- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0001

---------------------

FORM 10-K

<Table>

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

</Table>

COMMISSION FILE NUMBER: 001-31314

---------------------

AEROPOSTALE, INC.
(Exact name of registrant as specified in its charter)

<Table>

DELAWARE NO. 31-1443880
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1372 BROADWAY, 8TH FLOOR, 10018
NEW YORK, NY (Zip Code)
(Address of principal executive offices)
</Table>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(646) 485-5398

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------

Common Stock, without par value New York Stock Exchange
</Table>

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

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, and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate market value of voting stock held by non-affiliates of the
registrant as of August 3, 2002 was $293.4 million.

35,559,771 shares of Common Stock were outstanding at April 17, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Part III -- Aeropostale, Inc. Proxy Statement for 2003 Annual Meeting of
Stockholders, in part, as indicated.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

AEROPOSTALE, INC.

TABLE OF CONTENTS

<Table>
<Caption>
PAGE
NUMBER
------

PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6. Selected Consolidated Financial Data........................ 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 26
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 50
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 51
Item 11. Executive Compensation...................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 51
Item 13. Certain Relationships and Related Transactions.............. 51
Item 14. Controls and Procedures..................................... 51
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 52
Signatures............................................................ 55
Certification of Chief Executive Officer.............................. 58
Certification of Chief Financial Officer.............................. 59
</Table>

PART I

ITEM 1. BUSINESS

OVERVIEW

Aeropostale, Inc. (together with its wholly-owned subsidiary, Aeropostale
West, Inc., collectively the "Company" or "Aeropostale") is a mall-based
specialty retailer of casual apparel and accessories that targets both young
women and young men aged 11 to 20. We provide our customers with a focused
selection of high-quality, active-oriented, fashion basic merchandise at
compelling values. We maintain complete control over our proprietary brand by
designing and sourcing all of our merchandise. Our products can be purchased
only at our stores, or organized sales events at college campuses. We strive to
create a fun and high energy shopping experience through the use of creative
visual merchandising, colorful in-store signage, bright lighting, popular music
and an enthusiastic, well-trained sales force. Our average store size of
approximately 3,500 square feet is generally smaller than that of our mall-based
competitors and we believe that this enables us to achieve higher sales
productivity and project a sense of activity and excitement. As of February 1,
2003, we operated 367 stores in 35 states.

The Aeropostale brand was established by R.H. Macy & Co., Inc. as a
department store private label initiative in the early 1980s targeting men in
their twenties. As a result of the label's initial success, Macy's opened the
first mall-based Aeropostale specialty store in 1987. Over the next decade,
Macy's and then its current parent company, Federated Department Stores, Inc.,
continued new store expansion and opened over 100 stores. In August 1998,
Federated sold its specialty store division to our management team and Bear
Stearns Merchant Banking. On February 3, 2002, Aeropostale contributed all of
the assets relating to 10 stores that are located in Arizona and California to
its wholly-owned subsidiary, Aeropostale West, Inc. as part of a tax-free
organization.

On May 21, 2002, the Company completed an initial public offering of
14,375,000 shares of common stock of which 1,875,000 and 12,500,000 shares were
offered by the Company and certain selling stockholders, respectively, at a
price to the public of $18.00 per share. Upon completing the offering, net
proceeds of $31.4 million and $209.3 million were distributed to the Company and
selling stockholders, respectively. In connection with the Company's offering,
all of the Company's outstanding shares of non-voting common stock were
converted into approximately 1,851,000 shares of common stock. Approximately
$10.0 million of the approximately $31.4 million of the net proceeds to the
Company were used to redeem all of the outstanding shares of 12 1/2% Series B
redeemable preferred stock and pay all accrued and unpaid dividends thereon. The
remainder of the proceeds were used for working capital, general corporate
purposes and new store openings.

The Company elected to change its fiscal year from a 52/53 week year that
ends on the Saturday nearest to July 31 to a 52/53 week year that ends on the
Saturday nearest to January 31, effective for the transition period ended on
February 2, 2002. For tax purposes, the Company has retained its July year-end.
As used herein, "Fiscal 2002" refers to the fiscal year ended February 1, 2003,
"Fiscal 2001" refers to the fiscal year ended August 4, 2001, "Transition 2001"
refers to the six month period from August 5, 2001 to February 2, 2002.
Similarly, "Fiscal 2000" and "Fiscal 1999" refer to the fiscal years ended July
29, 2000 and July 31, 1999 and "Transition 2000" refers to the six month period
from July 30, 2000 to February 3, 2001. All references to amounts related to the
six months ended February 3, 2001 and the fifty-two weeks ended February 2, 2002
are unaudited. Transition 2001 has twenty-six weeks while Transition 2000 has
twenty-seven weeks.

GROWTH STRATEGY

Open new stores. We believe that our merchandise and stores have broad
national appeal that provides substantial new store expansion opportunities. In
the last three years, we expanded our store base, opening 57 new stores in
Fiscal 2000, 74 in Fiscal 2001 and 93 new stores in Fiscal 2002. We plan to open
approximately 85 new stores in fiscal 2003, and continue to open new stores at a
comparable pace in future years. We plan to open stores both in markets in which
we currently operate and in new markets. The four states that have the largest
teenage populations in the United States are California, Florida, New York and
Texas according to

data derived from information published by the U.S. Census Bureau. New York is
the only one of these four states in which we currently have a major presence.

Enhance and expand our brand. We intend to capitalize on the success of
our brand and continue to enhance our brand recognition through external
marketing and in store marketing efforts. We believe that as our brand gains
increased familiarity and national recognition, our stores will continue to be
preferred shopping destinations.

Continue high levels of store productivity. We seek to continue to produce
comparable store sales growth and average sales per square foot by maintaining
consistent store-level execution. We intend to continue employing our
promotional pricing strategies to maintain high levels of customer traffic. We
will also continue testing products so that we can identify developing trends
and evolve with the changing tastes of our customers.

PRICING

We believe that a key component of our success is our ability to understand
what our customers want and can afford. Our merchandise, which we believe is of
comparable quality to that of our primary competitors, is generally priced lower
than their merchandise, with most of our products falling within a price range
of approximately $10.00 to $39.50 per item and an average sales price of
approximately $13.00 during Fiscal 2002. We use a demand-driven promotional
pricing strategy to emphasize the value we offer relative to our competitors and
to encourage our customers to keep returning to our stores. We offer promotions
throughout the year and approximately 75% of the merchandise selection in our
stores is on promotion at any given time. Each promotion typically lasts for
approximately two to four weeks, depending on the demand for the product.

DESIGN AND MERCHANDISING

Our coordinated design and merchandising teams focus on designing
merchandise that meets the demands of our core customers' lifestyles. We
maintain a separate dedicated design and merchandising group for each of the
young women's, young men's and accessories product lines. Each group is overseen
by a merchandising manager to ensure consistency with the desires of our
customers.

Design. We offer a focused collection of fashion basic apparel, including
graphic t-shirts, tops, bottoms, sweaters, jeans, outerwear and accessories. Our
"design-driven, merchant-modified" philosophy, in which our designers' vision is
refined by our merchants' understanding of the current market for our products,
ensures that our merchandise styles both reflect the latest trends and are not
too fashion forward for our customers. Much of our merchandise features our
"Aeropostale" or "Aero" logo. We believe that our logo apparel appeals to our
young customers and reinforces our brand image.

Our design process is highly disciplined and carefully supervised, enabling
us to develop exclusive merchandise and offer a consistent assortment within a
season. About nine months prior to a selling season, the product development
process begins with our designers, merchandisers and senior management working
together to review the prior season's results and new trends and to discuss the
classifications and styles that we should develop for the upcoming season. We
continuously test our products in our stores. Our design group supplements this
analysis with market research from focus groups, travel, retail shopping, trade
shows and input from a design consultant.

Our merchandising planning process determines the quantities of units
needed for each product category. We then consider sourcing options and
establish price targets. Once approved, we place production orders with the
appropriate vendors. This occurs approximately four months after the initial
review meeting. We typically receive initial orders within three to five months
after order placement. We then allocate merchandise to individual stores based
upon recent selling trends and current inventory levels. By monitoring sales of
each style and color and employing our flexible sourcing capabilities, we are
able to adjust our merchandise on order for later in the season and future
seasons.

Merchandising. Our merchandise mix has evolved with the demands of our
target customers. Over the past three years, we have increased the percentage of
our merchandise for female customers as our young

women's line has grown increasingly popular and we have added more accessories
to complement our apparel offering. In addition, we have developed a narrower
and deeper merchandise assortment in response to our customers' preferences.

The following chart provides a historical breakdown of our merchandise mix
as a percentage of sales:

<Table>
<Caption>
FISCAL
-----------
2000 2001 TRANSITION 2001 FISCAL 2002
---- ---- --------------- -----------

Young Women's................................... 42% 49% 56% 58%
Young Men's..................................... 47 39 33 30
Accessories..................................... 11 12 11 12
</Table>

SOURCING

We employ a sourcing strategy that maximizes our speed to market and allows
us to respond quickly to our customers' preferences. We believe that we have
developed strong relationships with our vendors, some of whom rely upon us for a
significant portion of their business. The majority of our vendors can refill
orders within 45 to 90 days, enabling quick inventory replenishment. We ensure
the quality of our vendors' products by inspecting pre-production samples,
making periodic site visits to our vendors' foreign production factories and by
selectively inspecting inbound shipments at our distribution center.

During the past three years, we have sought to reduce the number of vendors
that we utilize in order to streamline our sourcing operations and to exercise
greater influence over our vendors. During Fiscal 2002, Federated Merchandising
Group, or FMG, a wholly owned subsidiary of our former parent company Federated
Department Stores, Inc., acted as our agent in sourcing approximately 22% of our
merchandise. We directly source all other production not covered by our
arrangement with FMG. Approximately 37% of our merchandise was directly sourced
from our top three vendors and 71% of our merchandise was directly sourced from
our top ten vendors during Fiscal 2002. Two vendors supplied 17% and 10%,
respectively, of our total merchandise during that period. Most of our vendors
maintain sourcing offices in the United States with the majority of their
production factories located in Europe, Asia and Central America. All payments
are made in U.S. dollars to minimize currency risk.

STORE GROWTH

Existing stores. As of February 1, 2003, we operated 367 stores in 35
states. Our stores are typically located in regional shopping malls in areas
with high concentrations of our target customers.

NUMBER OF AEROPOSTALE STORES
AS OF FEBRUARY 1, 2003

<Table>
<Caption>
NUMBER
OF
STATE STORES
- ----- ------

Alabama....................................... 5
Arkansas...................................... 2
Arizona....................................... 5
California.................................... 7
Connecticut................................... 9
Delaware...................................... 4
Florida....................................... 6
Georgia....................................... 9
Illinois...................................... 20
Indiana....................................... 14
Iowa.......................................... 5
Kansas........................................ 4
Kentucky...................................... 8
Louisiana..................................... 1
Massachusetts................................. 18
Maryland...................................... 8
Maine......................................... 2
Michigan...................................... 21
</Table>

<Table>
<Caption>
NUMBER
OF
STATE STORES
- ----- ------

Minnesota..................................... 9
Missouri...................................... 8
North Carolina................................ 13
Nebraska...................................... 4
New Hampshire................................. 6
New Jersey.................................... 21
New York...................................... 39
Ohio.......................................... 30
Pennsylvania.................................. 37
Rhode Island.................................. 1
South Carolina................................ 5
Tennessee..................................... 13
Texas......................................... 7
Virginia...................................... 12
Vermont....................................... 2
Wisconsin..................................... 8
West Virginia................................. 4
---
Total......................................... 367
===
</Table>

The following table highlights the number of stores opened and closed:

<Table>
<Caption>
TOTAL
NUMBER OF
STORES STORES STORES AT END
OPENED CLOSED(1) OF PERIOD
------ --------- -------------

Fiscal 2000................................................. 57 8 178
Fiscal 2001................................................. 74 0 252
Transition 2001............................................. 34 8(2) 278
Fiscal 2002................................................. 93 4 367
</Table>

- ---------------

(1) Does not include Chelsea Cambell stores, a concept we discontinued in Fiscal
2000.

(2) Includes the closing of seven aero kids stores.

Store design and environment. We design our stores to create an energetic
shopping environment, featuring powerful in-store promotional signage, creative
visuals, bright lighting and popular music. The enthusiasm of our associates is
integral to our store environment. Our stores feature display windows which
provide high visibility for mall traffic. The front of the store features the
newest and most desirable merchandise to draw shoppers into the store. We keep
our merchandise assortments fresh and exciting by updating our floor sets
approximately 11 times per year. Visual merchandising directives are initiated
at the corporate level to maintain consistency throughout all of our stores. We
generally locate our stores in central mall locations near popular teen
gathering spots, including food courts, music stores and other teen-oriented
retailers. In addition, we generally implement broad-scale renovations at every
store lease expiry.

Our stores generally range in size from 2,500 to 6,000 square feet, with an
average square footage of approximately 3,500. We believe that by keeping our
store size generally smaller than that of many of our competitors, we are able
to achieve a high level of productivity and reinforce the sense of activity and
energy that we want our stores to project.

Store management and training. Our stores are organized into regions and
districts. Each of our 4 regions is managed by a regional manager and
encompasses approximately 10 districts; each district is managed by a district
manager and encompasses approximately 7 to 10 individual stores. We usually
staff each store with one store manager, two assistant managers and 10 to 15
part-time sales associates, the number of which generally increases during our
peak selling seasons. Store managers are primarily responsible for hiring and
training store level associates, while our merchandise assortments, store
layout, inventory management and in-store visuals are directed by our corporate
headquarters.

We seek to instill enthusiasm and dedication in all our employees. To
promote this strategy, we compensate our district and store managers with a base
salary plus incentive bonus payments based on store sales performance and loss
prevention. We designed our "Career Development Program" to provide managers
with training to improve both operational expertise and supervisory skills.
Training programs are completed in modules which allow managers to customize the
program to meet their individual needs.

Our sales associates are a critical element to achieving our marketing and
customer satisfaction goals. We strive to hire employees who possess high energy
levels and excitement for our brand. All sales associates receive customer
service and product information training which enables them to assist customers
in a friendly, helpful manner. Sales associates receive hourly wages and the
potential for additional compensation through various contests and motivational
programs. We believe that our continued success is dependent on our ability to
attract, retain and motivate quality employees.

Expansion opportunities and site selection. Over the past two years, we
have opened new stores to capitalize on our store model. We plan to increase our
store base in fiscal 2003 by opening approximately 85 stores and to continue a
similar pace of new store openings in future years. We have identified mall
locations in both existing and new markets for potential new store
opportunities.

In selecting a specific site, we target high traffic, prime real estate
locations in malls with suitable demographics and favorable lease economics. As
a result, we generally locate our stores in malls in which comparable
teen-oriented retailers have performed well. Primary site evaluation criteria
include average sales per square foot, co-tenancies, traffic patterns and
occupancy costs. Historically, we have been able to locate and open stores
profitably in a wide variety of mall classifications by negotiating lease terms
that we believe are favorable, based on our expectations for store activity and
a store size of approximately 3,500 square feet. Prior to committing to each
store lease, at least one member of our senior management team visits and
approves each individual site location. After our real estate committee approves
a site, approximately 23 weeks are required to finalize the lease, design the
layout, build out the property, hire and train associates and equip and stock
the store before opening.

We have successfully and consistently implemented our store format across a
wide variety of mall classifications and geographic locations. Our average net
investment to open a new store has been approximately $274,000, which includes
capital expenditures adjusted for landlord contributions and initial inventory
at cost net of payables. Our stores which were opened during 1999, 2000 and 2001
have achieved average net sales of approximately $1.3 million during their first
twelve months of operations, sales per selling foot of approximately $389,
store-level operating cash flow of approximately $266,000 and an average pretax
cash return on investment of approximately 97%. These amounts exclude aerokids
stores and certain select outlet locations which are not considered profit
centers and are utilized primarily to sell end of season merchandise.

MARKETING AND ADVERTISING

We employ numerous initiatives to maximize the impact of our marketing and
advertising programs. We view the enthusiasm and commitment of our store-level
employees as a key element to establishing the credibility of our brand with our
target customers. To reinforce our image with our customers, we seek to locate
our stores in mall locations near popular teen gathering spots and utilize our
window and in-store displays with colorful and brand-focused presentations. We
view the use of our logo on our merchandise as an effective means for increasing
brand awareness among our target customers.

Over the past few years, we have developed a marketing program that allows
us to gain additional exposure for our brand on college campuses. We believe
that our target customers value and aspire to an active, collegiate lifestyle.
Accordingly, we sponsor a number of collegiate athletic conferences by providing
them with co-branded apparel and donating various scholarships. In addition, we
have entered into agreements with numerous colleges and universities that enable
us to sell and market our products on campuses through organized sales events.

We have historically relied on these methods as effective advertising tools
and have utilized traditional media advertising on a very limited basis. During
the year, we utilized television advertising and launched an interactive website
that will enable us to build and develop a web-based rewards program.

DISTRIBUTION

The timely and efficient replenishment of current styles is key to our
overall business strategy. We utilize a third party operator for merchandise
processing. This third party operates a 200,000 square foot distribution
facility in New Jersey, where our merchandise is processed by using an automated
picking and packing carousel. We also rely on a third party transportation
company to deliver our merchandise from our warehouse to our stores.

In order to accommodate our planned store growth, during Fiscal 2002 we
entered into a five-year lease for a 315,000 square foot facility also in New
Jersey, which has a five-year renewal option. The building is used to warehouse
inventory needed to replenish and backstock all of our stores. The building also
serves all of our general warehousing needs, such as storage of new store
merchandise, floor set merchandise and packaging supplies, with additional
capacity for processing as our growth requires. The staffing and management of
this facility is outsourced to the same third party provider that operates the
distribution facility. This third party employs personnel represented by a labor
union. There have been no work stoppages or disruptions since the

inception of our relationship with this third party in 1991. We believe the
third party's relationship with its employees to be good. We believe that our
current facilities are large enough to handle our expected store growth over the
next five years.

MANAGEMENT INFORMATION SYSTEMS

Our management information systems and electronic data processing systems
provide a full range of retail, financial and merchandising applications. We
utilize a combination of customized and industry standard software systems to
provide various functions related to:

- point-of-sales;

- inventory management;

- design;

- planning and distribution; and

- financial reporting.

We communicate with each store on a daily basis to gather all information
on sales, merchandise transfers and sales trends and to transmit details
regarding price changes and pending deliveries. By updating our sales
information daily from each store's point-of-sale terminal, we can evaluate such
information to implement merchandising decisions, pricing changes and inventory
allocation.

