UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended August ~~4, 2007~~

2, 2008

¨
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-33338

American Eagle Outfitters, Inc.

(Exact name of registrant as specified in its charter)


~~Delaware~~		~~No. 13-2721761~~
Delaware		No. 13-2721761
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



77 Hot Metal Street, Pittsburgh, PA		15203-2329
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (412) 432-3300

Former name, former address and former fiscal year, if changed since last report:

~~150 Thorn Hill Drive, Warrendale, PA 15086-7528~~

~~(724) 776-4857~~

N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YESxþ NOo¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a ~~non-accelerated filer.~~smaller reporting company. See ~~definition~~the definitions of ~~“accelerated filer and large~~“large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer¨ ~~Accelerated filer~~ ¨ ~~Non-accelerated filer~~

Accelerated filero

Non-accelerated filero

Smaller reporting companyo

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NO¨þ NO x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~214,907,297~~205,890,966 Common Shares were outstanding at August ~~31, 2007.~~

29, 2008.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)
August 4,
2007

February 3,
2007

July 29,
2006

   (Unaudited) (Unaudited)
Assets

Current assets:

Cash and cash equivalents
   $ 123,717 $ 59,737 $ 331,358
Short-term investments
   510,888 767,376 482,732
Merchandise inventory
   321,263 263,644 267,392
Accounts and note receivable
   29,783 26,045 13,290
Prepaid expenses and other
   61,353 33,720 33,953
Deferred income taxes
   44,194 51,886 40,507

Total current assets
   1,091,198 1,202,408 1,169,232

Property and equipment, at cost, net of accumulated depreciation and amortization
   552,218 481,645 404,390
Goodwill
   9,950 9,950 9,950
Long-term investments
   125,120 251,644 117,291
Non-current deferred income taxes
   48,806 30,340 27,382
Other assets, net
   20,223 15,651 11,858

Total assets
   $ 1,847,515 $ 1,991,638 $ 1,740,103

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable
   $ 146,431 $ 171,150 $ 175,934
Accrued compensation and payroll taxes
   35,099 58,371 26,542
Accrued rent
   56,259 57,543 49,954
Accrued income and other taxes
   13,290 91,934 38,934
Unredeemed gift cards and gift certificates
   30,093 54,554 25,371
Current portion of deferred lease credits
   12,787 12,803 10,402
Other liabilities and accrued expenses
   19,307 18,263 15,026

Total current liabilities
   313,266 464,618 342,163

Non-current liabilities:

Deferred lease credits
   64,472 65,114 60,036
Non-current accrued income taxes
   52,514 —   —
Other non-current liabilities
   42,425 44,594 44,516

Total non-current liabilities
   159,411 109,708 104,552

Commitments and contingencies
   —   —   —
Stockholders’ equity:

Preferred stock, $0.01 par value; 5,000 shares authorized; none issued and outstanding
   —   —   —
Common stock, $0.01 par value; 600,000 shares authorized; 248,777, 248,155 and 246,275 shares issued, respectively; 216,573, 221,284 and 224,092 shares outstanding, respectively
   2,481 2,461 2,445
Contributed capital
   479,450 453,418 403,007
Accumulated other comprehensive income
   29,381 21,714 25,054
Retained earnings
�� 1,405,414 1,302,345 1,087,012
Treasury stock, 31,499, 25,699 and 20,977 shares, respectively
   (541,888 ) (362,626 ) (224,130 )

Total stockholders’ equity
   1,374,838 1,417,312 1,293,388

Total liabilities and stockholders’ equity
   $ 1,847,515 $ 1,991,638 $ 1,740,103

AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

(Unaudited)

   13 Weeks Ended 26 Weeks Ended
(In thousands, except per share amounts)
August 4,
2007

July 29,
2006

August 4,
2007

July 29,
2006

Net sales
   $ 703,189 $ 602,326 $ 1,315,575 $ 1,124,754
Cost of sales, including certain buying, occupancy and warehousing expenses (exclusive of depreciation shown separately below)
   386,742 327,065 700,669 595,124

Gross profit
   316,447 275,261 614,906 529,630
Selling, general and administrative expenses
   166,386 142,772 323,375 277,441
Depreciation and amortization expense
   27,375 23,237 52,857 44,671

Operating income
   122,686 109,252 238,674 207,518
Other income, net
   8,766 8,969 20,067 17,065

Income before income taxes
   131,452 118,221 258,741 224,583
Provision for income taxes
   50,108 46,122 98,627 88,328

Net income
   $ 81,344 $ 72,099 $ 160,114 $ 136,255

Basic income per common share
   $ 0.37 $ 0.32 $ 0.73 $ 0.61
Diluted income per common share
   $ 0.37 $ 0.31 $ 0.71 $ 0.60
Cash dividends per common share
   $ 0.10 $ 0.08 $ 0.18 $ 0.13
Weighted average common shares outstanding - basic
   217,790 223,805 219,409 223,260
Weighted average common shares outstanding - diluted
   222,044 229,211 223,943 228,610
Retained earnings, beginning (for the 26 weeks ended August 4, 2007, refer to Note 6 for information regarding the adoption of FIN 48)
   $ 1,350,400 $ 1,031,796 $ 1,289,041 $ 978,855
Net Income
   81,344 72,099 160,114 136,255
Cash dividends
   (21,702 ) (16,883 ) (38,222 ) (28,098 )
Reissuance of treasury stock
   (4,628 ) —   (5,519 ) —

Retained earnings, ending
   $ 1,405,414 $ 1,087,012 $ 1,405,414 $ 1,087,012

13 Weeks Ended 26 Weeks Ended
August 2, August 4, August 2, August 4,
(In thousands, except per share amounts) 2008 2007 2008 2007
Net sales $ 688,815 $ 703,189 $ 1,329,117 $ 1,315,575
Cost of sales, including certain buying, occupancy and warehousing expenses (exclusive of depreciation shown separately below) 399,431 386,742 776,065 700,669

Gross profit 289,384 316,447 553,052 614,906

Selling, general and administrative expenses 167,898 166,386 337,537 323,375
Depreciation and amortization expense 32,059 27,375 61,609 52,857

Operating income 89,427 122,686 153,906 238,674
Other income, net 3,975 8,766 10,433 20,067

Income before income taxes 93,402 131,452 164,339 258,741
Provision for income taxes 33,571 50,108 60,613 98,627

Net income $ 59,831 $ 81,344 $ 103,726 $ 160,114

Basic income per common share $ 0.29 $ 0.37 $ 0.51 $ 0.73
Diluted income per common share $ 0.29 $ 0.37 $ 0.50 $ 0.71
Cash dividends per common share $ 0.10 $ 0.10 $ 0.20 $ 0.18

Weighted average common shares outstanding — basic 204,929 217,790 204,962 219,409
Weighted average common shares outstanding — diluted 207,504 222,044 207,890 223,943

Retained earnings, beginning $ 1,624,800 $ 1,350,400 $ 1,601,784 $ 1,302,345
Adoption of FIN 48 — — — (13,304 )
Net income 59,831 81,344 103,726 160,114
Cash dividends (20,494 ) (21,702 ) (40,919 ) (38,222 )
Reissuance of treasury stock (981 ) (4,628 ) (1,435 ) (5,519 )

Retained earnings, ending $ 1,663,156 $ 1,405,414 $ 1,663,156 $ 1,405,414

See Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

   26 Weeks Ended
(In thousands)    August 4,
2007 July 29,
2006
Operating activities:

Net income
   $ 160,114 $ 136,255
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization
   52,857 44,671
Share-based compensation
   19,686 16,196
Deferred income taxes
   (18,976 ) (7,554 )
Tax benefit from share-based payments
   6,916 7,738
Excess tax benefit from share-based payments
   (5,754 ) (5,862 )
Loss on impairment of assets
   —   150
Proceeds from sale of trading securities
   —   183,968
Changes in assets and liabilities:

Merchandise inventory
   (55,137 ) (56,444 )
Accounts and note receivable
   (3,937 ) 12,161
Prepaid expenses and other
   (27,337 ) (3,656 )
Other assets, net
   (3,125 ) (1,208 )
Accounts payable
   (26,216 ) 36,557
Unredeemed gift cards and gift certificates
   (24,817 ) (17,713 )
Deferred lease credits
   (1,127 ) 758
Accrued liabilities
   (58,648 ) (18,452 )

Total adjustments
   (145,615 ) 191,310

Net cash provided by operating activities
   14,499 327,565
Investing activities:

Capital expenditures
   (120,322 ) (103,149 )
Proceeds from sale of assets
   —   12,345
Purchase of investments
   (435,546 ) (211,476 )
Sale of investments
   822,547 194,450
Other investing activities
   (820 ) —

Net cash provided by (used for) investing activities
   265,859 (107,830 )
Financing activities:

Payments on capital leases
   (846 ) (470 )
Repurchase of common stock as part of publicly announced programs
   (184,761 ) —
Repurchase of common stock from employees
   (12,249 ) (7,617 )
Net proceeds from stock options exercised
   11,691 10,263
Excess tax benefit from share-based payments
   5,754 5,862
Cash dividends paid
   (38,222 ) (28,098 )

Net cash used for financing activities
   (218,633 ) (20,060 )

Effect of exchange rates on cash
   2,255 1,154

Net increase in cash and cash equivalents
   63,980 200,829
Cash and cash equivalents - beginning of period
   59,737 130,529

Cash and cash equivalents - end of period
   $ 123,717 $ 331,358

Supplemental disclosure of cash flow information:

Cash paid during the period for income taxes
   $ 164,446 $ 99,615
Supplemental disclosure of non-cash transactions:

Transfer of investment securities from available-for-sale to trading classification
   —   $ 180,787

26 Weeks Ended
August 2, August 4,
(In thousands) 2008 2007
Operating activities:
Net income $ 103,726 $ 160,114
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 61,609 52,857
Share-based compensation 12,909 19,686
Deferred income taxes (583 ) (18,976 )
Tax benefit from share-based payments 241 6,916
Excess tax benefit from share-based payments (279 ) (5,754 )
Changes in assets and liabilities:
Merchandise inventory (55,671 ) (55,137 )
Accounts and note receivable 5,183 (3,937 )
Prepaid expenses and other (28,593 ) (27,337 )
Other assets, net 457 (3,125 )
Accounts payable (12,050 ) (26,216 )
Unredeemed gift cards and gift certificates (24,694 ) (24,817 )
Deferred lease credits 11,354 (1,127 )
Accrued income and other taxes (11,704 ) (32,216 )
Accrued liabilities (22,987 ) (26,432 )

Total adjustments (64,808 ) (145,615 )

Net cash provided by operating activities
38,918 14,499
Investing activities:
Capital expenditures (157,486 ) (120,322 )
Purchase of investments (49,929 ) (435,546 )
Sale of investments 374,937 822,547
Other investing activities (958 ) (820 )

Net cash provided by investing activities
166,564 265,859
Financing activities:
Payments on capital leases (798 ) (846 )
Net proceeds from issuance of notes payable 75,000 —
Repurchase of common stock as part of publicly announced programs — (184,761 )
Repurchase of common stock from employees (3,409 ) (12,249 )
Net proceeds from stock options exercised 1,668 11,691
Excess tax benefit from share-based payments 279 5,754
Cash dividends paid (40,919 ) (38,222 )

Net cash provided by (used for) financing activities
31,821 (218,633 )

Effect of exchange rate on cash 26 2,255

Net increase in cash and cash equivalents
237,329 63,980
Cash and cash equivalents — beginning of period 116,061 59,737

Cash and cash equivalents — end of period $ 353,390 $ 123,717

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 97,479 $ 164,446
Cash paid during the period for interest $ 650 —

See Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Interim Financial Statements

The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the “Company”) at August 2, 2008 and August 4, 2007 ~~and July 29, 2006~~ and for the 13 and 26 week periods ended August 2, 2008 and August 4, 2007 ~~(the “current period”) and July 29, 2006 (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 ~~2006~~2007 Annual ~~Report on Form 10-K.~~Report. In the opinion of our management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

As used in this report, all references to “we,” “our,” and the “Company” refer to American Eagle Outfitters, Inc. and its wholly-owned subsidiaries. “American Eagle Outfitters,” “American Eagle,” “AE,” and the “AE Brand” refer to our U.S. and Canadian American Eagle Outfitters ~~stores, including the aerie sub-brand and ae.com. “MARTIN + OSA”~~stores. “AEO Direct” refers to our ~~sportswear concept launched during Fiscal 2006.~~
e-commerce operations, ae.com, aerie.com, martinandosa.com and 77kids.com.

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.

2. Summary of Significant Accounting Policies

Principles of Consolidation

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.
At August 2, 2008, the Company operated in one reportable segment.

Fiscal Year

The Company’s financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal ~~2009,~~2010,” “Fiscal ~~2008”~~2009” and “Fiscal ~~2007”~~2008” refer to the 52 week periods ending January 29, 2011, January 30, 2010, and January 31, 2009, ~~and~~respectively. “Fiscal 2007” refers to the 52 week period ended February 2, 2008 ~~respectively.~~and “Fiscal 2006” refers to the 53 week period ended February 3, 2007. “Fiscal 2005” refers to the 52 week period ended January 28, 2006.

Estimates

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 our 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, our management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Recent Accounting Pronouncements

In June 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) EITF No. 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(“FSP EITF No. 03-6-1”). FSP EITF No. 03-6-1 addresses whether awards granted in unvested share-based payment transactions that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and therefore need to be included in computing earnings per share under the two-class method, as described in Statement of Financial Accounting Standards (“SFAS”) No. 128Earnings Per Share(“SFAS No. 128”).This FSP will be effective for the Company beginning in the first quarter of Fiscal 2009 and will be applied retrospectively in accordance with the FSP. The Company is currently evaluating the impact that the adoption of FSP EITF No. 03-6-1 will have on its Consolidated Financial Statements.

