Jumpking 10-Q 2005 Q1 Quarterly report

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 endedAugust 28, 2004

¨ 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 August 28, 2004 (unaudited),
	May 31, 2004 (audited) and August 30, 2003 (unaudited)	3
	Condensed Consolidated Statements of Operation (unaudited) for the three
	months ended August 28, 2004 and August 30, 2003	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the three
	months ended August 28, 2004 and August 30, 2003	5
	Notes to Condensed Consolidated Financial
	Statements (unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	22
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 2.	Changes in Securities	23
Item 3.	Security Defaults Upon Senior Securities	23
Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 5.	Other Information	23
Item 6.	Exhibits and Reports on Form 8-K	23
Signatures		24
Certifications		25
Exhibit Index		27

PART I - FINANCIAL INFORMATION

ITEM 1  -  FINANCIAL STATEMENTS

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

August 28, 2004	May 31, 2004	August 30, 2003

ASSETS		(Unaudited)		(Audited)		(Restated)
Current assets						(Unaudited)
Cash	$	4,821	$	5,122	$	4,442
Accounts receivable, net		170,840		210,498		182,064
Inventories, net:
Raw materials		72,264		76,222		66,518
Finished goods		190,365		119,706		130,711

Total inventories, net	262,629	195,928	197,229
Income taxes receivable	-	-	162
Deferred income taxes	18,882	6,974	7,206
Other current assets	15,060	13,067	9,067

Total current assets	472,232		431,589		400,170
Property and equipment	120,821		111,981		103,708
Less accumulated depreciation	(57,099	)	(53,453	)	(52,862	)

Property and equipment, net	63,722	58,528	50,846
Intangible assets, net	37,097	38,681	27,897
Deferred income taxes	6,717	6,309	9,573
Other assets, net	21,255	23,388	20,969

$ 601,023 $ 558,495 $ 509,455

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt	$	191,430	$	135,879	$	144,469
Accounts payable		158,780		146,944		125,734
Accrued expenses		29,429		30,811		28,555
Income taxes payable		125		574		-
Interest payable		3,038		7,544		3,165

Total current liabilities	382,802	321,752	301,923
Long-term debt	153,145	153,111	153,009
Other liabilities	12,874	12,797	9,920

	548,821		487,660		464,852
Minority interest	3,500		3,500		3,100
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	(154,646	)	(133,863	)	(158,978	)
Accumulated other comprehensive income (loss)	1,393		(757	)	(1,474	)

Total stockholder's equity 48,702 67,335 41,503

$ 601,023 $ 558,495 $ 509,455

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

August 28, 2004	August 30, 2003

Net sales	$	170,334	$	197,823
Cost of sales		134,954		134,248

Gross profit 35,380 63,575

Operating expenses:
Selling	32,983	34,341
Research and development	3,271	3,251
General and administrative	23,517	21,212

Total operating expenses 59,771 58,804

Income (loss) from operations	(24,391	)	4,771
Interest expense	6,038		5,993
Amortization of deferred financing fees	277		41

Loss before income taxes	(30,706	)	(1,263	)
(Benefit of) provision for income taxes	(9,923	)	463

Net loss	(20,783	)	(1,726	)
Other comprehensive income (loss):
Foreign currency translation adjustment,
net of tax expense of $1,318
in fiscal 2005 and net of tax benefit of
$680 in fiscal 2004	2,150		(1,109	)

Comprehensive loss $ (18,633 ) $ (2,835 )

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 Three Months Ended

August 28, 2004 August 30, 2003

OPERATING ACTIVITIES:
Net loss	$	(20,783	)	$	(1,726	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Benefit for deferred taxes		(14,374	)		(397	)
Amortization of deferred financing fees		277			41
Amortization of debt discount		36			91
Depreciation and amortization		5,787			5,477
Changes in operating assets and liabilities:
Accounts receivable, net		39,658			(6,900	)
Inventories, net		(66,701	)		(35,521	)
Other assets, net		716			389
Accounts payable and accrued expenses		10,454			(852	)
Income taxes payable		(449	)		(4,390	)
Interest payable		(4,506	)		(4,319	)
Other liabilities		(36	)		(168	)

Net cash used in operating activities (49,921 ) (48,275 )

