UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the Quarterly Period Ended OctoberJuly 31, 20072008

OR

For the transition period from                         to

Commission File No. 000-22754

Urban Outfitters, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (215) 454-5500

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

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

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

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

Common stock, $0.0001 par value—166,018,015167,301,138 shares outstanding on December 4, 2007.September 5, 2008.

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

PART I

FINANCIAL INFORMATION

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)

See accompanying notes.notes

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except share and per share data)

(unaudited)

See accompanying notes.notes

URBAN OUTFITTERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

See accompanying notes.notes

URBAN OUTFITTERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) 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 GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2007,2008, filed with the United States Securities and Exchange Commission on March 30, 2007.28, 2008.

The retail segment of the Company’s business is subject to seasonal variations in which a greater percentagepercent of the Company’s annual net sales and net income typically occur during the period from August 1 through December 31 of the fiscal year. TheAccordingly, the results of operations for the three and ninesix months ended OctoberJuly 31, 20072008 are not necessarily indicative of the results to be expected for the full year.

The Company’s fiscal year ends on January 31. All references in these notes to the Company’s fiscal years refer to the fiscal years ended on January 31 in those years. For example, the Company’s fiscal year 20082009 will end on January 31, 2008.2009.

In February 2007,September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial assets and financial liabilities in fiscal years beginning after November 15, 2007 and for certain nonfinancial assets and certain nonfinancial liabilities in fiscal years beginning after November 15, 2008. Effective February 1, 2008, the Company has adopted the provisions of SFAS No. 157 that relate to its financial assets and financial liabilities (See Note 4). The Company is currently evaluating the impact of the provisions of SFAS No. 157 that relate to its nonfinancial assets and nonfinancial liabilities, which are effective for the Company as of February 1, 2009.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: Including an Amendment of FASB Statement No. 115.”115” (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Effective February 1, 2008, the Company has adopted SFAS No. 159 and has elected to not apply the provisions of SFAS No. 159 to report certain of its assets and liabilities at fair value.

In December 2007, the FASB issued SFAS No. 141R “Business Combinations” (“SFAS No. 141R”), which continues to require that all business combinations be accounted for by applying the acquisition method. Under the acquisition method, the acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, and any contingent consideration and contractual contingencies, as a whole at their fair value as of the acquisition date. Under SFAS No. 141R, all transaction costs are expensed as incurred. SFAS No. 141R rescinds Emerging Issues Task Force (“EITF”) 93-7. Under EITF 93-7, the effect of any subsequent adjustments to uncertain tax positions were generally applied to goodwill, except for post-acquisition interest on uncertain tax positions, which was recognized as an adjustment to income tax expense. Under SFAS No. 141R, all subsequent adjustments to these uncertain tax positions that otherwise would have impacted goodwill will be recognized in the income statement. The guidance in SFAS No. 141R will be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. The Company does not expect the adoption of SFAS No. 159 will141R to have a material impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

3.	Comprehensive Income

The Company does not expect the adoption of SFAS No. 157 will have a material impact on its consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The Company adopted FIN 48 on February 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting forCompany’s total comprehensive income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company has recorded the cumulative effect of applying FIN 48 of $0.7 million as an adjustment to the opening balance of retained earnings on February 1, 2007. See Note 5, “Income Taxes,” for additional information.

In June 2006, the Emerging Issues Task Force (“EITF”) ratified its consensus on Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement.” EITF 06-03 addresses what type of government assessments should be included within the scope of EITF 06-03, and how such government assessments should be presented in the income statement. The EITF reached a conclusion that the scope of EITF 06-03 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added and some excise taxes. In addition, the EITF also reached a conclusion that the presentation of taxes, within the scope of EITF 06-03, on either a gross or net basis, is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board Opinion No. 22, “Disclosure of Accounting Policies.” In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. EITF 06-03 was effective for reporting periods beginning after December 15, 2006. The Company adopted the disclosure requirements of EITF 06-03 effective February 1, 2007, however, since the Company presents its revenue on a net basis, no further disclosure under EITF 06-03 is required.below.

During all periods presented, marketable securities are classified as available for sale.available-for-sale. The amortized cost, gross unrealized gains (losses) and fair value of available-for-sale securities by major security type and class of security as of OctoberJuly 31, 2007,2008, January 31, 20072008 and OctoberJuly 31, 20062007 were as follows:

SalesProceeds and maturities from the sale of marketableavailable-for-sale securities were $105,074$262,669 and $165,724$55,218 for the ninesix months ended OctoberJuly, 31, 20072008 and 2006,2007, respectively. For the three and ninesix months ended OctoberJuly 31, 2007,2008 there were $5$2 and $9$116 of realized lossesgains included in other income, respectively. DuringFor the three and six months ended OctoberJuly 31, 2006,2007, there were no realized losses. During the nine months ended October 31, 2006, there was $8$4 of realized losses included in other income.

Effective February 1, 2008, the Company adopted the provisions of SFAS No. 157 that relate to its financial assets and financial liabilities as discussed in Note 2. SFAS No. 157 establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described as follows:

Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and liabilities and their placement within the fair value hierarchy. Our financial assets that are accounted for at fair value on a recurring basis are presented in the table below:

As of July 31, 2008 there was insufficient observable failed ARS market information for failed ARS held by the Company to determine the fair value. Therefore, the Company estimated Level 3 fair values for these securities by incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions included credit quality, collateralization, final stated maturity, estimates of the probability of being called or becoming liquid prior to final maturity, redemptions of similar ARS, previous market activity for the same investment security, impact due to extended periods of maximum auction rates and valuation models. Based upon this analysis, the Company has recorded a temporary impairment of $330 and $540 in other comprehensive income in the Condensed Consolidated Statement of Income for the three and six months ended July 31, 2008.

Below is a reconciliation of the beginning and ending balances for each type of security that the Company valued using a Level 3 valuation as of July 31, 2008.

On September 30, 2004,December 11, 2007, the Company renewed and amended its line of credit facility with Wachovia Bank, National Association (the “Line”). The Line is a three-year revolving credit facility with an accordion feature allowing an increase in available credit up to $50.0$100 million at the Company’s discretion, subject to a seven day request period. As of OctoberJuly 31, 2007,2008, the credit limit under the Line was $50.0 million.$60,000. The Line contains a sub-limit for borrowings by our European subsidiaries that are guaranteed by the Company. Cash advances bear interest at LIBOR plus 0.50% to 1.60% based on the Company’s achievement of prescribed adjusted debt ratios. The Line subjects the Company to various restrictive covenants, including maintenance of certain financial ratios and covenants such as fixed charge coverage and adjusted debt ratios.debt. The covenants also include limitations on the Company’s capital expenditures, ability to repurchase shares and the payment of cash dividends. On November 30, 2006, the Company amended its line to increase the capital expenditure limit and add additional subsidiaries that are permitted to borrow. As of October 31, 2007, the Company was in compliance with all covenants under the Line. As of and during the ninesix months ended OctoberJuly 31, 2007,2008, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled approximately $33.1 million$49,477 as of OctoberJuly 31, 2007.2008. The available credit, including the accordion feature under the Line was $16.9 million$50,523 as of OctoberJuly 31, 2007.2008. The Company plans to renewbelieves the renewed Line during the fourth quarter of fiscal 2008 and expects that the renewal will include the expansion of the available credit limit under the Line to an amount that will satisfy its letter of credit needs through fiscal 2010. As of October 31, 2007 the Company has extended the current Line until the renewal is completed.2011.