During Fiscal 2002, we deployed technological enhancements throughout our
stores and operations, including upgrading our point of sale systems and
implementing a storewide network system to improve processing time for credit
card transactions, merchandise price changes and merchandise distribution.

COMPETITION

The teen apparel market is highly competitive. We compete with a wide
variety of retailers including other specialty stores, department stores, mail
order retailers and mass merchandisers. Specifically, we compete with other teen
apparel retailers including, but not limited to, Abercrombie & Fitch, American
Eagle Outfitters, Gap, Hot Topic, Pacific Sunwear, Too, Urban Outfitters and Wet
Seal. Stores in our sector compete primarily on the basis of design, price,
quality, service and selection. We believe that our competitive advantage lies
with our differentiated brand and our unique combination of quality, comfort and
value. Moreover, we believe that we target a younger, value-oriented, customer,
while many of our competitors cater to a customer who is either older or seeking
cutting-edge fashion.

Many of our competitors are considerably larger and have substantially
greater financing, marketing, and other resources. We cannot assure you that we
will be able to compete successfully with them in the future, particularly in
geographic locations that represent new markets for us.

TRADEMARKS

We have registered the AEROPOSTALE(R) trademark and stylized design with
the U.S. Patent and Trademark Office as a trademark for clothing and for a
variety of accessories, including sunglasses, belts, socks and hats, and as a
service mark for retail clothing stores. We have also filed intent to use
applications with the U.S. Patent and Trademark Office to register the AERO(TM)
stylized design mark for children's clothing and retail store services.
Additionally, we have applied for or have obtained a registration for the
AEROPOSTALE mark in over 26 foreign countries where we obtain supplies,
manufacture goods or have the potential of doing so in the future. We
contributed all of our domestic intellectual property to our wholly-owned
subsidiary, Aeropostale West, Inc., as part of a tax-free reorganization
consummated on February 3, 2002 which, in turn, licenses use of these marks to
the Company.

EMPLOYEES

As of February 1, 2003, we employed 1,344 full-time and 2,830 part-time
employees. We employ 132 of our employees at our corporate offices, and 4,042 at
our store locations. The number of part-time employees fluctuates depending on
our seasonal needs. None of our employees are represented by a labor union and
we consider the relationship with our employees to be good.

SEASONALITY

The Company's business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and net income in the third quarter, reflecting increased demand during the
back-to-school selling season, and the fourth quarter, reflecting the increased
demand during the holiday selling season. The Company's results of operations
may also fluctuate significantly as a result of other factors, including the
timing of new store openings. Additionally, working capital requirements
fluctuate during the year, increasing in mid-summer in anticipation of the third
and fourth quarters.

AVAILABLE INFORMATION

The Company maintains an internet web-site, www.aeropostale.com, through
which is available access to the Company's annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, including all
amendments to those reports. The reports are free of charge and are available as
soon as is reasonably practicable after they are filed with the Securities and
Exchange Commission.

ITEM 2. PROPERTIES

We lease all of our store locations. Most of our leases have an initial
term of ten years with percentage rent clauses and do not contain extension
options. Generally, our leases allow for termination by us after a certain
period of time if sales at that site do not exceed specified levels.

We currently lease approximately 23,400 square feet of office space at 1372
Broadway in New York, New York for our corporate headquarters and our design,
sourcing and production teams. This lease expires in January 2004 and we are
currently in negotiations for new office space.

We also lease approximately 20,000 square feet of office space at 201
Willowbrook Boulevard in Wayne, New Jersey. This facility is used as
administrative offices for finance, operations and information systems
personnel. This lease expires in January 2013.

During Fiscal 2002, we signed a lease for a 315,000 square foot facility in
South River, New Jersey for a five-year term with a five-year renewal option. We
will use the facility to warehouse inventory needed to replenish and backstock
all of our stores as well as serve all of our general warehousing needs.

ITEM 3. LEGAL PROCEEDINGS

We are subject to various claims and legal actions that arise in the
ordinary course of our business. We believe that such claims and legal actions,
individually and in the aggregate, will not have a material adverse effect on
our business or our financial condition.

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

None

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

Our stock is traded on the New York Stock Exchange under the symbol "ARO".
The following table sets forth the range of high and low sales prices of the
common stock as reported on the New York Stock Exchange for each fiscal quarter
since May 16, 2002, the effective date of our initial public offering. As of
April 9, 2003, there were 45 stockholders of record. However, when including
others holding shares in broker accounts under street name, the Company
estimates the shareholder base at approximately 3,500.

<Table>
<Caption>
MARKET PRICE
---------------
FOR THE FISCAL QUARTERS ENDED HIGH LOW
- ----------------------------- ------ ------

February 1, 2003............................................ $15.45 $ 9.64
November 2, 2002............................................ 20.80 5.25
August 3, 2002 (from May 16, 2002).......................... 29.50 13.80
</Table>

We have never paid cash dividends and presently anticipate that all of our
future earnings will be retained for the development of our business. We do not
anticipate paying cash dividends in the foreseeable future. The payment of any
future dividends will be at the discretion of our Board of Directors and will be
based on future earnings, financial condition, capital requirements, and other
relevant factors.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial and operating data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our financial statements and related notes and other
financial information appearing elsewhere in this document. In January 2002, we
changed our fiscal year end from the Saturday closest to July 31st to the
Saturday closest to January 31st of each year. The statement of income data for
the fiscal years ended July 31, 1999, July 29, 2000, August 4, 2001, and
February 1, 2003 and for the six months ended February 2, 2002 and the balance
sheet data as of July 29, 2000, August 4, 2001, February 2, 2002 and February 1,
2003 are derived from audited financial statements. The statement of income data
for the fiscal year ended August 1, 1998, and the balance sheet data as of
August 1, 1998 are derived from the accounting records of our predecessor
company and are not comparable to our statements in all respects due to, among
other things, the omission of corporate overhead expense and provision for
taxes, different accounting policies and the effect of purchase accounting. The
fifty-two weeks ended February 2, 2002 and six months ended February 3, 2001 are
unaudited and are presented for comparative purposes.

<Table>
<Caption>
PREDECESSOR
COMPANY(1)
-----------
FISCAL YEAR FISCAL YEAR ENDED(2)
ENDED -------------------------------
AUGUST 1, JULY 31, JULY 29, AUGUST 4,
1998 1999 2000 2001
----------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF INCOME DATA:
Net sales......................... $141,419 $152,506 $213,445 $304,767
Cost of sales, including certain
buying, occupancy and
warehousing expenses............ 111,735 110,489 151,973 218,618
-------- -------- -------- --------
Gross profit...................... 29,684 42,017 61,472 86,149
Selling, general and
administrative expenses......... 28,157 32,406 45,680 65,918
Store closing expenses(5)......... -- -- -- 815
Amortization of negative
goodwill........................ -- (234) (234) (234)
-------- -------- -------- --------
Income from operations............ 1,527 9,845 16,026 19,650
Interest expense (income), net.... -- 86 911 1,671
-------- -------- -------- --------
Income before income taxes........ 1,527 9,759 15,115 17,979
Provision for income taxes........ -- 3,529 5,749 7,065
-------- -------- -------- --------
Income from continuing
operations...................... 1,527 6,230 9,366 10,914
Gain (loss) on discontinued
operations(6)................... (978) (268) 2,002 405
-------- -------- -------- --------
Cumulative effect of accounting
change(7)....................... -- -- -- --
Net income........................ 549 5,962 11,368 11,319
Preferred dividends............... -- 1,235 1,040 1,048
-------- -------- -------- --------
Net income available to common
stockholders.................... $ 549 $ 4,727 $ 10,328 $ 10,271
======== ======== ======== ========
Basic net income (loss) per common
share:(8)
From continuing operations(9)... $ 0.05 $ 0.16 $ 0.27 $ 0.32
From discontinued operations.... (0.03) (0.01) 0.06 0.01
From cumulative accounting
change........................ -- -- -- --
-------- -------- -------- --------
Net income per share............ $ 0.02 $ 0.15 $ 0.33 $ 0.33
======== ======== ======== ========
Diluted net income (loss) per
common share:(8)
From continuing operations(9)... $ 0.05 $ 0.15 $ 0.24 $ 0.28
From discontinued operations.... (0.03) (0.01) 0.06 0.01
From cumulative accounting
change........................ -- -- -- --
-------- -------- -------- --------
Net income per share............ $ 0.02 $ 0.14 $ 0.30 $ 0.29
======== ======== ======== ========
Basic weighted average number of
shares outstanding.............. 31,047 31,048 31,069 31,339
Diluted weighted average number of
shares outstanding.............. 31,047 34,497 34,693 35,465

SIX MONTHS ENDED(3) 52 WEEKS FISCAL YEAR
------------------------- ENDED ENDED(2)
FEBRUARY 3, FEBRUARY 2, FEBRUARY 2, FEBRUARY 1,
2001 2002 2002 2003
----------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF INCOME DATA:
Net sales......................... $184,369 $284,040 $404,438 $550,904
Cost of sales, including certain
buying, occupancy and
warehousing expenses............ 124,611 180,054(4) 274,061(4) 388,301(4)
-------- -------- -------- --------
Gross profit...................... 59,758 103,986 130,377 162,603
Selling, general and
administrative expenses......... 34,469 55,169(4) 86,619(4) 110,506(4)
Store closing expenses(5)......... -- -- 815 --
Amortization of negative
goodwill........................ (116) -- (117) --
-------- -------- -------- --------
Income from operations............ 25,405 48,817 43,060 52,097
Interest expense (income), net.... 1,082 292 877 (56)
-------- -------- -------- --------
Income before income taxes........ 24,323 48,525 42,183 52,153
Provision for income taxes........ 9,629 19,888 17,326 20,863
-------- -------- -------- --------
Income from continuing
operations...................... 14,694 28,637 24,857 31,290
Gain (loss) on discontinued
operations(6)................... 388 -- 17 --
-------- -------- -------- --------
Cumulative effect of accounting
change(7)....................... -- 1,632 1,632 --
Net income........................ 15,082 30,269 26,506 31,290
Preferred dividends............... 508 574 1,113 362
-------- -------- -------- --------
Net income available to common
stockholders.................... $ 14,574 $ 29,695 $ 25,393 $ 30,928
======== ======== ======== ========
Basic net income (loss) per common
share:(8)
From continuing operations(9)... $ 0.46 $ 0.89 $ 0.75 $ 0.90
From discontinued operations.... 0.01 -- -- --
From cumulative accounting
change........................ -- 0.05 0.05 --
-------- -------- -------- --------
Net income per share............ $ 0.47 $ 0.94 $ 0.80 $ 0.90
======== ======== ======== ========
Diluted net income (loss) per
common share:(8)
From continuing operations(9)... $ 0.40 $ 0.78 $ 0.66 $ 0.82
From discontinued operations.... 0.01 -- -- --
From cumulative accounting
change........................ -- 0.05 0.05 --
-------- -------- -------- --------
Net income per share............ $ 0.41 $ 0.83 $ 0.71 $ 0.82
======== ======== ======== ========
Basic weighted average number of
shares outstanding.............. 31,183 31,633 31,567 34,387
Diluted weighted average number of
shares outstanding.............. 35,177 36,000 35,879 37,854
</Table>

SELECTED OPERATING DATA:
Number of stores open at end of
period.......................... 119 129 178 252
Comparable store sales
increase(10).................... 10.7% 5.5% 14.5% 8.7%
Average store sales (in
thousands)(11).................. $ 1,194 $ 1,258 $ 1,372 $ 1,360
Average square footage per
store(12)....................... 3,719 3,687 3,548 3,437
Sales per square foot(13)......... $ 317 $ 339 $ 380 $ 392

SELECTED OPERATING DATA:
Number of stores open at end of
period.......................... 224 278 278 367
Comparable store sales
increase(10).................... 14.5% 23.0% 15.5% 6.6%
Average store sales (in
thousands)(11).................. $ 872 $ 1,028 $ 1,521 $ 1,651
Average square footage per
store(12)....................... 3,460 3,463 3,463 3,541
Sales per square foot(13)......... $ 250 $ 297 $ 456 $ 471
</Table>

<Table>
<Caption>
PREDECESSOR AS OF
COMPANY AS -----------------------------------------------------------
OF AUGUST 1, JULY 31, JULY 29, AUGUST 4, FEBRUARY 2, FEBRUARY 1,
1998 1999 2000 2001 2002 2003
------------ -------- -------- --------- ----------- -----------
(IN THOUSANDS)

BALANCE SHEET DATA:
Working capital................................. $19,833 $22,028 $ 8,186 $ 10,810 $38,181 $ 86,791
Total assets.................................... 56,234 58,899 93,539 121,128 146,927 223,032
6% Series A exchangeable redeemable preferred
stock......................................... -- 4,885 -- -- -- --
12 1/2% Series B redeemable preferred stock..... -- 7,070 7,995 9,043 9,617 --
Total debt...................................... 57,396(14) 565 26,987 35,267 -- --
Total stockholders' equity (deficit)............ (13,790) 5,676 16,006 26,290 60,190 127,959
</Table>

- ---------------

(1) The predecessor company's results of operations were derived from the
accounting records of Federated Department Stores, Inc. Prior to August 3,
1998, when we were sold by Federated, we were included in its consolidated
financial statements and no corporate expenses or taxes were allocated to
our financial statements. In addition, our predecessor company's financial
statements were prepared based on different accounting policies, and do not
reflect the effect of purchase accounting. Therefore, our results of
operations could have been materially different if we were reported as a
standalone company at that time. Net income per common share was calculated
using the number of outstanding shares at August 3, 1998.

(2) Our results of operations for Fiscal 2001 included 53 weeks compared to 52
weeks for all other fiscal years presented in this document. In January
2002, we changed our fiscal year end from the Saturday closest to July 31
to the Saturday closest to January 31 of each year.

(3) Our results of operations for the six months ended February 3, 2001
included 27 weeks compared to 26 weeks for our fiscal six months ended
February 2, 2002.

(4) On December 21, 2001, we granted options to purchase 565,997 shares of our
common stock with an exercise price which was less than the fair market
value of our common stock at the time of such grant. The equity based
compensation expense totaled approximately $8,445,000, of which $845,000
and $3,127,000 were recorded in cost of sales and selling, general and
administrative expenses, respectively, in the six months and the fifty two
weeks ended February 2, 2002. The unamortized balance of approximately
$4,473,000 associated with the immediate vesting of options upon the
consummation of the initial public offering, were recorded in the fiscal
year ended February 1, 2003 of which $952,000 and $3,521,000 were recorded
in cost of sales and selling, general and administrative expenses,
respectively.

(5) Reflects charge incurred in connection with the closing of seven aero kids
concept stores.

(6) On February 25, 2000, we decided to discontinue our Chelsea Cambell
specialty store business and we closed all Chelsea Cambell stores by the
end of December 2000. The operating results of this segment for all years
have been reclassified as discontinued operations.

(7) On August 5, 2001, we adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangibles. With the adoption, the remaining
balance of negative goodwill was recorded as cumulative effect of
accounting change.

(8) All per share information reflects a 376.328-for-1 split of all of our
common stock which we effected on May 10, 2002.

(9) Income from continuing operations per share has been computed after
deducting preferred dividends.

(10) Our comparable store sales percentages are based on net sales and stores
are considered comparable beginning on the first day of the fiscal month
following the fourteenth full fiscal month of sales.

(11) Our average store sales are based on total net sales divided by the
weighted average of all stores open for the entire period.

(12) Our average square footage per store is based on all open stores at the end
of the period.

(13) Our sales per square foot consists of total net sales, divided by the
weighted average of gross square footage of all stores open for the entire
period.

(14) Represents intercompany debt to our former parent company.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES

The Company elected to change its fiscal year from a 52/53 week year that
ends on the Saturday nearest to July 31 to a 52/53 week year that ends on the
Saturday nearest to January 31, effective for the transition period ended on
February 2, 2002. As used herein, "Fiscal 2002" refers to the fiscal year ended
February 1, 2003, "Fiscal 2001" refers to the fiscal year ended August 4, 2001,
"Transition 2001" refers to the six month period from August 5, 2001 to February
2, 2002. Similarly, "Fiscal 2000" refer to the fiscal year ended July 29, 2000
and "Transition 2000" refers to the six month period from July 30, 2000 to
February 3, 2001. All references to amounts related to the six months ended
February 3, 2001 and the fifty-two weeks ended February 2, 2002 are unaudited.
Transition 2001 has twenty-six weeks while Transition 2000 has twenty-seven
weeks.

Net sales. Net sales consist of sales from comparable stores and
non-comparable stores. A store is not included in comparable store sales until
the first day of the fiscal month following the fourteenth full fiscal month of
sales. Non-comparable store sales include sales in the current fiscal year from
our stores opened during the previous fiscal year before they are considered
comparable stores and new stores opened during the current fiscal year. In
addition, all sales generated from stores that we have closed and through our
arrangements with colleges and universities for organized sales events are
included in non-comparable store sales.

Cost of sales. Cost of sales includes the cost of merchandise,
distribution and warehousing, freight from the distribution center and warehouse
to the stores, payroll for our design, buying and merchandising personnel and
store occupancy costs. Store occupancy costs include rent, contingent rents,
common area maintenance, real estate taxes, utilities, repairs, maintenance and
depreciation. On December 21, 2002, we granted options to purchase 565,997
shares of our common stock with an exercise price which was less than the fair
market value of our common stock at the time of such grant. The equity based
compensation expense totaled approximately $8,445,000, of which $1,797,000 was
recorded in cost of sales. We recorded equity based compensation expense of
$845,000 in cost of sales for Transition 2001 and the fifty-two weeks ended
February 2, 2002. We incurred additional amortization for equity based
compensation of $952,000 in Fiscal 2002, as a result of the acceleration of the
unamortized balance of such equity based compensation associated with the
immediate vesting of options upon the consummation of the initial public
offering.

Selling, general and administrative expenses. Selling, general and
administrative expenses include selling, store management and corporate
expenses, including payroll and employee benefits, other than for our design,
buying and merchandising personnel, employment taxes, management information
systems, marketing, insurance, legal, store pre-opening and other corporate
level expenses. Store pre-opening expenses include store level payroll, grand
opening event marketing, travel, supplies and other store opening expenses.
Corporate level expenses are primarily attributable to our corporate offices in
New York, New York, and Wayne, New Jersey. On December 21, 2001, we granted
options to purchase 565,997 shares of our common stock with an exercise price
which was less than the fair market value of our common stock at the time of
such grant. The equity based compensation expense totaled approximately
$8,445,000, of which $6,648,000 was recorded in selling, general and
administrative expenses. We recorded equity based compensation expense of
$3,127,000 in selling, general and administrative expenses for Transition 2001
and the fifty-two weeks ended February 2, 2002. We incurred additional
amortization for equity based compensation of $3,521,000 in Fiscal 2002, as a
result of the acceleration of the unamortized balance of such equity based
compensation associated with the immediate vesting of options upon the
consummation of the initial public offering.