INVESTING ACTIVITIES:
Purchase of property and equipment	(5,026	)	(3,720	)
Purchase of property and equipment-China	(3,969	)	(1,840	)
Purchase of intangible assets	(402	)	(814	)

Net cash used in investing activities (9,397 ) (6,374 )

FINANCING ACTIVITIES:
Borrowings on revolving credit facility, net	56,799		53,130
Payments on term note	(1,250	)	-
Minority interest	-		3,100

Net cash provided by financing activities 55,549 56,230

Effect of exchange rates on cash 3,468 (1,789 )

Net decrease in cash	(301	)	(208	)
Cash, beginning of period	5,122		4,650

Cash, end of the period $ 4,821 $ 4,442

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 5,000 employees worldwide. The Company develops, manufactures and markets fitness equipment under the following company-owned brand names: ProForm, NordicTrack, Weslo, HealthRider, Image, JumpKing, 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's 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 ended August 28, 2004 and August 30, 2003. 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 August 28, 2004, 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 three months ended August 28, 2004 and August 30, 2003, respectively. All previously granted options were fully vested as of November 30, 2002. Therefore, there is no stock-based employee compensation for the three months ended August 28, 2004 and August 30, 2003.

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):

Three Months Ended

August 28, 2004 August 30, 2003

Beginning balance	$	2,505		$	2,694
Additions:
Charged to costs and expenses		-			27
Deductions:
Reduction in reserve		(241	)		-

Ending balance $ 2,264 $ 2,721

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 August 28, 2004, 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 proposed claim is currently being vigorously defended by the Company's counsel. At this time, the Company and its counsel are unable to determine the likelihood of an unfavorable outcome or the amount or range of potential recovery or loss.

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 this motion denying the preliminary injunction on literal patent infringement, and a trial has been scheduled for sometime in April 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 Company's share of the equity investment is expected to be approximately $10.0 million. The Company is in the process of arranging for the debt portion of the financing, which is expected to be provided by the Bank of China. The Company's equity interest in the foreign subsidiary is 70%, which will be funded in the form of equity and debt. As of August 28, 2004, the Company has made contributions of $5.0 million and the minority interest contributions were $3.5 million. The minority interest shareholder is also a long-time vendor of the Company. The Company has recorded purchases from this vendor of approximately $19.6 million and $23.5 million during the three months ended August 28, 2004 and August 30, 2003, 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”). The Amended Credit Agreement increases the amount of availability 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 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.

The Company does not believe that any of these MAE's have occurred or 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 Credit Agreement.

In addition, the Company has restated the August 30, 2003 balance sheet to properly reflect the borrowings as current as of August 30, 2003. This reclassification had no impact on the Company's debt covenants under the credit agreement, its ability to draw on existing facilities or its previously reported net income.

NOTE E - DISCONTINUED OPERATIONS

On September 17, 2004, management announced that JumpKing, Inc. (“JumpKing”), a wholly-owned subsidiary, will discontinue the manufacturing, marketing and distribution of trampolines (“trampoline operations”). As a result, approximately 415 jobs will be eliminated in the JumpKing plant in Mesquite, Texas. The Company expects the plant to cease trampoline operations by the end of the third quarter of fiscal 2005. Trampoline sales were approximately $82.6 million and $77.1 million for the fiscal years ended May 31, 2004 and 2003, respectively. As of August 28, 2004, the Company is unable in good faith to make a determination of the costs associated with the discontinuance of trampoline operations.

In conjunction with the discontinuance of trampoline operations, the Company has performed an evaluation of long-lived assets pursuant to Statements of Financial Accounting Standards ("SFAS") No. 144, “Accounting for the Impairment of Long Lived Assets” (“SFAS 144”) to determine if the manufacturing fixed assets will be subject to a possible impairment loss. As of August 28, 2004, the Company currently does not anticipate any material impairment of its long lived assets.

