other assets, net	20,456	23,388	24,112

628,201

558,495

606,242


LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt	$	207,202	$	135,879	$	5,000
Accounts payable		165,591		137,524		155,661
Accrued expenses		36,603		28,488		36,597
Income taxes payable		171		574		3,236
Interest payable		3,413		7,544		3,105
Current liabilities of discontinued operations		8,663		11,743		7,745

Total current liabilities	421,643	321,752	211,344

Long-term debt	153,210	153,111	299,772
Other liabilities	16,131	12,797	12,688

	590,984		487,660		523,804

Minority interest	5,371		3,500		3,500

Stockholder's equity
Common stock and additional paid-in capital	204,155		204,155		204,155
Receivable from parent	(2,200	)	(2,200	)	(2,200	)
Accumulated deficit	(173,534	)	(133,863	)	(125,349	)
Accumulated other comprehensive income (loss)	3,425		(757	)	2,332

Total stockholder's equity

31,846

67,335

78,938

628,201

558,495

606,242

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

ICON Health & Fitness, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(expressed in thousands)

For the Three Months Ended

	February 26, 2005		February 28, 2004


Net sales	$	301,277	$	306,874
Cost of sales		229,293		208,713

Gross profit

71,984

98,161

Total operating expenses

60,757

65,925

Income before income taxes		2,959			25,529
Provision for income taxes		1,933			5,661

Income before minority interest		1,026			19,868
Minority interest in net loss of consolidated subsidiary		129			-

Comprehensive income

1,166

16,396

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

ICON Health & Fitness, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(expressed in thousands)

For the Nine Months Ended

	February 26, 2005		February 28, 2004


Net sales	$	707,419	$	780,218
Cost of sales		539,209		531,983

Gross profit

168,210

248,235

Total operating expenses

170,368

176,663

Income (loss) before income taxes		(24,074	)		52,195
(Benefit of) provision for income taxes		(9,518	)		16,502

Income (loss) before minority interest		(14,556	)		35,693
Minority interest in net loss of consolidated subsidiary		129			-

Income (loss) from continuing operations	(14,427	)	35,693

Discontinued operations:
Loss from discontinued operations, net of tax benefit of $16,655
in fiscal 2005 and $1,752 in fiscal 2004.	(25,244	)	(3,790	)

Comprehensive income (loss)

(35,488

)

34,600

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

ICON Health & Fitness, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(expressed in thousands)

For the Nine Months Ended

February 26, 2005

February 28, 2004


OPERATING ACTIVITIES:
Net income (loss)	$	(39,671	)	$	31,903
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Provision (benefit) for deferred taxes		(12,433	)		1,038
Amortization of deferred financing fees		831			595
Amortization of debt discount		107			163
Loss on disposal of fixed assets		14			-
Loss allocated to minority interest		(129	)		-
Depreciation and amortization		17,844			16,812
Changes in operating assets and liabilities:
Accounts receivable, net		(70,041	)		(99,173	)
Inventories, net		9,503			(27,974	)
Other assets, net		(2,795	)		(1,877	)
Accounts payable and accrued expenses		35,575			43,847
Income taxes receivable		(21,361	)		(992	)
Interest payable		(4,131	)		(4,379	)
Other liabilities		2,352			384

Net cash used in operating activities

(84,335

)

(39,653

)


INVESTING ACTIVITIES:
Purchase of property and equipment	(16,094	)	(12,423	)
Purchase of property and equipment-China	(15,965	)	(4,931	)
Purchase of intangible assets	(1,860	)	(5,900	)

Net cash used in investing activities

(33,919

)

(23,254

)


FINANCING ACTIVITIES:
Borrowings on revolving credit facility, net	72,573		64,132
Payments on term note	(1,250	)	(3,750	)
Minority interest	2,000		3,500
Payments for debt financing fees	(843	)	(25	)
Other	(6	)	(5	)

Net cash provided by financing activities

72,474

63,852

Net increase in cash		3,826			7,426
Cash, beginning of period		5,122			4,650

Cash, end of the period

8,948

12,076

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

ICON Health & Fitness, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE A - BASIS OF PRESENTATION

This report covers ICON Health & Fitness, Inc. and its subsidiaries (collectively, "the Company"). The Company's parent company, HF Holdings, Inc. ("HF Holdings"), is not a registrant.

The Company is one of the world's leading manufacturers and marketers of fitness equipment. The Company is headquartered in Logan, Utah and has approximately 3,900 employees worldwide. The Company develops, manufactures and markets fitness equipment under the following company-owned brand names: ProForm, NordicTrack, Weslo, HealthRider, Image, Weider, Epic, Free Motion Fitness and, under license, Reebok and Gold's Gym.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation. In addition, certain minor reclassifications of previously reported financial information were made to conform to the current period presentation.

The Company, in its opinion, has included all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for the three months and nine months ended February 26, 2005 and February 28, 2004. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended May 31, 2004 included in the Company's annual report on Form 10-K as filed with the Securities and Exchange Commission on August 30, 2004. Interim results, including comparative balance sheets, are not necessarily indicative of results for the full fiscal year due to the inherent seasonality in the Company's business. See "Seasonality" in Management's Discussion and Analysis of Financial Condition and Results of Operations.

Critical Accounting Policies

The Company's discussion of results of operations and financial condition relies on its consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. The Company believes that investors need to be aware of these policies and how they impact its financial statements as a whole, as well as its related discussion and analysis presented herein. While the Company believes that these accounting policies are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related risks described in the Company's annual report on Form 10-K as filed with the Securities and Exchange Commission on August 30, 2004 are those that depend most heavily on these judgments and estimates. As of February 26, 2005, there have been no material changes to any of the critical accounting policies contained therein.

Stock-Based Compensation Plans

The Company accounts for employee stock-based compensation arrangements in accordance with provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for options granted to employees under its fixed stock option plan.

There were no stock options granted in the nine months ended February 26, 2005 and February 28, 2004, respectively. All previously granted options were fully vested as of November 30, 2002. Therefore, there is no stock-based employee compensation for the nine months ended February 26, 2005 and February 28, 2004.

Warranty Reserves

The Company maintains a warranty accrual for estimated future warranty obligations based upon the relationship between historical and anticipated costs and sales volumes. If actual warranty expenses are greater than those projected, additional reserves and other charges against earnings may be required. If actual warranty expenses are less than projected, prior reserves could be reduced providing a positive impact on the Company's reported results. The following table provides a reconciliation of the changes in the Company's product warranty reserve (table in thousands):

Nine Months Ended

February 26, 2005

February 28, 2004

Beginning balance	$	2,505		$	2,694
Additions:
Charged to costs and expenses		-			-
Deductions:
Reduction in reserve		(144	)		(22	)

Ending balance

2,361

2,672

NOTE B - ACCOUNTING CHANGES

See "Recent Accounting Standards" under Management's Discussion and Analysis of Financial Condition and Results of Operations.

NOTE C - COMMITMENTS AND CONTINGENCIES

Due to the nature of the Company's products, the Company is subject to product liability claims involving personal injuries allegedly related to the Company's products. These claims include injuries sustained by individuals using the Company’s products. The Company currently carries an occurrence-based product liability insurance policy. The current policy provides coverage for the period from October 1, 2004 to October 1, 2005 with limits of $10.0 million per occurrence and $10.0 million in the aggregate. The policy has a deductible on each claim of $1.0 million. For occurrences prior to October 1, 2004, the policy provided coverage of $10.0 million per occurrence and $10.0 million in the aggregate. The policy had a deductible on each claim of $1.0 million. For occurrences prior to October 1, 2003, the policy provided coverage of $5.0 million per occurrence and $5.0 million in the aggregate. The policy had a deductible on each claim of $1.0 million. The Company believes that its insurance is generally adequate to cover product liability claims. Nevertheless, currently pending claims and any future claims are subject to the uncertainties related to litigation, and the ultimate outcome of any such proceedings or claims cannot be predicted. Due to uncertainty with respect to the nature and extent of manufacturers' and distributors' liability for personal injuries, the Company cannot guarantee that its product liability insurance is or will be adequate to cover such claims. The Company vigorously defends any and all product liability claims brought against it and does not believe that any current pending claims or series of claims will have a material adverse effect on its results of operations, liquidity or financial position.

As of February 26, 2005, the Company is involved in various product reviews and recalls with the Consumer Product Safety Commission (“CPSC”). The Company believes that adverse resolutions of these reviews and recalls will not have a material adverse effect on its results of operations or financial position.

The Company is party to a variety of non-product liability commercial suits involving contract claims. The Company believes that adverse resolution of these lawsuits would not have a material adverse effect on its results of operations or financial position.

In December 2001, a claim was made against the Company alleging the Company received $1.7 million of preferential transfers in connection with the 1999 Service Merchandise bankruptcy proceedings. The claim was settled in November of 2004 for an insignificant amount.

On December 3, 2002, the Nautilus Group, Inc. (“Nautilus”) filed suit against the Company in the United States District Court, Western District of Washington (the “Court”) alleging the Company infringed Nautilus’ Bowflex patents. Nautilus seeks injunctive relief and monetary damages. In May 2003, the Court denied Nautilus’ motion for a preliminary injunction and granted partial summary judgment to the Company on the issue of “literal infringement.” Nautilus appealed the District Court's decision denying its request for a preliminary injunction on literal patent infringement. In November 2003, the United States Court of Appeals reversed the District Court's decision and remanded the case to the District Court for further proceedings. In February 2005, the District Court issued an order, after conducting a hearing pursuant to Markman v. Westview Instruments, Inc., 52 F.3rd 957 (5th Cir. 1995), Construing the disputed meaning of various terms contained in the allegedly infringed patent, a prerequisite to the litigation going to trial. The parties currently are preparing further motions for summary judgment to be presented to the District Court, and a trial date has been set for June of 2005. This case is currently being vigorously defended by the Company's counsel; however, it is not possible for the Company to quantify with any certainty the extent of any potential liability.