The Company adopted the provisions of FIN 48 on February 1, 2007. As a result of the implementation of FIN 48, the Company recorded a $5.0 million increase in the liability for unrecognized tax benefits, which is partially offset by an increase to the deferred tax asset of $4.3 million, resulting in a decrease to the February 1, 2007 retained earnings balance of $0.7 million. The amount of unrecognized tax benefits at February 1, 2007 was $8.7 million, of which $6.4 million would impact the Company’s effective tax rate if recognized. The amount of unrecognized tax benefits did not materially change from FIN 48 adoption at February 1, 2007 through October 31, 2007.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense in the Condensed Consolidated Statements of Income, which is consistent with the recognition of these items in prior reporting periods. As of February 1, 2007, the Company had recorded liabilities of approximately $1.4 million and $0.7 million for the payment of interest and penalties, respectively. The liabilities for the payment of interest and penalties did not materially change from FIN 48 adoption at February 1, 2007 through October 31, 2007.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. During the quarter ended April 30, 2007, the Company was notified by the Internal Revenue Service of its intent to examine the Company’s federal income tax return for the period ended January 31, 2005. The Company is not subject to U.S. federal tax examinations for years before fiscal 2004. State jurisdictions that remain subject to examination range from fiscal 2001 to 2006, with few exceptions. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months as a result of any of these examinations.

6.	Stock Based EmployeeShare-Based Compensation

Effective February 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment,” using the modified prospective method. Under this transition method, compensation cost in fiscal 2007 and fiscal 2008 includes the portion of vesting in the period for (1) all share-based payments granted prior to, but not yet vested as of January 31, 2006, based on the grant date fair value estimated in accordance with SFAS No. 123 and (2) all share-based payments granted subsequent to January 31, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.

Stock Options

Under the provisions of SFAS No. 123R, “Share-Based Payment,” the Company recorded $620$377 and $1,679$759 of stock compensation expense related to stock option awards as well as related tax benefits of $192$139 and $510$280 in its Condensed Consolidated Statements of Income for the three and ninesix months ended OctoberJuly 31, 2007,2008, or less than $.01 for both basic and diluted earnings per share for each of these periods. Stock compensation expense related to stock option awards for the three and nine months ended October 31, 2006 was $651 and $1,653 with related tax benefits of $117 and $341, respectively, and is also included in the accompanying Condensed Consolidated Statements of Income.Income for the three and six months ended July 31, 2007 was $583 and $1,059 with related tax benefits of $179 and $318, respectively. During the three and ninesix months ended OctoberJuly 31, 2007,2008 the Company granted 37,50091,000 and 142,500111,500 stock option awards, respectively. The Company granted 10,00095,000 and 90,000105,000 stock option awards during the three and ninesix months ended OctoberJuly 31, 2006, respectively.2007. The estimated fair value of the grants was calculated using a Lattice Binomial model for the options granted wasduring the three and six months ended July 31, 2008. For stock options granted during the three and six months ended July 31, 2007, the fair value of these grants were calculated using a Black Scholes option pricing model. Total compensation cost of stock options granted but not yet vested, as of OctoberJuly 31, 2007,2008, was $2,169,$1,864, which is expected to be recognized over the weighted average vesting period of 1.611.56 years.

Restricted Shares

During the fiscal year ended January 31, 2005, the Company granted 400,000 shares of restricted common stock with a grant date fair value of $5,766 or $14.42 per share. Share-based compensation expense resulting from this grant of $291 and $863$575 is included in the accompanying Condensed Consolidated Statements of Income for the three and ninesix months ended OctoberJuly 31, 2007 as well as related tax benefits of $214 and $441,2008, respectively. Share-based compensation expense for the three and ninesix months ended OctoberJuly 31, 20062007 was $291 and $863 with tax related benefits of $111 and $349, respectively, and$572 is also included in the accompanying Condensed Consolidated Statements of Income. As of OctoberJuly 31, 2007,2008, this was the only grant of non-vested, non-performance shares, and none of these shares had vested as of that date. Total unrecognized compensation costexpense of non-vested, non-performance shares granted, as of OctoberJuly 31, 2007,2008, was $1,889,$1,024, which is expected to be recognized over the weighted average period of 0.9 years.

Performance Shares

During April 2008, the Company granted two awards of 30,184 Performance Stock Units (“PSU’s”). These PSU’s are subject to a vesting period of 1.6two years for the first grant (“Grant A”), and three years for the second grant (“Grant B”). Each PSU grant is subject to various performance targets. If any of these targets are not met, the grants are forfeited. Each PSU is equal to one share of common stock with a total award value not to exceed 30% appreciation. Grant A had a grant date fair value of $21.55 per share and Grant B had a grant date fair value of $19.47 per share, with both grants having a total grant date fair value of $1,238. The grant date fair value was calculated using a Lattice Binomial Model. Share-based compensation expense resulting from these grants of $151 and $154 is included in the accompanying Condensed Consolidated Statements of Income for the three and six months ended July 31, 2008. Total unrecognized compensation cost for these non-vested PSU’s granted, as of July 31, 2008 was $1,084, which is expected to be recognized over the weighted average period of 1.43 years.

The following is a reconciliation of the weighted average shares outstanding used for the computation of basic and diluted net income per common share:

For the three months ended OctoberJuly 31, 20072008 and 2006,2007, options to purchase 4,166,25066,500 common shares with an exercise price range of $22.11$24.20 to $31.11$30.50 and options to purchase 4,853,2503,962,250 common shares with an exercise price range of $15.48$24.94 to $31.11, respectively, were outstanding but were not included in the Company’s computation of diluted weighted average common shares and common share equivalents outstanding because

their effect would have been anti-dilutive. Furthermore, options to purchase 4,126,0833,507,750 and 4,774,7504,106,000 common shares were outstanding for the ninesix months ended OctoberJuly 31, 20072008 and 2006,2007, respectively, but were not included in the Company’s computation because their effect would have been anti-dilutive. The price of the options range from $22.11$24.20 to $31.11 and $15.48$24.94 to $31.11 for the ninesix months ended OctoberJuly 31, 20072008 and 2006,2007, respectively.

The Company is party to various legal proceedings arising from normal business activities. Management believes that the ultimate resolution of these matters will not have a material effect on the Company’s financial position or results of operations.

The Company is a nationalan international retailer of lifestyle-oriented general merchandise with two reporting segments—“Retail” and “Wholesale.” The Company’s Retail segment consists of the aggregation of its threefour brands operating through 230269 stores under the retail names “Urban Outfitters,” “Anthropologie”“Anthropologie,” “Free People” and “Free People”“Terrain” and includes their direct marketing campaigns, which consisted of three catalogs and four web sites as of OctoberJuly 31, 2007.2008. The Company’s retail stores and their direct marketing campaigns are considered an reportablea single operating segment. Net sales from the Retail segment accounted for more than 93%approximately 94% of total consolidated net sales for both the nine monthsthree and six month periods ended OctoberJuly 31, 2008. For the three and six month periods ended July 31, 2007, and 2006.net sales from the Retail segment accounted for approximately 93% of total consolidated net sales. The remainder is derived from the Company’s Wholesale segment that manufactures and distributes apparel to theour Retail segment and to approximately 1,5001,700 better department and specialty retailers worldwide.