Store closing expenses. In Fiscal 2000, we tested a new store concept by
opening seven aero kids stores which targeted children 6 to 12 years old.
Although the concept showed growth potential, we decided that there was
significant expansion opportunity for our core Aeropostale store format, and we
determined to focus our resources solely on this concept. We recorded a non-cash
charge of $815,000 in Fiscal 2001 to reflect the write-down of leasehold
improvements and store fixtures and equipment to the net realizable value and
subsequently closed the seven aero kids' stores by October 2001.

Interest expense, net. Interest expense, net of interest income, includes
interest relating to our revolving credit facility and amortization of financing
intangibles.

Discontinued operations. On February 25, 2000, we decided to discontinue
our Chelsea Cambell specialty store business and we closed all Chelsea Cambell
stores by the end of December 2000. The operating results of this segment for
all years have been reclassified as discontinued operations.

Cumulative effect of accounting change. On August 5, 2001, we adopted
Statement of Financial Accounting Standards "SFAS" No. 142, Goodwill and Other
Intangible Assets, which requires companies to no longer amortize negative
goodwill. The cumulative effect of this change resulted in a gain of $1.6
million in Transition 2001.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
appropriate application of certain accounting policies, many of which require us
to make estimates and assumptions about future events and their impact on
amounts reported in our financial statements and related notes. Since future
events and their impact cannot be determined with certainty, the actual results
will inevitably differ from our estimates. Such differences could be material to
the financial statements.

We believe application of accounting policies, and the estimates inherently
required therein, are reasonable. These accounting policies and estimates are
constantly reevaluated, and adjustments are made when facts and circumstances
dictate a change. Historically, we have found our application of accounting
policies to be appropriate, and actual results have not differed materially from
those determined using necessary estimates except for the change in estimated
useful lives described in Note 2 to the financial statements.

Our accounting policies are more fully described in Note 2 to the financial
statements, located elsewhere in this document. We have identified certain
critical accounting policies which require significant management estimates and
are described below.

Merchandise inventory. Our merchandise inventory is carried at the lower
of cost or market on a first-in, first-out basis. We make certain assumptions to
adjust inventory based on historical experience and current information in order
to assess that inventory is recorded properly at the lower of cost or market.
These assumptions can have a significant impact on current and future operating
results and financial position.

Long-lived assets. In evaluating the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated undiscounted future
net cash flows of the related long-lived assets and reduce their carrying value
by the excess, if any, of the result of such calculation. We believe at this
time that the long-lived assets' carrying values and useful lives continues to
be appropriate.

RESULTS OF OPERATIONS

The following table sets forth our results of operations expressed as a
percentage of total net sales for the period indicated:

<Table>
<Caption>
FISCAL
FISCAL YEAR 52 WEEKS YEAR
ENDED(1) SIX MONTHS ENDED(2) ENDED ENDED
-------------------- ------------------------- ----------- -----------
JULY 29, AUGUST 4, FEBRUARY 3, FEBRUARY 2, FEBRUARY 2, FEBRUARY 1,
2000 2001 2001 2002 2002 2003
-------- --------- ----------- ----------- ----------- -----------

Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit................... 28.8 28.3 32.4 36.6 32.2 29.5
Selling, general and
administrative expenses...... 21.4 21.6 18.7 19.4 21.4 20.1
Store closing expenses......... -- 0.3 -- -- 0.2 --
Amortization of negative
goodwill..................... (0.1) (0.1) (0.1) -- -- --
Income from operations......... 7.5 6.4 13.8 17.2 10.6 9.5
Interest expense, net.......... 0.4 0.5 0.6 0.1 0.2 --
Income before income taxes..... 7.1 5.9 13.2 17.1 10.4 9.5
Provision for income taxes..... 2.7 2.3 5.2 7.0 4.3 3.8
Income from continuing
operations................... 4.4 3.6 8.0 10.1 6.1 5.7
Gain on discontinued
operations................... 0.9 0.1 0.2 -- -- --
Cumulative effect of accounting
change....................... -- -- -- 0.6 0.4 --
Net income..................... 5.3 3.7 8.2 10.7 6.6 5.7
</Table>

- ---------------

(1) Our results of operations for Fiscal 2001 included 53 weeks compared to 52
weeks for all other fiscal years presented in this table.

(2) Our results of operations for Transition 2000 included 27 weeks compared to
26 weeks for Transition 2001.

FISCAL 2002 COMPARED TO FIFTY-TWO WEEKS ENDED FEBRUARY 2, 2002 (UNAUDITED).

Net sales. Our net sales for Fiscal 2002 increased to approximately $550.9
million from approximately $404.4 million in the fifty-two weeks ended February
2, 2002, an increase of approximately $146.5 million. Of this increase,
comparable store sales contributed approximately $24.7 million and
non-comparable store sales contributed approximately $121.8 million. Comparable
store sales increased by 6.6% for Fiscal 2002, compared to an increase of 15.5%
in comparable store sales in the fifty-two weeks ended February 2, 2002. This
increase was due to higher comparable sales in the young women's and accessories
categories, with the young men's comparable sales essentially unchanged. The
increase in non-comparable store sales was primarily due to the 89 net new
stores open at the end of Fiscal 2002, as compared to the prior period.

Gross profit. Our gross profit dollars increased approximately $32.2
million for Fiscal 2002 to approximately $162.6 million from approximately
$130.4 million in the fifty-two weeks ended February 2, 2002. As a percentage of
net sales, gross profit decreased to 29.5% from 32.2% during these periods. This
decrease is primarily attributable to a decrease in our merchandise margins,
primarily in the young women's and men's categories of approximately 3.3%, due
to an increase in promotional markdowns. This decrease in gross profit was
partially offset by lower occupancy costs of approximately 0.9%. Included in
cost of sales is a charge for equity-based compensation of $845,000 and $952,000
for Fiscal 2002 and the fifty-two weeks ended February 2, 2002, respectively.

Selling, general and administrative expenses. Our selling, general and
administrative expenses increased approximately $23.9 million for Fiscal 2002 to
approximately $110.5 million from approximately $86.6 million

in the fifty-two weeks ended February 2, 2002. On an absolute dollar basis, this
increase was due to an approximate $18.9 million increase in payroll and store
transaction costs that resulted from new store growth. In addition, marketing
expense increased approximately $3.0 million. We also incurred a charge of
approximately $3.9 and $3.5 million for equity-based compensation for Fiscal
2002 and the fifty-two weeks ended February 2, 2002, respectively. As a
percentage of net sales, selling, general and administrative expenses decreased
to 20.1% from 21.4%. This decrease was attributable to a reduction in incentive
bonus programs and leveraging of corporate and store line expenses as compared
to the prior year.

Interest (income) expense. Our net interest income was approximately
$56,000 for Fiscal 2002, compared to net interest expense of approximately
$877,000 for the fifty-two weeks ended February 2, 2002, primarily due to lower
average borrowings.

Income taxes. Our effective tax rate of 40.0% for Fiscal 2002, compared to
an effective tax rate of 41.1% for the fifty-two weeks ended February 2, 2002.
The Company recorded an accrual in the fifty-two weeks ended February 2, 2002
for additional tax exposures.

Income from continuing operations. Our income from continuing operations
increased approximately $6.4 million for Fiscal 2002 to $31.3 million, compared
to income from continuing operations of $24.9 million for the fifty-two weeks
ended February 2, 2002. This increase was primarily due to increased sales and
gross profit, partially offset by an increase in selling, general and
administrative expenses related to new store growth.

Gain on discontinued operations. All Chelsea Cambell stores were closed by
the end of December 2000; therefore, no activity occurred during the Fiscal
2002. For the fifty-two weeks ended February 2, 2002, our Chelsea Cambell stores
had net income of $17,000.

Net income. Our net income was approximately $31.3 million for Fiscal
2002, compared to approximately $26.5 million for the fifty-two weeks ended
February 2, 2002. On August 5, 2001, we adopted SFAS No. 142, Goodwill and Other
Intangibles, which require companies to no longer amortize negative goodwill.
The cumulative effect of this change in accounting principle resulted in a gain
of $1.6 million in the fifty-two weeks ended February 2, 2002.

TRANSITION 2001 COMPARED TO TRANSITION 2000 (UNAUDITED).

Net sales. Our net sales for Transition 2001, increased to approximately
$284.0 million from approximately $184.4 million for Transition 2000, an
increase of approximately $99.6 million. Of this increase, comparable store
sales contributed approximately $37.4 million and non-comparable store sales
contributed approximately $62.2 million. Of the net sales for Transition 2001,
$2.7 million were generated during the extra week included in that period.
Comparable store sales increased by 23.0% for Transition 2001, compared to an
increase of 14.5% in comparable store sales in Transition 2000. This increase
was due to higher comparable sales of young women's merchandise and accessories,
with young men's comparable sales essentially unchanged. The increase in
non-comparable store sales was primarily due to 54 more stores open at the end
of Transition 2001 as compared to the prior period.

Gross profit. Our gross profit dollars increased approximately $44.2
million for Transition 2001 to approximately $104.0 million from approximately
$59.8 million for Transition 2000. As a percentage of net sales, gross profit
increased to 36.6% from 32.4% during these periods. This increase is primarily
attributable to an approximate 2.8% increase in merchandise margins due to a
shift in our merchandise mix as we sold a greater percentage of young women's
apparel, which has higher margins than young men's merchandise. Furthermore,
occupancy and payroll costs, which are relatively fixed, were lower as a
percentage of net sales than in the prior period which caused margins to
increase. Included in cost of sales during Transition 2001 is a $845,000 charge
for equity based compensation.

Selling, general and administrative expenses. Our selling, general and
administrative expenses increased approximately $20.7 million for Transition
2001 to approximately $55.2 million from approximately $34.5 million for
Transition 2000. This increase was partially due to an approximate $11.7 million
increase in payroll expenses that resulted from new store growth in addition to
compensation costs incurred in connection with
16

incentive bonus programs. Furthermore, we incurred a $3.1 million charge for
equity based compensation during Transition 2001. As a percent of net sales,
selling, general and administrative expenses increased to 19.4% from 18.7%. This
increase as a percentage of sales volume was due to the charge for equity based
compensation, offset by an increased leverage of store payroll.

Interest expense. Our interest expense decreased approximately $0.8
million, from $1.1 million for Transition 2001 to approximately $0.3 million for
Transition 2000, primarily due to lower average borrowings.

Income taxes. Our effective tax rate of 41.0% for Transition 2001 compares
to an effective tax rate of 39.6% for the Transition 2000. Our effective tax
rate increased as a result of the increase in our federal tax rate, partially
offset by the elimination of the negative goodwill amortization.

Gain from continuing operations. Our income from continuing operations
increased approximately $13.9 million for Transition 2001 to approximately $28.6
million from approximately $14.7 million for Transition 2000. This increase was
primarily due to increased sales and gross profit, partially offset by an equity
based compensation expense incurred in this period.

Income from discontinued operations. All Chelsea Cambell stores were
closed by the end of December 2000; therefore, no activity occurred during
Transition 2001. During Transition 2000, our Chelsea Cambell stores had net
sales of $2.9 million and expenses of $2.5 million.

Net income. Our net income increased by approximately $15.2 million, to
approximately $30.3 million in Transition 2001 from approximately $15.1 million
in Transition 2000. As a percentage of net sales, net income increased to 10.7%
from 8.2% during these periods.

FISCAL 2001 COMPARED TO FISCAL 2000.

Net sales. Our net sales for Fiscal 2001 increased to approximately $304.8
million from approximately $213.4 million in Fiscal 2000, an increase of
approximately $91.4 million. Of this increase, comparable store sales
contributed approximately $17.1 million and non-comparable store sales
contributed approximately $74.3 million. Comparable store sales increased by
8.7% in Fiscal 2001, compared to an increase of 14.5% in comparable store sales
in Fiscal 2000. This increase was due to higher comparable sales of young
women's merchandise and accessories, partially offset by a decrease in young
men's comparable sales. The increase in non-comparable store sales was primarily
due to an increase in our store count by 74 stores in Fiscal 2001.

Gross profit. Our gross profit dollars increased approximately $24.6
million in Fiscal 2001 to approximately $86.1 million from approximately $61.5
million for Fiscal 2000. As a percentage of net sales, gross profit decreased to
28.3% from 28.8% during these periods. This decrease was primarily attributable
to lower merchandise margins of approximately 0.5% due to higher markdowns
across all merchandise categories.

Selling, general and administrative expenses. Our selling, general and
administrative expenses increased approximately $20.2 million in Fiscal 2001 to
approximately $65.9 million from approximately $45.7 million in Fiscal 2000. Our
payroll expenses increased by approximately $14.7 million in Fiscal 2001 over
the prior fiscal year principally as a result of new store growth, in addition
to compensation costs incurred in connection with incentive bonus programs. The
remaining increase was due to variable sales expenses. In addition, part of this
increase was attributable to increased marketing initiatives for which we spent
approximately $2.2 million in Fiscal 2001 as compared to approximately $1.1
million in Fiscal 2000. As a percentage of net sales, selling, general and
administrative expenses increased to 21.6% in Fiscal 2001 from 21.4% in Fiscal
2000.

Interest expense. Our interest expense increased by approximately $0.8
million from $0.9 million in Fiscal 2000 to approximately $1.7 million in Fiscal
2001 primarily due to higher seasonal borrowings necessitated by our higher
store count.

Income taxes. Our effective tax rate of 39.3% in Fiscal 2001 compares to
an effective tax rate of 38.0% in Fiscal 2000. This increase was the result of
an increase in income in states with higher tax rates.

Income from continuing operations. Our income from continuing operations
increased approximately $1.5 million in Fiscal 2001 to approximately $10.9
million from approximately $9.4 million in Fiscal 2000. This increase was
primarily due to increased sales and gross profit.

Gain (loss) from discontinued operations. In Fiscal 2001, we recognized a
gain of approximately $0.4 million from the discontinuation of our Chelsea
Cambell business after having recognized a gain of approximately $2.0 million in
Fiscal 2000. The amount recognized in Fiscal 2001 represents actual amounts
compared to estimated loss on disposal for Fiscal 2000.

Net income. Our net income in Fiscal 2001 decreased to approximately $11.3
from approximately $11.4 million in Fiscal 2000, a decrease of $0.1 million. As
a percentage of net sales, net income decreased to 3.7% from 5.3% during these
periods.

QUARTERLY RESULTS

The following table sets forth our historical unaudited quarterly
consolidated statements of operations data for each of the ten fiscal quarters
ended February 1, 2003, and such information expressed as a percentage of our
revenue.
<Table>
<Caption>
FISCAL 2001 FISCAL 2002
--------------------------------------- -------------------
THIRTEEN WEEKS ENDED TRANSITION 2001 THIRTEEN WEEKS ENDED
--------------------------------------- ------------------- -------------------
OCT. 28, FEB. 3, MAY 5, AUG. 4, NOV. 3, FEB. 2, MAY 4, AUGUST 3,
2000 2001(1) 2001 2001 2001 2002 2002 2002
-------- -------- ------- ------- -------- -------- ------- ---------

STATEMENT OF INCOME DATA:
Net sales..................... $76,831 $107,538 $56,629 $63,769 $126,019 $158,021 $85,130 $ 90,141

Gross profit.................. 25,750 34,008 12,458 13,933 48,934 55,052(3) 24,149(3) 24,094(3)
Income (loss) from continuing
operations................... 6,007 8,687 (2,049) (1,731) 14,727 13,910(3) 592(3) (1,978)(3)
Gain from discontinued
operations................... -- 388 2 15 -- -- -- --

Net income (loss)............. 6,007 9,075 (2,047) (1,716) 16,359(2) 13,910 592 (1,978)

<Caption>
FISCAL 2002
-------------------------
THIRTEEN WEEKS ENDED
-------------------------
NOVEMBER 2, FEBRUARY 1,
2002 2003
----------- -----------

STATEMENT OF INCOME DATA:
Net sales..................... $169,210 $206,423
Gross profit.................. 50,902 63,458
Income (loss) from continuing
operations................... 15,001 17,675
Gain from discontinued
operations................... -- --
Net income (loss)............. 15,001 17,675
</Table>
<Table>
<Caption>
FISCAL 2001 FISCAL 2002
--------------------------------------- -------------------
THIRTEEN WEEKS ENDED TRANSITION 2001 THIRTEEN WEEKS ENDED
--------------------------------------- ------------------- -------------------
OCT. 28, FEB. 3, MAY 5, AUG. 4, NOV. 3, FEB. 2, MAY 4, AUGUST 3,
2000 2001(1) 2001 2001 2001 2002 2002 2002
-------- -------- ------- ------- -------- -------- ------- ---------

AS A PERCENTAGE OF NET SALES:
Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.................. 33.5 31.6 22.0 21.8 38.8 34.8 28.4 26.7
Income (loss) from continuing
operations................... 7.8 8.1 (3.6) (2.7) 11.7 8.8 0.7 (2.2)
Net income (loss)............. 7.8 8.4 (3.6) (2.7) 13.0 8.8 0.7 (2.2)
DILUTED INCOME (LOSS) PER
SHARE:
From continuing operations.... $ 0.17 $ 0.24 $ (0.07) $ (0.06) $ 0.40 $ 0.38 $ 0.01 $ (0.06)
From discontinued
operations................... -- 0.01 -- -- -- -- -- --
From cumulative accounting
change....................... -- -- -- -- 0.05(2) -- -- --
------- -------- ------- ------- -------- -------- ------- ---------
Net income.................... $ 0.17 $ 0.25 $ (0.07) $ (0.06) $ 0.45 $ 0.38 $ 0.01 $ (0.06)
------- -------- ------- ------- -------- -------- ------- ---------
SELECTED OPERATING DATA:
Comparable store sales
increase (decrease).......... 12.7% 15.9% 3.4% (0.4)% 22.8% 23.1% 22.0% 11.2%

<Caption>
FISCAL 2002
-------------------------
THIRTEEN WEEKS ENDED
-------------------------
NOVEMBER 2, FEBRUARY 1,
2002 2003
----------- -----------

AS A PERCENTAGE OF NET SALES:
Net sales..................... 100.0% 100.0%
Gross profit.................. 30.1 30.7
Income (loss) from continuing
operations................... 8.9 8.6
Net income (loss)............. 8.9 8.6
DILUTED INCOME (LOSS) PER
SHARE:
From continuing operations.... $ 0.39 $ 0.46
From discontinued
operations................... -- --
From cumulative accounting
change....................... -- --
-------- --------
Net income.................... $ 0.39 $ 0.46
-------- --------
SELECTED OPERATING DATA:
Comparable store sales
increase (decrease).......... 5.0% 0.3%
</Table>

The per share amounts are calculated independently for each thirteen-week
period presented. The sum of the thirteen weeks may not equal the full year per
share amounts.

