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

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 [X] NO [ ]

The aggregate market value of voting stock held by non-affiliates of the registrant as of August 3, 2002 was $810 million.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 71,058,137 Common Shares were outstanding at March 14 , 2003. 

DOCUMENTS INCORPORATED BY REFERENCE
Part III - Proxy Statement for 2003 Annual Meeting of Stockholders, in part, as indicated.

American Eagle Outfitters, Inc., a Delaware corporation, is a specialty retailer of casual apparel, accessories, and footwear for men and women between the ages of 16 and 34. We opened our first American Eagle Outfitters store in the United States in 1977 and expanded the brand into Canada in 2001. We design, market, and sell our own brand of relaxed, clean, and versatile clothing, providing high-quality merchandise at affordable prices. Our lifestyle collection offers casual basics like khakis, cargos, and jeans; fashion tops like rugbys, polos, and graphic T's; and functional items like swimwear, outerwear, footwear and accessories under our American Eagle Outfitters® and AE® brand names.

We also operate the Bluenotes/Thriftys specialty apparel chain in Canada. The Bluenotes/Thriftys brand targets a slightly younger demographic, offering a more urban/suburban, denim-driven collection for 12 to 22 year olds.

As of February 1, 2003, we operated 753 American Eagle Outfitters stores in the United States and Canada and 111 Bluenotes/Thriftys stores in Canada. We also operated via the internet at www.ae.com.

As used in this report, all references to "we, " "our," and "the Company" refer to American Eagle Outfitters, Inc. and its subsidiaries. The term "American Eagle" refers to our U.S. and Canadian American Eagle Outfitters stores and the Company's e-commerce business, ae.com. "Bluenotes" refers to the Bluenotes/Thriftys specialty apparel chain in Canada.

On April 13, 1994, the Company successfully completed an initial public offering of its common stock. Our stock is traded on the Nasdaq National Market under the symbol "AEOS".

In November 2000, we acquired three businesses in Canada - the Bluenotes chain, an established Canadian brand, the Braemar chain, with excellent real estate in prime mall locations, of which 46 were converted to American Eagle stores during Fiscal 2001, and National Logistics Services ("NLS"), a 400,000 square foot distribution center near Toronto, which handles all of the distribution needs for our Canadian operations and provides services to third parties.

Our financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, "Fiscal 2002" refers to the fifty-two week period ended February 1, 2003. "Fiscal 2001" and "Fiscal 2000" refer to the fifty-two and fifty-three week periods ended February 2, 2002 and February 3, 2001, respectively. "Fiscal 2003" refers to the fifty-two week period ending January 31, 2004.

Our primary American Eagle store expansion strategy is to continue our geographic expansion throughout the United States and to fill-in existing markets. We currently operate in 48 states and the District of Columbia. We opened 65 net new U.S. stores during Fiscal 2002, increasing our U.S. store base by approximately 10%. Additionally, our U.S. selling square footage increased by over 14% during Fiscal 2002 due to 65 U.S. net new store openings and 38 U.S. store remodels.

During Fiscal 2002, we grew rapidly in the western U.S., adding 16 new stores in California, a market with strong demographics for our target customer. We also opened our first major urban store, located in New York City. Our research has shown that there are still many attractive retail locations where we can open American Eagle stores in both enclosed regional malls and urban and lifestyle centers, leaving us with several years of solid growth opportunity within the United States.

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During Fiscal 2002, we opened 10 American Eagle stores in Canada. We are very pleased with the results of our American Eagle expansion into Canada and look to a long-term potential of 80 to 90 stores across the country.

The table below shows certain information relating to our historic American Eagle store growth:

The Company operated 111 Bluenotes stores throughout Canada at the end of Fiscal 2002, a decrease of one store from the prior year. The highest concentration of Bluenotes stores is in the province of Ontario.

The Company continues to remodel older and smaller stores into its new store format, which better reflects the American Eagle brand image. In order to maintain a balanced presentation and to accommodate additional product categories, we selectively enlarge our stores during the remodeling process. In most cases we expand stores from an average of 4,500 gross square feet to an average of 6,000 gross square feet. We believe the slightly larger format can better accommodate our new merchandise categories and support future growth. In many cases, we also upgrade the store location within the mall. We remodeled 38 U.S. stores during Fiscal 2002 to the new store design. As of February 1, 2003, approximately half of all American Eagle stores in the U.S. are in the new store design.