As part of the above suit, in July 2003, the Court ruled in favor of Nautilus on a motion for preliminary injunction on the issue of trademark infringement, and entered an order barring the Company from using the trademark “CrossBow” on any exercise equipment. In June of 2004, the United States Court of Appeals for the Federal Circuit affirmed the grant of a preliminary injunction as previously granted by the Federal District Court. Thus, the Company is barred from using the “CrossBow” trademark on any of its exercise equipment pending trial. The Company subsequently changed the name from “CrossBow” to “CrossBar” or “The Max” by Weider. In July of 2004, Nautilus filed an additional lawsuit in the United States District Court for the Western District of Washington alleging that the Company further infringed on the Bowflex trademark by using the “CrossBar” trademark. Nautilus seeks injunctive relief and monetary damages. The Company believes this additional lawsuit is without merit and will vigorously defend its right to use the “CrossBar” trademark.

The Company is also involved in several intellectual property and patent infringement claims, arising in the ordinary course of its business. The Company believes that the ultimate outcome of these matters will not have a material adverse effect upon its results of operations or financial position.

In fiscal 2003, the Company formed a foreign subsidiary to build a manufacturing facility in Xiamen, China. The original project costs were anticipated to be approximately $12.0 million. Due to the Company's decision to increase the size of one facility, it now anticipates the total project cost to be approximately $30.5 million, with $15.5 million to be funded in the form of equity by the subsidiary, and approximately $15.0 million in the form of debt. The Chinese subsidiary has arranged for the debt portion of the financing, which is provided by the Bank of China. As of February 26, 2005 the revolver balance with the Bank of China was $7.2 million. For the nine-month period ended February 26, 2005, the Chinese subsidiary had a loss of approximately 0.4 million of which approximately 0.1 million was recorded as minority interest in net loss of consolidated subsidiary. The Company's equity interest in the foreign subsidiary is 70%, which has been funded in the form of equity and debt. As of February 26, 2005, the Company has made contributions of $10.0 million and the minority interest contributions were $5.5 million. The minority interest shareholder is also a long-time vendor of the Company. The Company has recorded purchases from this vendor of approximately $59.0 million and $67.5 million during the nine months ended February 26, 2005 and February 28, 2004, respectively. As a result of the Company's controlling interest in the foreign subsidiary, the investment has been reported on a consolidated basis beginning in the first quarter of fiscal 2004.

NOTE D - THE 2002 CREDIT AGREEMENT

On October 11, 2004, the Company amended its credit agreement (the “Amended Credit Agreement” or “Credit Facility”). The Amended Credit Agreement increases the amount available from $210 million to $275 million. In addition, the remaining balance on the term note with accrued interest (approximately $12.5 million) is converted to and becomes a part of the revolver balance. At the Company's option, revolving credit advances bear interest at either (a) a floating rate equal to the Index Rate plus the applicable margin of 1.375% or (b) a floating rate equal to the LIBOR rate plus the applicable margin of 2.75%. If the Company meets certain fixed charge coverage ratios, the applicable margins have lower rates. The Amended Credit Agreement waives any violation of financial covenants for the first quarter of fiscal 2005 and eliminates those financial covenants going forward. The Amended Credit Agreement also provides for the formation of certain Chinese sales corporations to facilitate doing business in China.

The Company is also required to maintain a lockbox arrangement whereby remittances from its customers reduce the borrowings outstanding under the Credit Agreement. The Credit Agreement also contains a Material Adverse Effect ("MAE") clause which grants the agent and lenders having more than 66 and 2/3% of the commitment or borrowings the right to block, and serves as a condition for, the Company's requests for future advances. EITF Issue 95-22 "Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lockbox Arrangement" requires borrowings under credit agreements with these two provisions to be classified as current obligations.

The Company does not believe that any of these MAE's have occurred or in the ordinary course of business can reasonably be expected to occur based upon its history and its relationship with the Credit Facility lenders. The Company intends to manage the Credit Facility as long-term debt with a final maturity date in 2007, as provided for in the Amended Credit Agreement. A subsequent amendment was signed on December 21, 2004 relating to funding the China facility.

On January 13, 2004 the Company obtained written waivers from the agent and lenders having more than 33 and 1/3% of the commitment or borrowings waiving their rights under the MAE clause for the period from January 13, 2004 to January 18, 2005. Accordingly, the Company has classified the outstanding borrowings under the credit agreement, which totaled $146.7 million at February 28, 2004 as a long-term liability.

On April 7, 2005 the Company obtained an amendment to the Amended Credit Agreement that, removes the cap on borrowings by the Company's Chinese manufacturing affiliate from local lenders, allows for limited recourse financing for institutional customers, and provides consent for the anticipated sale of the majority of Jumpking's remaining assets. The Company has also obtained written waivers from the agent and Credit Facility lenders to, correct an erroneous borrowing base certificate of December 25, 2004, acknowledge Jumpking’s sale of certain spa assets pursuant to the Asset Purchase Agreement dated January 10, 2005 between the Company and Keys Backyard, LLP ("Keys"), waive violation of the Amended Credit Agreement related to recourse financing obtained by institutional customers, waive violation of the Amended Credit Agreement for failure to adequately notify the Credit Facility lenders of the recall of trampolines and trampoline enclosures, and consent to change the name of the Company's wholly owned subsidiary from ICON China OS, Inc. to World Fitness Sales.

NOTE E - DISCONTINUED OPERATIONS

During the second quarter of fiscal 2005, management determined that the Company's JumpKing, Inc. ("JumpKing") subsidiary would discontinue manufacturing, marketing and distributing all outdoor recreational equipment (“outdoor recreational equipment operations”) which includes trampolines, spas and other non-exercise related products. The outdoor recreational equipment operations have been classified as a discontinued operation and its expenses are not included in the results of continuing operations. The results of operations for the nine months ended February 26, 2005 for the outdoor recreational equipment operations have been reclassified to loss from discontinued operations. As of February 26, 2005, the Company has approximately $17.3 million of assets that have been written down which consist of inventory of approximately $15.9 million and fixed assets of approximately $1.3 million. The loss from operations, net of tax, for the outdoor recreational equipment was $25.2 million and $3.8 million for the nine months ended February 26, 2005 and February 28, 2004 respectively. The Company expects to complete this discontinuation of its outdoor recreational operations by the second quarter of fiscal 2006. The outdoor recreational equipment operations were not part of the Company’s core business operations or its strategic focus. The Company is in the process of finding a buyer for the remaining assets. The outdoor recreational operations were not making a positive contribution to the Company’s earnings and required a substantial investment of working capital.

On January 10, 2005, the Company sold its spa business comprising a portion of the Company's JumpKing subsidiary to Keys Backyard, LLP, ("Keys"). The assets sold included all inventory, equipment, business records and customer contracts associated with the spa business. In addition, the Company sold a license for the use of trade names to Keys over a period of three years and subleased a portion of JumpKing's facility located in Mesquite, Texas for the continued manufacturing by Keys. Keys paid approximately $4.5 million consisting of $1.0 million in cash and a note payable of $3.5 million over one year. The note bears interest at a rate of 7% per annum with principal payable in full on January 10, 2006 and interest payable quarterly. Keys is obligated to pay additional amounts associated with the license of trade names to the Company calculated as 1.5% of the gross selling price for the spa business products sold by Keys over the three year licensing period.

In conjunction with the discontinuance of outdoor recreational equipment operations, the Company performed an evaluation of long-lived assets pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment of Long-Lived Assets” (“SFAS 144”) and determined that certain of the manufacturing fixed assets will be subject to an impairment loss of approximately $0.4 million. Certain other manufacturing fixed assets met the “held for sale” and “discontinued operations” criteria as required by SFAS 144, at February 26, 2005

The following is a summary of the Company's discontinued operations for the three months ended February 26, 2005 and the comparative operating information for the three months ended February 28, 2004 (in thousands):

Three Months Ended

February 26, 2005

February 28, 2004

Gross Profit	$	(2,823	)	$	4,380
Selling expenses		(3,329	)		(4,346	)
Research and development		(125	)		(316	)
General and administrative		401			(1,815	)
Impairment loss		126			-
Income tax benefit		3,757			457

Loss from discontinued operations

(1,993

)

(1,640

)

The following is a summary of the Company's discontinued operations for the nine months ended February 26, 2005 and the comparative operating information for the Nine months ended February 28, 2004 (in thousands):

Nine Months Ended

February 26, 2005

February 28, 2004

Gross Profit	$	(3,496	)	$	13,900
Selling expenses		(17,240	)		(13,351	)
Research and development		(564	)		(851	)
General and administrative		(7,997	)		(5,240	)
Impairment loss		(180	)		-
Loss on inventory		(8,871	)		-
Loss on lease		(3,551	)		-
Income tax benefit		16,655			1,752

Loss from discontinued operations

(25,244

)

(3,790

)

The assets and liabilities of the discontinued operations consisted of the following (in thousands):

February 26, 2005

February 28, 2004

ASSETS
Current assets:
Trade accounts receivable	$	9,868	$	11,548
Assets held for sale:
Inventory		7,043		26,365
Property plant and equipment		1,164		1,596

Total assets of discontinued
operations	$	18,075		$	39,509


LIABILITIES
Current liabilities:
Trade accounts payable	$	452	$	7,745
Accrued liabilities		6,225		-
Reserves		1,986		-

Total liabilities of discontinued
operations	$	8,663		$	7,745

NOTE F - GUARANTOR / NON-GUARANTOR FINCANCIAL INFORMATION

The Company's subsidiaries JumpKing, Inc., 510152 N.B. Ltd., Universal Technical Services, Inc., ICON International Holdings, Inc., NordicTrack, Inc. and Free Motion Fitness, Inc. (“Subsidiary Guarantors”) have fully and unconditionally guaranteed on a joint and several basis, the obligation to pay principal and interest with respect to the 11.25% Notes. A significant portion of the Company's operating income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet the Company's debt service obligations are provided in part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of the Company's subsidiaries, could limit the Company's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the 11.25% Notes. Although holders of the 11.25% Notes will be direct creditors of the Company's principal direct subsidiaries by virtue of the guarantees, the Company has indirect subsidiaries located primarily in Europe (“Non-Guarantor Subsidiaries”) that are not included among the Guarantor Subsidiaries, and such subsidiaries will not be obligated with respect to the 11.25% Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the claims of creditors of the Company, including the holders of the 11.25% Notes.