The Company has aggregated its retail stores and associated direct marketing campaigns into a Retail segment based upon their unique management, customer base and economic characteristics. Reporting in this format provides management with the financial information necessary to evaluate the success of the segments and the overall business. The Company evaluates the performance of the segments based on the net sales and pre-tax income from operations (excluding inter-company charges) of the segment. Corporate expenses include expenses incurred and directed by the corporate office that are not allocated to segments. The principal identifiable assets for each operating segment are inventories and property and equipment. Other assets are comprised primarily of general corporate assets, which principally consist of cash and cash equivalents, marketable securities, and other assets, and which are typically not allocated to the Company’s segments. The Company accounts for inter-segment sales and transfers as if the sales and transfers were made to third parties making similar volume purchases, these inter-segment sales are eliminated in the Company’s consolidated financial statements.purchases.

The accounting policies of the operating segments are the same as the policies described in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” Both the Retail and Wholesale segments are highly diversified. No vendor or customer comprises more than 10% of net sales. A summary of the information about the Company’s operations by segment is as follows:

The Company has foreign operations in Europe and Canada. Revenues and long-term assets, based upon the Company’s domestic and foreign operations, are as follows:

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This filing with the United States Securities and Exchange Commission (“SEC”) is being made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Certain matters contained in this filing may constitute forward-looking statements. When used in this Form 10-Q, the words “project,” “believe,” “anticipate,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. The following are some of the factors that alone or together, could cause actual financial results to differ materially from those financial results mentioned in the forward-looking statements: the difficulty in predicting and responding to shifts in fashion trends, changes in the level of competitive pricing and promotional activity and other industry factors, overall economic and market conditions and the resultant impact on consumer spending patterns, any effects of terrorist acts or war, timing of store openings, seasonal fluctuations in gross sales, the departure of one or more key senior managers, import risks, including potential disruptions and changes in duties, tariffs and quotas, potential difficulty to liquidate certain marketable security investments, and other risks identified in our filings with the SEC, including our Form 10-K for the fiscal year ended January 31, 2007,2008, filed on March 30, 2007.28, 2008. We disclaim any intent or obligation to update forward-looking statements even if experience or future changes make it clear that actual results may differ materially from any projected results expressed or implied therein.

Unless the context otherwise requires, all references to “Urban Outfitters,” the “Company,” “we,” “us” or “our company” refer to Urban Outfitters, Inc., together with its subsidiaries.

Overview

We operate two business segments, a leading lifestyle merchandising retailretailing segment and a wholesale apparel segment. Our retailing segment consists of our Urban Outfitters, Anthropologie, and Free People and Terrain brands, whose merchandise is sold directly to our customers through our stores, catalogs, call centers and web sites. Our wholesale apparel segment consists of our Free People Wholesale division that designs, develops and markets young women’s contemporary casual apparel and Leifsdottir, Anthropologie’s recently released wholesale concept. Leifsdottir designs, develops and markets sophisticated women’s contemporary apparel.

A store is included in comparable store net sales data, as presented in this discussion, if it has been open at least 12one full months from the beginning of the period for which such data is presented,fiscal year, unless it was materially expanded or remodeled within that year or was not otherwise operating at its full capacity within that year. Sales from stores that do not fall within the definition of a comparable store are considered non-comparable. Non-storeFurthermore, non-store sales, such as catalog and internetwebsite related sales, are also considered non-comparable.

Although we have no precise empirical data as it relates to customer traffic or customer conversion rates in our stores, we believe that, based only on our observations, changes in transaction volume, as discussed in our results of operations, may correlate to changes in customer traffic. We believe this may be caused by a combination of response to our brands’ fashion offerings, our web advertising, changes incontinued circulation of our catalogs and an overall growth in brand recognition as we expand our store base.

Our fiscal year ends on January 31. All references in this discussion to our fiscal years refer to the fiscal years ended on January 31 in those years. For example, our fiscal 2008year 2009 will end on January 31, 2008.2009.

Our goal is to increase net sales by at least 20% per year through a combination of opening new stores, growing comparable store sales, and continuing the growth of our direct-to-consumer and wholesale operations.operations and introducing new concepts.

Retail Stores

As of OctoberJuly 31, 2007,2008, we operated 117132 Urban Outfitters stores of which 102112 were located in the United States, four6 were located in Canada and 1114 were located in Europe. For the ninesix months ended OctoberJuly 31, 2007,2008, we opened 11ten new Urban Outfitters stores, six of which eight were located within the United States, one wastwo that were located in Canada and two that were located in Europe. Urban Outfitters targets young adults aged 18 to 30 through a unique merchandise mix and compelling store environment. Our product offering includes women’s and men’s fashion apparel, footwear and accessories, as well as an eclectic mix of apartment wares and gifts. We plan to open additional stores over the next several years, some of which may be outside the United States. Urban’s North American and European store sales accounted for approximately 35.5%35.0% and 6.0%6.2% of consolidated net sales, respectively, for the ninesix months ended OctoberJuly 31, 2007,2008, compared to 39.6%34.9% and 5.1%5.9%, respectively, for the comparable period in fiscal 2007.2008.

As of OctoberJuly 31, 2007,2008, we operated 100115 Anthropologie stores all of which were located in the United States. During the ninesix months ended OctoberJuly 31, 2007,2008, we opened seven new Anthropologie stores. Anthropologie tailors its merchandise to sophisticated and contemporary women aged 30 to 45. Our product assortment includes women’s casual apparel and accessories, home furnishings and a diverse array of gifts and decorative items. We plan to open additional stores over the next several years. Anthropologie’s store sales accounted for approximately 38.0%36.7% of consolidated net sales for the ninesix months ended OctoberJuly 31, 2007,2008, compared to 36.3%38.6% for the comparable period in fiscal 2007.2008.

As of OctoberJuly 31, 2007,2008, we operated 1321 Free People stores, all of which were located in the United States. During the ninesix months ended OctoberJuly 31, 2007,2008 we opened fivesix new Free People stores.Stores. Free People primarily offers private label branded merchandise targeted to young contemporary women aged 25 to 30. Free People provides a unique merchandise mix of casual women’s casual apparel, accessories and gifts. We plan to open additional stores over the next several years. Free People’s store net sales accounted for approximately 1.0%1.6% of consolidated net sales for the ninesix months ended OctoberJuly 31, 2007,2008, compared to less than 1.0%1% of consolidated net sales for the comparable periodsix months ended July 31, 2007.

As of July 31, 2008, we operated one Terrain store which was located in fiscal 2007.Concordville, PA. Our new store concept is designed to appeal to men and women interested in a creative, sophisticated outdoor living and gardening experience. Terrain seeks to create a compelling shopping environment, inspired by the ‘greenhouse’. Sites are large and free standing. Merchandise includes lifestyle home and garden products combined with antiques, live plants and flowers. We plan to open additional stores over the next several years. Terrain’s store net sales accounted for less than 1% of consolidated net sales for the six months ended July 31, 2008.