Our American Eagle stores average approximately 5,000 gross square feet and approximately 4,100 on a selling square foot basis. At February 1, 2003, we operated 753 American Eagle stores in the United States and Canada as shown below:

Our Bluenotes stores average approximately 3,200 gross square feet and approximately 2,500 on a selling square foot basis. As of February 1, 2003, we operated 111 Bluenotes stores in eight Canadian provinces as shown below:

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The Company purchases merchandise from suppliers who either manufacture their own merchandise or supply merchandise manufactured by others, or both. During Fiscal 2002, both American Eagle and Bluenotes purchased a majority of their merchandise from non-North American suppliers.

All of our American Eagle suppliers receive a vendor compliance manual that describes our quality standards and shipping instructions. We maintain a quality control department at our distribution center to inspect incoming merchandise shipments for uniformity of sizes and colors, and for overall quality of manufacturing. Periodic quality inspections are also made by our employees at manufacturing facilities in the United States and internationally to identify potential problems prior to shipment of merchandise. Additionally, our merchant group works directly with many factories to address quality control issues before merchandise is shipped.

Global Labor Compliance

The Company is firmly committed to the goal of using only the most highly regarded and efficient suppliers throughout the world. We require our suppliers to provide a workplace environment that not only meets basic human rights standards, but also one that complies with all local legal requirements and encourages opportunity for all, with dignity and respect.

For many years, we have had a policy for the inspection of factories throughout the world where goods are produced to our order. This inspection process is important for quality control purposes, as well as customs compliance and human rights standards. During Fiscal 2001, we strengthened and formalized the process by developing and implementing a comprehensive vendor compliance program with the assistance of an internationally recognized consulting firm. This program contractually requires all suppliers to meet our global workplace standards, including human rights standards, as set forth in our Code of Conduct. The Code of Conduct is required to be posted in all factories in the local language. The program utilizes third party inspectors to audit compliance by vendor factories with our workplace standards and Code of Conduct.

Purchase orders, executed by our American Eagle buyers, are entered into the computerized merchandise data system at the time of order. Merchandise is normally shipped directly from vendors, split after clearing customs, and routed to our two distribution centers, one in Warrendale, PA and the other in Ottawa, KS. Upon receipt, merchandise is entered into the merchandise system, then processed and prepared for shipment to the stores or forwarded to a warehouse holding area to be used as store replenishment goods. The allocation of merchandise among stores varies based upon a number of factors, including geographic location, customer demographics and store size. These factors impact anticipated sales volume and the quantity and mix of merchandise allocated to stores. Merchandise is shipped to the stores two to five times per week depending upon the season and store requirements. Ae.com, the Company's e-commerce business, uses a third-party vendor for its fulfillment services.

American Eagle stores in Canada and Bluenotes stores receive merchandise from NLS, our Canadian distribution network which consists of a 400,000 square foot central distribution center near Toronto, and four smaller sub-centers across Canada totaling approximately 65,000 square feet. Merchandise is shipped to the stores two to five times per week depending upon the season and store requirements.

To support new store growth, over the past several years, we have improved our primary distribution facilities by installing a new warehouse management system, which makes the distribution process more efficient and productive. Additionally, to support our geographical expansion into the Northwest and Southwest, we purchased and expanded an existing distribution center in Ottawa, Kansas, which was opened in June 2001. This facility comprises approximately 400,000 square feet and will support our continuing store growth in the western U.S. This second facility not only more than doubles our potential capacity to roughly 1,100 stores, but gives the Company one or two day shipping times to approximately 85% of our stores. We also have a warehousing and distribution facility near Puebla, Mexico, which primarily supports our knit and denim production.

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We offer our U.S. customers an American Eagle private label credit card, issued by a third-party bank. We have no liability to the card issuer for bad debt expense, provided that purchases are made in accordance with the issuing banks' procedures. We believe that providing in-store credit through use of our proprietary credit card promotes incremental sales and encourages customer loyalty. Our credit card holders receive special promotional offers and advance notice of all in-store sales events. The names and addresses of these preferred customers are added to our customer database, which is used primarily for direct mail purposes. American Eagle customers in the U.S. and Canada may also pay for their purchases with American Express®, Discover®, MasterCard®, Visa®, bank debit cards, cash or check. Bluenotes customers may pay for their purchases with American Express®, MasterCard®, Visa®, bank debit cards or cash.

Additionally, gift cards can be purchased in our American Eagle stores in the U.S. and Canada and our Bluenotes stores. When the recipient uses the gift card, the value of the purchase is electronically deducted and any remaining value can be used for future purchases.