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 August 28, 2004 (unaudited), May 31, 2004 (audited) and August 30, 2003 (unaudited) and condensed consolidating statements of operations and cash flows for the three months ended August 28, 2004 (unaudited) and August 30, 2003 (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
August 28, 2004

ICON
Health &
Fitness, Inc. Combined
Guarantor
Subsidiaries Combined
Non-Guarantor
Subsidiaries Eliminations Consolidated

ASSETS
Current assets:
Cash	$	1,591	$	2,182	$	1,048	$	-		$	4,821
Accounts receivable, net		105,284		78,179		13,735		(26,358	)		170,840
Inventories, net		165,888		83,094		14,890		(1,243	)		262,629
Deferred income taxes		18,382		-		500		-			18,882
Other current assets		5,487		5,878		3,695		-			15,060

Total current assets 296,632 169,333 33,868 (27,601 ) 472,232

Property and equipment, net	39,254	23,130	1,338	-		63,722
Receivable from affiliates	149,306	49,769	-	(199,075	)	-
Intangible assets, net	29,524	6,355	1,218	-		37,097
Deferred income taxes	5,611	1,106	-	-		6,717
Investment in subsidiaries	33,077	-	-	(33,077	)	-
Other assets, net	14,907	5,483	865	-		21,255

Total assets $ 568,311 $ 255,176 $ 37,289 $ (259,753 ) $ 601,023

LIABILITIES & STOCKHOLDER'S EQUITY

Current liabilities:
Current portion of long-term debt	$	187,766	$	3,664		$	-	$	-		$	191,430
Accounts payable		109,426		39,251			36,461		(26,358	)		158,780
Accrued liabilities		17,509		8,339			3,581		-			29,429
Accrued income taxes		3,902		(3,917	)		140		-			125
Interest payable		3,038		-			-		-			3,038

Total current liabilities 321,641 47,337 40,182 (26,358 ) 382,802

Long-term debt	153,138		7	-		-		153,145
Other long-term liabilities	6,836		6,038	-		-		12,874
Payable to affiliates	37,994		138,051	23,030		(199,075	)	-
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)	(154,646	)	15,074	(29,405	)	14,331		(154,646	)
Accumulated other comprehensive
income (loss)	1,393		2,910	(1,999	)	(911	)	1,393

Total stockholder's equity (deficit) 48,702 63,743 (25,923 ) (37,820 ) 48,702

Total liabilities & stockholder's
equity (deficit)	$	568,311	$	255,176	$	37,289	$	(259,753	)	$	601,023

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		85,132		15,045		(21,706	)		210,498
Inventories, net		118,310		67,227		11,096		(705	)		195,928
Deferred income taxes		6,469		-		505		-			6,974
Other current assets		4,716		4,156		4,195		-			13,067

Total current assets 262,768 158,965 32,267 (22,411 ) 431,589

Property and equipment, net	38,302	19,058	1,168	-		58,528
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		36,676			34,114		(21,706	)		146,944
Accrued liabilities		18,800		8,340			3,671		-			30,811
Accrued income taxes		2,509		(2,299	)		364		-			574
Interest payable		7,544		-			-		-			7,544

Total current liabilities 262,592 42,717 38,149 (21,706 ) 321,752

Long-term debt	153,102		9	-		-		153,111
Other long-term 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
August 30, 2003
(Restated)

ICON
Health &
Fitness, Inc. Combined
Guarantor
Subsidiaries Combined
Non-Guarantor
Subsidiaries Eliminations Consolidated

ASSETS
Current assets:
Cash	$	880	$	2,978		$	584		$	-		$	4,442
Accounts receivable, net		116,651		73,435			9,953			(17,975	)		182,064
Inventories, net		129,861		57,524			10,471			(627	)		197,229
Income taxes receivable		1,018		(313	)		(543	)		-			162
Deferred income taxes		6,743		238			225			-			7,206
Other current assets		493		4,786			3,788			-			9,067

Total current assets 255,646 138,648 24,478 (18,602 ) 400,170

Property and equipment, net	38,383	11,221	1,242	-		50,846
Receivable from affiliates	113,303	23,229	-	(136,532	)	-
Intangible assets, net	19,363	7,316	1,218	-		27,897
Deferred income taxes	8,543	1,030	-	-		9,573
Investment in subsidiaries	26,882	-	-	(26,882	)	-
Other assets, net	13,316	7,632	21	-		20,969

Total assets $ 475,436 $ 189,076 $ 26,959 $ (182,016 ) $ 509,455

LIABILITIES & STOCKHOLDER'S EQUITY

Current liabilities:
Current portion of long-term debt	$	144,469	$	-	$	-	$	-		$	144,469
Accounts payable		87,472		29,169		27,068		(17,975	)		125,734
Accrued liabilities		18,191		7,429		2,935		-			28,555
Interest payable		3,165		-		-		-			3,165