For all brands combined, we plan to open a total of 38approximately 45 new stores during fiscal 2008,2009, including six12 to eight15 new Free People stores. The remaining new stores will be divided approximately evenly between Urban Outfitters and Anthropologie. We plan to continue to grow our store base at a similar rate per year.

Direct-to-consumer

Anthropologie distributes a direct-to-consumer catalog offering selected merchandise, most of which is also available in our Anthropologie stores. During the three months ended OctoberJuly 31, 2007,2008, we circulated approximately 5.74.5 million catalogs compared to 6.84.2 million catalogs during the same period in fiscal 2007.2008. We believe that this catalog has been instrumental in helping to build the Anthropologie brand identity with our target customers. We expectplan to decrease circulation to approximately 21 million catalogs during fiscal 20082009 and increase our investment in web marketing. We expect catalog circulation to be consistent with fiscal year 2007 or approximately 21.8 million catalogs.stable over the next few years.

Anthropologie operates a web site,www.anthropologie.com, that accepts orders directly from consumers. The web site captures the spirit of the store by offering a similar array of apparel, accessories, household and gift merchandise as found in ourthe stores. As with the Anthropologie catalog, we believe that the web site increases Anthropologie’s reputation and brand recognition with its target customers and helps support the strength of Anthropologie’s store operations.

Urban Outfitters distributes a direct-to-consumer catalog offering selected merchandise, much of which is also available in our Urban Outfitters stores. During the three months ended OctoberJuly 31, 2007,2008, we circulated approximately 4.02.4 million Urban Outfitters catalogs compared to approximately 2.92.2 million catalogs during the comparable period in fiscal 2007.2008. We believe thethis catalog has expanded our distribution channels and increased brand awareness. We plan to expanddecrease circulation to approximately 13.012 million catalogs in fiscal 2008 compared to approximately 11.4 million catalogs circulated during fiscal 2007.2009 and increase our investment in web marketing. We expect catalog circulation to be stable over the next few years.

Urban Outfitters also operates a web site,www.urbanoutfitters.com, that accepts orders directly from consumers. The web site captures the spirit of the store by offering a similar selection of merchandise as found in the stores. As with the Urban Outfitters catalog, we believe the web site increases the reputation and recognition of the brand with its target customers, as well as helps to support the strength of Urban Outfitters store operations.

In August 2006, Urban Outfitters launched a web site targeting our European customers. The web site,www.urbanoutfitters.co.uk, captures the spirit of our European stores by offering a similar selection of merchandise as found in our stores. Fulfillment is provided from a third-party distribution center located in the United Kingdom. We believe the web site increases the reputation and recognition of the brand with our European customers as well as helps to support our Urban Outfitters European store operations.

In October 2005, Free People introduced a direct-to-consumer catalog offering selected merchandise much of which is also available in our Free People stores. DuringFor the three months ended OctoberJuly 31, 2007,2008, we circulated approximately 1.3 million900 thousand Free People catalogs compared to approximately 1.0 million800 thousand catalogs during the comparable period in fiscal 2007.2008. We believe the catalog has expandedFree People catalogs expand our distribution channels and increasedincreases brand awareness. We plan to expand catalog circulation to approximately 4.87 million catalogs in fiscal 2008 compared to approximately 3.3 million catalogs circulated during fiscal 2007. We2009 and intend to increase the level of catalog circulation over the next few years.

We successfully launched the Free People also operates a web site,www.freepeople.comin September 2004., that accepts orders directly from consumers. The web site offersexposes consumers to the entire Free People product assortment found at Free People retail stores as well as all of the Free People wholesale line.offerings. As with the Free People catalog, we believe the web site increases theFree People’s reputation and recognition of the brand with its target customers, as well as helps to support the strength of Free People store operations.

Direct-to-consumer sales for all brands combined werewas approximately 12.7%13.3% and 14.0% of consolidated net sales for the ninethree and six months ended OctoberJuly 31, 2008, respectively. For the three and six months ended July 31, 2007, compared to 11.7%direct-to-consumer sales for the comparable period in fiscal 2007.all brands combined was 12.2% and 13.0%, respectively.

Wholesale

The Free People wholesale division designs, develops and markets young women’s contemporary casual apparel. Free People’s range of tops, bottoms, sweaters and dresses are sold worldwide through approximately 1,5001,700 better department and specialty stores, including Bloomingdale’s, Nordstrom, Lord & Taylor, Belk, Urban Outfitters and our own Free People stores. Free People wholesale sales accounted for approximately 6.8%6.0% and 6.1% of consolidated net sales for the ninethree and six months ended OctoberJuly 31, 2008, respectively. For the three and six months ended July 31, 2007, compared to 6.5%Free People wholesale sales accounted for 6.9% and 6.6% of consolidated net sales, respectively.

During the three months ended July 31, 2008, we launched Leifsdottir, a wholesale division for our Anthropologie brand. Leifsdottir designs, develops and markets sophisticated women’s contemporary apparel including dresses, tops and bottoms. Leifsdottir will be sold through luxury department stores including Bloomingdale’s, Nordstrom and Bergdorf Goodman, bigger specialty stores and our own Anthropologie stores. Leifsdottir wholesale sales accounted for less than 1% of consolidated net sales for the comparable period in fiscal 2007.three months ended July 31, 2008.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.America (“GAAP”). These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period.

Our senior management has reviewed the critical accounting policies and estimates with our audit committee. Our significant accounting policies are described in Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies,” for the fiscal year ended January 31, 2007,2008 which are included in our Annual Report on Form 10-K filed with the SEC on March 30, 2007.28, 2008. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayalpresentation of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. If actual results were to differ significantly from estimates made, the reported results could be materially affected. We are not currently aware of any reasonably likely events or circumstances that would cause our actual results to be materially different from our estimates.

Revenue Recognition

Revenue is recognized at the point-of-sale for retail store sales or when merchandise is shipped to customers for wholesale and direct-to-consumer sales, net of estimated customer returns. Revenue is recognized at the completion of a job or service for landscape sales. Revenue is presented on a net basis and does not include any tax assessed by a governmental authority. Payment for merchandise at our stores and through our direct-to-consumer business is by cash, check, credit card, debit card or gift card. Therefore, our need to collect outstanding accounts receivable for our retail and direct-to-consumer business is negligible and mainly results from returned checks or unauthorized credit card charges. We maintain an allowance for doubtful accounts for our wholesale businessand landscape service businesses accounts receivable, which management reviews on a regular basis and believes is sufficient to cover potential credit losses and billing adjustments. Deposits for custom orders are recorded as a liability and recognized as a sale upon delivery of the merchandise to the customer. These custom orders, typically for upholstered furniture, have not been material. Deposits for landscape services are recorded as a liability and recognized as a sale upon service completion. Landscape services and related deposits have not been material.

We account for a gift cardscard transaction by recording a liability at the time the gift card is issued to the customer in exchange for consideration from the customer. TheA liability is established and remains on our books until itthe card is redeemed by the customer at which time we record the redemption of the card for merchandise as a sale or when we determinesdetermine the likelihood of redemption is remote. We determineddetermine the probability of the gift cards being redeemed to be remote based on historical redemption patterns. Revenues attributable to gift cardscard liabilities relieved after the likelihood of redemption becomes remote are included in sales and have not been material. Our gift cards do not expire.