We offer our customers a hassle-free return policy. The Company believes that certain of its competitors offer similar credit card and service policies.

The retail apparel industry is very competitive. We compete primarily on the basis of quality, fashion, service, selection and price. American Eagle stores in the U.S. compete with various divisions of The Limited and The Gap, as well as with retail chains such as Abercrombie & Fitch, Pacific Sunwear, Aeropostale, The Buckle and other national, regional and local retailers catering to a youthful customer. We also compete with the casual apparel and footwear departments of department stores, often in the same mall as our stores.

American Eagle and Bluenotes stores in Canada compete with a variety of national specialty retail chains, a number of independent retailers and casual clothing shops within department stores, as well as various divisions of The Gap.

Trademarks and Service Marks

We have registered American Eagle Outfitters® in the U.S. Patent and Trademark Office ("PTO") as a trademark for clothing and for a variety of non-clothing products, including jewelry, perfume, and personal care products, and as a service mark for retail clothing stores and credit card services. We have also registered AE® for clothing and footwear products and an application is pending to register AE® for a variety of non-clothing items. We have also registered a number of other marks used in our business.

As of March 1, 2003, we had 11,800 employees in the United States, of whom 2,700 were full-time salaried employees, 800 were full-time hourly employees and 8,300 were part-time and seasonal hourly employees. In Canada, as part of our American Eagle, Bluenotes and NLS operations, we had 3,700 employees, of whom 600 were full-time salaried employees, 300 were full-time hourly employees, and 2,800 were part-time and seasonal hourly employees.

We consider our relationship with our employees to be satisfactory.

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ITEM 2. PROPERTIES.

We rent our headquarters and distribution facility near Pittsburgh, PA from Linmar Realty Company ("Linmar"), an affiliate of the Company and of Schottenstein Stores Corporation ("SSC"). Our headquarters and distribution center occupy approximately 490,000 square feet, 120,000 square feet of which is used for executive, administrative and buying offices.  This lease expires on December 31, 2020.  We also lease additional office and storage space near our headquarters totaling comprising approximately 38,000 square feet. These leases near Pittsburgh, PA expire in August 2004 and March 2005, respectively.

The Company rents office space at 401 Fifth Avenue in New York for our designers, sourcing, and production team. This lease, for approximately 48,000 square feet, expires in May 2016. The previous office space, of approximately 18,000 square feet, at 485 Fifth Avenue in New York, NY is currently under a sublease. The lease and sublease expire in December 2008. Additionally, we lease retail space in Los Angeles on Melrose Avenue for our American Eagle showroom totaling approximately 2,000 square feet. This lease expires in January 2004.

Bluenotes rents its headquarters, consisting of approximately 40,000 square feet, in Toronto, Ontario. The lease expires in February 2007.

We purchased an existing 290,000 square foot distribution facility in Ottawa, Kansas that opened in June 2001. This facility was expanded to approximately 400,000 square feet during Fiscal 2001. Through our Canadian acquisition, we purchased NLS, a 400,000 square foot distribution facility near Toronto, which is also used for the American Eagle administrative offices. Additionally, we rent four smaller distribution sub-centers across Canada as part of NLS with a total of approximately 65,000 square feet. These sub-center leases expire during 2003, 2004, and 2007. A distribution facility and office near Puebla, Mexico for approximately 94,300 square feet is also leased until 2005.

All of our stores in the United States and Canada are leased. The store leases generally have initial terms of approximately 10 years. Most of these leases provide for base rent and require the payment of a percentage of sales as additional rent when sales reach specified levels. Under our store leases, we are typically responsible for maintenance and common area charges, real estate taxes and certain other expenses. We have generally been successful in negotiating renewals as leases near expiration.

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.

Not applicable.

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Our stock is traded on the Nasdaq National Market under the symbol "AEOS". The following table sets forth the range of high and low sales prices of the common stock as reported on the Nasdaq National Market during the periods indicated. As of March 1, 2003, there were 227 stockholders of record. However, when including associates who own shares through the Company's 401(k) retirement plan and employee stock purchase plan, and others holding shares in broker accounts under street name, the Company estimates the shareholder base at approximately 25,000 .

We have never paid cash dividends and presently anticipate that all of our future earnings will be retained for the development of our business and the share repurchase program (See Note 2 of the Consolidated Financial Statements). At this time, we do not anticipate paying cash dividends. 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, changes in U.S. taxation and other relevant factors.