Foreign Currency Translation

The Canadian dollar is the functional currency for the Canadian business. In accordance with ~~Statement of Financial Accounting Standards (“SFAS”)~~SFAS No. 52,Foreign Currency Translation(“SFAS No. 52”), assets and liabilities denominated in foreign currencies were translated into U.S. dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. Gains or losses resulting from foreign currency transactions are included in the results of operations, whereas, related translation adjustments are reported as an element of other comprehensive income in accordance with SFAS No. 130,Reporting Comprehensive Income ~~(see~~(see Note 57 of the Consolidated Financial Statements).
6
~~Recent Accounting Pronouncements~~
~~In February 2007, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 159,~~~~The Fair Value Option for Financial Assets and Financial Liabilities~~ (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. The statement also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and the Company will adopt SFAS No. 159 in connection with the adoption of SFAS No. 157,~~Fair Value Measurements~~ ~~(“SFAS No. 157”), in the first quarter of Fiscal 2008. The Company does not believe that the adoption of SFAS No. 159 will have a material impact on its Consolidated Financial Statements.~~
In September 2006, the FASB issued SFAS No. 157. SFAS No. 157 addresses how companies should measure fair value when they are required to use fair value as a measure for recognition or disclosure purposes under generally accepted accounting principles. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and the Company will adopt SFAS No. 157 beginning in the first quarter of Fiscal 2008. The Company does not believe that the adoption of SFAS No. 157 will have a material impact on its Consolidated Financial Statements.

Revenue Recognition

Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the estimated customer receipt date of the merchandise. Shipping and handling revenues are included in net sales. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.
Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other promotions. The Company records the impact of adjustments to its sales return reserve quarterly within net sales and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages.

Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed (“gift card breakage”), determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of net sales. For further information on ~~a change in~~ the Company’s gift card program, see the Gift Cards caption below.
~~During the 13 weeks ended October 28, 2006, the~~

The Company ~~reclassified sell-offs of~~sells off end-of-season, overstock, and irregular merchandise ~~and~~to a third-party. The proceeds from these sales are presented ~~the amounts~~ on a gross basis, with proceeds and cost of sell-offs recorded in net sales and cost of sales, respectively. ~~Prior to this,~~For the 13 weeks and 26 weeks ended August 2, 2008, the Company ~~presented the~~recorded $0.5 million and $22.2 million in proceeds and $0.2 and $22.9 million of cost of sell-offs in net sales and cost of ~~sell-offs on a net basis within cost of sales.~~sales, respectively. For the 13 weeks and 26 weeks ended August 4, 2007, the Company recorded $2.9 million and $13.7 million of proceeds and $2.8 million and $14.7 million of cost of sell-offs in net sales and cost of sales, respectively. ~~Proceeds of $10.4 million and costs of $13.3 million for the 13 and 26 weeks ended July 29, 2006 were not reclassified to reflect this change as the amounts were determined to be immaterial.~~

Cost of Sales, Including Certain Buying, Occupancy and Warehousing Expenses

Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs. Buying, occupancy and warehousing costs consist of: compensation, employee benefit expenses and travel for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, communication costs, travel and entertainment, leasing costs and services purchased. Selling, general and administrative expenses do not include compensation, employee benefit expenses and travel for our design, sourcing and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales.
7
When the Company closes, remodels or relocates a store prior to the end of its lease term, the remaining net book value of the assets related to the store is recorded as a write-off of assets. Prior to February 3, 2007, the Company recorded this write-off of assets within selling, general and administrative expenses. However, the Company has determined that classification within depreciation and amortization expense is more appropriate. Accordingly, the Company recorded $2.1 million and $5.0 million related to asset write-offs within depreciation and amortization expense for the 13 weeks and 26 weeks ended August 4, 2007, respectively. Amounts of $1.5 million and $3.7 million for the 13 weeks and 26 weeks ended July 29, 2006, respectively, have been reclassified for comparative purposes.

Other Income, Net

Other income, net consists primarily of interest income as well as interest expense and foreign currency transaction gain/loss. As of July 8, 2007, the Company discontinued assessing a service fee on inactive gift cards. Prior to July 8, 2007, the Company recorded gift card service fee income in other income, net. ~~For the 13 weeks and 26 weeks ended August 4, 2007, the~~The Company recorded gift card service fee income of $0.2 million and $0.8 million ~~respectively. For~~for the 13 weeks and 26 weeks ended ~~July 29, 2006, the Company recorded gift card service fee of $0.5 million and $1.1 million, respectively.~~
~~Gift Cards~~
The value of a gift card is recorded as a current liability upon purchase and revenue is recognized when the gift card is redeemed for merchandise. Prior to July 8, 2007, if a gift card remained inactive for greater than 24 months, the Company assessed the recipient a one-dollar per month service fee, where allowed by law, which was automatically deducted from the remaining value of the card. For those jurisdictions where assessing a service fee was not allowable by law, the estimated breakage was recorded in a manner consistent with that described above, starting after 24 months of inactivity. Both gift card service fees and breakage estimates were recorded within other income, net.
On July 8, 2007, the Company discontinued assessing a service fee on inactive gift cards. As a result, the Company estimates gift card breakage and recognizes revenue in proportion to actual gift card redemptions as a component of net sales. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The Company recorded $4.8 million of revenue related to gift card breakage during the 13 weeks ended August 4, ~~2007. This amount included cumulative breakage revenue related to gift cards issued since the Company introduced its gift card program.~~2007, respectively.

Cash and Cash Equivalents, Short-term Investments and Long-term Investments

Cash includes cash equivalents. The Company considers all highly liquid investments purchased with a maturity of ~~13 weeks~~three months or less to be cash equivalents.

As of August ~~4, 2007,~~2, 2008, short-term investments generally included investments with remaining effective maturities of less than 12 months ~~(averaging approximately two months),~~ consisting primarily of ~~tax-exempt municipal bonds, taxable agency bonds and corporate notes classified as available-for-sale. Additionally, short-term investments include variable rate demand notes~~auction-rate securities (“~~VRDNs”~~ARS”) ~~and auction rate securities~~ classified as available-for-sale, ~~which~~that have ~~long-term contractual maturities but feature variable interest rates that reset at short-term intervals.~~
been called or have experienced partial redemptions.

As of August ~~4, 2007,~~2, 2008, long-term investments included investments with remaining maturities of greater than 12 months ~~but not exceeding five years (averaging approximately 30 months)~~ and consisted primarily of ~~agency bonds~~auction-rate securities classified as ~~available-for-sale.~~
available-for-sale that have experienced failed auctions. The remaining contractual maturities of our ARS classified as long-term investments is three to 39 years. The weighted average maturity for long-term investments is approximately 21 years.

Unrealized gains and losses on the Company’s available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders’ equity, within accumulated other comprehensive income, until realized. When available-for-sale securities are sold, the cost of the securities is specifically identified and is used to determine any realized gain or loss. ~~Proceeds from~~

The Company evaluates its investments for impairment in accordance with FSP SFAS 115-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments(“FSP SFAS 115-1”). FSP SFAS 115-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the ~~sale~~fair value of ~~available-for-sale securities were $822.5 million and $194.5 million for~~ the ~~26 weeks ended August 4, 2007 and July 29, 2006, respectively. These proceeds are offset against purchases~~investment is less than its cost. If, after consideration of ~~$435.5 million and $211.5 million for~~all available evidence to evaluate the ~~26 weeks ended August 4, 2007 and July 29, 2006, respectively. For the 13 weeks and 26 weeks ended August 4, 2007, realized losses related~~realizable value of its investment, impairment is determined to available-for-sale securities of $0.2 million and $0.4 million, respectively, were included in other income, net. For the 13 weeks and 26 weeks ended July 29, 2006, realized losses related to available-for-sale securities of $0.5 million were included in other income, net.
8
During the 13 weeks ended April 29, 2006, the Company transferred certain investment securities from available-for-sale classification to trading classification (the “trading securities”). As a result of this transfer, during the 13 weeks ended April 29, 2006, a reclassification adjustment of $(0.3) million was recorded in other comprehensive income relatedbe other-than-temporary, then an impairment loss would be recognized equal to the ~~gain realized in net income at~~difference between the ~~time~~investment’s cost and its fair value.

See Note 3 of ~~transfer. As a result of trading classification,~~ the Company realized $3.5 million of capital gains, which were recorded in other income, net during the 26 weeks ended July 29, 2006. The trading securities were sold during the 13 weeks ended July 29, 2006, at which time the Company received proceeds of $184.0 million. As of August 4, 2007, the Company had no investments classified as trading securities.
~~The following table summarizes the fair market value of our cash and marketable securities, which are recorded as~~Consolidated Financial Statements for information regarding cash and cash equivalents, ~~on the Consolidated Balance Sheets, our~~ short-term investments and ~~our~~ long-term ~~investments:~~

(In thousands)    August 4,
2007    February 3,
2007    July 29,
2006
Cash and cash equivalents:

Cash and money market investments
   $ 91,010    $ 59,079    $ 95,550
Tax exempt and advantaged investments
   31,779    —      2,700
Taxable investments
   928    658    233,108

Total cash and cash equivalents
   123,717    59,737    331,358
Short-term investments:

Tax exempt and advantaged investments
   356,579    659,906    423,953
Taxable investments
   154,309    107,470    58,779

Total short-term investments
   510,888    767,376    482,732
Long-term investments:

Tax exempt and advantaged investments
   —      7,477    —
Taxable investments
   125,120    244,167    117,291

Total long-term investments
   125,120    251,644    117,291

Total
   $ 759,725    $ 1,078,757    $ 931,381

investments.

Merchandise Inventory

Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts at the time merchandise is delivered to the foreign shipping port by the manufacturer (FOB port). This is the point at which title and risk of loss transfer to the Company.

The Company reviews its inventory levels ~~in order~~ to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned permanent markdowns related to current inventory. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve can be affected by changes in merchandise mix and changes in actual shrinkage trends.

Income Taxes

The Company calculates income taxes in accordance with SFAS No. 109,Accounting for Income Taxes. Effective February 4, 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. Under FIN 48, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. ~~See Note 6~~As a result of adopting FIN 48, the ~~Consolidated Financial Statements~~Company recorded a net liability of approximately $13.3 million for ~~further discussion~~unrecognized tax benefits, which was accounted for as a reduction to the beginning balance of ~~the adoption~~retained earnings as of ~~FIN 48.~~February 4, 2007.

Property and Equipment

Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line method over the assets’ estimated useful lives. The useful lives of our major classes of assets are as follows:

In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long Lived Assets(“ (“SFAS No. 144”), our management evaluates the ongoing value of leasehold improvements and store fixtures associated with retail stores, which have been open longer than one year. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of the assets. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded in selling, general and administrative expenses. No impairment losses were recognized during the 13 weeks or 26 weeks ended August 4, 2007 or during the 13 weeks ended July 29, 2006. The Company recognized impairment losses of $0.2 million during the 26 weeks ended July 29, 2006.

Goodwill

As of August ~~4, 2007,~~2, 2008, the Company had approximately ~~$10.0~~$11.4 million of goodwill, which is primarily related to the acquisition of its importing operations on January 31, 2000, as well as the acquisition of its Canadian business on November 29, 2000. In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, ~~our~~ management evaluates goodwill for possible impairment on at least an annual basis.

Gift Cards

The value of a gift card is recorded as a current liability upon purchase, and revenue is recognized when the gift card is redeemed for merchandise. Prior to July 8, 2007, if a gift card remained inactive for greater than 24 months, the Company assessed the recipient a one-dollar per month service fee, where allowed by law, which was automatically deducted from the remaining value of the card. For those jurisdictions where assessing a service fee was not allowable by law, the estimated breakage was recorded in a manner consistent with that described above, starting after 24 months of inactivity. Both gift card service fees and breakage estimates were recorded within other income, net.

On July 8, 2007, the Company discontinued assessing a service fee on inactive gift cards. As a result, the Company estimates gift card breakage and recognizes revenue in proportion to actual gift card redemptions as a component of net sales. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. During the 13 and 26 weeks ended August 2, 2008, the Company recorded $1.4 and $3.0 million of revenue related to gift card breakage. The Company recorded $4.8 million of revenue related to gift card breakage during the 26 weeks ended August 4, 2007. This amount included cumulative breakage revenue related to gift cards issued since the Company introduced its gift card program.

Deferred Lease Credits

Deferred lease credits represent the unamortized portion of construction allowances received from landlords related to the Company’s retail stores. Construction allowances are generally comprised of cash amounts received by the Company from its landlords as part of the negotiated lease terms. The Company records a receivable and a deferred lease credit liability at the lease commencement date (date of initial possession of the store). The deferred lease credit is amortized on a straight-line basis as a reduction of rent expense over the term of the original lease (including the pre-opening build-out period) and ~~the~~any subsequent renewal terms. The receivable is reduced as amounts are received from the landlord.

Co-branded Credit Card and Customer Loyalty Program

In April 2008, the Company introduced a new co-branded credit card (the “AE Visa Card”) and re-launched its private label credit card (the “AE Credit Card”). Both of these credit cards are issued by a third-party bank (the “Bank”), and the Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. The Bank pays fees to the Company, which are recorded as revenue, based on the number of credit card accounts activated and on card usage volume. Once a customer is approved to receive the AE Visa Card and the card is activated, the customer is eligible to participate in the Company’s credit card rewards program. Under the rewards program, points are earned on purchases made with the AE Visa Card at AE and aerie, and at other retailers where the card is accepted. Points earned under the credit cards reward program result in the issuance of an AE gift card when a certain point threshold is reached. The AE Gift Card does not expire, however points earned that have not been used towards the issuance of an AE gift card expire after 36 months of no purchase activity.

The Company determined that points earned under the credit card rewards program on purchases at AE and aerie should be accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-22,Accounting for “Points” and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future(“EITF 00-22”). Accordingly, the portion of the sales revenue attributed to the award points is deferred and recognized when the award gift card is redeemed or when the points expire. Additionally, credit card reward points earned on non-AE or aerie purchases are accounted for in accordance with EITF Issue No. 01-09,Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)(“EITF 01-09”). As the points are earned, a current liability is recorded for the estimated cost of the award gift card, and the impact of adjustments is recorded in cost of sales.