Sales Return Reserve

We record a reserve for estimated product returns where the sale has occurred during the period reported, but the return is likely to occur subsequent to the period reported and may otherwise be considered in-transit. The reserve for estimated in-transit product returns is based on our most recent historical return trends. If the actual return rate or experience is materially different than our estimate, the reserve is adjusted.will be adjusted in the future. As of OctoberJuly 31, 2007,2008, January 31, 20072008 and OctoberJuly 31, 2006,2007, reserves for estimated sales returns in-transit totaled $10.2$7.4 million, $8.9$6.8 million and $7.4$9.1 million, representing 3.8%2.5%, 4.0%2.3% and 3.2%3.9% of total liabilities, respectively.

Inventories

We value our inventories, which consist primarily of general consumer merchandise held for sale, at the lower of cost or market. Cost is determined on the first-in, first-out method and includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly stated at the lower of cost or market. Factors related to current inventories, such as future consumer demand and fashion trends, current aging, current and anticipated retail markdowns or wholesale discounts, and class or type of inventory, are analyzed to determine estimated net realizable values. Criteria we use to quantify aging trends includes factors such as average selling cycle and seasonality of merchandise, the historical rate at which merchandise has sold below cost during the average selling cycle, and merchandise currently priced below original cost. A provision is recorded to reduce the cost of inventories to its estimated net realizable value, if required. Inventories as of OctoberJuly 31, 2008, January 31, 2008 and July 31, 2007 January 31, 2007 and October 31, 2006 totaled $212.7$211.2 million, $154.4$171.9 million and $179.6$185.6 million, representing 19.9%16.7%, 17.2%15.0% and 20.8%18.9% of total assets, respectively. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results.

Adjustments to reserves related to the net realizable value of our inventories are primarily based on recent historical trends. Our estimates generally have been accurate and our reserve methods have been applied on a consistent basis. We expect the amount of our reserves to increase over time as we expand our store base and accordingly, related inventories.

Long-Lived Assets

Our long-lived assets consist principally of store leasehold improvements, as well as furniture and fixtures, and are included in the “Property and equipment, net” line item in our condensed consolidated balance sheets included in this report. Store leasehold improvements are recorded at cost and are amortized using the straight-line method over the lesser of the applicable store lease term, including lease renewals which are reasonably assured, or the estimated useful life of the leasehold improvements. The typical initial lease term for our stores is ten years. Buildings are recorded at cost and are amortized using the straight-line method over 39 years. Furniture and fixtures are recorded at cost and are amortized using the straight-line method over their useful life, which is typically five years. Net property and equipment as of OctoberJuly 31, 2008, January 31, 2008 and July 31, 2007 January 31, 2007 and October 31, 2006 totaled $489.4$507.4 million, $445.7$488.9 million and $426.4$469.0 million, respectively, representing 45.9%40.0%, 49.6%42.8% and 49.3%47.8% of total assets, respectively.

In assessing potential impairment of these assets, we periodically evaluate historical and forecasted operating results and cash flows on a store-by-store basis. Newly opened stores may take time to generate positive operating and cash flow results. Factors such as store type (e.g., mall versus free-standing), store location (e.g., urban area versus college campus or suburb), current marketplace awareness of our brands, local customer demographic data and current fashion trends are all considered in determining the time frame required for a store to achieve positive financial results, which, in general, is assumed to be within three years from the date a store location has opened. If economic conditions are substantially different from our expectations, the carrying value of certain of our long-lived assets may become impaired. For the ninesix months ended OctoberJuly 31, 20072008 and 2006,2007, as well as for fiscal 2007,2008, write downs of long-lived assets were not material.

We have only closed three store locations in our history, which in all cases were eventually re-located and took place at the expiration of the lease or renewal terms. We have not historically encountered material early retirement charges related to our long-lived assets. The cost of assets sold or retired and the related accumulated depreciation or amortization is removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to selling, general and administrative expense as incurred. Major renovations or improvements that extend the service lives of our assets are capitalized over the extension period or life of the improvement, whichever is less. We did not close any store locations for the three and six months ended July 31, 2008 and 2007, as well as for fiscal year 2008.

As of the date of this report, all of our stores opened in excess of three years are expected to generate positive annual cash flow before allocation of corporate overhead.

Accounting for Income Taxes

As part of the process of preparing our condensed consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves estimating our actual current tax obligations together with assessing temporary differences resulting from differing treatment of certain items for tax and accounting purposes, such as depreciation of property and equipment and valuation of inventories. These temporary differences result in deferred tax assets and liabilities, which are included within our condensed consolidated balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. Deferred tax assets as of OctoberJuly 31, 2008, January 31, 2008 and July 31, 2007 January 31, 2007 and October 31, 2006 totaled $36.6$40.7 million, $28.5$35.0 million and $24.1$35.9 million, respectively, representing 3.4%3.2%, 3.2%3.1% and 2.8%3.7% of total assets, respectively. To the extent we believe that recovery of an asset is at risk, we establish valuation allowances. To the extent we establish valuation allowances or increase the allowances in a period, we include an expense within the tax provision in the Condensed Consolidated Statementcondensed consolidated statement of Income.income.

We had valuation allowances of $0.2$1.2 million as of OctoberJuly 31, 20072008 due to uncertainties related to our ability to utilize the net operating loss carryforwards of certain foreign subsidiaries. In the future, if enough evidence of our ability to generate sufficient future taxable income in these foreign jurisdictions becomes apparent, we would be required to reduce our valuation allowances, resulting in a reduction in income tax expense in the Condensed Consolidated Statementcondensed consolidated statement of Income.income. On a quarterly basis, management evaluates the likelihood that we will realize the deferred tax assets and adjusts the valuation allowances, if appropriate.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”Taxes,” (“FIN 48”). FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. We adopted FIN 48 on February 1, 2007.2007 and the provisions of FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and it seekshave been applied to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting forall income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax positionpositions commencing from that an entity takes or expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification,date. We recognize potential accrued interest and penalties accounting in interim periods, disclosure, and transition. Under FIN 48, an entity may only recognize or continuerelated to recognizeunrecognized tax positions that meet a “more likely than not” threshold. We recorded the cumulative effect of applying FIN 48 of $0.7 million as an adjustment to the opening balance of retained earnings on February 1, 2007. See Note 5 to our condensed consolidated financial statements, “Income Taxes,” which are included in this report for additional information.benefits within income tax expense.

Accounting for Contingencies

From time to time, we are named as a defendant in legal actions arising from our normal business activities. We account for contingencies such as these in accordance with Statement of Financial Accounting StandardsSFAS No. 5, “Accounting for Contingencies.”Contingencies” (“SFAS No. 5”). SFAS No. 5 requires us to record an estimated loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies arising from contractual or legal proceedings requires management to use its best judgment when estimating an accrual related to such contingencies. As additional information becomes known, our accrual for a loss contingency could fluctuate, thereby creating variability in our results of operations from period to period. Likewise, an actual loss arising from a loss contingency that significantly exceeds the amount accrued in our financial statements could have a material adverse impact on our operating results for the period in which such actual loss becomes known.