The following supplemental condensed consolidating financial statements are presented (in thousands):

1.	Condensed consolidating balance sheets as of February 26, 2005 (unaudited), May 31, 2004 (unaudited) and February 28, 2004 (unaudited), condensed consolidating statements of operations for the three months and nine months ended February 26, 2005 (unaudited) and February 28, 2004 (unaudited), and condensed consolidating statements of cash flows for the nine months ended February 26, 2005 (unaudited) and February 28, 2004 (unaudited).

2.	The Company's combined Subsidiary Guarantors and combined Non-Guarantor Subsidiaries with their investments in subsidiaries accounted for using the equity method.

3.	Elimination entries necessary to consolidate the Company and all of its subsidiaries.

Supplemental Condensed Consolidating Balance Sheet
February 26, 2005

ICON
Health &
Fitness, Inc.

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

ASSETS
Current assets:
Cash	$	3,147	$	3,345	$	2,456	$	-		$	8,948
Accounts receivable, net		208,233		52,366		18,961		(31,648	)		247,912
Inventories, net		102,156		40,476		16,330		(1,211	)		157,751
Deferred income taxes		11,860		-		189		-			12,049
Income tax receivable		21,361		-		-		-			21,361
Other current assets		5,716		8,336		5,939		-			19,991
Current assets of discontinued operations		6,343		11,732		-		-			18,075

Total current assets

358,816

116,255

43,875

(32,859

)

486,087

Property and equipment, net	41,078	34,263	1,365	-		76,706
Receivable from affiliates	140,791	64,579	-	(205,370	)	-
Intangible assets, net	26,586	6,046	1,218	-		33,850
Deferred income taxes	9,252	1,850	-	-		11,102
Investment in subsidiaries	17,844	-	-	(17,844	)	-
Other assets, net	16,671	2,849	936	-		20,456

Total assets

611,038

225,842

47,394

(256,073

)

628,201

LIABILITIES & STOCKHOLDER'S EQUITY

Current liabilities:
Current portion of long-term debt	$	200,012	$	7,190		$	-		$	-		$	207,202
Accounts payable		126,234		27,145			43,860			(31,648	)		165,591
Accrued expenses		20,589		10,829			5,185			-			36,603
Accrued income taxes		11,089		(10,865	)		(53	)		-			171
Interest payable		3,413		-			-			-			3,413
Current liabilities of discontinued operations		1,986		6,677			-			-			8,663

Total current liabilities

363,323

40,976

48,992

(31,648

)

421,643

Long-term debt	153,210		-		-		-		153,210
Other liabilities	7,703		8,428		-		-		16,131
Payable to affiliates	54,956		126,496		23,918		(205,370	)	-

Minority interest	-		-		-		5,371		5,371

Stockholder's equity (deficit):
Common stock and additional
paid-in capital	204,155		52,759		5,481		(58,240	)	204,155
Receivable from parent	(2,200	)	-		-		-		(2,200	)
Retained earnings
(accumulated deficit)	(173,534	)	(7,557	)	(29,200	)	36,757		(173,534	)
Accumulated other comprehensive
income (loss)	3,425		4,740		(1,797	)	(2,943	)	3,425

Total stockholder's equity (deficit)

31,846

49,942

(25,516

)

(24,426

)

31,846

Total liabilities & stockholder's
equity (deficit)	$	611,038		$	225,842		$	47,394		$	(256,073	)	$	628,201

Supplemental Condensed Consolidating Balance Sheet
May 31, 2004

ICON
Health &
Fitness, Inc.

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

ASSETS
Current assets:
Cash	$	1,246	$	2,450	$	1,426	$	-		$	5,122
Accounts receivable, net		132,027		52,505		15,045		(21,706	)		177,871
Inventories, net		114,626		42,238		11,096		(705	)		167,255
Deferred income taxes		6,469		-		505		-			6,974
Other current assets		4,716		4,156		4,195		-			13,067
Current assets of discontinued operations		3,684		59,481		-		-			63,165

Total current assets

262,768

160,830

32,267

(22,411

)

433,454

Property and equipment, net	38,302	17,193	1,168	-		56,663
Receivable from affiliates	141,561	55,579	-	(197,140	)	-
Intangible assets, net	30,868	6,595	1,218	-		38,681
Deferred income taxes	5,570	-	739	-		6,309
Investment in subsidiaries	39,130	-	-	(39,130	)	-
Other assets, net	15,071	7,452	865	-		23,388

Total assets

533,270

247,649

36,257

(258,681

)

558,495

LIABILITIES & STOCKHOLDER'S EQUITY

Current liabilities:
Current portion of long-term debt	$	135,879	$	-		$	-	$	-		$	135,879
Accounts payable		97,860		27,256			34,114		(21,706	)		137,524
Accrued expenses		16,477		8,340			3,671		-			28,488
Accrued income taxes		2,509		(2,299	)		364		-			574
Interest payable		7,544		-			-		-			7,544
Current liabilities of discontinued operations		2,323		9,420			-		-			11,743

Total current liabilities

262,592

42,717

38,149

(21,706

)

321,752

Long-term debt	153,102		9	-		-		153,111
Other liabilities	6,723		6,074	-		-		12,797
Payable to affiliates	43,518		130,942	22,680		(197,140	)	-

Minority interest	-		-	-		3,500		3,500

Stockholder's equity (deficit):
Common stock and additional
paid-in capital	204,155		45,759	5,481		(51,240	)	204,155
Receivable from parent	(2,200	)	-	-		-		(2,200	)
Retained earnings
(accumulated deficit)	(133,863	)	20,295	(26,961	)	6,666		(133,863	)
Accumulated other comprehensive
income (loss)	(757	)	1,853	(3,092	)	1,239		(757	)

Total stockholder's equity (deficit)

67,335

67,907

(24,572

)

(43,335

)

67,335

Total liabilities & stockholder's
equity (deficit)	$	533,270		$	247,649		$	36,257		$	(258,681	)	$	558,495

Supplemental Condensed Consolidating Balance Sheet
February 28, 2004

ICON
Health &
Fitness, Inc.

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

ASSETS
Current assets:
Cash	$	3,848	$	6,456	$	1,772	$	-		$	12,076
Accounts receivable, net		198,472		62,904		19,318		(28,547	)		252,147
Inventories, net		111,053		48,095		15,122		(890	)		173,380
Deferred income taxes		6,688		246		128		-			7,062
Other current assets		1,326		3,241		5,285		-			9,852
Current assets of discontinued operations		3,234		36,275		-		-			39,509

Total current assets

324,621

157,217

41,625

(29,437

)

494,026

Property and equipment, net	39,114	13,138	1,258	-		53,510
Receivable from affiliates	125,398	52,208	-	(177,606	)	-
Intangible assets, net	20,562	6,835	1,248	-		28,645
Deferred income taxes	4,740	1,209	-	-		5,949
Investment in subsidiaries	46,269	-	-	(46,269	)	-
Other assets, net	15,809	7,312	991	-		24,112

Total assets

576,513

237,919

45,122

(253,312

)

606,242

LIABILITIES & STOCKHOLDER'S EQUITY

Current liabilities:
Current portion of long-term debt	$	5,000		$	-	$	-	$	-		$	5,000
Accounts payable		125,328			21,490		37,390		(28,547	)		155,661
Accrued expenses		19,787			11,826		4,984		-			36,597
Accrued income taxes		(526	)		3,156		606		-			3,236
Interest payable		3,105			-		-		-			3,105
Current liabilities of discontinued operations		-			7,745		-		-			7,745

Total current liabilities

152,694

44,217

42,980

(28,547

)

211,344

Long-term debt	299,762		10	-		-		299,772
Other liabilities	6,629		6,059	-		-		12,688
Payable to affiliates	38,490		116,582	22,534		(177,606	)	-

Minority interest	-		-	-		3,500		3,500

Stockholder's equity (deficit):
Common stock and additional
paid-in capital	204,155		45,759	5,481		(51,240	)	204,155
Receivable from parent	(2,200	)	-	-		-		(2,200	)
Retained earnings
(accumulated deficit)	(125,349	)	22,791	(25,222	)	2,431		(125,349	)
Accumulated other comprehensive
income (loss)	2,332		2,501	(651	)	(1,850	)	2,332

Total stockholder's equity (deficit)

78,938

71,051

(20,392

)

(50,659

)

78,938

Total liabilities & stockholder's
equity (deficit)	$	576,513		$	237,919		$	45,122		$	(253,312	)	$	606,242

Supplemental Condensed Consolidating Statement of Operations
Three months ended February 26, 2005

ICON
Health &
Fitness, Inc.