The Company also offers its ~~AE Brand~~ customers ~~a loyalty program,~~ the AE All-Access Pass (the “Pass”)., a customer loyalty program. Using the Pass, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds during three-month earning periods. Rewards earned during these periods are valid through the stated expiration date, which is approximately ~~one-month~~one month from the mailing ~~date of the reward certificate to the customer.~~date. These rewards can be redeemed for a discount on a purchase of AE merchandise. Rewards not redeemed during the one-month redemption period are forfeited. ~~A current liability is recorded~~The Company has historically accounted for the ~~estimated cost~~credits earned using the Pass in accordance with EITF 01-09. However, in connection with the launch of ~~anticipated redemptions and~~ the credit card rewards program, the Company determined that these credits should be accounted for consistently in accordance with EITF 00-22. The effect of applying EITF 00-22 did not have a material impact on the Company’s Consolidated Financial Statements. Accordingly, beginning in Fiscal 2008, the portion of ~~adjustments~~the sales revenue attributed to the ~~liability~~award credits is ~~recorded in cost of sales.~~
deferred and recognized when the award credits are redeemed or expire.

Stock Repurchases
~~On March 6, 2007 and then, additionally, on May 22,~~

During Fiscal 2007, the Company’s Board of Directors ~~(the “Board”~~(“the Board”) authorized a total of ~~30.0~~60.0 million shares of ~~its~~ common stock ~~to be repurchased~~for repurchase under ~~the Company’s~~a share repurchase program ~~through~~with expiration dates extending into Fiscal 2010. During Fiscal 2007, the ~~end~~Company repurchased 18.7 million shares as part of ~~Fiscal 2009. During~~its publicly announced repurchase programs for approximately $438.3 million, at a weighted average price of $23.38 per share. Of this amount, 6.5 million shares were purchased during the 26 weeks ended August 4, 2007 ~~the Company repurchased 6.5 million shares of its common stock~~ for ~~approximately~~ $184.8 million, at a weighted average share price of $28.41. The Company did not repurchase any shares as part of its publicly announced repurchase programs during the 26 weeks ended August 2, 2008. As of August ~~4, 2007,~~2, 2008, the Company had ~~23.5~~41.3 million shares ~~available~~remaining authorized for repurchase. These shares may be repurchased at the Company’s discretion. ~~See Note 8 of~~Of the ~~Consolidated Financial Statements for information on a subsequent event related~~41.3 million shares that may yet be purchased under the program, the authorization relating to 11.3 million shares expires in Fiscal 2009 and the ~~Company’s stock repurchase program.~~
authorization relating to 30.0 million shares expires in Fiscal 2010.

During ~~each of~~ the 26 week periods ended August 2, 2008 and August 4, 2007, ~~and July 29, 2006,~~ the Company repurchased approximately 0.2 and 0.4 million shares, respectively, from certain employees at market prices totaling approximately ~~$12.2~~$3.4 million and ~~$7.6~~$12.2 million, respectively. These shares were repurchased for the payment of taxes in connection with the vesting of share-based ~~compensation,~~payments, as permitted under the 2005 Stock Award and Incentive Plan (the “2005 Plan”) ~~and Incentive Plan and the 1999 Stock Incentive Plan (the “1999 Plan”)~~.
10
All of the aforementioned share repurchases have been recorded as treasury stock.
~~Stock Split~~
On November 13, 2006, the Board approved a three-for-two stock split. This stock split was distributed on December 18, 2006, to stockholders of record on November 24, 2006. All share amounts and per share data presented herein have been restated to reflect this stock split.

Earnings Per Share

The following table shows the amounts used in computing earnings per share.

   13 Weeks Ended    26 Weeks Ended
(In thousands)
August 4,
2007

July 29,
2006

August 4,
2007

July 29,
2006
Net income
   $ 81,344    $ 72,099    $ 160,114    $ 136,255
Weighted average common shares outstanding:

Basic shares
   217,790    223,805    219,409    223,260
Dilutive effect of stock options and non-vested restricted stock
   4,254    5,406    4,534    5,350

Diluted shares
   222,044    229,211    223,943    228,610

13 Weeks Ended 26 Weeks Ended
August 2, August 4, August 2, August 4,
(In thousands) 2008 2007 2008 2007
Net income $ 59,831 $ 81,344 $ 103,726 $ 160,114
Weighted average common shares outstanding:
Basic shares 204,929 217,790 204,962 219,409
Dilutive effect of stock options and non-vested restricted stock 2,575 4,254 2,928 4,534

Diluted shares 207,504 222,044 207,890 223,943

Equity awards to purchase approximately ~~2.8~~8.6 million and 6.9 million shares of common stock during the 13 weeks and 26 weeks ended August ~~4, 2007~~2, 2008, and approximately 2.8 million ~~and 3.0 million~~ shares ~~of common stock~~ during both the 13 ~~weeks~~ and 26 weeks ended ~~July 29, 2006,~~August 4, 2007, respectively, were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would have been anti-dilutive. Additionally, for the 13 weeks and 26 weeks ended August ~~4, 2007,~~2, 2008 approximately 0.9 and 0.7 million shares and approximately 0.6 million shares for both the 13 and 26 weeks ended August 4,

2007, of performance-based restricted stock were not included in the computation of weighted average diluted common share amounts because the number of shares ultimately issued is contingent on the Company’s performance compared to pre-established annual ~~EPS~~ performance goals. For the 13 weeks and 26 weeks ended July 29, 2007, approximately 1.1 million shares of performance-based restricted stock were not included in the computation of weighted average diluted common share amounts.

Segment Information

In accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information (“(“SFAS No. 131”), the Company has identified ~~four~~five operating segments (American Eagle U.S. retail stores, American Eagle Canadian retail stores, ~~ae.com and~~aerie by American Eagle retail stores, MARTIN + ~~OSA)~~OSA retail stores and AEO Direct) that reflect the basis used internally to review performance and allocate resources. ~~Three~~All of the operating segments ~~(American Eagle U.S. retail stores, American Eagle Canadian retail stores and ae.com, collectively the “AE brand”)~~ have been aggregated and are presented as one reportable segment, as permitted by SFAS No. 131, based on their similar economic characteristics, products, production processes, target customers and distribution methods. Our intimates sub-brand, aerie by American Eagle, was not identified as a separate operating segment under SFAS No. 131 as it is reviewed and operated as a component of the operating segments comprising the AE brand. At the end of the current period, MARTIN + OSA was determined to be immaterial for segment reporting purposes. Therefore, the Company has combined MARTIN + OSA with the AE Brand operating segment as one reportable segment. The Company will continue to monitor the materiality of MARTIN + OSA and will present it as a separate reportable segment at the time it becomes material to the Consolidated Financial Statements.
131.

Reclassification

Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the current period presentation.

3. Cash and Cash Equivalents, Short-term Investments and Long-term Investments

The following table summarizes the fair market values for our cash and marketable securities, which are recorded as cash and cash equivalents on the Consolidated Balance Sheets, our short-term investments and our long-term investments:

August 2, February 2, August 4,
(In thousands) 2008 2008 2007
Cash and cash equivalents:
Cash $ 68,938 $ 45,422 $ 83,235
Money-market 284,452 70,639 40,482

Total cash and cash equivalents 353,390 116,061 123,717
Short-term investments:
Student-loan backed securities — 248,800 119,000
Treasury and agency securities — 20,172 91,741
State and local government securities 22,436 136,161 165,144
Corporate securities 4,500 98,745 117,393

Total short-term investments 26,936 503,878 493,278
Long-term investments:
Student-loan backed securities 207,261 — —
Treasury and agency securities — 122,811 125,120
State and local government securities 59,537 6,419 2,610
Corporate securities 41,901 36,580 15,000

Total long-term investments 308,699 165,810 142,730

Total $ 689,025 $ 785,749 $ 759,725

Proceeds from the sale of available-for-sale securities were $374.9 million and $822.5 million for the 26 weeks ended August 2, 2008 and August 4, 2007, respectively. These proceeds are offset against purchases of $49.9 million and $435.5 million for the 26 weeks ended August 2, 2008 and August 4, 2007, respectively. For the 13 weeks ended August 2, 2008, the amount of net realized loss related to available-for-sale securities was nominal. For the 26 weeks ended August 2, 2008, net realized gains related to available-for-sale securities of $0.1 million were included in other income, net. For the 13 weeks and 26 weeks ended August 4, 2007, net realized losses related to available-for-sale securities of $0.2 and $0.4 million, respectively, were included in other income, net.

As of August 2, 2008, the Company had a total of $689.0 million in cash and cash equivalents, short-term and long-term investments, which included $332.6 million of net investments in ARS. This amount includes approximately 62% federally insured student loan backed securities, 24% municipal and education authority bonds and 14% dividend received auction rate preferred securities. The Company’s ARS portfolio is comprised of approximately 60% AAA rated investments, 29% AA rated investments and 11% A rated investments.

For the 26 weeks ended August 2, 2008, the Company experienced failed auctions for 49 ARS issues, representing principal and accrued interest in the total amount of $323.3 million. For the 26 weeks ended August 2, 2008, the Company also sold 33 ARS issues at par plus accrued interest, for a total of $84.9 million. Through the use of a discounted cash flow model, the Company concluded that the fair value of its remaining ARS issues was $332.6 million, excluding $2.0 million of accrued interest, at August 2, 2008. This amount is net of $8.2 million of unrealized losses that were recognized through other comprehensive income (“OCI”) for the 26 weeks ended August 2, 2008. The Company considers the decline in the fair value of its investments temporary, resulting from the current lack of liquidity relating to these investments. In addition, the Company believes that the current lack of liquidity relating to ARS investments will have no impact on its ability to fund its ongoing operations and growth initiatives.

The Company continues to monitor the market for auction-rate securities and consider the impact, if any, on the fair value of its investments. If current market conditions deteriorate further, we may be required to record additional unrealized losses in other comprehensive income. If the credit ratings of the security issuers significantly deteriorate, or the anticipated recovery in market values does not occur, we may be required to adjust the carrying value of these investments through an other-than-temporary impairment charge recorded in the Consolidated Statement of Operations.

See Note 4 to the Consolidated Financial Statements for additional information regarding fair value measurement of our ARS.

4. Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157Fair Value Measurements(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. The Company has adopted the provisions of SFAS No. 157 as of February 3, 2008, for its financial instruments, including its auction-rate securities.

Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. In addition, SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities.

	•		Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	•		Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of August 2, 2008, the Company held certain assets that are required to be measured at fair value on a recurring basis. These include cash equivalents and short and long-term investments, including auction-rate securities.

In accordance with SFAS No. 157, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of August 2, 2008:

5. Property and Equipment

Property and equipment consists of the following:

August 2, February 2, August 4,
(In thousands) 2008 2008 2007
Property and equipment, at cost $ 1,231,323 $ 1,091,310 $ 965,085
Less: Accumulated depreciation and amortization (512,684 ) (465,742 ) (412,867 )

Net property and equipment $ 718,639 $ 625,568 $ 552,218

6. Note Payable and Other Credit Arrangements

The Company has borrowing agreements with three separate financial institutions under which it may borrow an aggregate of $300.0 million. Of this amount, $100.0 million can be used for letter of credit facilities and $100.0 million can be used for demand line borrowings. The remaining $100.0 million can be used for either letters of credit or demand line borrowings at the Company’s discretion. As of August 2, 2008, the Company has outstanding letters of credit of $75.2 million and demand line borrowings of $75.0 million. The average borrowing rate on the demand lines was 3.25% and the Company has incorporated the demand line proceeds within working capital.

7. Comprehensive Income

Comprehensive income is comprised of the following:

13 Weeks Ended 26 Weeks Ended
August 2, August 4, August 2, August 4,
(In thousands) 2008 2007 2008 2007
Net income $ 59,831 $ 81,344 $ 103,726 $ 160,114
Other comprehensive income:
Temporary impairment related to auction-rate securities, net of $1.2 million and $3.1 million of tax, respectively (1,893 ) — (5,033 ) —
Unrealized (loss) on investments, net of tax (3 ) (420 ) (317 ) (238 )

Reclassification adjustment for (gain) loss realized in net income related to the sale of available-for-sale securities, net of tax 1 129 (51 ) 261
Foreign currency translation adjustment (1,347 ) 3,141 (3,973 ) 7,644

Other comprehensive (loss) income: (3,242 ) 2,850 (9,374 ) 7,667

Total comprehensive income $ 56,589 $ 84,194 $ 94,352 $ 167,781

8. Share-Based Compensation

The Company accounts for share-based compensation under the provisions of SFAS No. 123 (revised 2004),Share-Based Payment (“(“SFAS No. 123(R)”), which requires companies to measure and recognize compensation expense for all share-based ~~compensation~~payments at fair value. In accordance with the provisions of SFAS No. 123(R), the Company recognizes
11
compensation expense for stock option awards and time-based restricted stock awards on a straight-line basis over the requisite service period of the award (or to an employee’s eligible retirement date, if earlier). Performance-based restricted stock awards are recognized as compensation expense based on the fair value of the Company’s common stock on the date of grant, the number of shares ultimately expected to vest and the vesting period.
Total share-based compensation expense included in the Consolidated Statements of Operations for the 13 weeks and 26 weeks ended August 2, 2008 was $4.0 million ($2.5 million, net of tax) and $12.9 million ($8.0 million, net of tax), respectively, and for the 13 and 26 weeks ended August 4, 2007, was $7.2 million ($4.4 million, net of tax) and $19.7 million ($12.1 million, net of tax), ~~respectively, and for the 13 weeks and 26 weeks ended July 29, 2006, was $7.7 million ($4.8 million, net of tax) and $16.1 million ($10.0 million, net of tax),~~ respectively.

Stock Option Grants

A summary of the Company’s stock option activity for the 26 weeks ended August ~~4, 2007~~2, 2008 follows:

   26 Weeks Ended August 4, 2007 (1)
   Options
Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
Value
(in thousands)
Outstanding - February 3, 2007
   12,209,342 $ 11.24
Granted
   2,356,973 $ 29.80
Exercised (2)
   (1,096,438 ) $ 10.09
Cancelled
   (305,048 ) $ 21.51

Outstanding - August 4, 2007
   13,164,829 $ 14.42    5.2    $ 137,260

Vested and expected to vest - August 4, 2007
   12,769,126 $ 14.23    5.1    $ 135,353

Exercisable - August 4, 2007
   8,077,062 $ 8.66    4.4    $ 119,861

26 Weeks Ended
August 2, 2008 (1)
Weighted-Average
Remaining Aggregate
Weighted-Average Contractual Intrinsic Value
Options Exercise Price Term (in years) (in thousands)
Outstanding — February 2, 2008 12,915,576 $ 14.41
Granted 3,424,838 $ 21.19
Exercised (2) 170,444 $ 10.11
Cancelled 444,754 $ 23.51

Outstanding — August 2, 2008 15,725,216 $ 15.67 4.6 $ 48,252

Vested and expected to vest — August 2, 2008 15,256,353 $ 15.46 4.5 $ 48,153

Exercisable — August 2, 2008 6,986,012 $ 7.07 3.1 $ 47,524


(1)		As of August ~~4, 2007,~~2, 2008, the Company had approximately ~~7.4~~4.6 million shares available for stock option grants.