Results of Operations

As a Percentage of Net Sales

The following tables set forth, for the periods indicated, the percentage of our net sales represented by certain income statement data and the change in certain income statement data from period to period. This table should be read in conjunction with the discussion that follows:

		Three Months Ended July 31,						Six Months Ended July 31,
		2008			2007			2008			2007
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales, including certain buying, distribution and occupancy costs		58.9			62.7			59.3			63.4
Gross profit		41.1			37.3			40.7			36.6
Selling, general and administrative expenses		22.8			23.7			23.5			24.0
Income from operations		18.3			13.6			17.2			12.6
Other income, net		0.5			0.6			0.7			0.6
Income before income taxes		18.8			14.2			17.9			13.2
Income tax expense		6.2			5.0			6.1			4.0
Net income		12.6	%		9.2	%		11.8	%		9.2	%

Three Months Ended OctoberJuly 31, 20072008 Compared toTo Three Months Ended OctoberJuly 31, 20062007

Net sales for the thirdsecond quarter of fiscal 20082009 increased by 23.0%$105.9 million or 30.4% to $379.3$454.3 million from $308.4$348.4 million forin the thirdsecond quarter of fiscal 2007. The $70.9 million2008. This increase was primarily attributable to a $64.0$102.0 million, increase, or 22.2%31.4%, increase in retail segment net sales. Retail segment net sales for the thirdsecond quarter of fiscal 20082009 accounted for 92.9%93.8% of total net sales compared to 93.5%93.1% of net sales for the thirdsecond quarter of fiscal 2007. Free People wholesale2008. Wholesale segment net sales, excluding net sales to our retail segment, increased $6.9$3.9 million, or 34.4%16.1%, to $26.8$28.0 million from $19.9 million forduring the thirdsecond quarter of fiscal 2007. Free People wholesale sales accounted for 7.1% of total net sales for the third quarter of fiscal 2008 compared to 6.5% for the third quarter of fiscal 2007.2009. The growth in our retail segment net sales during the thirdsecond quarter of fiscal 20082009 was driven by a $34.7$47.0 million increase in new and non-comparable store net sales, an $18.0 million increase in direct-to-consumer net sales of $10.7 million, and an increase of $37.0 million in comparable store sales of $18.6 million or 7.6%. By brand,sales. Our total comparable store net sales increased by 0.2%increase of 13.3% was comprised of increases of 19.4% at Urban Outfitters, 17.4%7.1% at Anthropologie and 16.0%10.2% at Free People.People, respectively.

The increase in net sales attributable to non-comparable and new stores was primarily the result of operating 4255 new or existing stores that were not in operation for the full comparable quarter last fiscal year. Comparable store net sales increases for the thirdsecond quarter of fiscal 20082009 were primarily driven by an increaseincreases in the number of transactions and unitsthe average unit retail prices per transaction which more than offset a slight decrease in average retail unit prices.the units per transaction. Thus far during the fourth quarter of fiscal 2008, comparable store sales are running higher than the prior quarter’s rate. Direct-to- consumer net sales during the third quarter of fiscal 20082009, our total comparable store net sales are ahead of our modest single digit plan. Direct-to-consumer net sales increased over the prior year primarily due to increasedan increase in traffic to our websites and anweb sites which was also helped by a slight increase in average order value.our catalog circulation of approximately 0.6 million catalogs or 8.2% over the prior year. The increase in Free People wholesale segment net sales was primarily driven by a 26.3% increase in sales to department stores and an increase in the average order size coupled with an increase in average unit selling price.price to specialty stores.

Gross profit for the thirdsecond quarter of fiscal 20082009 increased to 39.5%41.1% of net sales or $149.9$186.5 million from 38.2%, or $117.9 million,37.3% of net sales during the same periodor $130 million in fiscal 2007.2008. The increase was primarily due to a combination of a lower rate ofimprovements in initial merchandise cost, reductions in merchandise markdowns and leveraging of store occupancy expenses.costs. Total inventories at OctoberJuly 31, 20072008 increased by 18.4%13.8% to $212.7$211.2 million from $179.6$185.6 million in the prior year’s comparable period.at July 31, 2007. The increase primarily related to the acquisition of inventory to stock new retail stores. On a comparable store basis, inventories as of October 31, 2007 increased by 6.2% compared to October 31, 2006.2.6%.

Selling, general and administrative expenses during the thirdsecond quarter of fiscal 20082009 decreased to 23.3%22.8% of net sales compared to 23.5%23.7% of net sales for the thirdsecond quarter of fiscal 2007.2008. The decrease was primarily attributable to the leveraging of direct store controllable costs which were helped by the increase in selling, general and administrative expenses were primarily due to controllingcomparable store related and support costs.sales. Selling, general and administrative expenses in the thirdsecond quarter of fiscal 20082009 increased to $88.6$103.6 million from $72.5$82.8 million in the comparable quarter ofin fiscal 2007.2008. The increase primarily related to the operating expenses of new and non-comparable stores.

Income from operations increased to 16.2%was 18.3% of net sales or $61.3$82.9 million for the thirdsecond quarter of fiscal 20082009 compared to 14.7%13.6% of net sales, or $45.5$47.3 million, for the comparable quarter in fiscal 2007.2008.

IncomeOur tax rate improved to 33.2% of income before income taxes as a rate of net sales for the thirdsecond quarter of fiscal 2008, increased to 4.8% or $18.1 million2009 from 4.0% or $12.3 million35.4% of income before income taxes for the thirdsecond quarter of fiscal 2007.2008. The improvement was due to various tax savings initiatives. We estimate an annual effective tax rate increase was primarily attributable to recognizingof approximately 35% for the final and smaller portion of one-time tax credits related to work performed on the development of our new home offices. We finalized our certification in the third quarter offull fiscal 2008.year.

NineSix Months Ended OctoberJuly 31, 20072008 Compared to NineTo Six Months Ended OctoberJuly 31, 20062007

Net sales for the ninesix months ended OctoberJuly 31, 20072009 increased by 20.7%$185.6 million or 28% to $1,042.3$848.6 million from $863.9$663.0 million in the comparable period of fiscal 2007. The $178.4 million2008. This increase was primarily attributable to a $164.1$177.4 million, or 20.3%28.7%, increase in retail segment net sales. Retail segment net sales for the ninesix months ended OctoberJuly 31, 20072008 accounted for 93.2%93.9% of total net sales compared to 93.5%93.4% of total net sales for the comparable nine month period inof fiscal 2007. Free People wholesale2008. Wholesale segment net sales, excluding net sales to our retail segment, for the nine months ended October 31, 2007 increased $14.3$8.2 million, or 25.3%18.7%, to $70.8 million compared to $56.5$52.2 million during the ninesix months ended OctoberJuly 31, 2006. Free People wholesale sales accounted for 6.8% of total net

sales for the nine months ended October 31, 20072008 compared to 6.5% of total net sales$44.0 million for the comparable nine month period inof fiscal 2007.2008. The growth in our retail segment net sales was driven by a $109.5$83.4 million increase in non-comparablenew and newnon-comparable store net sales, ana $32.7 million increase in direct-to-consumer net sales of $31.7 million and an increase of $61.3 million in comparable store sales of $22.9 million or 3.5%. By brand,sales. Our total comparable store net sales decreased by 3.1%increase of 11.8% was comprised of increases of 14.6% at Urban Outfitters, and increased by 11.1%8.7% at Anthropologie and 17.9%14.2% at Free People.People, respectively.

