See Notes to Consolidated Financial Statements

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The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the "Company") at April 30, 2005 and May 1, 2004 and for the three month periods ended April 30, 2005 (the "current period") and May 1, 2004 (the "prior period") 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 Article 10 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 statements.  Certain notes and other information have been condensed or omitted from the interim Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q. Therefore, these Consolidated Financial Statements should be read in conjunction with the Company's Fiscal 2004 Annual Report.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The Consolidated Balance Sheet at January 29, 2005 was derived from the audited financial statements.

The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. The results for the current and prior periods are not necessarily indicative of future financial results.

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The Company's financial year is a 52/53 week year that ends on the Saturday nearest to January 31.  As used herein, "Fiscal 2006" and "Fiscal 2005" refer to the fifty-three and fifty-two week periods ending February 3, 2007 and January 28, 2006, respectively. "Fiscal 2004" refers to the fifty-two week period ended January 29, 2005.   

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Restatement of Prior Financial Information

On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their application under generally accepted accounting principles ("GAAP"). In light of this letter, the Company's management initiated a review of its lease-related accounting and determined that its historical method of accounting for rent holidays and tenant allowances, as more fully described below, was not in accordance with GAAP. As a result, the Company restated its Consolidated Financial Statements for the year ended January 31, 2004 in its 2004 Annual Report on Form 10-K.  The Company also restated its quarterly financial information for Fiscal 2004, as described in Note 16 of the Consolidated Financial Statements included in its 2004 Annual Report on Form 10-K. The Company did not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the restatement. Accordingly, the financial statements and related financial information contained in such reports should no longer be relied upon. All referenced amounts for prior quarterly periods in this Quarterly Report on Form 10-Q are presented on a restated basis.

Historically, the Company had recognized straight line rent expense for leases beginning on the store opening date. This had the effect of excluding the build-out period of its stores from the calculation of the period over which it expenses rent and recognizes construction allowances. In accordance with Financial Accounting Standards Board Technical Bulletin No. 85-3, Accounting for Operating Leases with Scheduled Rent Increases, the Company changed this practice to include the build-out period in the calculations of rent expense and construction allowance amortization.

Additionally, in accordance with Financial Accounting Standards Board Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases, the Company changed its classification of construction allowances on its Consolidated Financial Statements to record them as deferred credits, which are amortized as a reduction to rent expense. Furthermore, construction allowances are now presented within operating activities on its Consolidated Statements of Cash Flows. Historically, construction allowances had been classified on the Company's Consolidated Balance Sheets as a reduction of property and equipment and the related amortization had been classified as a reduction to depreciation and amortization expense (over the lesser of the useful life or the life of the lease) on the Consolidated Statements of Operations. The Company's Consolidated Statements of Cash Flows had historically reflected construction allowances as a reduction of capital expenditures within investing activities.

The following is a summary of the effects of the restatement adjustments on our Consolidated Financial Statements.

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Recent Financial Accounting Standards Board Pronouncements

FSP No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004

In December 2004, the FASB issued Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 ("FSP No. 109-2").  FSP No. 109-2 allows additional time for companies to determine how the American Jobs Creation Act of 2004 (the "Act") affects a company's accounting for the deferred tax liabilities on un-remitted foreign earnings. The Act provides for a special one-time deduction of 85% of certain foreign earnings that are repatriated and which meet certain requirements. The Company is currently evaluating whether any of the earnings of our non-U.S. operations will be repatriated in accordance with the terms of the Act. Unremitted earnings that are considered reasonably possible for repatriation range from zero to $12.6 million. Repatriation of these earnings would require the Company to pay income taxes in the range of zero to $0.7 million. At this time, the Company has not established a provision for income taxes on unremitted earnings of the Canadian subsidiaries as it is the Company's intention to permanently invest these earnings in the Canadian Operations. However, additional taxes may be required to be recorded for any funds repatriated under the Act. The Company expects to complete its evaluation of the repatriation provision of the Act by July 30, 2005.

SFAS No. 123 (revised 2004), Share-Based Payment