- ---------------

(1) The fiscal quarter ended February 3, 2001 included 14 calendar weeks.

(2) On August 5, 2001, we adopted Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangibles." With the adoption, we recorded
income from cumulative effect of such accounting change of $1.6 million.

(3) On December 21, 2001, we granted options to purchase 565,997 shares of our
common stock with an exercise price which was less than the fair market
value of our common stock at the time of such grant. The equity based
compensation expense totaled approximately $8,445,000, of which $845,000 and
$3,127,000 were recorded in cost of sales and selling, general and
administrative expenses, respectively, in the thirteen weeks ended February
2, 2002. In addition, the company recorded amortization of approximately
$620,000, of which $132,000 and $488,000 were recorded in cost of sales and
selling, general and administrative expenses, respectively, in the thirteen
weeks ended May 4, 2002. The unamortized balance of approximately $3,853,000
of which $952,000 and $3,521,000 were recorded in cost of sales and selling,
general and administrative expenses, respectively, in the thirteen weeks
ended August 3, 2002 associated with the immediate vesting of options upon
the consummation of the initial public offering.

INFLATION

The Company does not believe that its operating results have been
materially affected by inflation during the past year. There can be no
assurance, however, that the Company's operating results will not be affected by
inflation in the future.

LIQUIDITY AND CAPITAL RESOURCES

Our cash requirements are primarily for working capital, the construction
of new stores, the remodeling of existing stores, and the investment in our
information systems. Historically, these cash requirements have been met through
cash flow from operations and borrowings under our credit facility with Fleet
Retail Finance, Inc. At February 1, 2003, we had working capital of
approximately $86.8 million.

On May 21, 2002, the Company received net proceeds of approximately $31.4
million through its sale of 1,875,000 shares of common stock as part of the
initial public offering of a total of 14,375,000 shares of common stock. The
Company used approximately $10.0 million of the proceeds to redeem all of the
Company's preferred stock and preferred stock dividends. The Company also used
approximately $2.0 million for offering costs in connection with the initial
public offering. The balance of approximately $19.4 million is being used for
general corporate purposes.

Our cash provided by operations for Fiscal 2002 was approximately $52.5
million, generated by our operating earnings and increased current liabilities.

Our cash used in investing activities for Fiscal 2002 was entirely used for
capital expenditures. These expenditures, consisting primarily of the
construction of new stores, remodeling of existing stores and investments in
technology, were approximately $29.7 million for Fiscal 2002. Our future capital
requirements will depend primarily on the number of new stores we open and the
number of existing stores we remodel and the timing of these expenditures. We
opened 93 new stores in Fiscal 2002 and expect to open approximately 85 stores
in fiscal 2003. Projected capital expenditures are approximately $36.4 million,
to be used primarily to fund new store openings, the remodeling of existing
stores and technology investments. Historically, we have financed such capital
expenditures with cash from operations and borrowings under our credit facility.
We believe that we will continue to finance capital expenditures in this manner
during fiscal 2003.

In Fiscal 2002, we had a net increase in cash and cash equivalents of
approximately $42.5 million. Our secured revolving credit facility provides us
with up to $55 million based upon our inventory balances, seasonal advance rates
and third party credit card balances. Borrowings bear interest at our option at
either the rate per annum at which deposits on U.S. dollars are offered to Fleet
in the Eurodollar market, referred to as the Eurodollar rate, plus 1.50% to
2.00% or the base rate announced from time to time by Fleet, dependent upon
excess availability. As of February 1, 2003, there was no balance under the
revolving credit facility. The revolving credit facility contains financial
performance and capital expense covenants, and has a termination

date of July 2004. There are fees for early termination. The revolving credit
facility contains a minimum EBITDA covenant, tested monthly. The facility also
contains a maximum capital expenditures covenant, tested quarterly.

Events of default under the credit facility include, subject to grace
periods and notice provisions in certain circumstances, failure to pay principal
amounts when due, failure to perform covenant or liability requirements,
misrepresentation, default of leases, excess uninsured casualty loss, excess
uninsured judgment or restraint of business, business failure or application for
bankruptcy, indictment of or institution of any legal process or proceeding
under federal, state, municipal or civil statutes, legal challenges to loan
documents, and a change in control, other than an initial public offering. If an
event of default occurs, the lenders under the credit facility will be entitled
to take various actions, including the acceleration of amounts due and requiring
that all such amounts be immediately paid in full as well as possession and sale
of all assets that have been used for collateral.

We have not issued any letters of credit for the purchase of merchandise
inventory or any capital expenditure.

As of February 1, 2003, we had approximately $87.5 million in cash
available to fund operations and future store growth. In addition, we had
approximately $43.8 million available for borrowings under our credit facility
as of February 1, 2003, which availability is limited by the credit facility's
borrowing base collateral requirements. In general, the borrowing base equals a
seasonally adjusted percentage of the retail value of our inventory and 80% of
our third party credit card balances. We believe that cash flows from
operations, our current cash balance and funds available under our revolving
credit facility will be sufficient to meet our working capital needs and planned
capital expenditures for fiscal 2003.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following tables summarize our contractual obligations and commercial
commitments as of February 1, 2003:

<Table>
<Caption>
PAYMENTS DUE IN PERIOD
------------------------------------------
WITHIN 1 AFTER 5
TOTAL YEAR 2-3 YEARS 4-5 YEARS YEARS
-------- -------- --------- --------- -------
(IN THOUSANDS OF DOLLARS)

Contractual Obligations:
Employment contracts.............. $ 2,250 $ 1,300 $ 950 $ -- $ --
Merchandise agreement............. 3,382 990 1,980 412 --
Operating leases.................. 225,131 34,600 58,244 49,440 82,847
-------- ------- ------- ------- -------
Total contractual obligations..... $230,763 $36,890 $61,174 $49,852 $82,847
======== ======= ======= ======= =======
</Table>

There were no commercial commitments outstanding as of February 1, 2003.

NEW ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and
Technical Corrections. This Statement rescinds SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers. This Statement amends SFAS No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Rescissions of SFAS No. 4 and SFAS No. 64 are effective for fiscal
years beginning after May 15, 2002. Rescissions for SFAS No. 13 are effective
for transactions entered into after May 15, 2002. All

other provisions are effective for financial statements issued after May 15,
2002. The adoption of SFAS No. 145 has not had and is not expected to have a
material impact on our consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The Statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operations, plant closing, or other exit or disposal activity. SFAS No. 146 is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The adoption of SFAS No. 146 has not had and is not expected
to have a material impact on our consolidated financial statements.

In November 2002, the FASB issued Financial Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires
certain guarantees to be recorded at fair value and requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. Generally, FIN 45 applies to certain types of
financial guarantees that contingently require the guarantor to make payments to
the guaranteed party based on changes in an underlying that is related to an
asset, liability, or an equity security of the guaranteed party; performance
guarantees involving contracts which require the guarantor to make payments to
the guaranteed party based on another entity's failure to perform under an
obligating agreement; indemnification agreements that contingently require the
guarantor to make payments to an indemnified party based on changes in an
underlying that is related to an asset, liability, or an equity security of the
indemnified party; or indirect guarantees of the indebtedness of others. The
initial recognition and initial measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
Disclosure requirements under FIN 45 are effective for financial statements
ending after December 15, 2002 and are applicable to all guarantees issued by
the guarantor subject to FIN 45's scope, including guarantees issued prior to
FIN 45. We have evaluated the accounting provisions of the interpretations and
there was no material impact on our financial condition, results of operations
or cash flows for the year ended February 1, 2003. We have made the required
disclosures in the consolidated financial statements as of February 1, 2003.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based
Compensation -- Transition and Disclosure. The standard provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition SFAS No. 148
amends the disclosure requirements for SFAS No. 123 to require more prominent
and more frequent disclosures in financial statements about the effects of stock
based compensation. SFAS No. 148 is effective for fiscal years ending after
December 31, 2002. We will continue to account for stock-based equity
compensation using the intrinsic value method of APB Opinion 25. We are required
to follow the prescribed disclosure format and have provided the additional
disclosures required by SFAS No. 148 for the year ended February 1, 2003 and
must also provide the disclosures in our quarterly reports containing condensed
consolidated financial statements for interim periods beginning with the
quarterly period ending May 3, 2003.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" with the objective of improving
financial reporting by companies involved with variable interest entities. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
Historically, entities generally were not consolidated unless the entity was
controlled through voting interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
company that consolidates a variable interest entity is called the "primary
beneficiary" of that entity. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The
21

consolidation requirements of FIN 46 apply to existing entities in the first
fiscal year or interim period after January 31, 2003, regardless of when the
variable interest entity was established. We have evaluated the accounting
provisions of the interpretations and there was no material impact on our
financial condition, results of operations or cash flows for the year ended
February 1, 2003 because we have no variable interest entities.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements involve certain
risks and uncertainties, including statements regarding the company's strategic
direction, prospects and future results. Certain factors, including factors
outside of our control, may cause actual results to differ materially from those
contained in the forward-looking statements. All forward looking statements
included in this report are based on information available to us as of the date
hereof, and we assume no obligation to update or revise such forward-looking
statements to reflect events or circumstances that occur after such statements
are made. Such uncertainties include, among others, the following factors:

OUR GROWTH STRATEGY RELIES ON THE CONTINUED ADDITION OF A SIGNIFICANT NUMBER OF
NEW STORES EACH YEAR, WHICH COULD STRAIN OUR RESOURCES AND CAUSE THE PERFORMANCE
OF OUR EXISTING STORES TO SUFFER.

Our growth will largely depend on our ability to open and operate new
stores successfully. We opened 93 new stores in Fiscal 2002, 74 new stores in
Fiscal 2001 and 57 new stores in Fiscal 2000. We plan to open approximately 85
new stores in fiscal 2003, an increase of approximately 23% over our current
store base. We intend to continue to open a significant number of new stores in
future years while remodeling a portion of our existing store base annually. Our
proposed expansion will place increased demands on our operational, managerial
and administrative resources. These increased demands could cause us to operate
our business less effectively, which in turn could cause deterioration in the
financial performance of our individual stores. In addition, to the extent that
our new store openings are in existing markets, we may experience reduced net
sales volumes in existing stores in those markets.

OUR EXPANSION PLAN IS DEPENDENT ON A NUMBER OF FACTORS, WHICH COULD DELAY OR
PREVENT THE SUCCESSFUL OPENING OF NEW STORES AND SUBSEQUENT PENETRATION INTO NEW
MARKETS.

We will be unable to open and operate new stores successfully and our
growth will be limited unless we can:

- identify suitable markets and sites for store locations;

- negotiate acceptable lease terms;

- hire, train and retain competent store personnel;

- maintain a proportion of new stores to mature stores that does not harm
existing sales;

- foster current relationships and develop new relationships with vendors
that are capable of supplying a greater volume of merchandise;

- manage inventory effectively to meet the needs of new and existing stores
on a timely basis; and

- expand our infrastructure to accommodate growth.

In addition, we will open new stores in regions of the United States in
which we currently have few or no stores. Our experience in these markets is
limited and we cannot assure you that we will be able to develop our brand in
these markets or adapt to competitive, merchandising and distribution challenges
that may be different from those in our existing markets. Our inability to open
new stores successfully and/or penetrate new markets would have a material
adverse effect on our revenue and earnings growth.

OUR NET SALES AND INVENTORY LEVELS FLUCTUATE ON A SEASONAL BASIS, LEAVING OUR
ANNUAL OPERATING RESULTS PARTICULARLY SUSCEPTIBLE TO CHANGES IN BACK-TO-SCHOOL
AND HOLIDAY SHOPPING PATTERNS.

Our net sales and net income are disproportionately higher from August
through January each year due to increased sales from back-to-school and holiday
shopping. Sales during this period cannot be used as an accurate indicator of
annual results. Our net sales and net income from February through July are
typically lower due, in part, to the traditional retail slowdown immediately
following the winter holiday season. Any significant decrease in sales during
the back-to-school and winter holiday seasons would have a material adverse
effect on our financial condition and results of operations.

In addition, in order to prepare for the back-to-school and holiday
shopping seasons, we must order and keep in stock significantly more merchandise
than we would carry during other parts of the year. Any unanticipated decrease
in demand for our products during these peak shopping seasons could require us
to sell excess inventory at a substantial markdown, which could reduce our net
sales and gross margins and negatively impact our profitability.

FLUCTUATIONS IN COMPARABLE STORE SALES AND QUARTERLY RESULTS OF OPERATIONS COULD
CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE SUBSTANTIALLY.

Our comparable store sales and quarterly results have fluctuated in the
past and are expected to continue to fluctuate in the future. In addition, we
cannot assure you that we will be able to maintain the recent levels of
comparable store sales as we expand our business.

Our comparable store sales and quarterly results of operations are affected
by a variety of factors, including:

- fashion trends;

- calendar shifts of holiday or seasonal periods;

- the effectiveness of our inventory management;

- changes in our merchandise mix;

- the timing of promotional events;

- weather conditions;

- changes in general economic conditions and consumer spending patterns;

- war or threat of war;

- international and domestic acts of terror; and

- actions of competitors or mall anchor tenants.

If our future comparable store sales fail to meet the expectations of
research analysts, then the market price of our common stock could decline
substantially.

IF WE ARE UNABLE TO IDENTIFY AND RESPOND TO CONSUMERS' FASHION PREFERENCES IN A
TIMELY MANNER, OUR PROFITABILITY WOULD DECLINE.

We may be unable to keep pace with the rapidly changing fashion trends and
consumer tastes inherent in the apparel industry. Our current design philosophy
is based on the belief that our target customers prefer clothing that suits the
demands of their active lifestyles and that they like to identify with a logo.
Accordingly, we produce casual, comfortable apparel, a majority of which
displays either the "Aeropostale" or "Aero" logo. We cannot assure you that
fashion trends will not move away from casual clothing or that we will not have
to alter our design strategy to reflect a consumer change in logo preference. If
we fail to anticipate, identify or react appropriately to changes in styles,
trends, desired images or brand preferences, we may need to incur higher
markdowns to reduce excess inventory. Utilizing such markdowns would negatively
impact our profitability.
23

WE RELY ON THIRD PARTIES TO MANAGE THE WAREHOUSING AND DISTRIBUTION ASPECTS OF
OUR BUSINESS. IF THESE THIRD PARTIES DO NOT ADEQUATELY PERFORM THESE FUNCTIONS,
OUR BUSINESS WOULD BE DISRUPTED.

The efficient operation of our stores is dependent on our ability to
distribute merchandise to locations throughout the United States in a timely
manner. Our distribution facility in Carlstadt, New Jersey is leased and
operated by an independent third party. We depend on this third party to
receive, sort, pack and distribute substantially all of our merchandise. In
addition, we rely on this third party to manage a separate warehouse facility
for us that we lease in South River, New Jersey. This third party employs
personnel represented by a labor union. Although there have been no work
stoppages or disruptions since the inception of our relationship with this third
party provider in 1991, we cannot assure you that there will be no disruptions
in the future. We also use a separate third party transportation company to
deliver our merchandise from our warehouses to our stores. Any failure by either
of these third parties to respond adequately to our warehousing and distribution
needs would disrupt our operations and negatively impact our profitability.

WE RELY ON A SMALL NUMBER OF VENDORS TO SUPPLY A SIGNIFICANT AMOUNT OF OUR
MERCHANDISE, AND OUR FAILURE TO MAINTAIN GOOD RELATIONSHIPS WITH ONE OR MORE OF
THEM COULD HARM OUR ABILITY TO SOURCE OUR PRODUCTS.

For Fiscal 2002, we sourced approximately 37% of our merchandise from our
top three vendors, two of which supplied approximately 17% and 10%,
respectively, of our products. In addition, Federated Merchandising Group, or
FMG, a wholly owned subsidiary of Federated Department Stores, Inc., acted as
our agent with respect to the sourcing of approximately 22% of our merchandise.
Our relationships with our vendors generally are not on a contractual basis and
do not assure adequate supply, quality or acceptable pricing on a long-term
basis. Most of our vendors could discontinue selling to us at any time. If one
or more of our significant vendors were to sever their relationship with us, we
could be unable to obtain replacement products in a timely manner, which could
cause our sales to decrease.

MOST OF OUR MERCHANDISE IS MANUFACTURED BY FOREIGN SUPPLIERS, THEREFORE THE
AVAILABILITY AND COSTS OF THESE PRODUCTS MAY BE NEGATIVELY AFFECTED BY RISKS
ASSOCIATED WITH INTERNATIONAL TRADE.

Trade restrictions such as increased tariffs or quotas, or both, could
affect the importation of apparel generally and increase the cost and reduce the
supply of merchandise available to us. Much of our merchandise is sourced
directly from foreign vendors in Europe, Asia and Central America. In addition,
many of our domestic vendors maintain production facilities overseas. Some of
these facilities are located in regions which may be affected by the Sudden
Acute Respiratory Syndrome (SARS) epidemic and or political instability which
could cause a disruption in trade. Any reduction in merchandise available to us
or any increase in its costs related to such factors could have a material
adverse effect on our results of operations.

THE DEPARTURE OF CERTAIN MEMBERS OF OUR SENIOR MANAGEMENT TEAM COULD ADVERSELY
AFFECT OUR BUSINESS.

The success of our business is dependent upon our senior management closely
supervising all aspects of our business, in particular the operation of our
stores and the designing of our merchandise. If we were to lose the benefit of
this involvement, and in particular if we were to lose the services of Julian R.
Geiger, our Chairman and Chief Executive Officer, John S. Mills, our President
and Chief Operating Officer or Christopher L. Finazzo, our Executive Vice
President-Chief Merchandising Officer, our business could be adversely affected.
In addition, Mr. Geiger and Mr. Finazzo maintain many of our vendor
relationships, and the loss of either of them could negatively impact present
vendor relationships. We do not have employment agreements with any member of
our senior management team other than Mr. Geiger, Mr. Mills and Mr. Finazzo.