Total current liabilities 253,297 36,598 30,003 (17,975 ) 301,923

Long-term debt	152,995		14	-		-		153,009
Other long-term liabilities	4,412		5,508	-		-		9,920
Payable to affiliates	23,229		91,574	21,729		(136,532	)	-
Minority interest	-		-	-		3,100		3,100
Stockholder's equity (deficit):
Common stock and additional
paid-in capital	204,155		42,359	5,481		(47,840	)	204,155
Receivable from Parent	(2,200	)	-	-		-		(2,200	)
Retained earnings
(accumulated deficit)	(158,978	)	11,390	(26,666	)	15,276		(158,978	)
Accumulated other comprehensive
income (loss)	(1,474	)	1,633	(3,588	)	1,955		(1,474	)

Total stockholder's equity (deficit) 41,503 55,382 (24,773 ) (30,609 ) 41,503

Total liabilities & stockholder's
equity (deficit)	$	475,436	$	189,076	$	26,959	$	(182,016	)	$	509,455

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

ICON
Health &
Fitness, Inc. Combined
Guarantor
Subsidiaries Combined
Non-Guarantor
Subsidiaries Eliminations Consolidated

Net sales	$	81,926	$	75,934	$	12,474	$	-	$	170,334
Cost of sales		71,223		55,087		8,106		538		134,954

Gross profit	10,703	20,847	4,368	(538	)	35,380
Total operating expenses	24,925	28,530	6,316	-		59,771

Loss from operations	(14,222	)	(7,683	)	(1,948	)	(538	)	(24,391	)
Interest expense	5,541		-		497		-		6,038
Amortization of deferred
financing fees	277		-		-		-		277
Equity in earnings
of subsidiaries	8,204		-		-		(8,204	)	-

Income (loss) before income taxes	(28,244	)	(7,683	)	(2,445	)	7,666	(30,706	)
Benefit from income taxes	(7,461	)	(2,462	)	-		-	(9,923	)

Net loss $ (20,783 ) $ (5,221 ) $ (2,445 ) $ 7,666 $ (20,783 )

Supplemental Condensed Consolidating Statement of Operations
Three months ended August 30, 2003

ICON
Health &
Fitness, Inc. Combined
Guarantor
Subsidiaries Combined
Non-Guarantor
Subsidiaries Eliminations Consolidated

Net sales	$	112,576	$	76,141	$	9,106	$	-	$	197,823
Cost of sales		82,253		46,262		5,662		71		134,248

Gross profit	30,323	29,879	3,444	(71	)	63,575
Total operating expenses	24,430	28,821	5,553	-		58,804

Income (loss) from operations	5,893	1,058	(2,109	)	(71	)	4,771
Interest expense	5,517	1	475		-		5,993
Amortization of deferred
financing fees	41	-	-		-		41
Equity in earnings
(losses) of subsidiaries	2,061	-	-		(2,061	)	-

Income (loss) before income taxes	(1,726	)	1,057	(2,584	)	1,990	(1,263	)
Provision for income tax	-		859	(396	)	-	463

Net income (loss) $ (1,726 ) $ 198 $ (2,188 ) $ 1,990 $ (1,726 )

Supplemental Condensed Consolidating Statement of Cash Flows
Three months ended August 28, 2004

ICON
Health &
Fitness, Inc. Combined
Guarantor
Subsidiaries Combined
Non-Guarantor
Subsidiaries Eliminations Consolidated

Operating Activities:
Net cash used in operating activities	$	(35,286	)	$	(13,108	)	$	(1,527	)	$	-	$	(49,921	)

Investing Activities:
Net cash used in investing activities	(4,308	)	(4,795	)	(294	)	-	(9,397	)

Financing Activities:
Borrowings on revolving credit
facility, net	53,138		3,661	-	-	56,799
Payments on term note	(1,250	)	-	-	-	(1,250	)
Other	(13,268	)	12,918	350	-	-

Net cash provided by
financing activities	38,620	16,579	350	-	55,549

Effect of exchange rates on cash 1,319 1,056 1,093 - 3,468

Net increase (decrease) in cash	345	(268	)	(378	)	-	(301	)
Cash, beginning of period	1,246	2,450		1,426		-	5,122

Cash, end of period $ 1,591 $ 2,182 $ 1,048 $ - $ 4,821

Supplemental Condensed Consolidating Statement of Cash Flows
Three months ended August 30, 2003