(2)		Options exercised during the 26 weeks ended August ~~4, 2007~~2, 2008 had exercise prices ranging from ~~$0.62~~$1.98 to ~~$20.77.~~$19.74.

The weighted-average grant date fair value of stock options granted during the 26 weeks ended August 2, 2008 and August 4, 2007 was $7.19 and $10.68, ~~and the weighted-average grant date fair value of stock options granted during the 26 weeks ended July 29, 2006 was $6.49.~~respectively. The aggregate intrinsic value of options exercised during the 26 weeks ended August 2, 2008 and August 4, 2007 was $1.4 million and $20.8 ~~million. The aggregate intrinsic value of options exercised during the 26 weeks ended July 29, 2006 was $21.5 million.~~
million, respectively.

Cash received from the exercise of stock options was $1.6 million for the 26 weeks ended August 2, 2008 and $11.7 million for the 26 weeks ended August 4, ~~2007 and $10.3 million for the 26 weeks ended July 29, 2006.~~2007. The actual tax benefit realized from stock option exercises totaled $0.2 million for the 26 weeks ended August 2, 2008 and $6.9 million for the 26 weeks ended August 4, ~~2007 and $7.7 million for the 26 weeks ended July 29, 2006.~~
2007.

The fair value of stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

   26 Weeks Ended

August 4,
2007

July 29,
2006

Black-Scholes Option Valuation Assumptions

Risk-free interest rates (1)
   4.5 % 4.9 %
Dividend yield
   0.9 % 1.0 %
Volatility factors of the expected market price of the Company’s common stock (2)
   39.2 % 41.3 %
Weighted-average expected term (3)
   4.4 years 4.5 years
Expected forfeiture rate (4)
   8.0 % 8.0 %

26 Weeks Ended
August 2, August 4,
Black-Scholes Option Valuation Assumptions 2008 2007
Risk-free interest rate (1) 2.5 % 4.5 %
Dividend yield 1.7 % 0.9 %
Volatility factor (2) 44.4 % 39.2 %
Weighted-average expected term (3) 4.3 years 4.4 years
Expected forfeiture rate (4) 8.0 % 8.0 %


(1)		Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our stock options.


(2)		Based on a combination of historical volatility of the Company’s common stock and implied volatility.


(3)		Represents the period of time options are expected to be outstanding. The weighted average expected option term for the 26 weeks ended August 2, 2008 was determined based on historical experience. The weighted averaged expected option term for the 26 weeks ended August 4, 2007 was determined using a combination of the “simplified method” for plain vanilla options as allowed by Staff Accounting Bulletin No. 107,Share-Based Payments (“(“SAB No. 107”), and past behavior. The “simplified method” calculates the expected term as the average of the vesting term and original contractual term of the options.


(4)		Based upon historical experience.

As of August ~~4, 2007,~~2, 2008, there was ~~$27.4~~$29.8 million of unrecognized compensation expense related to nonvested stock option awards that is expected to be recognized over a weighted average period of ~~2.2~~2.1 years.

Restricted Stock Grants

The Company grants both time-based and performance-based restricted stock awards under its 2005 Plan. The time-based restricted stock awards vest over three years, and performance-based restricted stock awards are earned if certain pre-established goals are met. The grant date fair value of the restricted stock awards ~~are~~is based on the closing market price of the Company’s common stock on the date of grant. A summary of the Company’s restricted stock activity is presented in the following tables.


26 Weeks Ended
August 4, 2007
      Shares
Weighted-
Average Grant
Date Fair Value
Time-Based Restricted Stock

Nonvested - February 3, 2007 (1)
   138,000 $ 16.63
Granted
   —   —
Vested
   (60,000 ) $ 12.12
Cancelled
   —   —

Nonvested - August 4, 2007
   78,000 $ 20.10
~~(1)~~ Nonvested time-based restricted stock at February 3, 2007 includes 45,000 shares issued under the 1999 Plan. Under the 1999 Plan, awards were valued using the average of the high and low market price of the Company’s common stock on the date of grant.


26 Weeks Ended
August 4, 2007
   Shares
Weighted-
Average Grant
Date Fair Value
Performance-Based Restricted Stock

Nonvested - February 3, 2007
   1,034,075 $ 17.93
Granted
   662,550 $ 29.71
Vested
   (1,029,575 ) $ 17.93
Cancelled
   (40,589 ) $ 27.86

Nonvested - August 4, 2007
   626,461 $ 29.75

26 Weeks Ended
August 2, 2008
Weighted-
Average Grant
Time-Based Restricted Stock Shares Date Fair Value
Nonvested — February 2, 2008 74,500 $ 19.97
Granted — —
Vested (15,000 ) $ 19.60
Cancelled — —

Nonvested — August 2, 2008 59,500 $ 20.06

26 Weeks Ended
August 2, 2008
Weighted-
Average Grant
Performance-Based Restricted Stock Shares Date Fair Value
Nonvested — February 2, 2008 �� 612,575 $ 29.73
Granted 878,415 $ 21.24
Vested (433,983 ) $ 29.72
Cancelled (198,285 ) $ 28.90

Nonvested — August 2, 2008 858,722 $ 21.24

As of August ~~4, 2007,~~2, 2008, there was ~~$14.1~~$0.4 million of unrecognized compensation expense related to nonvested restricted stock awards that is expected to be recognized over a weighted average period of 8nine months.
~~4. Property and Equipment~~
~~Property and equipment consists~~

9. Income Taxes

The provision for income taxes is based on the current estimate of the ~~following:~~

(In thousands)    August 4,
2007 February 3,
2007 July 29,
2006
Property and equipment, at cost
   $ 965,085 $ 857,690 $ 752,028
Less: Accumulated depreciation and amortization
   (412,867 ) (376,045 ) (347,638 )

Net property and equipment
   $ 552,218 $ 481,645 $ 404,390

13
~~5. Comprehensive Income~~
~~Comprehensive~~annual effective rate and is adjusted as necessary for quarterly events. The effective income ~~is comprised of the following:~~

      13 Weeks Ended 26 Weeks Ended
(In thousands)    August 4,
2007 July 29,
2006 August 4,
2007 July 29,
2006
Net Income
   $ 81,344 $ 72,099 $ 160,114 $ 136,255
Other comprehensive income (loss):

Unrealized (loss) gain on investments, net of tax
   (420 ) 239 (238 ) (49 )
Reclassification adjustment for loss realized in net income related to the sale of available-for-sale securities, net of tax
   129 298 261 298
Reclassification adjustment for gain realized in net income related to the transfer of investment securities from available-for-sale classification to trading classification, net of tax
   —   —   —   (177 )
Foreign currency translation adjustment
   3,141 (1,167 ) 7,644 2,076
Reclassification adjustment for loss realized in net income related to the disposition of National Logistics Services
   —   —   —   878

Other comprehensive income (loss):
   2,850 (630 ) 7,667 3,026

Total comprehensive income
   $ 84,194 $ 71,469 $ 167,781 $ 139,281

~~6. Income Taxes~~
~~For~~tax rate based on actual operating results for the 13 weeks ~~and~~ended August 2, 2008 was 35.9% compared to 38.1% for the 13 weeks ended August 4, 2007. The effective income tax rate based on actual operating results for the 26 weeks ended August 2, 2008 was 36.9% compared to 38.1% for the 26 weeks ended August 4, 2007, the effective tax rate used for the provision of income tax approximated 38.1%. For the 13 weeks and 26 weeks ended July 29, 2006, the effective tax rate used for the provision of income tax approximated 39.0% and 39.3%, respectively.2007. The lower effective income tax rate during Fiscal ~~2007~~2008 is primarily ~~due to an increase in tax exempt interest income and~~ the ~~additional tax liability recorded during the 26 weeks ended July 29, 2006 related to the repatriation of unremitted Canadian earnings.~~
Effective February 4, 2007, the Company adopted FIN 48, which prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. Under FIN 48, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits.
~~As a~~ result of ~~adopting FIN 48, the Company recorded a net liability of approximately $13.3 million for unrecognized~~state income tax ~~benefits, which was accounted for as a reduction to the beginning balance of retained earnings as of February 4, 2007. As of February 4, 2007, the gross amount of unrecognized~~settlements and other changes in income tax benefits was $39.3 million, of which $27.6 million would affect the effective tax rate if recognized. The gross amount of unrecognized tax benefits as of August 4, 2007 was $46.2 million, of which $32.9 million would affect the effective tax rate if recognized. The Company does not believe that its unrecognized tax benefits will significantly change within the next twelve months.
reserves.

The Company records accrued interest and penalties related to unrecognized tax benefits in income tax expense.

The Company ~~had approximately $8.8 million in interest and penalties~~recognizes income tax liabilities related to unrecognized tax benefits ~~accrued~~in accordance with FIN 48 and adjust these liabilities when its judgment changes as the result of ~~February 4, 2007. The amount~~the evaluation of ~~accrued interest and penalties related~~new information not previously available. There were no material adjustments to its recorded liability for unrecognized tax benefits ~~as of~~during the 13 weeks ended August ~~4, 2007 was $10.2 million.~~
~~The Company and its subsidiaries file income tax returns in~~2, 2008. Over the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for tax years prior to July 2003. The examination of the Company’s U.S. federal income tax returns for tax years ended July 2003 to July 2005 is anticipated to be substantially completed by the end of 2007. The Company does not anticipate that any adjustments will result in a material change to its financial position. With respect to state and local jurisdictions and countries outside of the United States, with limited exceptions, generally, the Company and its subsidiaries are no longer subject to income tax audits for tax years before 2001. Although the outcome of tax audits is always uncertain,next twelve months the Company believes that ~~adequate amounts~~it is reasonably possible that the liability for unrecognized tax benefits may decrease by approximately $12 million due to settlements, expiration of the statute of limitations, or other changes in unrecognized tax ~~interest and penalties have been provided for any adjustments that are expected~~benefits.

Due to ~~result from these years.~~
14
~~In December 2004,~~ the ~~FASB issued Staff Position No. FAS 109-2,~~~~Accounting and Disclosure Guidance for~~completion of the ~~Foreign Earnings Repatriation Provision within the American Jobs Creation Act~~second phase of ~~2004~~ (“FSP No. 109-2”). FSP No. 109-2 provides guidance to companies to determine how the American Jobs Creation Act of 2004 (the “Act”) affects a company’s accounting for the deferred tax liabilities on unremitted foreign earnings. The Act provided for a special one-time deduction of 85% of certain foreign earnings that are repatriated and that meet certain requirements. During Fiscal 2006,its Ottawa, Kansas distribution center in 2007, the Company ~~repatriated $83.4~~remains eligible for approximately $3.3 million ~~as extraordinary dividends from its Canadian subsidiaries. In anticipation~~(net of federal taxes) of nonrefundable incentive tax credits in Kansas. These credits can be utilized to offset future Kansas income taxes and will expire in 2017 and 2018. Due to the contingencies related to the future use of the ~~repatriation, the Company had recorded $0.6~~credits, a valuation allowance of $3.3 million (net of ~~income tax expense related to this repatriation during the 26 weeks ended July 29, 2006, in addition to the $3.8 million income tax liability that had been previously recorded in Fiscal 2005.~~
~~The decision to take advantage~~federal taxes) remains as of the special one-time deduction under the Act is a discrete event, and it has not changed the Company’s intention to indefinitely reinvest accumulated earnings from its Canadian operations to the extent not repatriated under the Act. Accordingly, no provision has been made for income taxes that would be payable upon the distributions of such earnings.
7.August 2, 2008.

10. Legal Proceedings

The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with SFAS No. 5,Accounting for Contingencies, ~~our~~ management records a reserve for estimated losses when the loss is probable and the amount can be reasonably estimated. If a range of possible loss exists and no anticipated loss within the range is more likely than any other anticipated loss, the Company records the accrual at the low end of the range, in accordance with FASB

Review by Independent Registered Public Accounting Firm

Ernst & Young LLP, our independent registered public accounting firm, has performed a limited review of the unaudited Consolidated Financial Statements for the 13 week and 26 week periods ended August 2, 2008 and August 4, 2007, ~~and July 29, 2006,~~ as indicated in their report on the limited review included below. Since they did not perform an audit, they express no opinion on the Consolidated Financial Statements referred to above. ~~Our management has given effect to any significant adjustments and disclosures proposed in the course of the limited review.~~

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

American Eagle Outfitters, Inc.

We have reviewed the consolidated balance sheets of American Eagle Outfitters, Inc. (the Company) as of August 2, 2008 and August 4, 2007, and ~~July 29, 2006,~~ the related consolidated statements of operations and retained earnings for the three and six ~~month periods~~months ended August 2, 2008 and August 4, 2007 ~~and July 29, 2006,~~ and the consolidated statements of cash flows for the six month periods ended August 2, 2008 and August 4, ~~2007 and July 29, 2006.~~2007. These financial statements are the responsibility of the Company’s management.

We conducted our ~~reviews~~review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, ~~(United States),~~ the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of American Eagle Outfitters, Inc. as of February ~~3, 2007,~~2, 2008, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the year then ended not presented herein, and in our report dated ~~April 2, 2007,~~March 26, 2008, we expressed an unqualified opinion on those consolidated financial ~~statements.~~statements and included an explanatory paragraph regarding the Company’s adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” effective February 4, 2007. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February ~~3, 2007,~~2, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

September ~~4, 2007~~3, 2008


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our Fiscal 2007 Management’s Discussion and Analysis of Financial Condition and Results of Operations which can be found in our Fiscal 2007 Annual Report on Form 10-K.

In addition, the following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements and should be read in conjunction with these statements and notes thereto.