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Net sales	$	217,345		$	63,036		$	20,896		$	-		$	301,277
Cost of sales		181,662			33,821			13,769			41			229,293

Gross profit		35,683			29,215			7,127			(41	)		71,984
Total operating expenses		29,813			23,432			7,512			-			60,757

Income from operations	5,870		5,783		(385	)	(41	)	11,227
Interest expense	7,477		(9	)	523		-		7,991
Amortization of deferred
financing fees	277		-		-		-		277
Equity in earnings
of subsidiaries	(5,347	)	-		-		5,347		-

Income (loss) before income taxes		3,463			5,792			(908	)		(5,388	)		2,959
Provision (benefit) for income taxes		3,044			(4,870	)		2			-			(1,824	)

Income (loss) before minority interest	419	10,662	(910	)	(5,388	)	4,783
Minority interest in net loss of
consolidated subsidiary	-	-	-		129		129

Income (loss) from continuing operations	419		10,662		(910	)	(5,259	)	4,912
Income (loss) from discontinued
operations	(1,257	)	(4,493	)	-		-		(5,750	)

Net income (loss)

(838

)

6,169

(910

)

(5,259

)

(838

)

Supplemental Condensed Consolidating Statement of Operations
Three months ended February 28, 2004

ICON
Health &
Fitness, Inc.

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Net sales	$	210,528		$	73,967		$	22,379		$	-		$	306,874
Cost of sales		159,144			35,117			14,296			156			208,713

Gross profit		51,384			38,850			8,083			(156	)		98,161
Total operating expenses		34,387			25,387			6,151			-			65,925

Income from operations	16,997		13,463	1,932	(156	)	32,236
Interest expense	5,846		83	501	-		6,430
Amortization of deferred
financing fees	277		-	-	-		277
Equity in earnings
of subsidiaries	(9,111	)	-	-	9,111		-

Income (loss) before income taxes		19,985			13,380			1,431			(9,267	)		25,529
Provision (benefit) for income taxes		1,757			3,135			302			-			5,194

Income (loss) from continuing operations	18,228	10,245		1,129	(9,267	)	20,335
Income (loss) from discontinued
operations	-	(2,107	)	-	-		(2,107	)

Net income (loss)

18,228

8,138

1,129

(9,267

)

18,228

Supplemental Condensed Consolidating Statement of Operations
Nine months ended February 26, 2005

ICON
Health &
Fitness, Inc.

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Net sales	$	493,598		$	157,029		$	56,792		$	-		$	707,419
Cost of sales		414,473			86,957			37,273			506			539,209

Gross profit		79,125			70,072			19,519			(506	)		168,210
Total operating expenses		84,519			65,722			20,127			-			170,368

Income from operations	(5,394	)	4,350		(608	)	(506	)	(2,158	)
Interest expense	19,571		(9	)	1,523		-		21,085
Amortization of deferred
financing fees	831		-		-		-		831
Equity in earnings
of subsidiaries	30,469		-		-		(30,469	)	-

Income (loss) before income taxes		(56,265	)		4,359			(2,131	)		29,963			(24,074	)
Provision (benefit) for income taxes		(17,851	)		(8,431	)		109			-			(26,173	)

Income (loss) before minority interest	(38,414	)	12,790	(2,240	)	29,963	2,099
Minority interest in net loss of
consolidated subsidiary	-		-	-		129	129

Income (loss) from continuing operations	(38,414	)	12,790		(2,240	)	30,092	2,228
Income (loss) from discontinued
operations	(1,257	)	(40,642	)	-		-	(41,899	)

Net income (loss)

(39,671

)

(27,852

)

(2,240

)

30,092

(39,671

)

Supplemental Condensed Consolidating Statement of Operations
Nine months ended February 28, 2004

ICON
Health &
Fitness, Inc.

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

Net sales	$	556,542		$	171,875		$	51,801		$	-		$	780,218
Cost of sales		416,607			81,688			33,355			333			531,983

Gross profit		139,935			90,187			18,446			(333	)		248,235
Total operating expenses		90,177			69,476			17,010			-			176,663

Income from operations	49,758		20,711	1,436	(333	)	71,572
Interest expense	17,222		85	1,475	-		18,782
Amortization of deferred
financing fees	595		-	-	-		595
Equity in earnings
of subsidiaries	(10,521	)	-	-	10,521		-

Income (loss) before income taxes		42,462			20,626			(39	)		(10,854	)		52,195
Provision (benefit) for income taxes		10,559			3,485			706			-			14,750

Income (loss) from continuing operations	31,903	17,141		(745	)	(10,854	)	37,445
Income (loss) from discontinued
operations	-	(5,542	)	-		-		(5,542	)

Net income (loss)

31,903

11,599

(745

)

(10,854

)

31,903

Supplemental Condensed Consolidating Statement of Cash Flows
Nine months ended February 26, 2005

ICON
Health &
Fitness, Inc.

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

*Operating Activities:*
Net cash used in operating activities	$	(54,417	)	$	(28,276	)	$	(933	)	$	(709	)	$	(84,335	)


*Investing Activities:*
Net cash used in investing activities	(13,758	)	(19,590	)	(571	)	-	(33,919	)


*Financing Activities:*
Borrowings on revolving credit
facility, net	65,383		7,190		-	-	72,573
Payments on term note	(1,250	)	-		-	-	(1,250	)
Minority interest	(5,000	)	7,000		-	-	2,000
Payments for debt financing fees	(843	)	-		-	-	(843	)
Other	12,208		(13,452	)	1,238	-	(6	)

Net cash provided by
financing activities		70,498			738			1,238			-			72,474

*Discontinued Operations:*
Changes in assets and liabilities from discontinued operations	(2,987	)	45,137	-	709	42,859

Effect of exchange rates on cash	2,565		2,886	1,296	-	6,747

Net increase in cash		1,901			895			1,030			-			3,826
Cash, beginning of period		1,246			2,450			1,426			-			5,122

Cash, end of period

3,147

3,345

2,456

8,948

Supplemental Condensed Consolidating Statement of Cash Flows
Nine months ended February 28, 2004

ICON
Health &
Fitness, Inc.

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

*Operating Activities:*
Net cash provided by (used in) operating activities	$	(42,277	)	$	5,259		$	(2,635	)	$	-		$	(39,653	)


*Investing Activities:*
Net cash used in investing activities	(15,509	)	(7,445	)	(300	)	-	(23,254	)


*Financing Activities:*
Borrowings on revolving credit
facility, net	64,132		-		-	-	64,132
Payments on term note	(3,750	)	-		-	-	(3,750	)
Minority interest	(5,000	)	8,500		-	-	3,500
Payment of fees-debt	(25	)	-		-	-	(25	)
Other	3,683		(4,870	)	1,182	-	(5	)

Net cash provided by
financing activities		59,040			3,630			1,182			-			63,852

*Discontinued Operations:*
Changes in assets and liabilities from discontinued operations	-	2,131	-	-	2,131

Effect of exchange rates on cash	1,653	496	2,201	-	4,350

Net increase in cash		2,907			4,071			448			-			7,426
Cash, beginning of period		941			2,385			1,324			-			4,650

Cash, end of period

3,848

6,456

1,772

12,076

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We are one of the world's leading manufacturers and marketers of fitness equipment. We are headquartered in Logan, Utah and have approximately 3,900 employees worldwide. We develop, manufacture and market fitness equipment under the following company-owned brand names: ProForm, NordicTrack, Weslo, HealthRider, Image, Weider, Epic, Free Motion Fitness and, under license, Reebok and Gold's Gym.

This Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The forward-looking statements contained in this report involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements. Forward-looking statements include, without limitation, statements containing the words "anticipates," "believes," "expects," "intends," "future" and words and terms of similar substance. Such words and terms express management's belief, expectations or intentions regarding future performance. Our actual results could differ materially from our historical operating results and from those anticipated in these forward-looking statements as a result of certain factors, including without limitation, those set forth in our Annual Report on Form 10-K and other factors and uncertainties contained in our other filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date they were made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which the forward-looking statement is based.

Three Months Ended February 26, 2005 Compared to Three Months Ended February 28, 2004

Net sales for the three months ended February 26, 2005 decreased $5.6 million, or 1.8%, to $301.3 million from $306.9 million in the corresponding three-month period ended February 28, 2004. Sales of our cardiovascular and other equipment in the three months ended February 26, 2005 increased $26.7 million, or 11.2%, to $264.6 million. Sales of our strength training equipment in the three months ended February 26, 2005 decreased $32.2 million, or 46.7%, to $36.7 million.

Gross profit in the three months ended February 26, 2005 was $72.0 million, or 23.9% of net sales, compared to $98.2 million, or 32.0% of net sales, in the three months ended February 28, 2004. This decrease in gross profit margin was primarily due to increased transportation costs and commodities, i.e., steel, plastics and wood, unfavorable manufacturing variances and the inability to pass on the full impact of these increases to the consumer. In addition, our direct to consumer business which realizes higher margins was a smaller portion of our overall sales mix in the three months ended February 26, 2005 than in the three months ended February 28, 2004.

Selling expenses decreased $5.3 million, or 13.8%, to $33.0 million in the three months ended February 26, 2005. This decrease reflected reduced advertising and trade show expenses. Expressed as a percentage of net sales, selling expenses were 11.0% in the three months ended February 26, 2005 compared to 12.5% in the three months ended February 28, 2004.