OUR FAILURE TO PROTECT OUR TRADEMARKS AEROPOSTALE(R) AND, TO A LESSER EXTENT,
AERO(TM) ADEQUATELY COULD HAVE A NEGATIVE IMPACT ON OUR BRAND IMAGE AND LIMIT
OUR ABILITY TO PENETRATE NEW MARKETS.

We believe that our trademark AEROPOSTALE(R) is integral to our logo-driven
design strategy. We have obtained federal registrations for the AEROPOSTALE(R)
mark in the United States and have applied for or obtained registrations in most
foreign countries in which our vendors are located. We use the term

"AERO" in many constantly changing designs and logos even though we have not
obtained registration for the mark or variation or combinations thereof for
adult clothing. We cannot assure you that the registrations we obtained will
prevent the imitation of our products or infringement of our intellectual
property rights by others. If any third party imitates our products in a manner
that projects lesser quality or carries a negative connotation, our brand image
could be materially adversely affected. Because we have not obtained federal
registration for the AERO(TM) mark and have not registered the "AEROPOSTALE"
mark in all categories or in all foreign countries in which we now or may in the
future source or offer our merchandise, international expansion and our
merchandising using these marks could be limited.

In addition, we cannot assure you that others will not try to block the
manufacture, export or sale of our products as violative of their trademarks or
other proprietary rights. Other entities may have rights to trademarks that
contain the word "AERO" or may have registered similar or competing marks for
apparel and accessories in foreign countries in which our vendors are located.
Our applications for international registration of the AEROPOSTALE(R) mark have
been rejected in a few countries in which our products are manufactured because
third parties have already registered the mark for clothing in those countries.
There may be other prior registrations in other foreign countries of which we
are not aware. In all such countries it may be possible for any third party
owner of the national trademark registration for "AEROPOSTALE" to enjoin the
manufacture, sale or exportation of "AEROPOSTALE" branded goods to the United
States. If we were unable to reach a licensing arrangement with these parties,
our vendors may be unable to manufacture our products in those countries. Our
inability to register our trademarks or purchase or license the right to use our
trademarks or logos in these jurisdictions could limit our ability to obtain
supplies from or manufacture in less costly markets or penetrate new markets
should our business plan change to include selling our merchandise in those
jurisdictions outside the United States.

OUR ABILITY TO ATTRACT CUSTOMERS TO OUR STORES DEPENDS HEAVILY ON THE SUCCESS OF
THE SHOPPING MALLS IN WHICH WE ARE LOCATED.

In order to generate customer traffic we must locate our stores in
prominent locations within successful shopping malls. We cannot control the
development of new shopping malls, the availability or cost of appropriate
locations within existing or new shopping malls, or the success of individual
shopping malls. A significant decrease in shopping mall traffic would have a
material adverse effect on our results of operations.

OUR MARKET SHARE MAY BE ADVERSELY IMPACTED AT ANY TIME BY A SIGNIFICANT NUMBER
OF COMPETITORS.

The teen apparel market is highly competitive and is characterized by low
barriers to entry. We compete against a diverse group of retailers, including
national and local specialty retail stores, mass merchandisers, regional retail
chains, traditional department stores and mail-order retailers. Many of our
competitors are already established in markets that we have not penetrated. In
addition, many of our competitors have many more stores in operation than us,
and therefore greater national recognition than we do. Our market share and
results of operations may be adversely impacted by this significant number of
competitors.

OUR CONCENTRATION OF STORES IN THE EASTERN UNITED STATES MAKES US SUSCEPTIBLE TO
ADVERSE CONDITIONS IN THIS REGION.

The majority of our stores are located in the eastern half of the United
States. As a result, our operations are more susceptible to regional factors
than the operations of more geographically diversified competitors. These
factors include, among others, economic and weather conditions, as well as
demographic and population changes.

BEAR STEARNS MERCHANT BANKING HAS THE RIGHT TO DESIGNATE A MAJORITY OF THE
MEMBERS OF OUR BOARD OF DIRECTORS, AND THEREFORE, NO CORPORATE ACTIONS REQUIRING
BOARD APPROVAL CAN BE CONSUMMATED WITHOUT THE APPROVAL OF ITS DESIGNEES.

In general, the designees of Bear Stearns Merchant Banking will be able to
control most matters requiring board approval. These matters would include the
approval of significant corporate transactions, including

potential mergers, consolidations or sales of all or substantially all of our
assets. This concentration of board representation may have the effect of
impeding a merger, consolidation, takeover or other business combination
involving us or discouraging a potential acquiror from making a tender offer for
our shares.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rates. The Company, in the normal course of doing business, is
theoretically exposed to interest rate change market risk. As borrowing patterns
are seasonal, the Company is not dependent on borrowing for the entire year.
Therefore, a sudden increase in interest rates (which under the Loan Agreement
is dependent on the prime rate) may, during peak borrowing, have a negative
impact on short-term results.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AEROPOSTALE, INC.

INDEX TO FINANCIAL STATEMENTS

<Table>
<Caption>
PAGE
----

Independent Auditors' Report................................ 27
Consolidated Balance Sheets as of February 2, 2002 and
February 1, 2003 ......................................... 28
Consolidated Statements of Income for the fiscal years ended
July 29, 2000 and August 4, 2001, and for the six months
ended February 3, 2001 (unaudited) and February 2, 2002
and for the fiscal year ended February 1, 2003 ........... 29
Consolidated Statements of Stockholders' Equity for the
fiscal years ended July 29, 2000, August 4, 2001, for the
six months ended February 2, 2002 and for the fiscal year
ended February 1, 2003 ................................... 30
Consolidated Statements of Cash Flows for the fiscal years
ended July 29, 2000 and August 4, 2001, and for the six
months February 3, 2001 (unaudited) and February 2, 2002
and for the fiscal year ended February 1, 2003 ........... 31
Notes to Financial Statements............................... 32
</Table>

INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors of
Aeropostale, Inc.

We have audited the accompanying consolidated balance sheets of
Aeropostale, Inc. (the "Company") as of February 1, 2003 and February 2, 2002,
and the related consolidated statements of income, stockholders' equity, and
cash flows for the fiscal years ended February 1, 2003, August 4, 2001 and July
29, 2000 and for the six months ended February 2, 2002. Our audits included the
financial statement schedule listed in Item 15. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of February 1,
2003 and February 2, 2002, and the results of its operations and its cash flows
for the fiscal years ended February 1, 2003, August 4, 2001 and July 29, 2000
and for the six months ended February 2, 2002 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.

As discussed in Note 4 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets as of August 5, 2001 to conform to Financial Accounting Standards Board
Statement No. 142.

/s/ DELOITTE & TOUCHE LLP

New York, New York
March 7, 2003

AEROPOSTALE, INC.
CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
FEBRUARY 2, FEBRUARY 1,
2002 2003
----------- -----------
(IN THOUSANDS)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 44,958 $ 87,475
Merchandise inventory..................................... 37,979 46,645
Deferred income taxes..................................... 25 682
Other current assets...................................... 6,818 9,987
-------- --------
Total current assets................................... 89,780 144,789
Fixtures, equipment and improvements -- Net................. 48,646 69,448
Deferred income taxes....................................... 7,923 8,468
Other assets................................................ 578 327
-------- --------
Total assets......................................... $146,927 $223,032
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 13,995 $ 17,954
Accrued expenses.......................................... 37,604 40,044
-------- --------
Total current liabilities.............................. 51,599 57,998
Other noncurrent liabilities................................ 25,521 37,075
Series B redeemable preferred stock:
$0.01 par value per share; authorized, issued and
outstanding, 6 shares liquidation preference $6,250;
12.5% cumulative....................................... 9,617 --
Commitment and contingencies
Stockholders' equity:
Common stock -- par value, $0.01 per share; 75,266 and
200,000 shares authorized, 31,047 and 35,306 shares
issued and outstanding................................. 310 353
Common stock -- Nonvoting, par value, $0.01 per share;
75,266 shares authorized, 1,118 and 0 shares issued and
outstanding............................................ 11 --
Additional paid-in capital................................ 9,321 41,657
Deferred compensation..................................... (4,473) --
Retained earnings......................................... 55,021 85,949
-------- --------
Total stockholders' equity............................. 60,190 127,959
-------- --------
Total liabilities and stockholders' equity............. $146,927 $223,032
======== ========
</Table>

See notes to consolidated financial statements.
28

AEROPOSTALE, INC.

CONSOLIDATED STATEMENTS OF INCOME

<Table>
<Caption>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
-------------------- -------------------------- --------------
JULY 29, AUGUST 4, FEBRUARY 3, FEBRUARY 2, FEBRUARY 1,
2000 2001 2001 2002 2003
-------- --------- ------------ ----------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NET SALES................................... $213,445 $304,767 $184,369 $284,040 $550,904
COST OF SALES............................... 151,973 218,618 124,611 180,054 388,301
-------- -------- -------- -------- --------
Gross profit............................ 61,472 86,149 59,758 103,986 162,603
-------- -------- -------- -------- --------
COSTS AND EXPENSES:......................... 45,680 65,918 34,469 55,169 110,506
Store closing expenses.................... -- 815 -- -- --
Amortization of negative goodwill......... (234) (234) (116) -- --
-------- -------- -------- -------- --------
Total costs and expenses................ 45,446 66,499 34,353 55,169 110,506
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS...................... 16,026 19,650 25,405 48,817 52,097
INTEREST EXPENSE (INCOME) -- Net of interest
income of $20, $197, $21, $105 and $399... 911 1,671 1,082 292 (56)
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES.................. 15,115 17,979 24,323 48,525 52,153
PROVISION FOR INCOME TAXES.................. 5,749 7,065 9,629 19,888 20,863
-------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS........... 9,366 10,914 14,694 28,637 31,290
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of
tax benefit of $2,008................... (3,212) -- -- -- --
Gain on disposal of discontinued
operations net of tax benefit of $2,776
and tax expense of $257 and $248........ 5,214 405 388 -- --
-------- -------- -------- -------- --------
Gain on discontinued operations........... 2,002 405 388 -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE...... -- -- -- 1,632 --
-------- -------- -------- -------- --------
NET INCOME.................................. $ 11,368 $ 11,319 $ 15,082 $ 30,269 $ 31,290
======== ======== ======== ======== ========
BASIC NET INCOME PER COMMON SHARE
From continuing operations................ $ 0.27 $ 0.32 $ 0.46 $ 0.89 $ 0.90
From discontinued operations.............. 0.06 0.01 0.01 -- --
From cumulative accounting change......... -- -- -- 0.05 --
-------- -------- -------- -------- --------
Net income per share...................... $ 0.33 $ 0.33 $ 0.47 $ 0.94 $ 0. 90
======== ======== ======== ======== ========
DILUTED NET INCOME PER COMMON SHARE:
From continuing operations................ $ 0.24 $ 0.28 $ 0.40 $ 0.78 $ 0.82
From discontinued operations.............. 0.06 0.01 0.01 -- --
From cumulative accounting change......... -- -- -- 0.05 --
-------- -------- -------- -------- --------
Net income per share...................... $ 0.30 $ 0.29 $ 0.41 $ 0.83 $ 0.82
======== ======== ======== ======== ========
Basic weighted average number of shares
outstanding............................... 31,069 31,339 31,183 31,633 34,387
Diluted weighted average number of shares
outstanding............................... 34,693 35,465 35,177 36,000 37,854
</Table>

See notes to consolidated financial statements.
29

AEROPOSTALE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<Table>
<Caption>
COMMON STOCK
COMMON STOCK NONVOTING ADDITIONAL
---------------- --------------- PAID-IN DEFERRED RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION EARNINGS TOTAL
------- ------ ------ ------ ---------- ------------ -------- --------
(IN THOUSANDS)

BALANCE, AUGUST 1, 1999:..... 31,047 $310 6 $ -- $ 639 $ -- $ 4,727 $ 5,676
Net income................. -- -- -- -- -- -- 11,368 11,368
Stock options exercised.... -- -- 60 1 1 -- -- 2
Accrued dividend --
redeemable preferred
stock.................... -- -- -- -- -- -- (1,021) (1,021)
Accretion of Series A
preferred stock.......... -- -- -- -- -- -- (19) (19)
------- ---- ------ ---- ------- ------- ------- --------
BALANCE, JULY 29, 2000:...... 31,047 310 66 1 640 -- 15,055 16,006
Net income................. -- -- -- -- -- -- 11,319 11,319
Stock options exercised.... -- -- 424 4 9 -- -- 13
Accrued dividend --
redeemable preferred
stock.................... -- -- -- -- -- -- (1,048) (1,048)
------- ---- ------ ---- ------- ------- ------- --------
BALANCE, AUGUST 4, 2001:..... 31,047 310 490 5 649 -- 25,326 26,290
Net income................. -- -- -- -- -- -- 30,269 30,269
Stock options exercised.... -- -- 628 6 227 -- -- 233
Equity based
compensation............. -- -- -- -- 8,445 (8,445) -- --
Amortization of equity
based compensation....... -- -- -- -- -- 3,972 -- 3,972
Accrued dividend --
redeemable preferred
stock.................... -- -- -- -- -- -- (574) (574)
------- ---- ------ ---- ------- ------- ------- --------
BALANCE, FEBRUARY 2, 2002:... 31,047 310 1,118 11 9,321 (4,473) 55,021 60,190
Net income................. -- -- -- -- -- -- 31,290 31,290
Stock options exercised.... 533 5 733 8 274 -- -- 287
Tax benefit related to
exercise of stock
options.................. -- -- -- -- 2,674 -- -- 2,674
Deferred offering costs.... -- -- -- -- (1,981) -- -- (1,981)
Initial public offering.... 1,875 19 -- -- 31,369 -- -- 31,388
Amortization of equity
based compensation....... -- -- -- -- -- 4,473 -- 4,473
Conversion of common stock
nonvoting to common
stock.................... 1,851 19 (1,851) (19) -- -- -- --
Accrued dividend -- Series
B redeemable preferred
stock.................... -- -- -- -- -- --_ (362) (362)
------- ---- ------ ---- ------- ------- ------- --------
BALANCE, FEBRUARY 1, 2003:... 35,306 $353 -- $ -- $41,657 $ -- $85,949 $127,959
======= ==== ====== ==== ======= ======= ======= ========
</Table>

See notes to consolidated financial statements.
30

AEROPOSTALE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
-------------------- ------------------------- --------------
JULY 29, AUGUST 4, FEBRUARY 3, FEBRUARY 2, FEBRUARY 1,
2000 2001 2001 2002 2003
-------- --------- ----------- ----------- --------------
(UNAUDITED)
(IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 11,368 $ 11,319 $ 15,082 $ 30,269 $ 31,290
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 3,799 3,938 1,698 3,124 8,993
Amortization of tenant allowances and above market
leases............................................. (2,401) (1,917) (869) (1,315) (3,350)
Impairment charge.................................... -- 815 -- -- --
Amortization of negative goodwill.................... (847) (234) (116) -- --
Equity based compensation charge..................... -- -- -- 3,972 4,473
Gain (loss) on discontinued operations............... 2,782 (662) (636) -- --
Deferred rent, net................................... 916 1,132 540 406 2,265
Pension expense...................................... 171 247 125 133 241
Deferred income taxes................................ 2,068 2,843 (292) (2,168) (1,202)
Cumulative effect of accounting change............... -- -- -- (1,632) --
Changes in operating assets and liabilities:
Merchandise inventory.............................. (20,964) (10,713) 14,282 20,700 (8,666)
Other current assets............................... (6,520) 2,432 1,570 389 (3,169)
Other assets....................................... (357) 21 (22) -- 174
Accounts payable................................... 5,317 (2,501) (7,653) 684 3,959
Accrued expenses and other noncurrent
liabilities...................................... 8,129 12,844 14,571 28,316 17,512
-------- -------- -------- -------- --------
Net cash provided by operating activities........ 3,461 19,564 38,280 82,878 52,520
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixtures, equipment and improvements...... (19,656) (23,916) (10,977) (9,392) (29,718)
-------- -------- -------- -------- --------
Net cash used in investing activities................ (19,656) (23,916) (10,977) (9,392) (29,718)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised................................ 2 13 4 233 287
Net proceeds from initial public offering.............. -- -- -- -- 31,388
Offering costs related to initial public offering...... -- -- -- -- (1,981)
Net borrowings under revolving credit facility......... 26,563 8,280 (25,275) (35,267) --
Payment of deferred finance costs...................... -- (220) -- -- --
Redemption of Series A preferred stock................. (4,537) -- -- -- --
Payment and redemption of dividends.................... (463) -- -- -- (9,979)
-------- -------- -------- -------- --------
Net cash (used in) provided by financing
activities......................................... 21,565 8,073 (25,271) (35,034) 19,715
-------- -------- -------- -------- --------
Net cash used in discontinued operations............. (5,563) (932) (958) -- --
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (193) 2,789 1,074 38,452 42,517
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 3,910 3,717 3,717 6,506 44,958
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 3,717 $ 6,506 $ 4,791 $ 44,958 $ 87,475
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid...................................... $ 1,369 $ 1,953 $ 1,883 $ 10,699 $ 19,649
======== ======== ======== ======== ========
Interest paid.......................................... $ 785 $ 1,724 $ 1,026 $ 391 $ 298
======== ======== ======== ======== ========
SIGNIFICANT NONCASH INVESTING AND FINANCING TRANSACTIONS:
Accrued dividends on Series A Exchangeable Redeemable
Preferred Stock...................................... $ 96 $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
Accrued dividends on Series B Redeemable Preferred
Stock................................................ $ 925 $ 1,048 $ 508 $ 574 $ 362
======== ======== ======== ======== ========
Accretion on Series A Exchangeable Redeemable Preferred
Stock................................................ $ 19 $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
</Table>

See notes to consolidated financial statements.
31

AEROPOSTALE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND STORE DATA)

1. BUSINESS

Description of Business -- Aeropostale, Inc. (together with its
wholly-owned subsidiary, Aeropostale West, Inc., collectively the "Company" or
"Aeropostale") is a mall-based specialty retailer of casual apparel and
accessories for young women and young men. On February 3, 2002, Aeropostale
contributed all of the assets relating to 10 stores that are located in Arizona
and California to its wholly-owned subsidiary, Aeropostale West, Inc. as part of
a tax-free reorganization.