This report contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events, including the following:

~~the planned opening of approximately 32 American Eagle stores in the United States and Canada, 37 aerie stores and 14 MARTIN + OSA stores in the United States during Fiscal 2007;~~

	•		the planned opening of 36 American Eagle stores in the United States and Canada, 77 aerie stand-alone stores and approximately 10 MARTIN + OSA stores in the United States during Fiscal 2008;

	•		the planned opening of 37 American Eagle stores and 50 to 60 aerie stores in the United States and Canada during Fiscal 2009;

	•		the selection of approximately 31 American Eagle stores in the United States and Canada for remodeling during Fiscal 2008;

	•		the selection of approximately 35 American Eagle stores in the United States and Canada for remodeling during Fiscal 2009;

	•		the online launch of our new children’s apparel brand, 77kids by american eagle, during Fiscal 2008 with the opening of U.S. stores planned for 2010;

	•		the completion of improvements and expansion at our distribution centers;

	•		the success of MARTIN + OSA and martinandosa.com;

	•		the success of aerie by american eagle and aerie.com;

	•		the expected payment of a dividend in future periods;

	•		the possibility of growth through acquisitions and/or internally developing additional new brands; and

	•		the possibility that future auctions of our ARS holdings will not be successful and that we may be required to take additional temporary or other-than-temporary impairment charges relating to our ARS investments.

~~the selection of approximately 53 American Eagle stores in the United States for remodeling during Fiscal 2007;~~

~~the completion of improvements and expansion at our distribution centers;~~

~~the success of MARTIN + OSA;~~

~~the success of our intimates sub-brand, aerie by American Eagle;~~

~~the expected payment of a dividend in future periods; and~~

~~the possibility of growth through acquisitions and/or internally developing additional new brands.~~

We caution that these forward-looking statements, and those described elsewhere in this report, involve material risks and uncertainties and are subject to change based on factors beyond our control as discussed within Item 1A of this Quarterly Report on Form 10-Q and Item 1A of our Fiscal ~~2006~~2007 Annual Report on Form 10-K. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements.

Gross profit- Gross profit measures whether we are optimizing the price and inventory levels of our ~~merchandise.~~merchandise and achieving an optimal level of sales. Gross profit is the difference between net sales and cost of sales. Cost of sales consists of: merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage, certain promotional costs and buying, occupancy and warehousing costs. Buying, occupancy and warehousing costs consist of: compensation, employee benefit expenses and travel for our buyers; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. ~~Any~~The inability to obtain acceptable levels of sales, initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations.

Operating income- Our management views operating income as a key indicator of our success. The key drivers of operating income are comparable store sales, gross profit and our ability to control selling, general and administrative expenses.
Store productivity- Store productivity, including net sales per average square foot, sales per productive hour, average unit retail price, conversion rate, the number of transactions per store, the number of units sold per store and the number of units per transaction, is evaluated by our management in assessing our operational performance.
17

Inventory turnover- Our management evaluates inventory turnover as a measure of how productively inventory is bought and sold. Inventory turnover is important as it can signal slow moving inventory. This can be critical in determining the need to take markdowns on merchandise.

Cash flow and liquidity- Our management evaluates cash flow from operations, investing and financing in determining the sufficiency of our cash position. Cash flow from operations has historically been sufficient to cover our uses of cash. Our management believes that cash flow from operations will be sufficient to fund anticipated capital expenditures and working capital requirements.

Results of Operations

Overview
~~We achieved our fourteenth consecutive~~

During the 13 weeks ended August 2, 2008 (“the second quarter”), a challenging retail climate contributed to lower traffic and transactions. Additionally, the American Eagle women’s business has experienced difficult performance. As a result, total sales declined 2% to $688.8 million for the second quarter, ~~of record~~compared to $703.2 million in the prior year. The decline in net sales ~~and earnings during~~was driven by second quarter comparable store sales decreasing 9%, compared to a 2% increase last year. Men’s comparable store sales increased 2% as compared to last year while women’s decreased 16% as compared to last year.

Our operating margin was 13.0% in the second quarter, compared to 17.4% for the 13 weeks ended August 4, ~~2007 (the “second quarter”). Net sales increased 17% over the prior year to $703.2 million.~~
During the second quarter, we discontinued assessing a service fee on inactive gift cards. As a result, we estimate gift card breakage and recognize revenue in proportion to actual gift card redemptions as a component of net sales. We recorded $4.8 million in revenue related to gift card breakage during the current period, which had the effect of increasing gross profit and operating income by a comparable amount. This amount included cumulative breakage revenue related to gift cards issued since the introduction of our gift card program in 1998.
~~Operating income as a percent to net sales decreased 80 basis points from the prior year to a rate of 17.4%.~~2007. The decrease was ~~driven primarily by a~~largely due to the 9% decline in ~~gross profit, as a percent to net~~comparable store sales.

Net income for the second quarter ~~increased 13%~~decreased 26% to ~~$81.3~~$59.8 million, or ~~11.6%~~8.7% as a percent toof net sales. Net income per diluted common share also decreased 22% to $0.29 versus $0.37 last year.

We ended the second quarter with $689.0 million in cash and cash equivalents, short-term and long-term investments. During the period, we continued to make significant investments in our business, including $83.9 million in capital expenditures. These expenditures related primarily to new and remodeled stores in the U.S. and Canada, as well as headquarters and distribution center projects.

Our 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 following table shows the percentage relationship to net sales of the listed line items included in our Consolidated Statements of Operations.

   13 Weeks Ended 26 Weeks Ended

August 4,
2007

July 29,
2006

August 4,
2007

July 29,
2006

Net sales
   100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales, including certain buying, occupancy and warehousing expenses
   55.0 54.3 53.3 52.9

Gross profit
   45.0 45.7 46.7 47.1
Selling, general and administrative expenses
   23.7 23.7 24.5 24.6
Depreciation and amortization expense
   3.9 3.8 4.0 4.0

Operating income
   17.4 18.2 18.2 18.5
Other income, net
   1.3 1.5 1.5 1.5

Income before income taxes
   18.7 19.7 19.7 20.0
Provision for income taxes
   7.1 7.7 7.5 7.9

Net income
   11.6 % 12.0 % 12.2 % 12.1 %

18

13 Weeks Ended 26 Weeks Ended
August 2, August 4, August 2, August 4,
2008 2007 2008 2007
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales, including certain buying, occupancy and warehousing expenses 58.0 55.0 58.4 53.3

Gross profit 42.0 45.0 41.6 46.7
Selling, general and administrative expenses 24.4 23.7 25.4 24.5
Depreciation and amortization expense 4.6 3.9 4.6 4.0

Operating income 13.0 17.4 11.6 18.2
Other income, net 0.6 1.3 0.8 1.5

Income before income taxes 13.6 18.7 12.4 19.7
Provision for income taxes 4.9 7.1 4.6 7.5

Net Income 8.7 % 11.6 % 7.8 % 12.2 %

The following table shows our consolidated store data for the 26 weeks ended August 2, 2008 and August 4, ~~2007 and July 29, 2006.~~

   26 Weeks Ended
   August 4,
2007 July 29,
2006
Number of stores:

Beginning of period
   911 869
Opened
   20 18
Closed
   (3 ) (4 )

End of Period
   928 883

Total gross square feet at end of period
   5,350,468 4,911,192

2007.

26 Weeks Ended
August 2, August 4,
2008 2007
Number of stores:
Beginning of period 987 911
Opened 70 20
Closed (3 ) (3 )

End of Period 1,054 928

Total gross square feet at end of period 6,092,855 5,350,468

Our operations are conducted in one reportable ~~segment. The American Eagle~~ segment ~~consists of 919~~which includes 951 U.S. and Canadian AE retail stores, ~~(including five~~81 aerie stand-alone ~~stores), ae.com~~retail stores, AEO Direct and ~~our nine~~22 MARTIN + OSA retail stores. ~~At the end of the current period, MARTIN + OSA was determined to be immaterial for classification as a separate reportable segment.~~

Comparison of the 13 weeks ended August ~~4, 2007~~2, 2008 to the 13 weeks ended ~~July 29, 2006~~
August 4, 2007

Net Sales

Net sales ~~increased approximately 17%~~for the 13 weeks ended August 2, 2008 decreased 2% to $688.8 million compared to $703.2 million ~~from $602.3 million last year.~~for the 13 weeks ended August 4, 2007. The decline in net sales ~~increase~~ was ~~primarily due~~a result of a decline in traffic and lower transactions per store, which led to ~~an increase in~~second quarter comparable store sales decreasing 9%, compared to a 9%2% increase ~~in gross square feet due~~last year. American Eagle Brand men’s comparable store sales increased 2% as compared to ~~new stores and remodels,~~last year while women’s decreased 16% as ~~well as an increase in sales from our e-commerce operation.~~
~~During~~compared to last year.

Gross Profit

Gross profit for the second quarter we experienced a low single-digit increase in our transaction value, driven by a mid single-digit increase in units per transaction and partially offset by a slight decrease in our average unit retail price. Comparable store sales increased in the high single-digits in our men’s business and decreased in the low single-digits in the women’s business over last year.
~~Gross Profit~~
~~Gross profit increased 15% to $316.4~~was $289.4 million, ~~from $275.3 million last year. However,~~or 42.0% as a percent to net sales, ~~gross profit declined by 70 basis points~~compared to ~~a rate of~~$316.4 million, or 45.0%. Our merchandise margin declined by 50 basis points primarily due to an increase in markdowns partially offset by a strong initial mark-up. Buying, occupancy and warehousing costs increased by 20 basis points, as a percent to net sales last year. The gross profit decline was primarily due to ~~rent expense relating to upcoming aerie store openings, as well as incremental~~higher promotional costs associated with ~~transitioning~~ our ~~e-commerce fulfillment in-house~~denim “try-on” event. Additionally, design and production expenses increased as a rate to ~~our Ottawa, Kansas distribution center. Share-based compensation~~net sales during the quarter. These items were partially offset by lower markdowns and a slight improvement in initial markup (“IMU”). There was $1.3 million of share-based payment expense included in gross profit ~~was~~for the period compared to $1.4 million ~~both this year and~~ last year.

Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as selling, general and administrative expenses. See Note 2 of the Consolidated Financial

Statements for a description of our accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased ~~17%~~approximately 1% to $167.9 million from $166.4 million ~~from $142.8 million, but remained flat~~last year, and increased by 70 basis points, as a percent to net sales, atto 24.4% from 23.7% last year. The higher rate is primarily due to the negative comparable store sales. Advertising expense increased 40 basis points due to planned marketing events. Nearly all other operating expenses were flat compared to last year, as a rate ~~of 23.7%. Improvements in store payroll and lower incentive compensation were offset by an increase in store supplies and professional services, as a percent~~ to net sales. ~~Share-based compensation~~There was $2.7 million of share-based payment expense included in selling, general and administrative expenses ~~decreased~~compared to $5.8 million ~~compared to $6.3 million~~ last year.
19

Depreciation and Amortization Expense

Depreciation and amortization expense as a percent to net sales increased to ~~3.9%~~4.6% for the second quarter compared to ~~3.8%~~3.9% for the corresponding period last year. Depreciation and amortization expense increased to ~~$27.4~~$32.1 million compared to ~~$23.2~~$27.4 million last year. ~~The increase in expense is~~These increases are primarily due to ~~an increase in our~~a greater property and equipment base driven by our ~~increased~~ level of capital ~~expenditures.~~
expenditures related to new stores, distribution centers, and our corporate headquarters.

Other Income, Net

Other income, net decreased to $4.0 million from $8.8 million ~~from $9.0 million~~compared to last year primarily due to lower interest income as a ~~gift card program change that occurred in July 2007. Prior~~result of lower investment balances, lower interest rates and increased interest expense relating to ~~July 8, 2007, we recorded gift card service fee~~our demand line borrowings.

Provision for Income Taxes

The effective income ~~in other income, net. As of July 8, 2007, we discontinued assessing a service fee on inactive gift cards and now record estimated gift card breakage revenue in net sales. For~~tax rate for the 13 weeks ended August 2, 2008 was 35.9% compared to 38.1% for the 13 weeks ended August 4, ~~2007 and July 29, 2006, we recorded gift card service fee~~2007. The lower effective income ~~of $0.2 million and $0.5 million, respectively, in other income, net.~~
~~Provision for Income Taxes~~
~~The effective~~ tax rate ~~declined to approximately 38% from 39% last year. The decrease was~~during Fiscal 2008 is primarily ~~due to an increase~~the result of state income tax settlements and other changes in income tax ~~exempt interest income during the 13 weeks ended August 4, 2007.~~
reserves.

Net Income

Net income ~~increased 13%~~decreased approximately 26% to ~~$81.3~~$59.8 million, or ~~11.6%~~8.7% as a percent to net sales, from ~~$72.1~~$81.3 million, or ~~12.0%~~11.6% as a percent to net sales last year. Net income per diluted common share ~~increased~~decreased to ~~$0.37~~$0.29 from ~~$0.31~~$0.37 in the prior year. The ~~increase~~decrease in net income was attributable to the factors noted above.

Comparison of the 26 weeks ended August ~~4, 2007~~2, 2008 to the 26 weeks ended ~~July 29, 2006~~
August 4, 2007

Net Sales

Net sales for the 26 weeks ended August 2, 2008 increased ~~approximately 17%~~1% to $1.329 billion compared to $1.316 billion ~~from $1.125 billion last year. The~~for the 26 weeks ended August 4, 2007. Increased net sales ~~increase was primarily due to~~were a 9%result of a 14% increase in ~~gross~~ square ~~feet from new stores and remodels, a comparable store sales increase,~~footage as well as an increase in sales from our e-commerce ~~operation.~~
~~We experienced a low single-digit increase in our transaction value, driven~~operation partially offset by a ~~low single-digit increase in units per transaction. Our average unit retail price was flat, compared to the corresponding period last year. Comparable~~7% comparable store sales ~~increased in the high single-digits in our men’s business and in the low-single digits in the women’s business over last year.~~
decline.