Research and development expenses in the three months ended February 26, 2005 were $3.0 million, compared to $3.3 million in the three months ended February 28, 2004. Expressed as a percentage of net sales, research and development expenses were 1.0% in three months ended February 26, 2005 and 1.1% in the three months ended February 28, 2004.

General and administrative expenses increased $0.4 million, or 1.6%, to $24.7 million in the three months ended February 26, 2005. This increase for the period can be attributed to increases in salary and wages related to the amended employment contracts for Scott Watterson and Gary Stevenson during their leave of absence and increased depreciation and amortization offset by reductions in legal fees. Expressed as a percentage of net sales, general and administrative expenses were 8.2% in the three months ended February 26, 2005 and 7.9% in the three months ended February 28, 2004.

As a result of the foregoing factors, the income from operations was $11.2 million in the three months ended February 26, 2005 compared to income from operations of $32.2 million in the three months ended February 28, 2004.

As a result of the foregoing factors, EBITDA (as defined under "Seasonality") was $17.8 million in the three months ended February 26, 2005 compared to EBITDA of $38.3 million in the three months ended February 28, 2004.

Interest expense, including amortization of deferred financing fees, increased $1.6 million, or 23.9%, to $8.3 million in the three months ended February 26, 2005. Expressed as a percentage of net sales, interest expense, including amortization of deferred financing fees, was 2.8% in the three months ended February 26, 2005 and 2.2% in the three months ended February 28, 2004.

The provision for income taxes was $1.9 million in the three months ended February 26, 2005, compared to a provision for income taxes of $5.7 million in the three months ended February 28, 2004. This change in income taxes for the period can be attributed to the differences in operating results between the two periods.

During the second quarter of fiscal 2005, we determined that our JumpKing, Inc. ("JumpKing") subsidiary would discontinue manufacturing, marketing and distributing all outdoor recreational equipment (“outdoor recreational equipment operations”) which includes trampolines, spas and other non-exercise related products. The outdoor recreational equipment operations have been classified as a discontinued operation and its expenses are not included in the results of continuing operations. The results of operations for the three months ended February 26, 2005 for the outdoor recreational equipment operations have been reclassified to loss from discontinued operations. As of February 26, 2005, we have approximately $17.3 million of assets that have been written down which consist of inventory of approximately $15.9 million and fixed assets of approximately $1.3 million. The loss from operations, net of tax, for the outdoor recreational equipment was $2.0 million and $1.6 million for the three months ended February 26, 2005 and February 28, 2004, respectively. We expect to complete this discontinuation of our outdoor recreational operations by the second quarter of fiscal 2006. Neither the trampoline operations nor the outdoor recreational equipment operations were part of our core business operations or our strategic focus. We are in the process of finding a buyer for the remaining assets. The outdoor recreational operations were not making a positive contribution to our earnings and also required a substantial investment in working capital.

On January 10, 2005, we sold our spa business comprising a portion of our JumpKing subsidiary to Keys Backyard, L.P. ("Keys"). The assets sold included all inventory, equipment, business records and customer contracts associated with the spa business. In addition, we sold a license for the use of trade names to Keys over a period of three years and subleased a portion of JumpKing's facility for the continued manufacturing by Keys. Keys paid approximately $4.5 million consisting of $1.0 million in cash and a note payable of $3.5 million over one year. The note bears interest at a rate of 7% per annum with principal payable in full on January 10, 2006 and interest payable quarterly. Keys is obligated to pay additional amounts associated with the license of trade names calculated as 1.5% of the gross selling price for the Spa Business products sold by Keys over the three year licensing period.

In conjunction with the discontinuance of outdoor recreational equipment operations, we performed an evaluation of long-lived assets pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment of Long-Lived Assets” (“SFAS 144”) and determined that certain of the manufacturing fixed assets will be subject to an impairment loss of approximately $0.4 million. Certain other manufacturing fixed assets met the “held for sale” and “discontinued operations“ criteria as required by SFAS 144, at February 26, 2005

As a result of the foregoing factors, net loss was $0.8 million in the three months ended February 26, 2005, compared to net income in the three months ended February 28, 2004 of $18.2 million, a decrease of 104.4% over the same period last year.

Nine Months Ended February 26, 2005 Compared to Nine Months Ended February 28, 2004

During the nine months ended February 26, 2005, net sales decreased $72.8 million, or 9.3%, to $707.4 million from $780.2 million in the corresponding nine-month period ended February 28, 2005. Due to the historically high sales in the nine-month period ended February 28, 2004 and weak demand, sales were lower in the nine month period ended February 26, 2005. Sales of our cardiovascular and other equipment in the nine months ended February 26, 2005 decreased $15.0 million, or 2.4%, to $598.7 million. Sales of our strength training equipment in the nine months ended February 26, 2005 decreased $57.8 million, or 34.7%, to $108.7 million.

Gross profit in the nine months ended February 26, 2005 was $168.2 million, or 23.8% of net sales, compared to $248.2 million, or 31.8% of net sales, in the nine months ended February 28, 2004. This decrease in gross profit margin was primarily due to increased transportation costs and commodities, i.e., steel, plastics and wood, unfavorable manufacturing variances and the inability to pass on to the consumer the full cost of these increases. In addition, our direct to consumer business which realizes higher margins was a smaller portion of our overall sales mix in the nine months ended February 26, 2005 than in the nine months ended February 28, 2004.

Selling expenses decreased $8.4 million, or 8.5%, to $91.0 million in the nine months ended February 26, 2005. This decrease reflected lower advertising and warranty expenses offset by an increase in contract labor, freight, commission charges, and bad-debt. Expressed as a percentage of net sales, selling expenses were 12.9% in the nine months ended February 26, 2005 compared to 12.7% in the nine months ended February 28, 2004.

Research and development expenses in the nine months ended February 26, 2005 were $9.2 million, compared to $9.4 million in the nine months ended February 28, 2004. Expressed as a percentage of net sales, research and development expenses were 1.3% in the nine months ended February 26, 2005 and 1.2% in the nine months ended February 28, 2004.

General and administrative expenses increased $2.3 million, or 3.4%, to $70.2 million in the nine months ended February 26, 2005. This increase for the period can be attributed in part to increased salaries and wages due to the amended employment contracts for Scott Watterson and Gary Stevenson during their leave of absence, increased loss on foreign currency transactions, and increased depreciation and amortization. Expressed as a percentage of net sales, general and administrative expenses were 9.9% in the nine months ended February 26, 2005 and 8.7% in the nine months ended February 28, 2004.

As a result of the foregoing factors, the loss from operations was $2.2 million in the nine months ended February 26, 2005 compared to income from operations of $71.6 million in the nine months ended February 28, 2004.

As a result of the foregoing factors, EBITDA (as defined under "Seasonality") was $15.8 million in the nine months ended February 26, 2005 compared to EBITDA of $88.4 million in the nine months ended February 28, 2004.

Interest expense, including amortization of deferred financing fees, increased $2.6 million, or 12.9%, to $22.0 million in the nine months ended February 26, 2005. Expressed as a percentage of net sales, interest expense, including amortization of deferred financing fees, was 3.1% in the nine months ended February 26, 2005 and 2.5% in the nine months ended February 28, 2004.

The benefit from income taxes was $9.5 million in the nine months ended February 26, 2005, compared to a provision for income taxes of $16.5 million in the nine months ended February 28, 2004. This change in income taxes for the period can be attributed to the differences in operating results between the two periods.

During the second quarter of fiscal 2005, we determined that our JumpKing, Inc. ("JumpKing") subsidiary would discontinue manufacturing, marketing and distributing all outdoor recreational equipment (“outdoor recreational equipment operations”) which includes trampolines, spas and other non-exercise related products. The outdoor recreational equipment operations have been classified as a discontinued operation and its expenses are not included in the results of continuing operations. The results of operations for the nine months ended February 26, 2005 for the outdoor recreational equipment operations have been reclassified to loss from discontinued operations. As of February 26, 2005, we have approximately $17.3 million of assets that have been written down which consist of inventory of approximately $15.9 million and fixed assets of approximately $1.3 million. The loss from operations, net of tax, for the outdoor recreational equipment was $25.2 million and $3.8 million for the nine months ended February 26, 2005 and February 28, 2004, respectively. We expect to complete this discontinuation of our outdoor recreational operations by the second quarter of fiscal 2006. The outdoor recreational equipment operations were not part of our core business operations or our strategic focus. We are in the process of finding a buyer for the remaining assets. The outdoor recreational operations were not making a positive contribution to our earnings and also required a substantial investment in working capital.

On January 10, 2005, we sold our spa business comprising a portion of our JumpKing subsidiary to Keys Backyard, L.P.("Keys"). The assets sold included all inventory, equipment, business records and customer contracts associated with the spa business. In addition, we sold a license for the use of trade names to Keys over a period of three years and subleased a portion of JumpKing's facility for the continued manufacturing by Keys. Keys paid approximately $4.5 million consisting of $1.0 million in cash and a note payable of $3.5 million over one year. The note bears interest at a rate of 7% per annum with principal payable in full on January 10, 2006 and interest payable quarterly. Keys is obligated to pay additional amounts associated with the license of trade names calculated as 1.5% of the gross selling price for the Spa Business products sold by Keys over the three year licensing period.

In conjunction with the discontinuance of outdoor recreational equipment operations, we performed an evaluation of long-lived assets pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment of Long-Lived Assets” (“SFAS 144”) and determined that certain of the manufacturing fixed assets will be subject to an impairment loss of approximately $0.4 million. Certain other manufacturing fixed assets met the “held for sale” and “discontinued operations” criteria as required by SFAS 144, at February 26, 2005.