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(In thousands, except per share amounts, ratios and other financial information)

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(1) Except for the fiscal year ended February 3, 2001, which includes 53 weeks, all fiscal years presented include 52 weeks.
(2) Includes the results of operations, beginning October 29, 2000, for the divisions of Dylex Limited purchased by the Company as discussed in Note 3 of the Consolidated Financial Statements.
(3) The American Eagle comparable store sales increase for the period ended February 3, 2001 was compared to the corresponding 53-week period in the prior year.
(4) Consolidated comparable stores sales include American Eagle and Bluenotes stores.
(5) Net sales per average square foot is calculated using retail sales for the year divided by the straight average of the beginning and ending square footage for the year.

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions that may affect the reported financial condition and results of operations should actual results differ. The Company bases its estimates and assumptions on the best available information and believes them to be reasonable for the circumstances. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgement and complexity. See also Note 2 of the Consolidated Financial Statements.

Revenue Recognition. The Company principally records revenue upon the purchase of merchandise by customers. Revenue is not recorded on the purchase of stored value cards and gift certificates by customers. A current liability is recorded upon purchase and revenue is recognized when the card is redeemed for merchandise. Revenue is recorded net of sales returns. A sales returns reserve is provided on gross sales for projected merchandise returns based on historical average return percentages.

Revenue is not recorded on the sell-off of end-of-season, overstock and irregular merchandise to off-price retailers. These sell-offs are typically sold below cost and the proceeds are reflected in cost of sales.

Asset Impairment. The Company is required to test for asset impairment whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. The Company applies SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in order to determine whether or not an asset is impaired. Management evaluates the ongoing value of assets associated with retail stores that have been open longer than one year. When undiscounted cash flows estimated to be generated by those assets are less than the carrying value of those assets, impairment losses are recorded. When events such as these occur, the impaired assets are adjusted to estimated fair value and an impairment loss is recorded in selling, general and administrative expenses. Should actual results or market conditions differ from those anticipated, additional losses may be recorded.

Goodwill. The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on February 3, 2002, the beginning of Fiscal 2002. In accordance with SFAS No. 142, management evaluates goodwill quarterly for impairment by comparing the fair value of the reporting unit to the book value. The book value of goodwill has been assigned to the Company's two reporting units, American Eagle and Bluenotes. Approximately $10.3 million and $13.7 million in goodwill was assigned to American Eagle and Bluenotes, respectively. The fair value of the Company's reporting units is estimated using discounted cash flow methodologies and market comparable information. Based on the analysis, if the implied fair value of each reporting unit exceeds the book value of the goodwill, no impairment loss is recognized. In the fourth quarter of Fiscal 2002, the Company performed the required annual impairment test and determined that no goodwill impairment existed.

The Company's prospective determination will depend on the ongoing operations and performance of its defined reportable units. Bluenotes' future earnings growth depends, in part, upon the Company's ability to successfully reposition the brand. The Company has made management changes in the Bluenotes division and is in the process of implementing new merchandising and operating strategies. However, there can be no assurance that the merchandising and operating strategies implemented by the Company's new management team will result in improved results of operations. Additionally, management's assumptions about discount rates, inflation rates and other internal and external economic conditions, such as the expected growth rate and terminal value of its reportable units, requires significant judgement based on fluctuating rates, anticipated future revenues, and the prospective financial markets.

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Inventory. Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses.

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

Income Taxes. The Company calculates income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates in effect in the years when those temporary differences are expected to reverse. No valuation allowance has been provided for the deferred tax assets. The Company anticipates that future taxable income will be able to recover the full amount of the net deferred tax assets, including the portion attributed to the foreign tax loss carryforward. Additionally, a portion of the deferred tax asset resulted from a capital loss carryforward. The use of the capital loss carryforward is dependent on the Company's ability to generate capital gains. Management believes that the Company will generate sufficient capital gains prior to the expiration of the capital loss.

This table shows, for the periods indicated, the percentage relationship to net sales of the listed items included in the Company's Consolidated Statements of Operations.

Net Sales
Net sales increased 6.7% to $1,463.1 million from $1,371.9 million. The sales increase was due primarily to the net addition of 74 stores offset by a consolidated comparable store sales decrease of 5.7%.