Gross Profit

Gross profit ~~increased 16%~~decreased approximately 10% to ~~$614.9~~$553.1 million from ~~$529.6~~$614.9 million last year. ~~However,~~As a percent to net sales, gross margin declined 510 basis points to a rate of 41.6% compared to 46.7% last year. The primary cause of the reduced margin was increased markdowns as a result of lower than expected sales. In addition, rent increased as a percent to net sales ~~gross profit declined by 40 basis points to a rate of 46.7%. Our merchandise margin decreased by 20 basis points primarily~~ due to ~~an increase in markdowns and the impact~~new store openings. There was $2.8 million of presenting the cost of merchandise sell-offs and the related proceeds on a gross basis in the current period (see Note 2 of the Consolidated Financial Statements), partially offset by an improved markon. Amounts for prior periods were not adjusted to reflect the change in the presentation of merchandise sell-offs as the amounts were determined to be immaterial. Buying, occupancy and warehousing costs increased by 20 basis points, as a percent to net sales, primarily due to incremental costs associated with transitioning our e-commerce fulfillment in-house to our Ottawa, Kansas distribution center. Share-based compensationshare-based payment expense included in gross profit ~~increased~~for the period compared to ~~approximately~~ $3.3 million ~~compared to $3.2 million~~ last year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased ~~17%~~approximately 4% to $337.5 million from $323.4 million ~~from $277.4 million, but improved~~last year, and increased by 1090 basis points, as a percent to net sales, to a25.4% from 24.5% last year. The higher rate ~~of 24.5%. The improvement in the rate was~~is primarily due to ~~lower~~the comparable store sales decline. Other factors include increases in direct compensation and benefits, which were partially offset by reductions in incentive compensation, as a percent to net ~~sales, partially offset by an increase in professional services. Share-based compensation~~sales. There was $10.1 million of share-based payment expense included in selling, general and administrative expenses ~~increased~~compared to ~~approximately~~ $16.4 million ~~compared to $12.9 million~~ last year.

Depreciation and Amortization Expense

Depreciation and amortization expense as a percent to net sales ~~remained flat at a rate of 4.0%,~~increased to 4.6% for the 26 weeks ended August 2, 2008 compared to 4.0% for the corresponding period last year. ~~However, depreciation~~Depreciation and amortization expense increased to ~~$52.9~~$61.6 million compared to ~~$44.7~~$52.9 million last year. ~~The increase in expense is~~These increases are primarily due to ~~an increase in our~~a greater property and equipment base driven by our ~~increased~~ level of capital ~~expenditures.~~
expenditures related to new stores, distribution centers, and our corporate headquarters.

Other Income, Net

Other income, net ~~increased~~decreased to ~~$20.1~~$10.4 million from ~~$17.1~~$20.1 million primarily due to lower interest income as a result of lower investment balances, lower interest rates and increased ~~investment~~interest expense relating to our demand line borrowings.

Provision for Income Taxes

The effective income resulting from improved investment returns. Additionally, we realized a $0.9 million foreign currency translation loss last year, related to the final settlement of National Logistics Services. These increases were partially offset by a $3.5 million realized capital gain last year, related to investments that were classified as trading securities prior to being sold duringtax rate for the 26 weeks ended ~~July 29, 2006.~~
~~Provision~~August 2, 2008 was 36.9% compared to 38.1% for ~~Income Taxes~~
The effective tax rate decreased to approximately 38% from approximately 39% last year. The decrease in the effective tax rate is primarily due to an increase in tax exempt interest income this year and the additional tax liability recorded during the 26 weeks ended ~~July 29, 2006 related to the anticipated repatriation of unremitted Canadian earnings, which had the effect of increasing the~~August 4, 2007. The lower effective income tax rate ~~last year.~~
during Fiscal 2008 is primarily the result of state income tax settlements and other changes in income tax reserves.

Net Income

Net income ~~increased 18%~~decreased approximately 35% to ~~$160.1~~$103.7 million, or ~~12.2%~~7.8% as a percent to net sales, from ~~$136.3~~$160.1 million, or ~~12.1%~~12.2% as a percent to net sales last year. Net income per diluted common share ~~increased~~decreased to ~~$0.71~~$0.50 from ~~$0.60~~$0.71 in the prior year. The ~~increase~~decrease in net income was attributable to the factors noted above.

Income Taxes

Effective February 4, 2007, we adopted FIN 48. As a result of adopting FIN 48, we recorded a net liability of approximately $13.3 million for unrecognized tax benefits, which was accounted for as a reduction to the beginning balance of retained earnings as of February 4, 2007.
~~We placed~~

There were no material adjustments to our recorded liability for unrecognized tax benefits during the 13 weeks ended August 2, 2008. Over the next twelve months we believe that it is reasonably possible that the liability for unrecognized tax benefits may decrease by approximately $12 million due to settlements, expiration of the statute of limitations, or other changes in unrecognized tax benefits.

Due to the completion of the second phase of our Ottawa, Kansas distribution center ~~into service~~ in ~~May 2007. As a result,~~2007, we ~~are~~remain eligible for approximately ~~$2.5~~$3.3 million (net of federal taxes) of nonrefundable incentive tax credits in Kansas. These credits can be utilized to offset future Kansas income taxes and will expire in ~~10 years. These available credits are not currently utilizable due to existing credit carryovers~~2017 and ~~the level of income taxes paid to Kansas. Additionally, use of these credits is dependent upon our meeting certain requirements in future periods.~~2018. Due to the contingencies related to the future use of the credits, ~~we believe that it is more likely than not that the benefit of this asset will not be realized within the carryforward period. Thus,~~ a ~~full~~ valuation allowance of ~~$2.5~~$3.3 million ~~has been recorded~~(net of federal taxes) remains as of August ~~4, 2007.~~
For the 26 weeks ended July 29, 2006, the remaining $0.5 million of a $1.4 million valuation allowance that had been previously recorded against a capital loss deferred tax asset was released. We were able to realize sufficient capital gains to fully utilize the capital loss carry forward prior to its expiration in July 2006.
2, 2008.

Liquidity and Capital Resources

Our uses of cash are generally for working capital, the construction of new stores and remodeling of existing stores, information technology upgrades, distribution center improvements and expansion, the purchase of both short and long-term investments, the repurchase of ~~our~~ common stock and the payment of dividends. Historically, these uses of cash have been funded with cash flow from operations. Additionally, our uses of cash include the construction of our new corporate headquarters and the ~~development~~expansion of MARTIN + OSA and aerie by American Eagle. In the future, we expect that our uses of cash will also include new brand concept ~~development.~~
21
development, including the development of 77kids by american eagle. Our growth ~~strategies include continued expansion of the American Eagle Brand,~~strategy includes internally developing new brands and the possibility of acquisitions. We periodically consider and evaluate these options to support future growth. In the event that we do pursue such options, we could require additional equity or debt financing. There can be no assurance that we would be successful in closing any potential transaction, or that any endeavor we undertake would increase our profitability.

The following sets forth certain measures of our liquidity:

   August 4,
2007    February 3,
2007    July 29,
2006
Working Capital (in 000’s)
   $ 777,932    $ 737,790    $ 827,069
Current Ratio
   3.48    2.59    3.42

August 2, February 2, August 4,
2008 2008 2007
Working Capital (in 000’s) $ 473,619 $ 644,656 $ 760,322
Current Ratio 2.23 2.71 3.43

The decrease in working capital as of August 2, 2008 compared to February 2, 2008 and August 4, 2007 is primarily related to the reduction in short-term investments and an increase in borrowings.

Cash Flows from Operating Activities

Net cash provided by operating activities totaled ~~$14.5~~$38.9 million for the 26 weeks ended August ~~4, 2007, compared to $327.6 million for the 26 weeks ended July 29, 2006.~~2, 2008. Our major source of cash from operations was merchandise sales. Our primary outflows of cash for operations were for the payment of operational costs and the purchase of inventory.
The decrease in net cash provided by operating activities of $313.1 million from the prior year was primarily due to proceeds from the sale of trading securities of $184.0 million received during the 26 weeks ended July 29, 2006, as well as a $62.8 million increase in cash used for the payment of accounts payable and a $40.2 million increase in cash used for accrued liabilities. The increase in cash used for the payment of accounts payable resulted primarily from a change in payment terms and method with our foreign buying agent, which also resulted in a reduction to the available amounts that we maintain under our unsecured letter of credit facility as discussed below. The increase in cash used for accrued liabilities resulted primarily from a reduction in our accrued income and other taxes as a result of payments made during the current period.

Cash Flows from Investing Activities

Investing activities for the 26 weeks ended August ~~4, 2007~~2, 2008 included ~~$387.0~~$325.0 million from the net sale of investments classified as available-for-sale, partially offset by ~~$120.3~~$157.5 million used for capital expenditures. Investing activities for the 26 weeks ended July 29, 2006 included $103.1 million for capital expenditures, as well as $17.0 million for the net purchase of investments classified as available-for-sale.
We invest primarily in tax-exempt municipal bonds, taxable agency bonds, corporate notes and auction rate securities with an original maturity up to five years and an expected rate of return of approximately a 5.8% taxable equivalent yield. We place an emphasis on investing in tax-exempt and tax-advantaged asset classes and all investments must have a highly liquid secondary market and a stated maturity not exceeding five years.

Cash Flows from Financing Activities

Cash ~~used for~~provided by financing activities ~~resulted~~ primarily included proceeds from ~~$197.0~~a $75.0 million ~~used for the repurchase of~~borrowing against our ~~common stock and $38.2~~demand facilities, partially offset by $40.9 million used for the payment of ~~dividends during~~dividends.

Auction-rate Securities

As discussed in Note 4 to the Consolidated Financial Statements, we adopted the provisions of SFAS No. 157 effective February 3, 2008. We have determined that we utilize observable inputs (Level 2) and unobservable inputs (Level 3) in determining the fair value of our ARS portfolio.

As of August 2, 2008, we had a total of $689.0 million in cash and cash equivalents, short-term and long-term investments, which included $332.6 million of investments in ARS, excluding $2.0 million of accrued interest and $8.2 million of temporary impairment. For the 26 weeks ending August 2, 2008, we experienced failed auctions for 49 ARS issues representing principal and accrued interest in the amount of $323.3 million. For the 26 weeks ended August 2, 2008, we have also sold 33 ARS issues at par plus accrued interest for $84.9 million. These amounts are net of $8.2 million of unrealized losses for the six month period ended August 2, 2008 which were recognized through other comprehensive income (“OCI”).

We consider the decline in the fair value of our investments temporary, resulting from the current lack of liquidity relating to these investments. We believe that the current lack of liquidity relating to ARS investments will have no impact on our ability to fund our ongoing operations and growth initiatives.

Based on our belief that our ARS investments can be liquidated through successful auctions or redemptions at par plus accrued interest, and on our ability and intent to hold these investments until such liquidation, we believe that the current illiquidity and impairment of these investments is temporary. However, we will reassess this conclusion in future reporting periods based on several factors, including the nature of the assets underlying the ARS, the success or failure of future auctions, the credit-worthiness of the underlying issuer, any third-party insurance or guaranty provisions, ability to sell in secondary markets and other factors. If it is determined that the fair value of these securities is other-than-temporarily impaired, we would record a loss in our Consolidated Statements of Operations, which could materially adversely impact our Consolidated Results of Operations and financial condition.

As a result of several states’ Attorney General’s actions, during mid-August 2008, several large financial institutions/broker dealers announced that they will purchase auction-rate securities from their clients at par value, beginning in September 2008 through June 2010. Prior to this announcement, these securities had experienced failed auctions and were illiquid. While these purchases are intended to restore liquidity to the ARS market, at this time we cannot determine if any of our ARS investments will be included in the announced purchases. As a result, we have not considered any of these announcements in the valuation of our ARS at August 2, 2008.

See Note 4 ~~2007. During~~to the Consolidated Financial Statements for additional information regarding the fair value measurement of our ARS.

Credit Facilities

We have borrowing agreements with three separate financial institutions under which we may borrow an aggregate of $300.0 million. Of this amount, $100.0 million can be used for letter of credit facilities and $100.0 million can be used for demand line borrowings. The remaining $100.0 million can be used for either letters of credit or demand line borrowings at our discretion. As of August 2, 2008, we have outstanding letters of credit of $75.2 million and demand line borrowings of $75.0 million. The average borrowing rate on the demand lines is 3.25% and we have incorporated the demand line proceeds with our working capital.

Capital Expenditures

Capital expenditures of $157.5 million for the 26 weeks ended ~~July 29, 2006, cash used for financing activities resulted primarily from $28.1~~August 2, 2008 included $78.5 million ~~used for the payment of dividends.~~
~~Credit Facilities~~
~~During the second quarter, we reduced the amount available under~~related to investments in our ~~unsecured letter of credit facility (the “facility”) to $100.0 million~~AE stores, including 70 new AE, aerie, and eliminated a $40.0 million unsecured demand line of credit (the “line”). The interest rate on the facility is at the lender’s prime lending rate (8.25% at August 4, 2007) or at LIBOR plus a negotiated margin rate. No direct borrowings were required against the line for the current or prior periods. At August 4, 2007, letters of creditM+O stores in the amount of $13.4 million were outstanding on the facility, leaving a remaining available balance of $86.6 million. We also have an uncommitted letter of credit facility for $100.0 million with a separate financial institution. At August 4, 2007, letters of creditUnited States and Canada, 23 remodeled stores in the ~~amount~~United States, and fixtures and visual investments. The remaining capital expenditures were primarily related to the expanding of ~~$51.1 million were outstanding on this facility, leaving a remaining available balance~~our distribution centers, continued construction of ~~$48.9 million.~~
22
~~Capital Expenditures~~
our home office campus, and our information technology infrastructure, including the roll-out of our new point-of-sale system.

We expect capital expenditures for Fiscal ~~2007~~2008 to be in the range of approximately ~~$240~~$250 million to ~~$260~~$275 million. ~~This~~These expenditures will relate primarily to approximately 77 new aerie stand-alone stores, 36 new and 31 remodeled American Eagle stores in the United States and Canada, approximately 10 new MARTIN + OSA stores, information technology upgrades, the construction of ~~new stores and remodeling of existing AE stores. Additionally, we will continue to support our infrastructure growth by investing in information technology upgrades at our home office, construction~~the second phase of our new corporate headquarters, ~~in Pittsburgh, Pennsylvania,~~ and distribution center expansion/improvement, including the completion of the second phase of our Ottawa, Kansas distribution ~~center.~~
center expansion. We plan to fund these capital expenditures through existing cash and cash generated from operations.