As a result of the foregoing factors, net loss was $39.7 million in the nine months ended February 26, 2005, compared to net income in the nine months ended February 28, 2004 of $31.9 million.

Seasonality

The market for exercise equipment is highly seasonal, with peak periods occurring from late fall through early spring. As a result, the first and fourth quarters of every fiscal year are generally our weakest periods in terms of sales. During these periods, we build product inventory to prepare for the heavy demand anticipated during the upcoming peak season. This operating strategy helps us to realize the efficiencies of a steady pace of year-round production.

The following are net sales, net income (loss) and EBITDA by quarter for fiscal years 2005 and 2004 (in millions):

	First		Second		Third		Fourth
	Quarter⁽¹⁾		Quarter⁽²⁾		Quarter⁽³⁾		Quarter⁽⁴⁾

Net Sales
2005	$	130.7		$	275.4		$	301.3		$	-
2004		164.3			309.0			306.9			194.5

Net income (loss)
2005	$	(20.8	)	$	(18.1	)	$	(0.8	)	$	-
2004		(1.7	)		15.4			18.2			(8.5	)

Use of Non-GAAP Financial Measures

To supplement our consolidated financial statements presented in accordance with GAAP, we use the non-GAAP measure of earnings before income taxes, depreciation and amortization (“EBITDA”) which is adjusted from our GAAP results to exclude certain expenses. These non-GAAP adjustments are provided to enhance the reader's overall understanding of our current financial performance and our prospects for the future. We believe the non-GAAP results provide useful information to both management and investors by excluding certain expenses that we believe are not indicative of our core operating results. The non-GAAP measures are included to provide us and investors with an alternative method for assessing our operating results in a manner that is focused on the performance of our ongoing operations and to provide a more consistent basis for comparison between quarters. For example, EBITDA can be used to measure our ability to service debt, fund capital expenditures and expand our business. Further, these non-GAAP results are one of the primary indicators we use for planning and forecasting in future periods. In addition, since we have historically reported non-GAAP results to the investment community, we believe the inclusion of non-GAAP numbers provides consistency in our financial reporting. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with accounting principles generally accepted in the United States.

We define EBITDA as income before interest expense, income tax expense, depreciation and amortization and certain non-recurring items. The loss on discontinuing operations incurred in the nine months ended February 26, 2005 meets the definition of "non-recurring" in relevant SEC guidelines.

This information should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States, nor should it be considered as an indicator of our overall financial performance. Our calculation of EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited.

The following is a reconciliation of net income (loss) to EBITDA by quarter (in millions):

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter

Fiscal Year 2005
Net loss	$	(20.8	)	$	(18.1	)	$	(0.8	)	$	-
Add back:
Depreciation and amortization		5.6			5.8			6.4			-
Provision for (benefit of) income taxes		(11.2	)		(0.2	)		1.9			-
Interest expense		6.0			7.1			8.0			-
Amortization of deferred financing fees		0.3			0.3			0.3			-
Discontinued operations		5.3			17.9			2.0			-

EBITDA

(14.8

)

12.8

17.8

Fiscal Year 2004
Net income (loss)	$	(1.7	)	$	15.4	$	18.2	$	(8.5	)
Add back:
Depreciation and amortization		5.3			5.4		6.1		3.9
Provision for income taxes		0.2			10.6		5.7		1.4
Interest expense		6.0			6.4		6.4		6.3
Amortization of deferred financing fees		-			0.3		0.3		0.3
Discontinued operations		(0.4	)		2.6		1.6		(0.8	)

EBITDA

9.4

40.7

38.3

2.6

The following is a reconciliation of cash flows from operating activities to EBITDA by quarter (in millions):

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter

Fiscal Year 2005
Net cash provided by (used in)
operating activities	$	(49.9	)	$	(81.7	)	$	47.3		$	-
Net change in operating assets
and liabilities		23.8			63.1			(36.7	)		-
Interest Expense		6.0			7.1			8.0			-
Provision for deferred taxes		11.2			6.6			(4.7	)		-
Discontinued operations, net of tax benefit		5.3			17.9			2.0			-
Income tax benefit		(11.2	)		(0.2	)		1.9			-

EBITDA

(14.8

)

12.8

17.8

Fiscal Year 2004
Net cash provided by (used in)
operating activities	$	(48.3	)	$	(22.7	)	$	31.4		$	33.6
Net change in operating assets
and liabilities		51.8			45.0			(6.8	)		(36.3	)
Interest Expense		6.0			6.4			6.4			6.3
Amortization of discount on 11.25% notes		(0.1	)		-			-			-
Provision for deferred taxes		0.2			(1.2	)		-			(1.6	)
Discontinued operations, net of tax benefit		(0.4	)		2.6			1.6			(0.8	)
Income tax benefit		0.2			10.6			5.7			1.4

EBITDA

9.4

40.7

38.3

2.6

⁽¹⁾	Our first quarter ended August 28 and August 30 for fiscal years 2005 and 2004, respectively.

⁽²⁾	Our second quarter ended November 27 and November 29 for fiscal years 2005 and 2004, respectively.

⁽³⁾	Our third quarter ended February 26 and February 28 for fiscal years 2005 and 2004, respectively.

⁽⁴⁾	Our fourth quarter ended May 31 for the fiscal years 2005 and 2004, respectively.

Liquidity and Capital Resources

Working Capital

Working capital decreased to $64.4 million at February 26, 2005, from $111.7 million at May 31, 2004. The decrease was attributable to an increase in the current portion of long-term debt and accounts payable. Through the third quarter of fiscal 2005, our primary source of cash consisted of borrowings under our credit facilities, which increased by $67.4 million to $203.3 million at February 26, 2005 from $135.9 million at May 31, 2004. Our primary uses of cash through the third quarter of fiscal 2005 included $84.3 million to fund operating activities, compared to $37.5 million in the same period of fiscal 2004, and $16.1 million for capital expenditures, compared to $12.4 million in the same period of fiscal 2004. In addition, cash used for capital expenditures related to our Chinese facility were 16.0 million compared to 4.9 million in the same period of fiscal 2004. Cash used in operating activities was primarily attributable to in the increase in accounts receivable following our largest sales quarters.

Capital Expenditures

Capital expenditures were $32.1 million through the third quarter of fiscal 2005 and $17.4 million through the third quarter of fiscal 2004. Capital expenditures through the third quarter of fiscal 2005 were for routine replacement of machinery and equipment, facility improvements and expansions, including $16.0 million for the facility we are building in China, and the purchase of computer hardware and software. Capital expenditures through the third quarter of fiscal 2004 were primarily for routine replacement of machinery and equipment, facility improvements and expansions, including $4.9 million for the facility we are building in China, and the purchase of computer hardware and software.

Sources of Liquidity

As of February 26, 2005, our primary sources of liquidity were available borrowings of $20.8 million under our domestic credit facility.

China Subsidiary Liquidity

Our China subsidiary has available its own credit facilities of up to $13.0 million, consisting of a term loan facility of $6.0 million and a revolving credit facility of $7.0 million. As of February 26, 2005, the credit facility had availability of approximately $5.7 million.

Future Needs

Our ongoing cash requirements for debt service and related obligations are expected to consist primarily of interest payments under our domestic credit facility, interest payments on our 11.25% senior subordinated notes and capital expenditures.

We believe our sources of liquidity and capital resources are sufficient to meet all currently anticipated short-term and long-term operating cash requirements arising in the ordinary course of business, including debt service payment on our credit facility and 11.25% senior secured notes prior to their scheduled maturities in fiscal 2012 and fiscal 2012, respectively. However, we may need to revise, replace or refinance all or a portion of our credit facility and the 11.25% notes prior to their respective maturities. If we are unable to satisfy our debt obligations or to timely revise, refinance or replace our debt, we may need to sell assets, reduce or delay capital investments or raise additional capital to be able to effectively operate our business.

Total assets as of February 26, 2005 and May 31, 2004 were $628.2 million and $558.5 million, respectively. The increase in assets was primarily attributable to the increases in accounts receivable, and deferred tax assets. Accounts receivable increased as a result of our completing our peak periods for sales. The increase in deferred tax assets can be attributed to the current year losses, i.e., the benefit going forward from the loss on discontinued operations and the carry forward of foreign tax credits available from the carry back of the current year's net operating loss. We have approximately $6.9 million of foreign tax credit carryforwards available to reduce future income taxes at February 26, 2005. We believe it is more likely than not that our foreign tax credit carryforwards will be utilized through the reversal of existing temporary differences, future earnings, tax strategies or a combination thereof. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We also booked an income tax receivable for $21.4 million for the current net operating loss that can be carried back to prior taxable years. Net debt (current portion of long-term debt plus long-term debt less cash) for the nine-month period ended February 26, 2005 and the fiscal year ended May 31, 2004 was $351.5 million and $283.9 million, respectively. This increase represents the amounts to fund operating activities for the period, including capital expenditures purchases which were $32.1 million compared to capital expenditures of $17.4 million in the nine months ended February 28, 2004. Capital expenditures in China were $16.0 million for the period ended February 26, 2005 and $4.9 million for the period ended February 28, 2004.

The Credit Agreement

On October 11, 2004, we amended our credit agreement (the “Amended Credit Agreement” or “Credit Facility”). The Amended Credit Agreement increases the maximum availability from $210 million to $275 million. In addition, the remaining balance on the term note with accrued interest (approximately $12.5 million) was converted to and becomes a part of the revolver balance. At our option, revolving credit advances bear interest at either (a) a floating rate equal to the Index Rate plus the applicable margin of 1.375% or (b) a floating rate equal to the LIBOR rate plus the applicable margin of 2.75%. If we meet certain fixed charge coverage ratios, the applicable margins have lower rates. The Amended Credit Agreement waives any violation of financial covenants for the third quarter of fiscal 2005 and eliminates those financial covenants going forward. The Amended Credit Agreement also provides for the formation of certain Chinese sales corporations to facilitate our doing business in China.