The Company provides customers with a focused selection of high-quality,
active-oriented, fashion basic merchandise at compelling values. Aeropostale
maintains complete control over its proprietary brand by designing and sourcing
all of its merchandise. The Company's products can be purchased only in our
stores, which sell Aeropostale merchandise exclusively. The Company's stores
creates a fun and high energy shopping experience through the use of creative
visual merchandising, colorful in-store signage, bright lighting, popular music
and an enthusiastic, well-trained sales force. The average store size of
approximately 3,500 square feet is generally smaller than that of its mall-based
competitors and the Company believes that this enables it to achieve higher
sales productivity and project a sense of activity and excitement. As of
February 1, 2003, the Company operated 367 stores in 35 states.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year -- The Company elected to change its fiscal year from a 52/53
week year that ends on the Saturday nearest to July 31 to a 52/53 week year that
ends on the Saturday nearest to January 31, effective for the transition period
ended on February 2, 2002. For tax purposes, the Company has retained its July
year-end. As used herein, "Fiscal 2002" refers to the fiscal year ended February
1, 2003, "Fiscal 2001" refers to the fiscal year ended August 4, 2001,
"Transition 2001" refers to the six month period from August 5, 2001 to February
2, 2002. Similarly, "Fiscal 2000" refers to the fiscal year ended July 29, 2000
and "Transition 2000" refers to the six month period from July 30, 2000 to
February 3, 2001. All references to amounts related to the six months ended
February 3, 2001 are unaudited. Transition 2001 has twenty-six weeks while
Transition 2000 has twenty-seven weeks.

Cash Equivalents -- The Company considers credit card receivables and all
short-term investments with an original maturity of three months or less as cash
equivalents.

Merchandise Inventory -- Inventory consists of finished goods and is valued
utilizing the cost method at the lower of cost or market determined on a
first-in, first-out basis. Merchandise inventory includes warehousing, freight,
merchandise and design costs as an inventory product cost.

Fixtures, Equipment and Improvements -- Fixtures, equipment and
improvements are stated at cost. Depreciation and amortization are provided for
by the straight-line method over the following estimated useful lives:

<Table>

Store fixtures and equipment............. 10 years
Lesser of life of the asset or life of
Leasehold improvements................... lease
Computer equipment and software.......... 5 years
</Table>

Effective the first quarter of 2001, the Company adjusted the estimated
useful lives for store fixtures and equipment from 7 to 10 years and computer
equipment and software from 3 to 5 years. The Company examined and reviewed its
accounting policies and practices and determined that revised useful lives
reflect a more accurate timing of the economic benefits to be received from such
assets. The change in estimate had a $574 (net of tax benefit of $382) impact on
the Fiscal 2001 results.

Impairment of Long-lived and Intangible Assets -- The Company evaluates
Long-lived assets in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-lived
Assets. This Statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed of. Long-lived assets
are evaluated for recoverability in accordance SFAS No. 144 whenever events or
changes in circumstances indicate that an asset may have been impaired. In
evaluating an asset for recoverability, the Company estimates the future cash
flows expected to result from the use of the asset and eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss,
equal to the excess of the carrying amount over the fair market value of the
asset is recognized.

In Fiscal 2001, the Company recorded store closing expenses of $815 to
reflect the write-down of leasehold improvements and stores fixtures and
equipment to their net realizable value, in seven stores closed by October 2001.
The Company did not incur any other costs associated with such store closings.

Income Taxes -- Income taxes are recognized during the year in which
transactions enter into the determination of financial statement income, with
deferred taxes being provided for temporary differences between amounts of
assets and liabilities for financial reporting purposes and such amounts as
measured by the tax laws.

Pre-Operating Expenses -- The Company expenses new store operating costs as
incurred.

Deferred Financing Costs -- Deferred financing costs are amortized over the
life of the debt using the straight-line method. Net deferred financing charges
were $155, $208, $77, $174 and $104, net of accumulated amortization of $307,
$12, $384, $46 and $116 at the end of Fiscal 2000, Fiscal 2001, Transition 2000
(unaudited), Transition 2001 and Fiscal 2002, respectively. These amounts are
included in other assets in the balance sheets.

Deferred Rent -- Rent expense under operating leases provides for tenant
allowances and fixed non-contingent escalations and is recognized on a
straight-line basis over the term of each individual underlying lease.

Revenue Recognition -- Revenue is recognized at the "point of sale."
Allowances for sales returns are recorded as a component of net sales in the
periods in which the related sales are recognized.

Reserve for Returns -- The Company provides a reserve equal to the gross
profit on projected merchandise returns based upon its prior returns experience.

Marketing -- Marketing costs, which includes internet, television, print,
radio and other media advertising and collegiate athlete conference
sponsorships, are expensed as incurred and were $1,062, $2,210, $1,329, $1,792
and $5,719 for Fiscal 2000, Fiscal 2001, Transition 2000(unaudited), Transition
2001 and Fiscal 2002, respectively.

Net Income Per Share -- The Company calculates net income per share in
accordance with SFAS No. 128, Earnings Per Share. Basic net income per share is
computed by dividing net income after preferred dividends by the weighted
average number of common shares outstanding for the period. Diluted net income
per share also includes the dilutive effect of potential common shares
outstanding during the period.

Fair Value of Financial Instruments -- The following disclosure is made in
accordance with the requirements of SFAS No. 107, Disclosures about Fair Value
of Financial Instruments. The carrying amounts of cash and cash equivalents and
accounts payable approximate their fair value due to the short-term maturities
of such items. The carrying amount of the revolving credit facility approximates
its fair value due to the variable interest rate it carries. Estimated fair
value disclosures have been determined by the Company, using available market
information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and estimation methodologies
may have a material effect on the estimated fair value amounts.
33

Derivatives -- The Company adopted SFAS No. 133 and 138, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
requiring all companies to recognize derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. SFAS No. 138 is an amendment to SFAS No. 133, which amended or modified
certain issues discussed in SFAS No. 133. Implementation of SFAS No. 133 and
SFAS No. 138 did not have a material impact on the Company's statement of
financial position, results of operations or cash flows.

Reclassifications -- Certain reclassifications have been made to the
consolidated financial statements in prior periods to conform to the current
period presentation.

Segment Reporting -- SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information establishes standards for reporting
information about a company's operating segments. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company operates in a single operating segment -- the operation
of mall-based specialty retail stores. Revenues from external customers are
derived from merchandise sales. The Company's net sales mix by merchandise
category were as follows:

<Table>
<Caption>
FISCAL TRANSITION
----------- ----------- FISCAL
MERCHANDISE CATEGORIES 2000 2001 2000 2001 2002
- ---------------------- ---- ---- ---- ---- ------

Young Women's........................................ 42% 49% 47% 56% 58%
Young Men's.......................................... 47 39 42 33 30
Accessories.......................................... 11 12 11 11 12
--- --- --- --- ---
Total Merchandise Sales.............................. 100% 100% 100% 100% 100%
=== === === === ===
</Table>

The Company does not rely on any major customers as a source of revenue.

New Accounting Standards -- In April 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 145, Rescission of SFAS No. 4, 44 and
64, Amendment of SFAS No. 13, and Technical Corrections. This Statement rescinds
SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. This Statement also rescinds SFAS No.
44, Accounting for Intangible Assets of Motor Carriers. This Statement amends
SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. Rescissions
of SFAS No. 4 and SFAS No. 64 are effective for fiscal years beginning after May
15, 2002. Rescissions for SFAS No. 13 are effective for transactions entered
into after May 15, 2002. All other provisions are effective for financial
statements issued after May 15, 2002. The adoption of SFAS No. 145 has not had
and is not expected to have a material impact on our consolidated financial
statements.

significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. Generally, FIN 45 applies to certain types of
financial guarantees that contingently require the guarantor to make payments to
the guaranteed party based on changes in an underlying that is related to an
asset, liability, or an equity security of the guaranteed party; performance
guarantees involving contracts which require the guarantor to make payments to
the guaranteed party based on another entity's failure to perform under an
obligating agreement; indemnification agreements that contingently require the
guarantor to make payments to an indemnified party based on changes in an
underlying that is related to an asset, liability, or an equity security of the
indemnified party; or indirect guarantees of the indebtedness of others. The
initial recognition and initial measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
Disclosure requirements under FIN 45 are effective for financial statements
ending after December 15, 2002 and are applicable to all guarantees issued by
the guarantor subject to FIN 45's scope, including guarantees issued prior to
FIN 45. We have evaluated the accounting provisions of the interpretations and
there was no material impact on our financial condition, results of operations
or cash flows for the year ended February 1, 2003. We have made the required
disclosures in the consolidated financial statements as of February 1, 2003.

3. SIGNIFICANT RISKS AND UNCERTAINTIES

Use of Estimates -- The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The accounts requiring the use
of significant estimates included inventory, income tax and certain reserves.

Certain Risks Concentration -- The Company had three suppliers who in the
aggregate constituted approximately 31%, 36%, 30%, 41% and 37% of the Company's
purchases for Fiscal 2000, Fiscal 2001, Transition 2000 (unaudited), Transition
2001 and Fiscal 2002, respectively. The loss of any of these suppliers could
adversely affect the Company's operations.

4. CUMULATIVE EFFECT OF ACCOUNTING CHANGE

In connection with the purchase of all the shares of the Company from
Federated Specialty Stores, Inc. (a wholly-owned subsidiary of Federated
Department Stores, Inc.) on August 3, 1998 ("Acquisition"), the Company recorded
gross negative goodwill in the amount of $12.8 million that was being amortized
over an estimated life of ten years.

In connection with the decision to discontinue the operations of the
Chelsea Cambell business, an allocation of the negative goodwill was made
between the Aeropostale and the Chelsea Cambell businesses based upon their
relative fair values at the Acquisition date. As a result of such allocation,
approximately $8.8 million of unamortized negative goodwill was written off as
part of the gain on disposal of the Chelsea Cambell business. The remaining
negative goodwill allocated to Aeropostale continued to be amortized over its
estimated life of ten years. Net negative goodwill was approximately $1,866 and
$1,632 at the end of Fiscal 2000 and Fiscal 2001, respectively.

The Company adopted SFAS No. 142, Goodwill and Intangibles, which changed
the accounting for goodwill from an amortization method to an impairment
approach on August 5, 2001. With the adoption of SFAS No. 142, the remaining
negative goodwill was recorded as income from a cumulative effect of accounting
change.

Net income and income from continuing operations for Transition 2000
(unaudited) and Transition 2001 and the two previous fiscal years had been
adjusted to reflect net income and income from continuing operations as though
no negative goodwill amortization and the cumulative accounting change was
recorded.

<Table>
<Caption>
FISCAL TRANSITION
---------------- ----------------- FISCAL
2000 2001 2000 2001 2002
------ ------- ------- ------- -------
(UNAUDITED)

Income from continuing operations..... $9,366 $10,914 $14,694 $28,637 $31,290
Adjusted income from continuing
operations.......................... 9,132 10,680 14,578 28,637 31,290
Net income............................ 11,368 11,319 15,082 30,269 31,290
Adjusted net income................... 11,134 11,085 14,966 28,637 31,290
Diluted income from continuing
operations per share................ $ 0.24 $ 0.28 $ 0.40 $ 0.78 $ 0.82
Adjusted diluted income from
continuing operations per share..... 0.23 0.27 0.40 0.78 0.82
Diluted net income per share.......... 0.30 0.29 0.41 0.83 0.82
Adjusted net income per share......... 0.29 0.28 0.41 0.78 0.82
</Table>

5. OTHER CURRENT ASSETS

Other current assets consist of the following:

<Table>
<Caption>
FEBRUARY 2, 2002 FEBRUARY 1, 2003
---------------- ----------------

Prepaid expenses........................................ $ 593 $1,544
Prepaid rent............................................ 3,547 4,857
Other receivables....................................... 2,678 3,586
------ ------
$6,818 $9,987
====== ======
</Table>

6. FIXTURES, EQUIPMENT AND IMPROVEMENTS -- NET

Fixtures, equipment and improvements -- net, consist of the following:

<Table>
<Caption>
FEBRUARY 2, 2002 FEBRUARY 1, 2003
---------------- ----------------

Leasehold improvements.................................. $33,507 $49,766
Store fixtures and equipment............................ 18,877 26,457
Computer equipment and software......................... 4,434 6,886
Construction in progress................................ 245 2,622
------- -------
57,063 85,731
Less accumulated depreciation and amortization.......... 8,417 16,283
------- -------
$48,646 $69,448
======= =======
</Table>

Depreciation and amortization expense from continuing operations amounted
to approximately $1,653, $3,770, $1,623, $3,090 and $8,916 for Fiscal 2000,
Fiscal 2001, Transition 2000 (unaudited), Transition 2001 and Fiscal 2002,
respectively.

7. ACCRUED EXPENSES

Accrued expenses consist of the following:

<Table>
<Caption>
FEBRUARY 2, 2002 FEBRUARY 1, 2003
---------------- ----------------

Accrued compensation.................................... $ 8,535 $ 7,838
Sales and use tax....................................... 640 1,158
Accrued rent............................................ 4,192 4,950
Accrued gift certificates and credits................... 4,658 6,761
Income tax payable...................................... 13,237 14,248
Other................................................... 6,342 5,089
------- -------
$37,604 $40,044
======= =======
</Table>

8. OTHER NONCURRENT LIABILITIES

Other noncurrent liabilities consist of the following:

<Table>
<Caption>
FEBRUARY 2, 2002 FEBRUARY 1, 2003
---------------- ----------------

Deferred rent........................................... $21,300 $33,301
Above market rental liability........................... 1,919 1,231
Unfunded pension liability.............................. 2,302 2,543
------- -------
$25,521 $37,075
======= =======
</Table>

In connection with the Acquisition, the Company recorded a liability to
reflect leases that were at above-market rental rates. This liability will be
amortized as a reduction of future rental expenses over the respective lease
lives. The amortization was approximately $2.0 million and $0.8 million for
Fiscal 2000 and Fiscal 2001, respectively; $0.4 million for Transition 2000
(unaudited) and Transition 2001, and $0.7 million for Fiscal 2002. In Fiscal
2000, approximately $0.5 million was written off in connection with the
discontinued operations and approximately $0.9 million was written off in
connection with certain store closings.

9. REVOLVING CREDIT FACILITY

The Company has a revolving credit agreement, as amended, with a bank under
which the Company may borrow or obtain letters of credit up to an aggregate of
$55 million (the "Credit Facility"), with letters of credit having a sub-limit
of $15 million. The facility matures by its terms on July 31, 2004. Indebtedness
under

the Credit Facility is collateralized by the assets of the Company. Borrowings
under the Credit Facility bear interest, at the Company's option, either at (a)
the lender's prime rate or (b) the Euro Dollar Rate plus 1.50% to 2.00%,
depending on excess availability. Additionally, the Company must pay commitment
fees on any unused portion of the Credit Facility at an annualized rate of 0.375
percent of the difference between the unused portion and borrowings (including
outstanding letters of credit) at the preceding month-end. In connection with
the Credit Facility, the Company incurred a one-time financing fee of $220,
which is being amortized over the term of the Credit Facility as additional
interest expense. At February 1, 2003, the Company was in compliance with the
financial covenants of the credit facility, which require the Company to achieve
certain earnings before interest, income taxes, depreciation and amortization
("EBITDA" as defined in the Agreement) amounts and capital spending limitations.

At February 2, 2002 and February 1, 2003, the Company had $0 borrowings
outstanding under the Credit Facility. The average amount of borrowings
outstanding during Fiscal 2001, Transition 2001 and Fiscal 2002 were $18,486,
$10,026 and $1,570 at a weighted average interest rate of 7.70%, 5.57% and 5.99%
excluding an unused line fee of approximately $105, $82 and $202, respectively.
There were no issued stand-by or commercial letters of credit at February 2,
2002 and February 1, 2003.

10. NET INCOME PER SHARE

In accordance with SFAS No. 128, Earnings Per Share, basic earnings per
share has been computed based upon the weighted average of common shares and
nonvoting common shares outstanding, after deducting preferred dividend
requirements. Diluted earnings per share gives effect to outstanding stock
options.

Net income per common share has been computed as follows:

<Table>
<Caption>
FISCAL 2000 FISCAL 2001
----------------- -----------------
BASIC DILUTED BASIC DILUTED
------- ------- ------- -------

Income from continuing operations.............. $ 9,366 $ 9,366 $10,914 $10,914
Preferred stock dividends...................... (1,040) (1,040) (1,048) (1,048)
------- ------- ------- -------
Income from continuing operations available for
per-share calculation........................ 8,326 8,326 9,866 9,866
Income from discontinued operations............ 2,002 2,002 405 405
------- ------- ------- -------
Net income available for per-share
calculation.................................. $10,328 $10,328 $10,271 $10,271
======= ======= ======= =======
Average shares of common stock outstanding..... 31,069 31,069 31,339 31,339
Stock options.................................. -- 3,624 -- 4,126
------- ------- ------- -------
Total average equivalent shares................ 31,069 34,693 31,339 35,465
======= ======= ======= =======
Per Common Share:
Income from continuing operations.............. $ 0.27 $ 0.24 $ 0.32 $ 0.28
Income from discontinued operations............ 0.06 0.06 0.01 0.01
------- ------- ------- -------
Net income..................................... $ 0.33 $ 0.30 $ 0.33 $ 0.29
======= ======= ======= =======
</Table>

<Table>
<Caption>
TRANSITION
-------------------------------------
2001 2002
----------------- -----------------
BASIC DILUTED BASIC DILUTED
------- ------- ------- -------
(UNAUDITED)

Income from continuing operations.............. $14,694 $14,694 $28,637 $28,637
Preferred stock dividends...................... (508) (508) (574) (574)
------- ------- ------- -------
Income from continuing operations available for
per-share calculation........................ 14,186 14,186 28,063 28,063
Income from discontinued operations............ 388 388 -- --
Cumulative effect of accounting change......... -- -- 1,632 1,632
------- ------- ------- -------
Net income available for per-share
calculation.................................. $14,574 $14,574 $29,695 $29,695
======= ======= ======= =======
Average shares of common stock outstanding..... 31,183 31,183 31,633 31,633
Stock options.................................. -- 3,994 -- 4,367
------- ------- ------- -------
Total average equivalent shares................ 31,183 35,177 31,633 36,000
======= ======= ======= =======
Per Common Share:
Income from continuing operations.............. $ 0.46 $ 0.40 $ 0.89 $ 0.78
Income from discontinued operations............ 0.01 0.01 -- --
Cumulative effect of accounting change......... -- -- 0.05 0.05
------- ------- ------- -------
Net income..................................... $ 0.47 $ 0.41 $ 0.94 $ 0.83
======= ======= ======= =======
</Table>

<Table>
<Caption>
FISCAL 2002
-----------------
BASIC DILUTED
------- -------

Net income.................................................. $31,290 $31,290
Preferred stock dividends................................... (362) (362)
------- -------
Net income available for per-share calculation.............. $30,928 $30,928
======= =======
Average shares of common stock outstanding.................. 34,387 34,387
Stock options............................................... -- 3,467(1)
------- -------
Total average equivalent shares............................. 34,387 37,854
======= =======
Per Common Share:
Income from continuing operations........................... $ 0.90 $ 0.82
Net income.................................................. $ 0.90 $ 0.82
======= =======
</Table>

(1) Options to purchase 20 shares were not included in the computation of
dilutive shares because to do so would have been anti-dilutive.