ICON
Health &
Fitness, Inc. Combined
Guarantor
Subsidiaries Combined
Non-Guarantor
Subsidiaries Eliminations Consolidated

Operating Activities:
Net cash used in operating activities	$	(46,967	)	$	(908	)	$	(400	)	$	-	$	(48,275	)

Investing Activities:
Net cash (used in) provided by investing activities	(4,060	)	(2,333	)	19	-	(6,374	)

Financing Activities:
Borrowings on revolving credit
facility, net	53,130		-		-	-	53,130
Minority interest	(2,000	)	5,100		-	-	3,100
Other	515		(892	)	377	-	-

Net cash provided by
financing activities	51,645	4,208	377	-	56,230

Effect of exchange rates on cash (680 ) (372 ) (737 ) - (1,789 )

Net increase (decrease) in cash	(62	)	595	(741	)	-	(208	)
Cash, beginning of period	941		2,385	1,324		-	4,650

Cash, end of period $ 879 $ 2,980 $ 583 $ - $ 4,442

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

Three Months Ended August 28, 2004 Compared to Three Months Ended August 30, 2003

We are one of the world's leading manufacturers and marketers of fitness equipment. We are headquartered in Logan, Utah and have approximately 5,000 employees worldwide. We develop, manufacture and market fitness equipment under the following company-owned brand names: ProForm, NordicTrack, Weslo, HealthRider, Image, JumpKing, 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.

Net sales for the first quarter of fiscal 2005 decreased $27.5 million, or 13.9%, to $170.3 million from $197.8 million in the comparable period in fiscal 2004. Sales for the first quarter of fiscal 2004 were historically high, and therefore the Company expected a softer first quarter in fiscal 2005. Due to soft consumer demand in a challenging economic environment through the summer, results were lower than anticipated. Sales of our cardiovascular and other equipment in the first quarter of fiscal 2005 decreased $15.3 million, or 9.6%, to $143.4 million. Sales of our strength training equipment in the first quarter of fiscal 2005 decreased $12.3 million, or 31.4%, to $26.8 million.

Gross profit in the first quarter of fiscal 2005 was $35.4 million, or 20.8% of net sales, compared to $63.6 million, or 32.2% of net sales, in the first quarter of fiscal 2004. This decrease was due in part to increased commodity prices; particularly steel, plastics, wood and paper products, increases in transportation costs and unfavorable manufacturing variances.

Selling expenses decreased $1.3 million, or 3.8%, to $33.0 million in the first quarter of fiscal 2005. This decrease reflected lower advertising and bad debt expenses offset by an increase in freight charges. Expressed as a percentage of net sales, selling expenses were 19.4% in the first quarter of fiscal 2005 compared to 17.3% in the first quarter of fiscal 2004.

Research and development expenses in the first quarter of fiscal 2005 were $3.3 million, compared to $3.3 million in the first quarter of fiscal 2004. Expressed as a percentage of net sales, research and development expenses were 1.9% in first quarter of fiscal 2005 and 1.7% in the first quarter of fiscal 2004.

General and administrative expenses increased $2.3 million, or 10.8%, to $23.5 million in the first quarter of fiscal 2005. This increase for the period can be attributed to increased legal fees due to ongoing litigation, the cost of insurance plans and rent and lease expenses. Expressed as a percentage of net sales, general and administrative expenses were 13.8% in the first quarter of fiscal 2005 and 10.7% in the first quarter of fiscal 2004.

As a result of the foregoing factors, the loss from operations was $24.4 million in the first quarter of fiscal 2005 compared to income from operations of $4.8 million in the first quarter of fiscal 2004.

As a result of the foregoing factors, EBITDA (as defined under "Seasonality") was a negative $18.6 million in the first quarter of fiscal 2005 compared to EBITDA of $10.2 million in the first quarter of fiscal 2004.

Interest expense, including amortization of deferred financing fees, increased $0.3 million, or 5.0%, to $6.3 million in the first quarter of fiscal 2005. Expressed as a percentage of net sales, interest expense, including amortization of deferred financing fees, was 3.7% in the first quarter of fiscal 2005 and 3.0% in the first quarter of fiscal 2004.