We are also required to maintain a lockbox arrangement whereby remittances from our customers reduce the borrowings outstanding under the Amended Credit Agreement. The Amended Credit Agreement also contains a Material Adverse Effect ("MAE") clause which grants the agent and lenders having more than 66 and 2/3% of the commitment or borrowings the right to block, and serves as a condition for, our requests for future advances. EITF Issue 95-22 "Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lockbox Arrangement" requires borrowings under credit agreements with these two provisions to be classified as current obligations.

We do not believe that any of these MAE's have occurred. We intend to manage the Credit Facility as long-term debt with a final maturity date in 2007, as provided for in the Amended Credit Agreement. A subsequent amendment was signed on December 21, 2004 related to funding the China facility.

The balance outstanding under the existing Amended Credit Agreement consisted of (in millions):

February 26, 2005

May 31, 2004

February 28, 2004

Revolver	$	203.3		$	122.1		$	136.7
Term Loan		-			13.8			15.0

Total

203.3

135.9

151.7

As of February 26, 2005, our consolidated indebtedness was approximately $356.5 million, of which approximately $203.3 million was senior indebtedness. With the exception of the increases in the revolver noted above, our contractual cash obligations and commercial commitments remained consistent with those at the end of fiscal 2004.

On January 13, 2004 we obtained written waivers from the agent and Credit Facility lenders having more than 33 and 1/3% of the commitment or borrowings waiving their rights under the MAE clause for the period from January 13, 2004 to January 18, 2005. Accordingly, we have classified the outstanding borrowings under the Amended Credit Agreement, which totaled $146.7 million at February 28, 2004 as a long-term liability.

On April 7, 2005 we obtained an amendment to the Amended Credit Agreement that, removes the cap on borrowings by our Chinese manufacturing affiliate from local lenders, allows for limited recourse financing for institutional customers, and provides consent for the anticipated sale of the majority of Jumpking's remaining assets. We have also obtained written waivers from the agent and Credit Facility lenders to, correct an erroneous borrowing base certificate of December 25, 2004, acknowledge Jumpking’s sale of certain spa assets pursuant to the Asset Purchase Agreement dated January 10, 2005 between the Company and Keys Backyard, LLP ("Keys"), waive violation of the Amended Credit Agreement related to recourse financing obtained by institutional customers, waive violation of the Amended Credit Agreement for failure to adequately notify the Credit Facility lenders of the recall of trampolines and trampoline enclosures, and consent to change the name of the Company's wholly owned subsidiary from ICON China OS, Inc. to World Fitness Sales.

Critical Accounting Policies

Our discussion of financial condition and results of operations relies on our consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. We believe that investors need to be aware of these policies and how they impact our financial statements as a whole, as well as our related discussion and analysis presented herein. While we believe that these accounting policies are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related risks described in our annual report on Form 10-K as filed with the Securities and Exchange Commission on August 30, 2004 are those that depend most heavily on these judgments and estimates. As of February 26, 2005, there have been no material changes to any of the critical accounting policies contained therein.

Risk Factors

Our future operating results are likely to fluctuate and therefore may fail to meet expectations.

Our operating results have varied widely in the past and may continue to fluctuate in the future. In addition, our operating results may not follow any past trends. Our future operating results will depend on many factors and may fluctuate and fail to meet our expectations or those of others for a variety of reasons, including the following:

	1.	competitive pricing pressure,

	2.	price increases in raw materials and

	3.	the need for constant, rapid, new product introductions present an ongoing design and manufacturing challenge.

As a result of these or other factors, we could fail to achieve our expectations as to future revenues, gross profit and income from operations. Any downward fluctuation or failure to meet expectations will likely adversely affect our financial results.

Our ability to meet our cash requirements depends on a number of factors, many of which, including the results of the Nautilus litigation, are beyond our control.

Our ability to meet our cash requirements (including our debt service obligations) is dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. We cannot guarantee that our business will generate sufficient cash flows from operations to fund our cash requirements. If we were unable to meet our cash requirements from operations, we would be required to fund these cash requirements by alternative financing. The degree to which we may be leveraged could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes, could make us more vulnerable to industry downturns and competitive pressures or could limit our flexibility in planning for, or reacting to changes and opportunities in our industry, which may place us at a competitive disadvantage compared to our competitors. There can be no assurance that we will be able to obtain alternative financing, that any such financing would be on acceptable terms or that we will be permitted to do so under the terms of our existing financing arrangements. In the absence of such financing, our ability to respond to changing business and economic conditions, make future acquisitions, react to adverse operating results, meet our debt service obligations or fund required capital expenditures or increased working capital requirements may be adversely affected.

We are functioning under new operating management.

On July 1, 2004, we announced the appointment of David Watterson as Chairman and Chief Executive Officer, replacing the then-current Chairman and Chief Executive Officer, Scott Watterson. Until that time, David Watterson was the President of North America Operations. Gary Stevenson's duties as President and Chief Operating Officer were assumed by Matthew Allen, who moved to the position of President and Chief Merchandising Officer and Joseph Brough became the Chief Operating Officer. Additionally, Jace Jergensen became a Senior Vice President. There can be no assurance that the transition to this new management, or the new structure itself, will be successful.

Reliance on Major Customers.

Our three largest customers together accounted for approximately 53.1%, 53.8%, 56.4% and 53.2% of our revenues in fiscal years 2002, 2003, 2004, and the first nine months of fiscal 2005, respectively. Our largest customer, Sears, Roebuck and Co., accounted for 44.5%, 39.3%, 38.7% and 41.9% of our revenues in fiscal years 2002, 2003, 2004, and the first nine months of fiscal 2005, respectively. In addition, Sears was merged with Kmart in early 2005. Together Sears and Kmart will form a major new retail company named Sears Holding Corporation. It is not yet possible to determine the potential impact of this merger on Sears' purchases from us.

The level of our sales to these customers depends in large part on consumers' continuing commitment to home fitness equipment products and on the success of the customers' efforts to market and promote our products, as well as our competitiveness in terms of price, quality, product innovation, customer service and other factors. Consistent with industry practice, we do not have long-term purchase agreements or other commitments as to levels of future sales. The loss of, or a substantial decrease in the amount of purchases by, or a write-off of any significant receivables due from any of our major customers would have a material adverse effect on our business. In addition, we offer our products directly to consumers through Nordictrack stores, kiosks and direct response channels. Our direct sales to consumers, particularly through kiosks and stores in malls where our existing customers have retail sales outlets, could affect our sales and our relationships with existing customers.

Our financial results could be seriously harmed if the markets in which we sell our products do not grow.

Our continued success depends in large part on the continued growth of the exercise equipment market. Any reduction in the growth of, or decline in the demand for exercise equipment could seriously harm our business, financial condition and results of operations. In addition, certain of our products, may in the future, experience significant fluctuations in demand. We may also be seriously harmed by slower growth in the other markets in which we sell our products. Even in the absence of an industry downturn, the average selling prices of our products have historically decreased during the products’ lives and we expect this trend to continue. In order to offset selling price decreases, we attempt to decrease the manufacturing costs of our products and to introduce new, higher priced products that incorporate advanced features. If these efforts are not successful or do not occur in a timely manner, or if our newly introduced products do not gain market acceptance, our business, financial condition and results of operations could be seriously harmed.

In addition to following the general pattern of decreasing average selling prices, the selling prices for certain products fluctuate significantly with real and perceived changes in the balance of supply and demand for these products. In the event we are unable to decrease per unit manufacturing costs at a rate equal to or faster than the rate at which selling prices continue to decline, our business, financial condition and results of operations will be seriously harmed. Furthermore, we expect our competitors to invest in new manufacturing capacity and achieve significant manufacturing yield improvements in the future. These developments could dramatically increase the worldwide supply of competitive products and result in further downward pressure on prices.

We may be unable to protect our intellectual property rights adequately and may face significant expenses as a result of ongoing or future litigation.

Protection of our intellectual property rights is essential to keep others from copying the innovations that are central to our existing and future products. Consequently, we may become involved in litigation to enforce our patents or other intellectual property rights, to protect our trade secrets and know-how, to determine the validity or scope of the proprietary rights of others or to defend against claims of invalidity. This type of litigation can be expensive, regardless of whether we win or lose.

We are now and may again become involved in litigation relating to alleged infringement by us of others’ patents or other intellectual property rights. This type of litigation is frequently expensive to both the winning party and the losing party and could take up significant amounts of management’s time and attention. In addition, if we lose such a lawsuit, a court could require us to pay substantial damages and/or royalties or prohibit us from using essential technologies. For these and other reasons, this type of litigation could seriously harm our business, financial condition and results of operations. Also, although in certain instances we may seek to obtain a license under a third party’s intellectual property rights in order to bring an end to certain claims or actions asserted against us, we may not be able to obtain such a license on reasonable terms or at all.

For a variety of reasons, we have entered into license agreements with third parties that give those parties the right to use patents and other technology developed by us and that gives us the right to use patents and other technology developed by them. We anticipate that we will continue to enter into these kinds of licensing arrangements in the future. It is possible, however, that licenses we want will not be available to us on commercially reasonable terms or at all. If we lose existing licenses to key technology, or are unable to enter into new licenses that we deem important, our business, financial condition and results of operations could be seriously harmed.