For Fiscal 2009, we expect capital expenditures to be in the range of approximately $150 to $175 million with approximately two-thirds of the amount relating to store growth and renovation. This includes 37 new and 35 remodeled AE stores and 50 to 60 new aerie stores. At this time, our 2009 capital expenditures projection does not include new M+O stores.
Stock Repurchases

During Fiscal 2007, our Board authorized a total of 60.0 million shares of common stock for repurchase under our share repurchase program with expiration dates extending into Fiscal 2010. During Fiscal 2007, we repurchased 18.7 million shares as part of our publicly announced repurchase programs for approximately $438.3 million, at a weighted average price of $23.38 per share. Of this amount, 6.5 million shares were purchased during the 26 weeks ended August 4, 2007 capital expenditures of $120.3 million included $58.2 million related to investments in our stores, including 14 new AE stores in the United States and Canada, four new MARTIN + OSA stores, two new stand-alone aerie stores and 34 remodeled AE stores in the United States. The remaining amounts included approximately $17.4 million for the construction of our new corporate headquarters, $14.9 million related to information technology upgrades at our home office, $13.5 million for the purchase of a corporate aircraft and $11.7 million for construction at our Ottawa, Kansas distribution center.
In the second half of Fiscal 2007, we will invest in the construction of an additional 35 new aerie stand-alone stores, 18 new AE stores in the United States and Canada, 10 new MARTIN + OSA stores and the remodeling of approximately 19 AE stores in the United States. Additionally, we will continue to primarily invest in distribution center improvements and expansion, information technology upgrades and the construction of our new corporate headquarters.
~~Stock Repurchases~~
On March 6, 2007 and then, additionally, on May 22, 2007, our Board authorized a total of 30.0 million shares of our common stock to be repurchased under our share repurchase program through the end of Fiscal 2009. During the 26 weeks ended August 4, 2007, we repurchased 6.5 million shares of our common stock for approximately $184.8 million, at a weighted average share price of $28.41. We did not repurchase any shares as part of our publicly announced repurchase programs during the 26 weeks ended August 2, 2008. As of August ~~4, 2007,~~2, 2008, we had ~~23.5~~41.3 million shares ~~available~~remaining authorized for repurchase.
Subsequent to the second quarter of Fiscal 2007, we repurchased 2.4 million shares of our common stock under the March 6, 2007 and May 22, 2007 repurchase authorizations. The shares were repurchased for approximately $58.5 million, at a weighted average share price of $24.34. As of September 4, 2007, we had 21.1 million shares available for repurchase under the May 22, 2007 authorization. These shares may be repurchased at our discretion.
Of the 41.3 million shares that may yet be purchased under the program, the authorization relating to 11.3 million shares expires in Fiscal 2009 and the authorization relating to 30.0 million shares expires in Fiscal 2010.

During ~~each of~~ the 26 week periods ended August 2, 2008 and August 4, 2007, ~~and July 29, 2006,~~ we repurchased approximately 0.2 million and 0.4 million shares, respectively, from certain employees at market prices totaling approximately ~~$12.2~~$3.4 million and ~~$7.6~~$12.2 million, respectively. These shares were repurchased for the payment of taxes in connection with the vesting of share-based ~~compensation,~~payments, as permitted under the 2005 ~~Plan and the 1999~~ Plan.
All of the aforementioned share repurchases have been recorded as treasury stock.

Dividends

During the second quarter of Fiscal ~~2007,~~2008, our Board declared a quarterly cash dividend of $0.10 per share, which was paid on July 13, 2007. Subsequent to the second quarter of Fiscal 2007, our Board declared a quarterly cash dividend of $0.10 per share payable on October 12, 2007 to stockholders of record at the close of business on September 28, 2007.25, 2008. The payment of future dividends is at the discretion of our Board and is based on earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation and other relevant factors. It is anticipated that any future dividends paid ~~will~~would be declared on a quarterly basis.
~~Obligations and Commitments~~
~~Disclosure about Contractual Obligations~~
As a result of the adoption of FIN 48 on February 4, 2007, our gross liability for unrecognized tax benefits was approximately $48.1 million, including approximately $8.8 million of accrued interest and penalties. The gross liability as of August 4, 2007 was $56.4 million, including approximately $10.2 million of acrrued interest and penalties. We estimate that approximately $4.0 million of this amount will be paid within one year. We are unable to reasonably estimate the amount or timing of payments for the remainder of the liability. Other than the adoption of FIN 48, there have been no significant changes to the Contractual Obligations table which was included in our Fiscal 2006 Annual Report on Form 10-K.
23

Critical Accounting Policies

Our critical accounting policies are described in Item 7,Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended February ~~3, 2007~~2, 2008 contained in our Fiscal ~~2006~~2007 Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting

policies as a result of new accounting pronouncements have been discussed in the notes to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

Impact of Inflation/Deflation

We do not believe that inflation has had a significant effect on our net sales or our profitability. Substantial increases in cost, however, could have a significant impact on our business and the industry in the future. Additionally, while deflation could positively impact our merchandise costs, it could have an adverse effect on our average unit retail price, resulting in lower sales and profitability.

~~ITEM 3.~~

~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There were no material changes in our exposure to market risk from February ~~3, 2007.~~2, 2008. Our market risk profile as of February ~~3, 2007~~2, 2008 is disclosed in Item 7A,Quantitative and Qualitative Disclosures About Market Risk, of our Fiscal ~~2006~~2007 Annual Report on Form 10-K.

~~ITEM 4.~~

~~CONTROLS AND PROCEDURES.~~

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management including our Principal Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

In connection with the preparation of this Quarterly Report on Form 10-Q, as of August ~~4, 2007,~~2, 2008, an evaluation was performed under the supervision and with the participation of our management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the 13 weeks ended August ~~4, 2007~~2, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

~~ITEM 1A.~~

~~RISK FACTORS.~~

ITEM 1A. RISK FACTORS.

In addition to the updated risk ~~factors~~factor below, risk factors that affect our business and financial results are discussed within Item 1A of our Fiscal ~~2006~~2007 Annual Report on Form 10-K.

~~Our ability to continue our current level~~The effect of ~~sales~~competitive pressures from other retailers and ~~earnings growth~~other business factors
~~With our Fiscal 2007 second quarter, we achieved 14 consecutive quarters~~

The specialty retail industry is highly competitive. We compete primarily on the basis of ~~record-high sales~~quality, fashion, service, selection and earnings. Our gross margin and operating margin rates are also near historic highs and exceed most of our industry peers. Although it is difficult to maintain this level of performance or to continue to reach higher levels, we have growth initiatives that we are pursuing to achieve our goal of increasing earnings per share by at least 15% per year over the long term. Nonetheless, our product offerings are constantly changing and our success is directly dependent on customer acceptance of these new offerings. If our future product offerings are not as well accepted by our customers, our financial performance may decline until we are able to improve our product. A decline in our financial performance could result in a decline in the price of our common stock.
~~Our ability to grow through new store openings and existing store remodels and expansions~~
Our continued growth and success will depend in part on our ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis. During Fiscal 2007, we plan to open approximately 32 new American Eagle stores in the U.S. and Canada, 37 aerie stores and 14 MARTIN + OSA stores. Additionally, we plan to remodel or expand approximately 53 existing American Eagle stores during Fiscal 2007. Accomplishing our new and existing store expansion goals will depend upon a number of factors, including the ability to obtain suitable sites for new and expanded stores at acceptable costs, the hiring and training of qualified personnel, particularly at the store management level, the integration of new stores into existing operations and the expansion of our buying and inventory capabilities.price. There can be no assurance that we will be able to ~~achieve our store expansion goals, manage our growth effectively,~~ successfully ~~integrate~~compete in the ~~planned new stores into~~future.

The success of our operations also depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions affecting disposable consumer income such as employment, consumer debt, interest rates, increases in energy costs and consumer confidence. There can be no assurance that consumer spending will not be negatively affected by general or ~~operate~~local economic conditions, thereby adversely impacting our ~~new~~continued growth and ~~remodeled stores profitably.~~
25
results of operations.

Our ability to develop the MARTIN + OSA brand

During the remainder of Fiscal 2008, we plan to continue our investment in MARTIN + OSA. Our strategy includes a targeted marketing plan to drive traffic and brand awareness in several key markets; repositioning the brand by establishing MARTIN + OSA as a destination for sweaters, knits, and denim; and refining our merchandise collection, styles and prices. In light of this strategy, we will continue to evaluate the growth and performance of MARTIN + OSA. There can be no assurance that our strategy will be successful or lead to long-term growth or profitability. If we are unable to succeed in repositioning the brand, this will adversely impact our continued growth and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

~~ITEM 2.~~

~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.~~

Issuer Purchases of Equity Securities

~~ITEM 4.~~

~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.~~

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

(a) We held our ~~2007~~2008 Annual Meeting of Stockholders on June ~~12, 2007.~~24, 2008. Holders of ~~197,317,442~~168,433,310 shares of our common stock were present in person or by proxy, representing approximately ~~90%~~82% of our ~~220,315,491~~205,797,609 shares outstanding on the record date.

(b) and (c) The following persons continue to serve as Class I directors: Michael G. Jesselson, Roger S. Markfield and Jay L. Schottenstein; and the following persons continue to serve as Class II directors: Janice E. Page, J. Thomas Presby, and Gerald E. Wedren. The following persons were elected as Class ~~III members~~I directors of the Board of Directors to serve a three year term until the annual meeting in ~~2010~~2011 or until their successors are duly elected and qualified. Each person received the number of votes for or the number of votes with authority withheld indicated ~~below.~~

Name
   Shares For    Shares Withheld
Jon P. Diamond
   183,545,904    13,771,538
Alan T. Kane
   196,075,159    1,242,283
Cary D. McMillan
   195,462,305    1,855,137
James V. O’Donnell
   192,812,179    4,505,263
below:

Name Shares For Shares Against Shares Withheld
Michael G. Jesselson 156,261,941 11,996,706 174,663
Roger S. Markfield 157,825,267 10,446,065 161,977
Jay L. Schottenstein 154,048,558 14,239,866 144,886

The ~~proposal~~following persons continue to ~~amend~~serve as Class II directors: Janice E. Page, J. Thomas Presby, and ~~restate the Company’s Amended and Restated Certificate of Incorporation~~Gerald E. Wedren. The following persons continue to ~~increase the number of shares of authorized common stock from 250 million to 600 million passed. It received 158,149,805 shares for, 38,765,893 against and 401,744 shares abstain.~~
serve as Class III directors: Jon P. Diamond, Alan T. Kane, Cary D. McMillan, James V. O’Donnell.

The proposal to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm passed. It received ~~197,076,932~~167,533,644 shares for, ~~114,063~~746,658 shares against and ~~126,447~~153,008 shares abstain.

(d) Not applicable.


	Page
	Number
PART I — FINANCIAL INFORMATION
			~~Page~~ ~~Number~~
~~PART I - FINANCIAL INFORMATION~~

Item 1.	Financial Statements

	~~Consolidated Balance Sheets August 4, 2007, February 3, 2007 and July 29, 2006~~		3


Consolidated Balance Sheets: August 2, 2008, February 2, 2008 and August 4, 2007		3

Consolidated Statements of Operations and Retained ~~Earnings~~Earnings: 13 weeks and 26 weeks ended August 2, 2008 and August 4, 2007 ~~and July 29, 2006~~		4


Consolidated Statements of Cash ~~Flows~~Flows: 26 weeks ended August 2, 2008 and August 4, 2007 ~~and July 29, 2006~~		5


Notes to Consolidated Financial Statements		6


Report of Independent Registered Public Accounting Firm	16	18

~~Item 2.~~
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17	19

~~Item 3.~~
Item 3. Quantitative and Qualitative Disclosures about Market Risk	24	26

~~Item 4.~~
Item 4. Controls and Procedures	24	26

~~PART II - OTHER INFORMATION~~

~~Item 1.~~
PART II — OTHER INFORMATION

Item 1. Legal Proceedings		N/A

~~Item 1A.~~	~~Risk Factors~~		25

Item 2. 1A. Risk Factors		27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26	27

~~Item 3.~~
Item 3. Defaults Upon Senior Securities		N/A

~~Item 4.~~
Item 4. Submission of Matters to a Vote of Security Holders	26	28

~~Item 5.~~
Item 5. Other Information		N/A

~~Item 6.~~	~~Exhibits~~		27
Item 6. Exhibits		29
EX-15
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	Level 3 (Unobservable inputs)
							Student			Auction-Rate Dividend
				Auction-Rate			Loan-Related			Received
				Municipal			Auction-Rate			Deduction
(in thousands)	Total			Securities			Securities			Securities
Carrying Value at Feb 2, 2008	$	—		$	—		$	—		$	—
Transfers to Level 3 (1)		340,475			84,575			212,000			43,900
(Settlements) (2)		(23,625	)		(13,625	)		—			(10,000	)
Total Losses
Reported in earnings		—			—			—			—
Reported in OCI (3)		(8,151	)		(1,413	)		(4,739	)		(1,999	)

Balance at August 2, 2008	$	308,699		$	69,537		$	207,261		$	31,901


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Maximum Number of Share that May Yet be Purchased Under the Program
	(1)	(2)		(1)(3)	(1)(3)
Month #1 (May 6, 2007 through June 1, 2007)	1,721,474	$	27.61	1,700,000	25,500,000
Month #2 (June 2, 2007 through July 7, 2007)	2,000,000	$	26.26	2,000,000	23,500,000
Month #3 (July 8, 2007 through August 4, 2007)	683	$	25.82	—	23,500,000

Total	3,722,157	$	26.88	3,700,000	23,500,000


					Total Number of		Maximum Number of
	Total		Average		Shares Purchased as		Shares that May
	Number of		Price Paid		Part of Publicly		Yet Be Purchased
Period	Shares Purchased		Per Share		Announced Programs		Under the Program
	(1)		(2)		(1)		(1) (3)
Month #1 (May 3, 2008 through May 31, 2008)		1,530	$	17.63		—		41,250,000
Month #2 (June 1, 2008 through July 2, 2008)		1,299	$	13.48		—		41,250,000
Month #3 (July 3, 2008 through August 2, 2008)		—	$	—		—		41,250,000

Total		2,829	$	15.72		—		41,250,000


*	~~Exhibit 3.1~~	~~Amended and Restated Certificate of Incorporation, as amended~~