11. STOCKHOLDERS' EQUITY

All references to share information reflects a 376.328 for 1 stock split of
the Company's common stock and nonvoting common stock which was approved by the
Company's Board of Directors and became effective on May 10, 2002. The
respective share and per share amounts and conversion ratios included in the
condensed consolidated financial statements reflect the stock split for all
periods presented.

During 1998, the Company sold a total of 31,047,060 shares of voting common
stock $0.01 par value for proceeds of approximately $950 in connection with the
Acquisition. The common stock is entitled to one vote per share. Bear Stearns
Merchant Banking owned 65.7% of the Company's outstanding shares of common stock
and had the right to designate a majority of the members of the Board of
Directors. Bear Stearns Merchant Banking elected five persons out of nine
persons designated by the Company's by-laws to be directors.
39

On May 21, 2002, the Company completed an initial public offering of
14,375,000 shares of common stock of which 1,875,000 and 12,500,000 shares were
offered by the Company and certain selling stockholders, respectively, at a
price to the public of $18.00 per share. Upon completing the offering, net
proceeds of $31.4 million and $209.3 million were distributed to the Company and
selling stockholders, respectively. The Company is authorized to issue
200,000,000 shares of common stock $0.01 par value, and 5,000,000 shares of
undesignated preferred stock, $0.01 par value. In connection with the Company's
offering, all of the Company's outstanding shares of non-voting common stock
were converted into approximately 1,851,000 shares of common stock.
Approximately $10.0 million of the approximately $31.4 million of the net
proceeds to the Company were used to redeem all of the outstanding shares of
12 1/2% Series B redeemable preferred stock and pay all accrued and unpaid
dividends thereon (Note 12). The remainder of the proceeds were used for working
capital, general corporate purposes and new store openings. The Company also
incurred a $142 compensation charge for a bonus for certain management
stockholders in connection with the completion of the initial public offering.

Stock Option Plans -- During 1998, the Company adopted a stock option plan
under which it may grant non-qualified and qualified stock options to purchase
up to 6,585,740 shares of the Company's Common Stock $0.01 par value (which may
be voting or nonvoting) to executives, consultants, directors, or other key
employees (the "Stock Option Plan"). Options may have a maximum term of up to
eight years and qualified stock options may not be granted at less than the fair
market value at the date of grant. Vesting provisions of the options will be
determined by the Board of Directors at the date of option grants; however, all
outstanding options will immediately vest upon an initial public offering of the
Company's Common Stock or a sale of the Company. On December 21, 2001, the
Company granted 565,997 options with an exercise price of $0.85 per share which
was at a price less than fair market value of $15.77 per share. The equity based
compensation expense totaled approximately $8,445,000, of which $845,000 and
$3,127,000 were recorded in cost of sales and selling, general and
administrative expenses, respectively, in the six months and the fifty two weeks
ended February 2, 2002. The unamortized balance of approximately $4,473,000
associated with the immediate vesting of options upon the consummation of the
initial public offering, were recorded in the fiscal year ended February 1, 2003
of which $952,000 and $3,521,000 were recorded in cost of sales and selling,
general and administrative expenses, respectively.

On February 27, 2002, the Company adopted the Aeropostale 2002 Long-Term
Incentive Plan that became effective upon the consummation of the initial public
offering. A total of 1,735,556 shares of the Company's common stock became
available for issuance under the plan. Under the plan, the compensation
committee or the board may award grants of incentive stock options and other,
non-qualified stock options. The compensation committee also has the authority
to grant options that will become fully vested and exercisable automatically
upon a change in control. The compensation committee may not, however, award to
any one person in any calendar year options to purchase common stock equal to
more than 10% of the total number of shares authorized under the plan, and it
may not award incentive options first exercisable in any calendar year whose
underlying shares have a fair market value greater than $100,000 determined at
the time of grant. The compensation committee will determine the exercise price
and term of any option in its discretion. The exercise price of an incentive
option, however, may not be less than 100% of the fair market value of a share
of common stock on the date of grant and the option must be exercised within 10
years of the date of grant. The exercise price of an incentive option awarded to
a person who owns stock constituting more than 10% of our voting power may not
be less than 110% of such fair market value on such date and the option must be
exercised within five years of the date of grant.

The following table summarizes stock option transactions for common stock:

<Table>
<Caption>
FISCAL 2000 FISCAL 2001 TRANSITION 2001 FISCAL 2002
----------------- ----------------- ----------------- ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ -------- ------- --------

Outstanding, beginning of
period........................ 4,411 $0.03 4,633 $0.11 5,208 $0.19 5,420 $ 0.27
Granted....................... 1,125 0.32 1,227 0.43 848 0.85 20 15.55
Exercised..................... (59) 0.03 (425) 0.03 (628) 0.37 (1,265) 0.23
Forfeited..................... (844) 0.03 (227) 0.23 (8) 0.47 (19) 0.30
----- ----- ----- ----- ------ ----- ------- ------
Outstanding, end of period...... 4,633 $0.11 5,208 $0.19 5,420 $0.27 4,156 $ 0.36
===== ===== ===== ===== ====== ===== ======= ======
Options exercisable at
period-end.................... 982 $0.17 973 $0.19 1,048 $0.18 4,136 $ 0.29
===== ===== ===== ===== ====== ===== ======= ======
Weighted average fair value of
options granted during the
year.......................... $0.10 $0.10 $0.16 $ 8.56
===== ===== ===== ======
</Table>

The following table summarizes information concerning currently outstanding
options at February 2, 2002 and February 1, 2003:

<Table>
<Caption>
AVERAGE AVERAGE
NUMBER REMAINING NUMBER NUMBER REMAINING NUMBER
OUTSTANDING CONTRACTUAL EXERCISABLE OUTSTANDING CONTRACTUAL EXERCISABLE
AT FEBRUARY 2, LIFE AT FEBRUARY 2, AT FEBRUARY 1, LIFE AT FEBRUARY 1,
EXERCISE PRICES 2002 (YEARS) 2002 2003 (YEARS) 2003
- --------------- -------------- ----------- -------------- -------------- ----------- --------------

$0.03 2,871 1.6 701 2,102 0.6 2,102
0.38 163 3.1 163 -- -- --
0.39 1,220 3.5 109 1,060 2.5 1,060
0.51 418 4.0 -- 365 3.0 365
0.85 748 4.9 75 609 3.8 609
15.55 -- -- -- 20 3.6 --
----- ----- ----- -----
5,420 1,048 4,156 4,136
===== ===== ===== =====
</Table>

The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for
stock option grants. Accordingly, no compensation cost has been recognized for
employee stock options. In accordance with SFAS No. 123, Accounting for
Stock-Based Compensation, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model using the
following assumptions for grants in the respective periods:

<Table>
<Caption>
FISCAL TRANSITION
--------------------- --------------------- FISCAL
2000 2001 2000 2001 2002
--------- --------- --------- --------- ---------
(UNAUDITED)

Expected volatility............. 0 0 0 0 70%
Expected life................... 5.0 years 5.0 years 5.0 years 5.0 years 4.0 years
Risk-free interest rate......... 6.55% 5.41% 5.44% 4.25% 3.29%
Expected dividend yield......... 0% 0% 0% 0% 0%
</Table>

Set forth below are the Company's income from continuing operations, net
income, income from continuing operations per share and net income per share
presented "as reported" and pro forma as if compensation cost had been
recognized in accordance with the provisions of SFAS No. 123:

<Table>
<Caption>
FISCAL TRANSITION
----------------- --------------------- FISCAL
2000 2001 2000 2001 2002
------- ------- ----------- ------- -------
(UNAUDITED)

Income from continuing operations:
As reported........................ $ 9,366 $10,914 $14,694 $28,637 $31,290
Deduct: total stockbased
compensation expense determined
under the fair value method, net
of taxes........................ (34) (23) (9) (41) (45)
------- ------- ------- ------- -------
Pro-forma.......................... 9,332 10,891 14,685 28,596 31,245
======= ======= ======= ======= =======
Net income:
As reported........................ 11,368 11,319 15,082 30,269 31,290
Deduct: total stockbased
compensation expense determined
under the fair value method, net
of taxes........................ (34) (23) (9) (41) (45)
------- ------- ------- ------- -------
Pro-forma.......................... 11,334 11,296 15,073 30,228 31,245
======= ======= ======= ======= =======
Basic income from continuing
operations per share:
As reported........................ 0.27 0.32 0.46 0.89 0.90
Deduct: total stockbased
compensation expense determined
under the fair value method, net
of taxes........................ -- (0.01) -- -- --
------- ------- ------- ------- -------
Pro-forma.......................... 0.27 0.31 0.46 0.89 0.90
======= ======= ======= ======= =======
Basic net income per share:
As reported........................ 0.33 0.33 0.47 0.94 0.90
Deduct: total stockbased
compensation expense determined
under the fair value method, net
of taxes........................ -- -- -- -- --
------- ------- ------- ------- -------
Pro-forma.......................... 0.33 0.33 0.47 0.94 0.90
======= ======= ======= ======= =======
Diluted income from continuing
operations per share:
As reported........................ 0.24 0.28 0.40 0.78 0.82
Deduct: total stockbased
compensation expense determined
under the fair value method, net
of taxes........................ -- -- -- -- --
------- ------- ------- ------- -------
Pro-forma.......................... 0.24 0.28 0.40 0.78 0.82
======= ======= ======= ======= =======
Diluted net income per share:
As reported........................ 0.30 0.29 0.41 0.83 0.82
Deduct: total stockbased
compensation expense determined
under the fair value method, net
of taxes........................ -- -- -- (0.01) --
------- ------- ------- ------- -------
Pro-forma.......................... 0.30 0.29 0.41 0.82 0.82
======= ======= ======= ======= =======
</Table>

12. REDEEMABLE PREFERRED STOCK

Series A Exchangeable Redeemable Preferred Stock -- The Company issued
6,000 shares of its Series A exchangeable, redeemable preferred stock, $0.01 par
value ("Series A Preferred Stock") in connection with the Acquisition. The
Series A Preferred Stock has no voting rights. Dividends accrue at 6 percent per
annum at a liquidation value of $1,000 per share and are cumulative. The shares
are mandatory redeemable at the liquidation value at the earliest of an initial
public offering of the Company's stock, a sale of the Company or 10 years from
the date of issue or at any time at the Company's option. The shares are
exchangeable, at the Company's option on any dividend payment date, into 6
percent Subordinated Notes due 2008. The Series A Preferred Stock was recorded
at its fair value on the date of issue of approximately $4.5 million, the
discount of approximately $1.5 million was being recorded as an additional
dividend over the mandatory redemption period. In November 1999, the Company
exercised its option to redeem the Series A Preferred Stock at a price that
approximated its current fair value plus accrued dividends. The Company recorded
accretion to increase the carrying value to a liquidation value of $6 million.

Series B Redeemable Preferred Stock -- The Company issued 6,250 shares of
its Series B redeemable preferred stock $0.01 par value ("Series B Preferred
Stock") for proceeds of $6.25 million in connection with the Acquisition. The
Series B Preferred Stock has no voting rights. Dividends accrue at 12.5 percent
per annum at a liquidation value of $1,000 per share and are cumulative. The
shares are mandatory redeemable at the liquidation value at the earliest of an
initial public offering of the Company's stock, a sale of the Company or 10
years from the date of issue or at any time at the Company's option.

Cumulative dividends on the Series B Preferred Stock are payable at the
rate of 12.5 percent per annum, quarterly on the first day of November,
February, May, and August, based on face value. Dividends not declared and paid
will also accrue dividends at the same annual rate. Unpaid dividends on a
quarterly basis are then payable in Series B preferred stock. As of February 2,
2002, the Company had accrued $3,367 in dividends which is recorded as
Redeemable Preferred Stock which upon the liquidation, rank senior to all
classes of common stock. In connection with the Company's offering, all of the
Company's outstanding shares of 12 1/2% Series B redeemable preferred stock were
redeemed and all accrued and unpaid dividends payed thereon.

13. EMPLOYEE BENEFIT PLANS

The Company has a retirement plan with a 401(k) salary deferral feature
that covers substantially all of its employees who meet certain requirements.
Under the terms of the plan, employees may contribute up to 14 percent of gross
earnings and the Company will provide a matching contribution of 50 percent of
the first 5 percent of gross earnings contributed by the participants. The
Company may, at its option, make additional contributions. The terms of the plan
provide for vesting in the Company's matching contributions to the plan over a
five-year service period with 50 percent vesting after year three, an additional
25 percent vesting after year four, and participants will be fully vested after
year five. The Company expensed contributions for the retirement plan of
approximately $271, $278, $122, $226, and $312 for the Fiscal 2000, Fiscal 2001,
Transition 2000 (unaudited), Transition 2001, and Fiscal 2002, respectively.

The Company maintains a supplemental executive retirement plan ("SERP"),
which is an unfunded defined benefit plan for certain executives. The benefits
are based on years of service and the employee's highest average pay during any
five years within the ten-year period prior to retirement.

The following information on the Company's pension plan is provided:

<Table>
<Caption>
FEBRUARY 2, FEBRUARY 1,
2002 2003
----------- -----------

CHANGE IN BENEFIT OBLIGATION:
Net Benefit obligation at beginning of period............. $ 2,451 $ 2,588
Service cost.............................................. 45 101
Interest cost............................................. 86 182
Actuarial (gain) loss..................................... 6 170
Gross benefits paid....................................... -- (44)
------- -------
Net benefit obligation at end of period................... $ 2,588 $ 2,997
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of period.......... $ -- $ --
Employer contributions.................................... -- 44
Gross benefits paid....................................... -- (44)
Actual return on plan assets.............................. -- --
------- -------
Fair value of plan assets at end of period................ $ -- $ --
======= =======
Funded status at end of period............................ $(2,588) $(2,997)
Unrecognized net actuarial (gain)......................... 286 424
Prior service and cost.................................... -- 30
Unrecognized transition amount............................ -- --
------- -------
$(2,302) $(2,543)
======= =======
</Table>

Pension expenses includes the following components:

<Table>
<Caption>
FISCAL TRANSITION FISCAL
----------- ----------- ------
2000 2001 2000 2001 2002
---- ---- ---- ---- ------
(UNAUDITED)

COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost...................................... $ 80 $ 89 $ 45 $ 45 $101
Interest cost..................................... 101 155 79 86 182
Amortization of prior experience loss (gain)...... (10) 3 1 2 2
---- ---- ---- ---- ----
Net periodic benefit cost......................... $171 $247 $125 $133 $285
==== ==== ==== ==== ====
WEIGHTED-AVERAGE ASSUMPTIONS USED:
Discount rate..................................... 7% 7% 7% 7% 6.75%
Rate of compensation increase..................... 4.5% 4.5% 4.5% 4.5% 4.5%
</Table>

14. INCOME TAXES

The provision for income taxes included within continuing operations for
Fiscal 2000, Fiscal 2001 and Transition 2000 (unaudited), Transition 2001 and
Fiscal 2002 consists of the following:

<Table>
<Caption>
FISCAL TRANSITION FISCAL
--------------- ---------------- -------
2000 2001 2000 2001 2002
------ ------ ------ ------- -------
(UNAUDITED)

Federal:
Current............................... $ 463 $4,730 $7,977 $18,386 $18,420
Deferred.............................. 4,231 1,074 (56) (1,896) (1,092)
------ ------ ------ ------- -------
4,694 5,804 7,921 16,490 17,328
------ ------ ------ ------- -------
State and local:
Current............................... 402 758 1,457 3,777 3,645
Deferred.............................. 653 503 251 (379) (110)
------ ------ ------ ------- -------
1,055 1,261 1,708 3,398 3,535
------ ------ ------ ------- -------
$5,749 $7,065 $9,629 $19,888 $20,863
====== ====== ====== ======= =======
</Table>

The provision for income taxes for discontinued operations consists of the
following:

<Table>
<Caption>
FISCAL TRANSITION
---------------- ----------------
2000 2001 2000 2001
------- ------ ------ -------
(UNAUDITED)

Federal:
Current.............................. $(2,908) $ -- $ -- $ --
Deferred............................. (1,009) 225 216 --
------- ------ ------ -------
(3,917) 225 216 --
------- ------ ------ -------
State and local:
Current.............................. (679) -- -- --
Deferred............................. (188) 32 32 --
------- ------ ------ -------
(867) 32 32 --
------- ------ ------ -------
$(4,784) $ 257 $ 248 $ --
======= ====== ====== =======
Total provision........................ $ 965 $7,322 $9,877 $19,888
======= ====== ====== =======
</Table>

Reconciliation of the U.S. statutory rate with the Company's effective tax
rate excluding discontinued operations is summarized as follows:

<Table>
<Caption>
FISCAL TRANSITION FISCAL
----------- ----------- ------
2000 2001 2000 2001 2002
---- ---- ---- ---- ------
(UNAUDITED)

Federal statutory rate.............................. 34.0% 34.0% 34.0% 35.0% 35.0%
Increase (decrease) in tax resulting from:
State income taxes (net of federal tax
benefits)...................................... 4.1 4.6 4.6 4.6 4.6
Nondeductible goodwill amortization and
write-off...................................... (0.1) (0.5) (0.5) -- --
Change in federal tax rate........................ -- -- -- (.3) --
Other............................................. -- 1.2 1.5 1.7 0.4
---- ---- ---- ---- ----
Effective rate...................................... 38.0% 39.3% 39.6% 41.0% 40.0%
==== ==== ==== ==== ====
</Table>

As of February 2, 2002 and February 1, 2003, the components of the net
deferred income tax assets are as follows:

<Table>
<Caption>
FEBRUARY 2, FEBRUARY 1,
2002 2003
----------- -----------

Current:
Inventory................................................. $ (411) $ 103
Accrued vacation.......................................... 199 271
Other..................................................... 186 308
Accrued bonuses........................................... 51 --
------ ------
Total current............................................... $ 25 $ 682
====== ======
Noncurrent:
Fixed assets.............................................. 4,464 4,030
Acquired lease liability.................................. 806 511
Deferred rent............................................. 1,499 2,420
State income taxes........................................ (474) (512)
Equity based compensation................................. 1,628 2,019
------ ------
Total noncurrent............................................ 7,923 8,468
------ ------
Net deferred income tax assets.............................. $7,948 $9,150
====== ======
</Table>

15. COMMITMENTS AND CONTINGENCIES

The Company is committed under noncancelable leases for all its store and
office space, expiring at various dates through July 2011. The leases generally
provide for minimum rent plus additional increases in real estate taxes, certain
operating expenses, etc. Certain leases also require contingent rent based on
sales.