It is critical to our success that we are able to prevent competitors from copying our innovations. We, therefore intend to continue to seek patent, trade secret and mask work protection for our manufacturing technologies. The process of seeking patent protection can be long and expensive and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. Furthermore, others may develop technologies that are similar or superior to our technology or design around the patents we own.

We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties. However, these parties may breach these agreements and we may not have adequate remedies for any breach. Also, others may come to know about or determine our trade secrets through a variety of methods. In addition, the laws of certain countries in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as the laws of the United States.

We are subject to foreign taxes in the countries in which we operate, which may reduce amounts we receive from our operating companies or may increase our tax costs.

Many of the foreign countries in which we operate have increasingly turned to new taxes, as well as aggressive interpretations of current taxes, as a method of increasing revenue. These taxes may reduce the amount of earnings that we can generate from our services.

Distributions of earnings and other payments, including interest, received from our operating companies may be subject to withholding taxes imposed by some countries in which these entities operate. Any of these taxes will reduce the amount of after-tax cash we can receive from those operating companies.

In general, a U.S. corporation may claim a foreign tax credit against its federal income tax expense for foreign withholding taxes and, under certain circumstances, for its share of foreign income taxes paid directly by foreign corporate entities in which the company owns 10% or more of the voting stock. Our ability to claim foreign tax credits is, however, subject to numerous limitations, and we may incur incremental tax costs as a result of these limitations or because we do not have U.S. federal taxable income.

We may also be required to include in our income for U.S. federal income tax purposes our proportionate share of specified earnings of our foreign corporate subsidiaries that are classified as controlled foreign corporations, without regard to whether distributions have been actually received from these subsidiaries. For instance, because our Canadian subsidiary is a guarantor on our Credit Facility, we are required to include their earnings as income for U.S. federal income tax purposes even though the income is not actually distributed.

We may be exposed to potential risks if we do not have an effective system of disclosure controls or internal controls or fail to properly implement Section 404 of Sarbanes-Oxley.

We are now in the process of complying with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX"), including those provisions that establish the requirements for both management and auditors of public companies with respect to reporting on internal control over financial reporting. These requirements will first become applicable to the Company on August 29, 2007. In 2004, we have devoted significant resources to review and strengthen our internal controls in advance of complying with the Section 404 requirements. The requirements and processes associated with Section 404 are new and untested, and we cannot be certain that the measures we have taken, and will take, will be sufficient or timely completed to meet the Section 404 requirements, or that we will be able to implement and maintain adequate disclosure controls and controls over our financial processes and reporting in the future, particularly in light of our rapid growth and international expansion, which is expected to result in on-going changes to our control systems and areas of potential risk. If we fail to maintain an effective system of disclosure controls or internal control over financial reporting, including satisfaction of the requirements of Section 404 of SOX, we may not be able to accurately or timely report on our financial results or adequately identify and reduce fraud. As a result, the financial position of our business could be harmed; current and potential future security holders could lose confidence in the Company and/or its reported financial results, which may cause a negative effect on our securities; and we could be exposed to litigation or regulatory proceedings, which may be costly or divert management attention.

We depend on third parties to transport our products.

We rely on independent carriers and freight haulers to move our products between manufacturing plants and our customers. Any transport or delivery problems because of their errors or because of unforeseen interruptions in their activities due to factors such as strikes, political instability, terrorism, natural disasters and accidents could seriously harm our business, financial condition and results of operations and ultimately impact our relationship with our customers.

We may face product liability claims that are disproportionately higher than the value of the products involved.

Although all of our products sold are covered by our standard warranty, we could incur costs not covered by our warranties including, but not limited to, labor and other costs of replacing defective parts, lost profits and other damages. These costs could be disproportionately higher than the revenue and profits we receive from the products involved. If we are required to pay for damages resulting from quality or other, our business, financial condition and results of operations could be adversely affected.

We are exposed to the risks associated with the slowdown in the U.S. and worldwide economy.

Among other factors, concerns about inflation, decreased consumer confidence and spending and reduced corporate profits and capital spending resulted in a downturn in the U.S. economy generally. If the adverse economic conditions continue or worsen, our business, financial condition and results of operations may be seriously effected.

Interruptions in the availability of raw materials can harm our financial performance.

Our manufacturing operations require raw materials that must meet exacting standards. We generally have more than one source available for these materials, but for certain of our products there are only a limited number of suppliers capable of delivering the raw materials that meet our standards. If we need to use other companies as suppliers, they must go through a qualification process, which can be difficult and lengthy. In addition, the raw materials we need for certain of our products could become scarcer as worldwide demand for these materials increases. Interruption of our sources of raw materials could seriously harm our business, financial condition and results of operations.

We spend heavily on equipment to stay competitive and will be adversely impacted if we are unable to secure financing for such investments.

In order to remain competitive, exercise equipment manufacturers generally must spend heavily on equipment to maintain or increase technology and design development and manufacturing capacity and capability. We currently plan for approximately $41.0 million in capital expenditures in fiscal 2005, and anticipate significant continuing capital expenditures in subsequent years. In the past, we have reinvested a substantial portion of our cash flow from operations in tooling, design development and capacity expansion and improvement programs. If we are unable to decrease costs for our products at a rate at least as fast as the rate of the decline in selling prices for such products, we may not be able to generate enough cash flow from operations to maintain or increase manufacturing capability and capacity as necessary. In such a situation, we would need to seek financing from external sources to satisfy our needs for manufacturing equipment and, if cash flow from operations declines too much, for operational cash needs as well. Such financing, however, may not be available on terms that are satisfactory to us or at all, in which case our business, financial condition and results of operations would seriously be harmed.

We are subject to extensive government regulation.

Our business is subject to the provisions of, among other laws, the Federal Consumer Products Safety Act and the Federal Hazardous Substances Act, and rules and regulations promulgated under these acts. These statutes are administered by the Consumer Product Safety Commission (“CPSC”) which has the authority to remove products from the market that are found to be defective and present a substantial hazard or risk of serious injury or death. The CPSC can require us to recall, repair, or replace these products under certain circumstances. We cannot assure that defects in our products will not be alleged or found. Products that we develop or sell may also expose us to liability for the costs related to product recalls. These costs can include legal expenses, advertising, collection and destruction of product, and free goods. Our product liability insurance coverage generally excludes such costs and damages resulting from product recalls.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

Fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations expose us to market risk. We are vulnerable to significant fluctuations in interest rates on our variable rate debt and on any future repricing or refinancing of our fixed rate debt and on future debt.

We use long-term and medium-term debt as a source of capital. At February 26, 2005, we had approximately $153.2 million in outstanding fixed rate debt, consisting of 11.25% subordinated notes maturing in April 2012. When debt instruments of this type mature, we typically refinance such debt at the then-existing market interest rates, which may be more or less than the interest rates on the maturing debt.

Our Credit Agreement has variable interest rates and any fluctuation in interest rates could increase or decrease our interest expense. At February 26, 2005, we had approximately $203.3 million in outstanding variable rate debt.

In addition to the United States, we have operations or transact business in Canada, the United Kingdom, France, Italy, Germany and Asia. The operations in these foreign countries conduct business in their local currencies as well as other regional currencies. To mitigate our exposure to transactions denominated in currencies other than the functional currency of each entity, we enter into forward exchange contracts from time to time to manage foreign currency risk related to the procurement of merchandise from foreign sources. As of February 26, 2005, the Company had foreign currency contracts in the form of forward exchange contracts in the amounts of approximately $2.2 million in U.S. dollars and $0.9 million in Canadian dollars. Unrealized losses associated with these contracts were not significant. These unrealized losses are included in the statement of operations. The market risk inherent in these instruments was not material to the Company’s consolidated financial condition, results of operations, or cash flow for the period ended February 26, 2005. Because of the variety of currencies in which purchases and sales are transacted, it is not possible to predict the impact of a movement in foreign currency exchange rates on future operating results. However, we intend to continue to mitigate our exposure to foreign exchange gains or losses.

ITEM 4 - CONTROLS AND PROCEDURES

(a)	Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of February 26, 2005 (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them, on a timely basis, to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic filings under the Exchange Act.

(b)	Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls.

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings

	See Note C in Item 1 of Part I.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

	None

Item 3.	Defaults Upon Senior Securities

	None

Item 4.	Submission of Matters to a Vote of Security Holders

	None

Item 5.	Other Information

	None

Item 6.	Exhibits

(a)	Exhibits
	99.01	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	99.02	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	10.69	Sixth amendment and limited waiver with respect to Credit Agreement.

SIGNATURES

Pursuant to the requirements of Section of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf of the undersigned, thereunto duly authorized.

By:	/s/ David J. Watterson

	David J. Watterson, Chairman of the Board of Directors
	and Chief Executive Officer (Principal Executive Officer)
	Date: April 12, 2005

By:	/s/ S. Fred Beck

	S. Fred Beck, Vice President, Chief Financial Officer
	(Principal Accounting Officer), and Treasurer
	Date: April 12, 2005

CERTIFICATION

I, David J. Watterson, certify that:

1.	I have reviewed this quarterly report of ICON Health & Fitness, Inc.;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: April 12, 2005	/s/ David J. Watterson

	(Signature)

	Chief Executive Officer

	(Title)

CERTIFICATION

I, S. Fred Beck, certify that:

1.	I have reviewed this quarterly report of ICON Health & Fitness, Inc.;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: April 12, 2005	/s/ S. Fred Beck

	(Signature)

	Chief Financial Officer

	(Title)

EXHIBIT INDEX

Exhibit Number		Description of Exhibit

99.01		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.02		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

10.69		Sixth amendment and limited waiver with respect to Credit Agreement.