The benefit from income taxes was $9.9 million in the first quarter of fiscal 2005, compared to a provision of $0.4 million in the first quarter of fiscal 2004. This decrease in income taxes for the period can be attributed to the income tax benefit from the net operating loss for the period.

As a result of the foregoing factors, the net loss was $20.8 million in the first quarter of fiscal 2005, compared to a net loss of $1.7 million in the first quarter of fiscal 2004.

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, 2004 and 2003 (in millions):

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

Net Sales
2005	$	170.3		$	-	$	-	$	-
2004		197.8			331.8		328.0		238.1
2003		170.2			292.7		344.0		204.6
Net income (loss)
2005	$	(20.8	)	$	-	$	-	$	-
2004		(1.7	)		15.4		18.2		(8.5	)
2003		(3.4	)		13.7		20.3		(3.9	)

The following is a reconciliation of net income (loss) to EBITDA ⁽⁵⁾ by quarter (in millions):

First	Second	Third	Fourth
Quarter	Quarter	Quarter	Quarter

Fiscal Year 2005
Net income (loss)	$	(20.8	)	$	-	$	-	$	-
Add back:
Depreciation and amortization		5.8			-		-		-
Benefit of income taxes		(9.9	)		-		-		-
Interest expense		6.0			-		-		-
Amortization of deferred financing fees		0.3			-		-		-

EBITDA $ (18.6 ) $ - $ - $ -

Fiscal Year 2004
Net income (loss)	$	(1.7	)	$	15.4	$	18.2	$	(8.5	)
Add back:
Depreciation and amortization		5.5			5.6		6.2		4.1
Provision for income taxes		0.4			9.1		5.2		1.2
Interest expense		6.0			6.4		6.4		6.3
Amortization of deferred financing fees		-			0.3		0.3		0.3

EBITDA $ 10.2 $ 36.8 $ 36.3 $ 3.4

Fiscal Year 2003
Net income (loss)	$	(3.4	)	$	13.7	$	20.3	$	(3.9	)
Add back:
Depreciation and amortization		4.2			4.0		5.0		6.0
Provision (benefit) for income taxes		(1.2	)		8.3		10.7		(0.2	)
Interest expense		6.4			6.5		6.3		5.9
Amortization of deferred financing fees		0.3			0.2		0.2		0.5

EBITDA $ 6.3 $ 32.7 $ 42.5 $ 8.3

(1)	Our first quarter ended August 28, August 30 and August 31 for fiscal years 2005, 2004 and 2003, respectively.
(2)	Our second quarter ended November 27, November 29 and November 30 for fiscal years 2005, 2004 and 2003, respectively.
(3)	Our third quarter ended February 26, February 28 and March 1 for fiscal years 2005, 2004 and 2003, respectively.
(4)	Our fourth quarter ended May 31 for the fiscal years 2005, 2004 and 2003, respectively.
(5)	EBITDA is a presentation of "earnings before interest, taxes, depreciation and amortization." EBITDA data is included because management understands that such information is considered by bankers and certain investors as an additional basis on evaluating a company's ability to pay interest, repay debt and make capital expenditures. Pursuant to our credit agreement, EBITDA is a significant covenant used by our creditors to measure operating results. EBITDA may not be comparable to similarly titled measures reported by other companies. In addition, EBITDA is a non-GAAP measure and should not be considered an alternative to operating or net income in measuring company results.

Liquidity and Capital Resources

Working Capital

Working capital decreased to $89.4 million at August 28, 2004, from $109.9 million at May 31, 2004. The decrease was attributable to an increase in the current portion of long term debt and accounts payable due to build up of inventory for the upcoming busy season. During the first quarter of fiscal 2005, our primary source of cash consisted of borrowings under our credit facilities, which increased by $56.8 million to $178.9 million at August 28, 2004 from $122.1 million at May 31, 2004. Our primary uses of cash in the first quarter of fiscal 2005 included $49.9 million to fund operating activities, compared to $48.3 million in the same period of fiscal 2004, and $9.0 million for capital expenditures, compared to $5.6 million in the same period of fiscal 2004. Cash used in operating activities was primarily attributable to in the increase in inventory to support the upcoming busy season, higher commodity prices particularly steel, plastics and wood and changes in inventory mix.