	~~Exhibit 4.1~~	~~See Amended and Restated Certificate of Incorporation, as amended, in Exhibit 3.1 hereof~~

*	Exhibit 15	Acknowledgement of Independent Registered Public Accounting Firm

*
* Exhibit 31.1	Certification by James V. O’Donnell pursuant to Rule 13a-14(a) or Rule 15d-14(a)

*
* Exhibit 31.2	Certification by Joan Holstein Hilson pursuant to Rule 13a-14(a) or Rule 15d-14(a)

**
**Exhibit 32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

**
**Exhibit 32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*(In thousands, except per share amounts)*		August 4, 2007			February 3, 2007			July 29, 2006
		(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	123,717		$	59,737		$	331,358
Short-term investments			510,888			767,376			482,732
Merchandise inventory			321,263			263,644			267,392
Accounts and note receivable			29,783			26,045			13,290
Prepaid expenses and other			61,353			33,720			33,953
Deferred income taxes			44,194			51,886			40,507

Total current assets			1,091,198			1,202,408			1,169,232

Property and equipment, at cost, net of accumulated depreciation and amortization			552,218			481,645			404,390
Goodwill			9,950			9,950			9,950
Long-term investments			125,120			251,644			117,291
Non-current deferred income taxes			48,806			30,340			27,382
Other assets, net			20,223			15,651			11,858

Total assets		$	1,847,515		$	1,991,638		$	1,740,103

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	146,431		$	171,150		$	175,934
Accrued compensation and payroll taxes			35,099			58,371			26,542
Accrued rent			56,259			57,543			49,954
Accrued income and other taxes			13,290			91,934			38,934
Unredeemed gift cards and gift certificates			30,093			54,554			25,371
Current portion of deferred lease credits			12,787			12,803			10,402
Other liabilities and accrued expenses			19,307			18,263			15,026

Total current liabilities			313,266			464,618			342,163

Non-current liabilities:
Deferred lease credits			64,472			65,114			60,036
Non-current accrued income taxes			52,514			—			—
Other non-current liabilities			42,425			44,594			44,516

Total non-current liabilities			159,411			109,708			104,552

Commitments and contingencies			—			—			—
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued and outstanding			—			—			—
Common stock, $0.01 par value; 600,000 shares authorized; 248,777, 248,155 and 246,275 shares issued, respectively; 216,573, 221,284 and 224,092 shares outstanding, respectively			2,481			2,461			2,445
Contributed capital			479,450			453,418			403,007
Accumulated other comprehensive income			29,381			21,714			25,054
Retained earnings	��		1,405,414			1,302,345			1,087,012
Treasury stock, 31,499, 25,699 and 20,977 shares, respectively			(541,888	)		(362,626	)		(224,130	)

Total stockholders’ equity			1,374,838			1,417,312			1,293,388

Total liabilities and stockholders’ equity		$	1,847,515		$	1,991,638		$	1,740,103


	August 2,			February 2,			August 4,
	2008			2008			2007
(In thousands, except share and per share amounts)	(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	353,390		$	116,061		$	123,717
Short-term investments		26,936			503,878			493,278
Merchandise inventory		341,463			286,485			321,263
Accounts and note receivable		26,697			31,920			29,783
Prepaid expenses and other		64,009			35,486			61,353
Deferred income taxes		46,839			47,004			44,194

Total current assets		859,334			1,020,834			1,073,588


Property and equipment, at cost, net of accumulated depreciation and amortization		718,639			625,568			552,218
Goodwill		11,370			11,479			9,950
Long-term investments		308,699			165,810			142,730
Non-current deferred income taxes		27,338			24,238			37,822
Other assets, net		19,944			19,751			20,223

Total assets	$	1,945,324		$	1,867,680		$	1,836,531


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	145,507		$	157,928		$	146,431
Notes payable		75,000			—			—
Accrued compensation and payroll taxes		27,157			49,494			35,099
Accrued rent		62,970			62,161			56,259
Accrued income and other taxes		12,159			22,803			13,290
Unredeemed gift cards and gift certificates		29,771			54,554			30,093
Current portion of deferred lease credits		13,988			12,953			12,787
Other liabilities and accrued expenses		19,163			16,285			19,307

Total current liabilities		385,715			376,178			313,266

Non-current liabilities:
Deferred lease credits		81,598			70,355			64,472
Non-current accrued income taxes		43,875			44,837			52,514
Other non-current liabilities		28,819			35,846			31,441

Total non-current liabilities		154,292			151,038			148,427

Commitments and contingencies		—			—			—
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued and outstanding		—			—			—

Common stock, $0.01 par value; 600,000 shares authorized; 249,443, 248,763 and 248,777 shares issued; 204,961, 204,480 and 216,573 shares outstanding, respectively		2,485			2,481			2,481

Contributed capital		506,104			493,395			479,450
Accumulated other comprehensive income		26,111			35,485			29,381
Retained earnings		1,663,156			1,601,784			1,405,414
Treasury stock, 43,564, 43,596 and 31,499 shares, respectively		(792,539	)		(792,681	)		(541,888	)

Total stockholders’ equity		1,405,317			1,340,464			1,374,838

Total liabilities and stockholders’ equity	$	1,945,324		$	1,867,680		$	1,836,531


	13 Weeks Ended						26 Weeks Ended
*(In thousands, except per share amounts)*	August 4, 2007			July 29, 2006			August 4, 2007			July 29, 2006
Net sales	$	703,189		$	602,326		$	1,315,575		$	1,124,754
Cost of sales, including certain buying, occupancy and warehousing expenses (exclusive of depreciation shown separately below)		386,742			327,065			700,669			595,124

Gross profit		316,447			275,261			614,906			529,630
Selling, general and administrative expenses		166,386			142,772			323,375			277,441
Depreciation and amortization expense		27,375			23,237			52,857			44,671

Operating income		122,686			109,252			238,674			207,518
Other income, net		8,766			8,969			20,067			17,065

Income before income taxes		131,452			118,221			258,741			224,583
Provision for income taxes		50,108			46,122			98,627			88,328

Net income	$	81,344		$	72,099		$	160,114		$	136,255

Basic income per common share	$	0.37		$	0.32		$	0.73		$	0.61
Diluted income per common share	$	0.37		$	0.31		$	0.71		$	0.60

Cash dividends per common share	$	0.10		$	0.08		$	0.18		$	0.13

Weighted average common shares outstanding - basic		217,790			223,805			219,409			223,260
Weighted average common shares outstanding - diluted		222,044			229,211			223,943			228,610

Retained earnings, beginning (for the 26 weeks ended August 4, 2007, refer to Note 6 for information regarding the adoption of FIN 48)	$	1,350,400		$	1,031,796		$	1,289,041		$	978,855
Net Income		81,344			72,099			160,114			136,255
Cash dividends		(21,702	)		(16,883	)		(38,222	)		(28,098	)
Reissuance of treasury stock		(4,628	)		—			(5,519	)		—

Retained earnings, ending	$	1,405,414		$	1,087,012		$	1,405,414		$	1,087,012


	26 Weeks Ended
*(In thousands)*	August 4, 2007			July 29, 2006
Operating activities:
Net income	$	160,114		$	136,255
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		52,857			44,671
Share-based compensation		19,686			16,196
Deferred income taxes		(18,976	)		(7,554	)
Tax benefit from share-based payments		6,916			7,738
Excess tax benefit from share-based payments		(5,754	)		(5,862	)
Loss on impairment of assets		—			150
Proceeds from sale of trading securities		—			183,968
Changes in assets and liabilities:
Merchandise inventory		(55,137	)		(56,444	)
Accounts and note receivable		(3,937	)		12,161
Prepaid expenses and other		(27,337	)		(3,656	)
Other assets, net		(3,125	)		(1,208	)
Accounts payable		(26,216	)		36,557
Unredeemed gift cards and gift certificates		(24,817	)		(17,713	)
Deferred lease credits		(1,127	)		758
Accrued liabilities		(58,648	)		(18,452	)

Total adjustments		(145,615	)		191,310

Net cash provided by operating activities		14,499			327,565
Investing activities:
Capital expenditures		(120,322	)		(103,149	)
Proceeds from sale of assets		—			12,345
Purchase of investments		(435,546	)		(211,476	)
Sale of investments		822,547			194,450
Other investing activities		(820	)		—

Net cash provided by (used for) investing activities		265,859			(107,830	)
Financing activities:
Payments on capital leases		(846	)		(470	)
Repurchase of common stock as part of publicly announced programs		(184,761	)		—
Repurchase of common stock from employees		(12,249	)		(7,617	)
Net proceeds from stock options exercised		11,691			10,263
Excess tax benefit from share-based payments		5,754			5,862
Cash dividends paid		(38,222	)		(28,098	)

Net cash used for financing activities		(218,633	)		(20,060	)

Effect of exchange rates on cash		2,255			1,154

Net increase in cash and cash equivalents		63,980			200,829
Cash and cash equivalents - beginning of period		59,737			130,529

Cash and cash equivalents - end of period	$	123,717		$	331,358

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	164,446		$	99,615

Supplemental disclosure of non-cash transactions:
Transfer of investment securities from available-for-sale to trading classification		—		$	180,787


	Fair Value Measurements at August 2, 2008
			Quoted Market
			Prices in Active				Significant
			Markets for		Significant Other		Unobservable
	Carrying Amount as		Identical Assets		Observable Inputs		Inputs
(in thousands)	of August 2, 2008		(Level 1)		(Level 2)		(Level 3)
Cash and Cash Equivalents
Cash	$	68,938	$	68,938	$	—	$	—
Money-market		284,452		284,452		—		—

Total cash and cash equivalents		353,390		353,390		—		—
Short-term Investments
State and local government securities		22,436		3,086		19,350		—
Corporate securities		4,500		—		4,500		—

Total Short-term Investments		26,936		3,086		23,850		—
Long-term Investments
Student-loan backed securities		207,261		—		—		207,261
State and local government securities		59,537		—		—		59,537
Corporate securities		41,901		—		—		41,901

Total Long-term Investments		308,699		—		—		308,699

Total	$	689,025	$	356,476	$	23,850	$	308,699


(1)		Transfers to Level 3 represent amounts transferred during the first quarter of Fiscal 2008

(2)		Settlements occurred during the second quarter of Fiscal 2008

(3)		Temporary losses of $5.1 million and $3.1 million occurred during the first and second quarters of 2008, respectively


	26 Weeks Ended August 4, 2007 (1)
	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding - February 3, 2007	12,209,342		$	11.24
Granted	2,356,973		$	29.80
Exercised (2)	(1,096,438	)	$	10.09
Cancelled	(305,048	)	$	21.51

Outstanding - August 4, 2007	13,164,829		$	14.42	5.2	$	137,260

Vested and expected to vest - August 4, 2007	12,769,126		$	14.23	5.1	$	135,353

Exercisable - August 4, 2007	8,077,062		$	8.66	4.4	$	119,861


	26 Weeks Ended
	August 2, 2008 (1)
					Weighted-Average
					Remaining		Aggregate
			Weighted-Average		Contractual		Intrinsic Value
	Options		Exercise Price		Term (in years)		(in thousands)
Outstanding — February 2, 2008		12,915,576	$	14.41
Granted		3,424,838	$	21.19
Exercised (2)		170,444	$	10.11
Cancelled		444,754	$	23.51

Outstanding — August 2, 2008		15,725,216	$	15.67		4.6	$	48,252

Vested and expected to vest — August 2, 2008		15,256,353	$	15.46		4.5	$	48,153

Exercisable — August 2, 2008		6,986,012	$	7.07		3.1	$	47,524


	26 Weeks Ended August 4, 2007
	Shares		Weighted- Average Grant Date Fair Value
Time-Based Restricted Stock
Nonvested - February 3, 2007 (1)	138,000		$	16.63
Granted	—			—
Vested	(60,000	)	$	12.12
Cancelled	—			—

Nonvested - August 4, 2007	78,000		$	20.10


	26 Weeks Ended
	August 2, 2008
				Weighted-
				Average Grant
Time-Based Restricted Stock	Shares			Date Fair Value
Nonvested — February 2, 2008		74,500		$	19.97
Granted		—			—
Vested		(15,000	)	$	19.60
Cancelled		—			—

Nonvested — August 2, 2008		59,500		$	20.06


(1)		Shares purchased during Month #1 ~~include 1.7 million repurchased as part of our publicly announced share repurchase program~~ and ~~21,474 shares~~#2 were all repurchased from employees for the payment of taxes in connection with the vesting of share-based payments. Shares purchased during Month #2 include 2.0 million repurchased as part of our publicly announced share repurchase program. During Month #3, the Company repurchased 683 shares from employees for the payment of taxes in connection with the vesting of share-based payments.


(2)		Average price paid per share excludes any broker commissions paid.


(3)	~~On March 6, 2007, our Board authorized~~	Of the ~~repurchase of 7.0~~41.3 million shares ~~of our common stock. This repurchase~~that may yet be purchased under the program, the authorization ~~does not have an expiration date. On May 22, 2007, our Board authorized the repurchase of 23.0~~relating to 11.3 million shares ~~of our common stock. This~~expires in Fiscal 2009 and the authorization relating to 30.0 million shares expires ~~at the end of~~in Fiscal ~~2009.~~2010.


Name	Shares For	Shares Withheld
Jon P. Diamond	183,545,904	13,771,538
Alan T. Kane	196,075,159	1,242,283
Cary D. McMillan	195,462,305	1,855,137
James V. O’Donnell	192,812,179	4,505,263


Name	Shares For		Shares Against		Shares Withheld
Michael G. Jesselson		156,261,941		11,996,706		174,663
Roger S. Markfield		157,825,267		10,446,065		161,977
Jay L. Schottenstein		154,048,558		14,239,866		144,886


	American Eagle Outfitters, Inc. (Registrant)
	By:
~~By:~~		/s/ James V. O’Donnell

James V. O’Donnell
		Chief Executive Officer
(Principal Executive Officer)

~~By:~~
	By:	/s/ Joan Holstein Hilson

Joan Holstein Hilson
		Executive Vice President and Chief Financial Officer, AE Brand
(Principal Financial Officer and Principal Accounting Officer)

Leasehold Improvements

Lesser of 5 to 10 years or the term of the lease

Fixtures and equipment

3 to 5 years