The increase in net sales attributable to non-comparable and new stores was primarily the result of operating 5861 new or existing stores that were not in operation for the full comparable period last fiscal year. Comparable store net sales increases for the ninefirst six months ended October 31, 2007of fiscal 2009 were primarily driven by an increaseincreases in the number of transactions and the average unit retail prices thatper transaction which more than offset slight declinesa decrease in transaction andthe units per transaction. Direct-to-consumer net sales during the nine months ended October 31, 2007 increased over the prior year primarily due to increased traffic to the web sites, an increase in average order value, and antraffic to our web sites which was also helped by a slight increase in our catalog circulation of approximately 1.40.8 million additional catalogs or 4.9% over the comparable nine month period in the prior period.year. The increase in Free People wholesale segment net sales was primarily driven by a 28.8% lift in sales to department stores and an increase in the average order size coupled with an increase in average unit selling price.price to specialty stores.

Gross profit for the ninesix months ended OctoberJuly 31, 20072008 increased to 37.7%40.7% of net sales or $392.6$345.2 million from 37.0%36.6% of net sales or $319.5$242.6 million duringfor the samecomparable period in fiscal 2007.2008. The increase wasis primarily driven by a reductiondue to reductions in merchandise markdowns, improvement in initial merchandise cost and leveraging of store occupancy expenses.costs.

Selling, general and administrative expenses during the ninesix months ended OctoberJuly 31, 2007 increased2008 decreased to 23.8%23.5% of net sales compared to 23.6%24.0% of net sales for the comparable period ofin fiscal 2007.2008. The increase of selling, general and administrative expensesdecrease was primarily attributable to non-comparablethe leveraging of direct store controllable costs which were helped by the increase in comparable store sales. The savings in direct store controllable costs more than offset certain one-time pre-opening expenses related to operate our new home office facility, which reached its first year anniversary toward the endTerrain store launch and development expenses of the third quarter of fiscal 2008 as well as certain non-recurring legal fees for intellectual property.new Leifsdottir wholesale collection. Selling, general and administrative expenses during the six month period increased to $248.0$199.3 million from $203.7$159.4 million in the comparable period ofin fiscal 2007.2008. The increase primarily related to the operating expenses of new and non-comparable stores.

Income from operations increased to 13.9%was 17.2% of net sales or $144.6$145.9 million forduring the ninesix months ended OctoberJuly 31, 2007,2008 compared to 13.4%12.6% of net sales, or $115.7$83.3 million, for the comparable period in fiscal 2008.

Our tax rate increased to 34.3% of income before income taxes for the six months ended July 31, 2008 from 29.7% of income before income taxes for the comparable period of fiscal 2007.

Income taxes as a rate of net sales decreased to 4.2% or $44.0 million for the nine months ended October 31, 2007 from 4.6% or $39.8 million for the comparable period of fiscal 2007. This decrease2008. The increase was primarily attributable to additional receipt of certificationa tax credit received for work performed on the development of our new home offices that qualifiesqualified for certain one-time federal tax incentives andin the benefitfirst quarter of certain tax planning strategies.the prior comparable period.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities were $269.3$428.4 million as of OctoberJuly 31, 2007,2008, as compared to $221.6$373.7 million as of January 31, 20072008 and $185.2$241.5 million as of OctoberJuly 31, 2006.2007. Cash provided by operating activities increased by $13.3$26.3 million to $96.0 million for the ninesix months ended OctoberJuly 31, 2007 versus the comparable period last fiscal year2008. This increase in operating activities was primarily due to a $26.1$38.3 million increase in net income versus the prior period.income. Cash used in investing activities for the ninesix months ended OctoberJuly 31, 20072008 was $123.5$55.7 million, of which the primary use was for construction of new stores. Our net working capital was $306.5$356.7 million at OctoberJuly 31, 20072008 compared to $231.1$266.2 million at January 31, 20072008 and $208.9$279.1 million at OctoberJuly 31, 2006.2007. Increases in working capital primarily relate to the volume of cash, cash equivalents, marketable securities and inventories relative to inventory-related payables and store-related accruals.

During the last three years, we have mainly satisfied our cash requirements through our cash flow from operations. Our primary uses of cash have been to open new stores and purchase inventories, as well as the construction of our home offices at the Navy Yard in Philadelphia, PA, which was completed in fiscal 2007. We have also continued to invest in our direct-to-consumer efforts and in our European subsidiaries. Cash paid for property and equipment for the ninesix months ended OctoberJuly 31, 2008 and 2007 and 2006 were $84.2was $53.9 million and $168.2$55.5 million, respectively, and werewas primarily used to expand and support our store base, as well as our home office in

the nine month period ended October 31, 2006.base. During fiscal 2008,2009, we expect to construct and open approximately 3845 new stores, renovate certain existing stores, modestly increase our catalog circulation by approximately 3.1a half million books, to approximately 39.640 million catalogs, and purchase inventory for our stores and direct-to-consumer business at levels appropriate to maintain our planned sales growth. We expect the level of gross capital expenditures during fiscal 20082009 to approximate $120$140 million, which will be used primarily to expand our store base. We believe that our new store, catalog and inventory investments generally have the ability to generate positive operating cash flow within a year.

During fiscal 2009 we may enter into one or more acquisitions or transactions related to the expansion of the Terrain brand.

On February 28, 2006, our Board of Directors approved a stock repurchase program. The program authorizes us to repurchase up to 8,000,000 common shares from time-to-time, based upon prevailing market conditions.conditions with 6,780,000 available as of July 31, 2008. During the ninesix months ended OctoberJuly 31, 2008 and July 31, 2007, no shares were repurchased. During the nine months ended October 31, 2006 we repurchased and subsequently retired 1,220,000 shares at a cost of $20.8 million.

During fiscal 2008 we are making investments to evaluate and begin our fourth retail concept, recently named Terrain. We are still in the stages of developing the format and market objectives of Terrain and have yet to determine or quantify the extent of such an investment. Expenditures will include the costs of strategic research and development, hiring personnel to develop and execute a store format, obtaining leases and related store inventory, property and equipment, construction costs, acquiring assets or existing businesses, intellectual property and trade secrets or intangible knowledge and any other costs related to developing and executing this new concept.

Accumulated cash and future cash from operations, as well as available credit under our line of credit facility, are expected to fund our commitments and all such expansion-related cash needs at least through fiscal 2010.2011.