Capital Expenditures

Capital expenditures were $9.0 million in the first quarter of fiscal 2005 and $5.6 in the first quarter of fiscal 2004. Capital expenditures in the first quarter of fiscal 2005 were primarily for routine replacement of machinery and equipment, facility improvements and expansions, including $4.0 million for the facility we are building in China, and the purchase of computer hardware and software. Capital expenditures in the first quarter of fiscal 2004 were primarily for routine replacement of machinery and equipment, facility improvements and expansions, including $1.8 million for the facility we are building in China, and the purchase of computer hardware and software.

Sources of Liquidity

As of August 28, 2004, our primary sources of liquidity were available borrowings of $34.7 million under our domestic credit facility.

China Subsidiary Liquidity

Our China subsidiary has available its own credit facilities of up to $11.0 million, consisting of a revolving credit facility of $15.0 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, including debt service payment on our credit facility and 11.25% senior secured noted prior to their scheduled maturities in fiscal 2012 and fiscal 2012, respectively. However, we may need to replace or to 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 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 for the three-month period ended August 28, 2004 and the fiscal year ended May 31, 2004 were $601.0 million and $558.5 million, respectively. The increase in assets was primarily attributable to the increase in inventory. Inventory increased as a result of higher commodity prices particularly steel, plastics and wood, changes in inventory mix and production for the upcoming busy season. In addition, first quarter sales for fiscal 2005 were below Company expectations and inventory purchases for the first quarter of fiscal 2005 were based upon those expectations. However, at this point in the Company's business cycle, the Company expects the inventory to be absorbed through normal business channels, consistent with past experience, primarily in the second and third quarter of fiscal 2005. Net debt (current portion of long-term debt plus long-term debt less cash) for the three-month period ended August 28, 2004 and the fiscal year ended May 31, 2004 was $339.7 million and $283.9 million, respectively. This increase represents the amounts to fund operating activities for the period, including capital expenditures purchases which were $9.0 million compared to capital expenditures of $5.6 million if the first quarter of fiscal 2004.

The Credit Agreement

On October 11, 2004, we amended our credit agreement (the “Amended Credit Agreement”). The Amended Credit Agreement increases the amount of our availability 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 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 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 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 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 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 or can reasonably be expected to occur based upon our history and our relationship with the Credit Facility lenders. We intend to manage the Credit Facility as long-term debt with a final maturity date in 2007, as provided for in the Credit Agreement.

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

August 28, 2004 May 31, 2004 August 30, 2003

Revolver	$	178.9	$	122.1	$	125.7
Term Loan		12.5		13.8		18.7

Total $ 191.4 $ 135.9 $ 144.4

As of August 28, 2004, our consolidated indebtedness was approximately $344.5 million, of which approximately $191.4 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.

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 August 28, 2004, there have been no material changes to any of the critical accounting policies contained therein.

Recent Accounting Pronouncements

In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." This accounting standard became effective in fiscal 2004. The adoption of FIN 46 did not have a material impact on our consolidated financial statements.

Risk Factors

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.

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 and
2.	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 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 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. Additionally, Matthew Allen, moved to the position of President and Chief Merchandising Officer, Joseph Brough became the Chief Operating Officer, replacing Gary Stevenson, and Jace Jergensen became the Senior Vice President. There can be no assurance that the transition to this new management, or the new structure itself, will be successful.

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 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.

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.

Our ability to meet our cash requirements depends on a number of factors, many of which 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.

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 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.

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 August 28, 2004, we had approximately $153.1 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 August 28, 2004, we had approximately $191.4 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 August 28, 2004, the Company had foreign currency contracts in the form of forward exchange contracts in the amounts of approximately $1.2 million in U.S. dollars and $0.8 million in Canadian dollars. Unrealized gains associated with these contracts were not significant. These unrealized gains 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 August 28, 2004. 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 August 28, 2004 (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.	Changes in Securities
	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 and Reports on Form 8-K

(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.

(b)	Reports on Form 8-K
	Report on Form 8-K dated August 31, 2004 containing the Company's press release dated August 31, 2004 announcing earnings for the fourth quarter and fiscal 2004 which ended May 31, 2004.    (press release)

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: October 12, 2004
By:	/s/ S. Fred Beck
	S. Fred Beck, Vice President, Chief Financial Officer
	(Principal Accounting Officer), and Treasurer
	Date: October 12, 2004

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: October 12, 2004	/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: October 12, 2004	/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
10.11C	Third Amendment to Credit Agreement and Amended and Restated Revolving Note