As of February 1, 2003, the aggregate minimum annual rent commitments are
as follows:

<Table>
<Caption>
FISCAL RELATED
YEAR PARTY OTHER TOTAL
- ------ ------- -------- --------

2003.................................................. $ 7,188 $ 27,412 $ 34,600
2004.................................................. 6,571 24,372 30,943
2005.................................................. 5,658 21,643 27,301
2006.................................................. 5,117 19,841 24,958
2007.................................................. 5,272 19,210 24,482
Thereafter............................................ 16,328 66,519 82,847
------- -------- --------
$46,134 $178,997 $225,131
======= ======== ========
</Table>

Rental expense consists of the following

<Table>
<Caption>
FISCAL TRANSITION
----------------- --------------------- FISCAL
2000 2001 2000 2001 2002
------- ------- ----------- ------- -------
(UNAUDITED)

Minimum rentals.................... $15,011 $21,073 $10,255 $11,915 $30,233
Contingent rentals................. 759 1,379 691 1,915 3,673
Office space rentals............... 594 777 363 439 832
</Table>

Included in rent and occupancy expense within income from continuing
operations for Fiscal 2000, Fiscal 2001, Transition 2000 (unaudited), Transition
2001, and Fiscal 2002 is approximately $9,632, $9,575, $4,651, $5,202, and
12,588, respectively, paid to a related party shareholder of the Company who is
no longer a related party at the end of Fiscal 2002.

Employment Agreements -- As of February 1, 2003, the Company had
outstanding employment contracts expiring in fiscal 2003 and fiscal 2004. The
amount payable for these contracts is approximately $2.3 million.

Legal Proceedings -- Various suits and claims arising in the course of
business are pending against the Company and its subsidiaries. In the opinion of
management, dispositions of these matters are not expected to materially affect
the Company's consolidated financial position, cash flows or results from
operations.

Merchandise Agreement -- The Company has a five-year contract expiring June
30, 2006 that requires minimum commitments of $990 per year.

Guarantees -- The Company has not provided any financial guarantees as of
February 1, 2003.

16. RELATED PARTY TRANSACTIONS

Sponsor Fee -- The Company has a Management Services Agreement with the
holder of the Series B Preferred Stock and the majority shareholder of the
Company's voting common stock. The services consist of formulating and
implementing business strategies, including identifying and assisting the
Company in evaluating corporate opportunities, such as marketing opportunities,
and financial strategies. In addition, assistance has been provided for lending,
security holder and public relations matters. The agreement calls for annual
payments equal to the greater of $200 or 3 percent of earnings before interest,
income taxes, depreciation and amortization ("EBITDA," as defined) up to a
maximum of $450. Such fees aggregated $403 and $450 for the Fiscal 2000 and
Fiscal 2001, respectively, $350 for Transition 2000 (unaudited) and Transition
2001 and $127 for Fiscal 2002. The agreement was terminated upon the
consummation of the initial public offering.

Leases -- The Company is the lessee under operating leases where the
landlord is a stockholder of the Company who is longer a related party at the
end of Fiscal 2002 (Note 15).

Sourcing Agreement -- The Company has a Sourcing Agreement with Federated
Merchandising Group, Inc., ("FMG") a subsidiary of Federated Department Stores,
Inc., the previous owner of the Company. Effective November 1999, FMG ceased to
be a related party due to the Company's redemption of the Series A Preferred
Stock. The total purchases of merchandise under the Sourcing Agreement for the
period August 1, 1999 through September 30, 1999 (the date of redemption) was
approximately $20 million which included approximately $0.9 million of fees for
Fiscal 2000.

Loans to Executives -- In 1999, the Company repurchased all of its
outstanding shares of Series A Preferred Stock from Federated Department Stores,
Inc. This triggered a loan forgiveness provision contained in loan agreements
regarding loans that Federated had previously made to Mr. Geiger and Mr. Mills.
This loan forgiveness caused Messrs. Geiger and Mills to incur significant tax
liability in 1999. The Company therefore extended interest free loans in the
amount of $70 to both Mr. Geiger and Mr. Mills to cover this tax liability. Mr.
Geiger and Mr. Mills each repaid the full amount of the loan in February 2002
and currently do not have any outstanding indebtedness to the Company.

Employment Contracts: The Company has employment agreements with certain
members of the Company's senior management (Note 15).

17. DISCONTINUED OPERATIONS

During February 2000, the Company's Board of Directors decided to
discontinue the Chelsea Cambell specialty store business at its meeting on
February 25, 2000 (the measurement date) and the Company closed all Chelsea
Cambell stores by the end of December 2000. Accordingly, operating results of
this segment have been reclassified as income from discontinued operations for
all periods presented.

Operating results of discontinued operations are as follows:

<Table>
<Caption>
FISCAL TRANSITION TRANSITION
2000 2000 2001
------- ---------- ----------
(UNAUDITED)

Net sales.............................................. $35,117 $2,854 $2,854
======= ====== ======
Income (loss) from discontinued operations:
Before income taxes.................................. $(9,531) $ -- $ --
Estimated net gain on disposal....................... 6,749 662 636
Income tax (expense) benefit......................... 4,784 (257) (248)
------- ------ ------
Net gain............................................... $ 2,002 $ 405 $ 388
======= ====== ======
</Table>

During Fiscal 2001, the Company was able to negotiate settlements on future
lease obligations and incurred better than expected profitability on the closing
of the Chelsea Cambell stores and therefore realized a reversal of the estimated
loss on disposal of $662.

The July 29, 2000 loss from discontinued operations before income taxes
includes ($24,541) in cost of goods sold, ($6,221) in payroll expense, ($14,079)
in nonpayroll expenses, $613 in amortization of negative goodwill, and an
estimated loss from operations during the phase-out period subsequent to July
29, 2000 of ($806), and other revenue of $386.

The estimated net gain on disposal includes the write-off of negative
goodwill of $8,838, the lease termination costs of ($2,478), write-offs of
tenant liabilities, acquired lease liabilities, and deferred rent of $1,305 and
other expenses of ($916).

Included within accrued expenses and other liabilities on the accompanying
balance sheet is an accrual for the costs associated with the disposal of the
Chelsea Cambell business. The major components of the accrual and the activity
through August 4, 2001 were as follows:

<Table>
<Caption>
ACCRUAL OF
LEASE OPERATING
BUY-OUT SEVERANCE LOSSES
AND CONTRACT AND THROUGH THE
TERMINATION TERMINATION DISPOSITION
COSTS BENEFITS DATE OTHER TOTAL
------------ ----------- ----------- ----- -------

Provision at measurement date... $ 2,478 $ 566 $ 806 $ 316 $ 4,166
Activity........................ (1,944) (352) -- (281) (2,577)
------- ----- ----- ----- -------
Balance, at July 29, 2000....... 534 214 806 35 1,589
------- ----- ----- ----- -------
Activity........................ (534) (214) (806) (35) (1,589)
------- ----- ----- ----- -------
Balance, at August 4, 2001...... $ -- $ -- $ -- $ -- $ --
======= ===== ===== ===== =======
</Table>

18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<Table>
<Caption>
THIRTEEN WEEKS ENDED
-----------------------------------------------
OCTOBER 28, FEBRUARY 3, MAY 5, AUGUST 4,
2000 2001(1) 2001 2001
----------- ----------- ------- ---------

FISCAL 2001
Net sales................................. $76,831 $107,538 $56,629 $63,769
Gross profit.............................. 25,750 34,008 12,458 13,933
Income (loss) from continuing
operations............................. 6,007 8,687 (2,049) (1,731)
Gain from discontinued operations......... -- 388 2 15
Net income (loss)......................... 6,007 9,075 (2,047) (1,716)
Basic net income (loss) per share:
From continuing operations............. 0.19 0.27 (0.07) (0.06)
From discontinued operations........... -- 0.01 -- --
Net income (loss)...................... 0.19 0.28 (0.07) (0.06)
Diluted income (loss) per share:
From continuing operations............. 0.17 0.24 (0.07) (0.06)
From discontinued operations........... -- 0.01 -- --
Net income (loss)...................... 0.17 0.25 (0.07) (0.06)
</Table>

- ---------------

(1) This period is a 14-week period.

<Table>
<Caption>
THIRTEEN WEEKS ENDED
-------------------------
NOVEMBER 3, FEBRUARY 2,
2001 2002
----------- -----------

TRANSITION 2001
Net sales................................................. $126,019 $158,021
Gross profit.............................................. 48,934 55,052
Income from continuing operations......................... 14,727 13,910
Cumulative accounting change.............................. 1,632 --
Net income................................................ 16,359 13,910
Basic net income per share:
From continuing operations............................. 0.46 0.43
Cumulative accounting change........................... 0.05 --
Net income............................................. 0.51 0.43
Diluted income per share:
From continuing operations............................. 0.40 0.38
Cumulative accounting change........................... 0.05 --
Net income............................................. 0.45 0.38
</Table>

<Table>
<Caption>
THIRTEEN WEEKS ENDED
-----------------------------------------------
MAY 4, AUGUST 3, NOVEMBER 2, FEBRUARY 1,
2002 2002 2002 2003
------- --------- ----------- -----------

FISCAL 2002
Net sales................................ $85,130 $90,141 $169,210 $206,423
Gross profit............................. 24,149 24,094 50,902 63,458
Net income (loss)........................ 592 (1,978) 15,001 17,675
Basic net income (loss) per share..... 0.01 (0.06) 0.43 0.50
Diluted net income (loss) per share... 0.01 (0.06) 0.39 0.46
</Table>

The per share amounts are calculated independently for each thirteen-week
period presented. The sum of the thirteen weeks may not equal the full year per
share amounts.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14. CONTROLS AND PROCEDURES

(a) Explanation of disclosure controls and procedures: We have carried out
an evaluation, under the supervision and with the participation of our,
including our Chairman and Chief Executive Officer along with our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon
that evaluation, our Chief Executive Officer along with our Chief Financial
Officer concluded that as of December 10, 2002, our disclosure controls and
procedures (1) are effective in timely alerting them to material information
relating to our company (including its consolidated subsidiaries) required to be
included in our periodic SEC filings and (2) are adequate to ensure that
information required to be disclosed by us in the reports filed or submitted by
us under the Exchange Act is recorded, processed and summarized and reported
within the time periods specified in the SEC's rules and forms.

(B) Changes in internal controls: There have been no significant changes in
our internal controls or in other factors which could significantly affect
internal controls subsequent to the date the we carried out our evaluation.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. The consolidated financial statements set forth in Part II, Item 8.

2. Financial Statement Schedule II Valuation and Qualifying Accounts

3. Exhibits included or incorporated herein:

EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------

3.1 Form of Amended and Restated Certificate of Incorporation.+
3.2 Form of Amended and Restated By-Laws.+
4.1 Specimen Common Stock Certificate.+
4.2 Stockholders' Agreement, dated as of August 3,1998, by and
among MSS-Delaware, Inc., MSS Acquisition Corp. II,
Federated Specialty Stores, Inc., Julian R. Geiger, David R.
Geltzer and John S. Mills.+
10.1 Aeropostale, Inc. 1998 Stock Option Plan.+
10.2 Aeropostale, Inc. 2002 Long-Term Incentive Plan.+
10.3 Management Services Agreement, dated as of July 31, 1998,
between MSS-Delaware, Inc. and MSS Acquisition Corp. II.+
10.4 Loan and Security Agreement, dated July 31, 1998 between
Bank Boston Retail Finance Inc., as agent for the lenders
party thereto (the "Lenders"), the Lenders and MSS-Delaware,
Inc.+
10.5 First Amendment to Loan and Security Agreement, dated
November 8, 1999, by and between Bank Boston Retail Finance
Inc., as agent for the Lenders, the Lenders and
MSS-Delaware, Inc.+
10.6 Second Amendment to Loan and Security Agreement, dated May
2, 2002, by and between Fleet Retail Finance Inc. (f/k/a
Bank Boston Retail Finance), as agent for the Lenders, the
Lenders and Aeropostale, Inc. (f/k/a MSS-Delaware, Inc.).+
10.7 Third Amendment to Loan and Security Agreement, dated June
13, 2001, by and between Fleet Retail Finance Inc. (f/k/a
Bank Boston Retail Finance), as agent for the Lenders, the
Lenders and Aeropostale, Inc. (f/k/a MSS-Delaware, Inc.).+
10.8 Fourth Amendment to Loan and Security Agreement, dated
February 2, 2002, by and between Fleet Retail Finance Inc.
(f/k/a Bank Boston Retail Finance), as agent for the
Lenders, the Lenders and Aeropostale, Inc. (f/k/a
MSS-Delaware, Inc.).+
10.9 Sublease Agreement, dated February 5, 2002, between the
United States Postal Services and Aeropostale, Inc.+
10.10 Merchandise Servicing Agreement, dated March 1, 1999,
between American Consolidation, Inc. and MSS Delaware, Inc.+
10.11 Interim Merchandise Servicing Agreement, dated as of
February 11, 2002, by and between American Consolidation
Inc. and Aeropostale, Inc.+
10.12 Sourcing Agreement, dated July 22, 2003, by and among
Federated Department Stores, Inc., Specialty Acquisition
Corporation and Aeropostale, Inc.*
10.13 Fifth Amendment to Loan and Security Agreement, dated April
15, 2002, by and between Fleet Retail Finance Inc. (f/k/a
Bank Boston Retail Finance), as agent for the Lenders, the
Lenders and Aeropostale, Inc. (f/k/a MSS-Delaware, Inc.).+
10.14 Amendment No. 1 to Stockholders' Agreement, dated April 23,
2002, by and among Aeropostale, Inc., Bear Stearns MB
1998-1999 Pre-Fund, LLC and Julian R. Geiger.+
10.15 Employment Agreement, dated as of February 1, 2002, between
Aeropostale, Inc. and Julian R. Geiger.+
10.16 Employment Agreement, dated February 1, 2002, between
Aeropostale, Inc. and Christopher L. Finazzo.*
10.17 Employment Agreement, dated February 1, 2002, between
Aeropostale, Inc. and John S. Mills.*
21.1 List of subsidiaries of Aeropostale, Inc.+
23.1 Consent of Deloitte & Touche LLP.
99.1 Chief Executive Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sorbanes-Oxley Act of 2002.
99.2 Chief Financial Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sorbanes-Oxley Act of 2002.
</Table>

- ---------------

* Filed herewith.

+ Incorporated by reference to the Registration Statement on Form S-1,
originally filed by Aeropostale, Inc. on March 8, 2003 (Registration No.
333-84056).

(b) Reports on Form 8-K:

1. The Registrant's Current Report on Form 8-K, dated June 11, 2002,
relating to monthly and quarterly historical net sales.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

AEROPOSTALE, INC.

By: /s/ JULIAN R. GEIGER
------------------------------------
Julian R. Geiger
Chairman, Chief Executive Officer,
and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
Registrant, and in the capacities and on the dates indicated.

<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----

/s/ JULIAN R. GEIGER Julian R. Geiger April 29, 2003
- -------------------------------------- Chairman, Chief Executive Officer,
Julian R. Geiger and Director (Principal Executive
Officer)

/s/ JOHN S. MILLS President, Chief Operating Officer, April 29, 2003
- -------------------------------------- and Director
John S. Mills

/s/ MICHAEL J. CUNNINGHAM Executive Vice President and Chief April 29, 2003
- -------------------------------------- Financial Officer
Michael J. Cunningham (Principal Financial Officer)

/s/ ALAN C. SIEBELS Vice President -- Controller April 29, 2003
- -------------------------------------- (Principal Accounting Officer)
Alan C. Siebels

/s/ BODIL ARLANDER Director April 29, 2003
- --------------------------------------
Bodil Arlander

/s/ MARY ELIZABETH BURTON Director April 29, 2003
- --------------------------------------
Mary Elizabeth Burton

/s/ DAVID EDWAB Director April 29, 2003
- --------------------------------------
David Edwab

/s/ JOHN D. HOWARD Director April 29, 2003
- --------------------------------------
John D. Howard

/s/ RICHARD METRICK Director April 29, 2003
- --------------------------------------
Richard Metrick

/s/ DAVID GLASER Director April 29, 2003
- --------------------------------------
David Glaser
</Table>

<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----

/s/ DOUGLAS KORN Director April 29, 2003
- --------------------------------------
Douglas Korn

/s/ RICHARD PERKAL Director April 29, 2003
- --------------------------------------
Richard Perkal
</Table>

AEROPOSTALE

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<Table>
<Caption>
BALANCE BEGINNING AMOUNTS CHARGED TO WRITE-OFFS AGAINST BALANCE END OF
RESERVE FOR RETURNS: OF PERIOD NET INCOME RESERVE PERIOD
- -------------------- ----------------- ------------------ ------------------ --------------

Year Ended February 1, 2003... $299 $18,561 $18,442 $418
Six months Ended February 2,
2002........................ 213 10,464 10,378 299
Year Ended August 4, 2001..... 221 10,404 10,412 213
Year Ended July 29, 2000...... 221 7,806 7,806 221
</Table>

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Julian R. Geiger, Chairman and Chief Executive Officer of Aeropostale,
Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Aeropostale,
Inc.;

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

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

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

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

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation date;

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

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

/s/ JULIAN R. GEIGER
--------------------------------------
Julian R. Geiger
Chairman and Chief Executive Officer

April 29, 2003

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Michael J. Cunningham, Chief Financial Officer of Aeropostale, Inc.,
certify that:

3. I have reviewed this annual report on Form 10-K of Aeropostale,
Inc.;

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

12. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation date;

13. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

14. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

/s/ MICHAEL J. CUNNINGHAM
--------------------------------------
Michael J. Cunningham
Senior Vice President and Chief
Financial Officer

April 29, 2003