On September 30, 2004,December 11, 2007, we renewed and amended our line of credit facility with Wachovia Bank, National Association (the “Line”). The Line is a three-year revolving credit facility with an accordion feature allowing an increase in available credit up to $50.0$100 million at our discretion, subject to a seven day request period. As of OctoberJuly 31, 2007,2008, the credit limit under the Line was $50.0$60 million. The Line contains a sub-limit for borrowings by our European subsidiaries that are guaranteed by us. Cash advances bear interest at LIBOR plus 0.50% to 1.60% based on our achievement of prescribed adjusted debt ratios. The Line subjects us to various restrictive covenants, including maintenance of certain financial ratios and covenants such as fixed charge coverage and adjusted debt ratios.debt. The covenants also include limitations on our capital expenditures, ability to repurchase shares and the payment of cash dividends. On November 30, 2006, we amended our line to increase our capital expenditure limit and add additional subsidiaries that are permitted to borrow. As of OctoberJuly 31, 2007,2008, we were in compliance with all covenants under the Line. As

of and during the ninesix months ended OctoberJuly 31, 2007,2008, there were no borrowings under the Line. Outstanding letters of credit and stand-by letters of credit under the Line totaled approximately $33.1$49.5 million as of OctoberJuly 31, 2007.2008. The available credit, including the accordion feature under the Line was $16.9$50.5 million as of OctoberJuly 31, 2007.2008. We plan to renew the Line during fiscal 2008 and expect the renewal will include the expansion of the available credit limit under the Line to an amount thatbelieve our renewed line will satisfy our letter of credit needs through fiscal 2010. As of October 31, 2007 we have extended the Current Line until the renewal is completed.2011.

Off-Balance Sheet Arrangements

As of and for the ninesix months ended OctoberJuly 31, 2007,2008, except for operating leases entered into in the normal course of business, we were not party to any material off-balance sheet arrangements.

Other Matters

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial assets and financial liabilities in fiscal years beginning after November 15, 2007 and for certain nonfinancial assets and certain nonfinancial liabilities in fiscal years beginning after November 15, 2008. Effective February 1, 2008, we have adopted the provisions of SFAS No. 157 that relate to our financial assets and financial liabilities (See Note 4, “Fair Value of Financial Assets and Financial Liabilities” in the notes to our condensed consolidated financial statements for additional information). We are currently evaluating the impact of the provisions of SFAS No. 157 that relate to our nonfinancial assets and nonfinancial liabilities, which are effective for us as of February 1, 2009.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: Including an Amendment of FASB Statement No. 115.”115” (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have adopted SFAS No. 159 as of February 1, 2008. We have elected to not apply the provisions of SFAS No. 159 to report certain of our assets and liabilities at fair value.

In December 2007, the FASB issued SFAS No. 141R “Business Combinations” (“SFAS No. 141R”), which continues to require that all business combinations be accounted for by applying the acquisition method. Under the acquisition method, the acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, and any contingent consideration and contractual contingencies, as a whole at their fair value as of the acquisition date. Under SFAS No. 141R, all transaction costs are expensed as incurred. SFAS No. 141R rescinds Emerging Issues Task Force (“EITF”) 93-7. Under EITF 93-7, the effect of any subsequent adjustments to uncertain tax positions were generally applied to goodwill, except for post-acquisition interest on uncertain tax positions, which was recognized as an adjustment to income tax expense. Under SFAS No. 141R, all subsequent adjustments to these uncertain tax positions that otherwise would have impacted goodwill will be recognized in the income statement. The guidance in SFAS No. 141R will be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. We do not expect the adoption of SFAS No. 159 will141R to have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles in the United States of America, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect the adoption of SFAS No. 157 will have a material impact on our consolidated financial statements.

In June 2006, the Emerging Issues Task Force (“EITF”) ratified its consensus on Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement.” EITF 06-03 addresses what type of government assessments should be included within the scope of EITF 06-03, and how such government assessments should be presented in the income statement. The EITF reached a conclusion that the scope of EITF 06-03 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added and some excise taxes. In addition, the EITF also reached a conclusion that the presentation of taxes, within the scope of EITF 06-03, on either a gross or net basis, is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board Opinion No. 22, “Disclosure of Accounting Policies.” In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. EITF 06-03 was effective for reporting periods beginning after December 15, 2006. We have adopted the disclosure requirements of EITF 06-03 effective February 1, 2007, however, since we present our revenue on a net basis, no further disclosure under EITF 06-03 is required.

In July 2006, the FASB issued FIN 48. We adopted FIN 48 on February 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. We recorded the cumulative effect of applying FIN 48, of $0.7 million as an adjustment to the opening balance of retained earnings on February 1, 2007. See Note 5, “Income Taxes,” for additional information.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company isWe are exposed to the following types of market risks—fluctuations in the purchase price of merchandise, as well as other goods and services; the value of foreign currencies in relation to the U.S. dollar; and changes in interest rates. Due to the Company’sour inventory turnover rate and itsour historical ability to pass through the impact of any generalized changes in its cost of goods to its customers through pricing adjustments, commodity and other product risks are not expected to be material. The Company purchases the majorityWe purchase substantially all of itsour merchandise in U.S. dollars, including a portion of the goods for itsour stores located in Canada and Europe.

The Company’s

Our exposure to market risk for changes in interest rates relates to itsour cash, cash equivalents and marketable securities. As of OctoberJuly 31, 2008 and 2007, and 2006, the Company’sour cash, cash equivalents and marketable securities consisted primarily of funds invested in tax-exempt municipal bonds rated AA or better, auction rate securities rated AA or better and money market accounts, which bear interest at a variable rate.rate, and auction rate securities (“ARS”) rated AA or better. Due to the average maturity and conservative nature of the Company’sour investment portfolio, we believe a 100 basis point change in interest rates would not have a material effect on the condensed consolidated financial statements. As the interest rates on a material portion of our cash, cash equivalents and marketable securities are variable, a change in interest rates earned on the cash, cash equivalents and marketable securities would impact interest income along with cash flows, but would not impact the fair market value of the related underlying instruments.

A minority portion of our marketable securities are invested in “A” or better rated ARS that represent interests in municipal and student loan related collateralized debt obligations, all of which are guaranteed by either government agencies and/or insured by private insurance agencies. Our ARS had a fair value of $90.6 million as of July 31, 2008. Subsequent to the close of the current fiscal quarter, $52.1 million of ARS currently failed to liquidate at auction due to a lack of market demand. Liquidity for these ARS is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually 7, 28, 35 or 90 days. The principal associated with these failed auctions will not be available until a successful auction occurs, the bond is called by the issuer, a buyer is found from outside the auction process, or the debt obligation reaches its maturity. We have determined that there is a $0.5 million temporary impairment charge related to these failures based on review of the projected cash flows, credit rating and assessment of the credit quality of the underlying security, quoted market prices and valuation models. We have the ability to hold the investments until their maturity. As a result of the current illiquidity, we have reclassified $52.1 million of ARS from current assets under marketable securities to long term assets under marketable securities. We continue to monitor the market for ARS and consider the impact, if any, on the fair value of its investments.

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed by us in our Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure. As of the end of the period covered by this Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of these disclosure controls and procedures. Based on that evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that our disclosure controls and procedures were effective.

There have been no changes in our internal controls over financial reporting during the quarter ended OctoberJuly 31, 20072008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II

OTHER INFORMATION

The Company isWe are party to various legal proceedings arising from normal business activities. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company’sour financial position or results of operations.

There have been no material changes in the Company’sour risk factors since January 31, 2007.2008. Please refer to the Company’sour Annual Report on Form 10-K for the fiscal year ended January 31, 2007,2008, filed with the United States Securities and Exchange Commission on March 30, 2007,28, 2008, for a list of its risk factors.

Previously reported in our Form 10-Q for the quarter ended April 30, 2008, filed on June 9, 2008.

SIGNATURES