American Eagle net sales increased 8.9% to $1,382.9 million from $1,271.2 million. The sales increase was due primarily to the net addition of 75 stores offset by a comparable store sales decrease of 4.3%. The comparable store sales decrease was driven primarily by a lower average unit retail price due to increased promotional activity. The units sold per average store and units sold per transaction increased, while the number of transactions per average store declined slightly. Comparable store sales in the men's business declined in Fiscal 2002 while the women's comparable store sales were flat for the year.

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Bluenotes net sales decreased 20.3% to $80.2 million from $100.7 million. The sales decline was due primarily to a comparable store sales decrease of 22.3% as a result of a lower average unit retail price as well as a decline in units sold per average store.

A store is included in comparable store sales in the thirteenth month of operation. However, stores that have a gross square footage increase of 25% or greater due to an expansion and/or relocation are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation.

Gross profit as a percent to sales declined to 37.1% from 39.9%. The percentage decrease was attributed primarily to a lower merchandise margin and the deleveraging of buying, occupancy and warehousing costs at both the American Eagle and Bluenotes stores. A lower merchandise margin resulted from an increase in markdowns as a percent to sales partially offset by an improved markon. Additionally, the merchandise margin in the second half of the year, primarily the fourth quarter, was negatively impacted by increased airfreight expense stemming from the West Coast dock strike. The deleveraging of buying, occupancy and warehousing costs resulted primarily from an increase in rent expense as a percent to sales.

Selling, general and administrative expenses as a percent to sales decreased to 24.0% from 24.7% as a result of reduced incentive compensation expense as well as cost control measures that were initiated in Fiscal 2002. For the year, selling, general and administrative expense per gross square foot declined 8.5% and decreased 5.4% per average store. The Company leveraged total compensation, advertising, services purchased, leasing costs and travel expenses in Fiscal 2002 compared to Fiscal 2001.

Depreciation and amortization expense as a percent to sales increased to 3.5% from 3.1% due primarily to our U.S. expansion, including new and remodeled stores.

Other income decreased to $2.5 million from $2.8 million due primarily to higher interest expense.

Net sales increased 25.5% to $1,371.9 million from $1,093.5 million. Excluding sales from the additional week in the Fiscal 2000 period, net sales increased 26.8%. The sales increase was due primarily to the net addition of 127 stores and a comparable store sales increase of 2.3% compared to the corresponding fifty-two week period last year.

American Eagle net sales increased 20.1% to $1,271.2 million from $1,058.5 million. Excluding sales from the additional week in the Fiscal 2000 period, net sales increased 17.7%. The sales increase was due primarily to the net addition of 124 stores and a comparable store sales increase of 2.3%. The comparable store sales increase was driven primarily by an increase in units sold per average store and higher transactions per average store partially offset by a lower average unit retail price. Comparable store sales in the men's business increased in Fiscal 2001 while the women's comparable store sales were flat for the year.

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Bluenotes net sales increased to $100.7 million from $35.0 million. The sales increase is due to a full year of operations during Fiscal 2001 compared to three months during Fiscal 2000.

Gross profit, as a percent to sales, was flat at 39.9% for Fiscal 2001 and Fiscal 2000. The merchandise margin improved offset by the deleveraging of buying, occupancy and warehousing costs. The increase in merchandise margin resulted primarily from an improved markon in our American Eagle stores in the United States. The deleveraging of buying, occupancy and warehousing costs resulted primarily from an increase in rent expense, as a percent to sales.

Selling, general and administrative expenses as a percent to sales increased to 24.7% from 24.4%. The increase as a percent to sales is due primarily to increased communication costs related to the implementation of a wide area network and increased equipment costs, offset by the leveraging of compensation expense.

Depreciation and amortization expense as a percent to sales increased to 3.1% from 2.1%. The percentage increase was due primarily to our U.S. expansion, including new stores, remodeled stores and our new distribution center in Kansas, as well as our Canadian acquisition and expansion.

Other income decreased to $2.8 million from $6.2 million. The decrease was primarily due to lower average investment rates, which resulted in lower investment income and interest expense on the note payable issued in connection with the Canadian acquisition.

The following sets forth certain measures of the Company's liquidity:

Net cash provided by operating activities was $104.5 million for Fiscal 2002 compared to $174.9 million for Fiscal 2001. The decrease in net cash provided by operating activities was due primarily to an increase in inventory, net of payables, decreased accrued liabilities and a decrease in net income adjusted for depreciation and amortization compared to the prior year.

Net cash used for investing activities of $68.5 million was primarily for capital expenditures of $61.4 million.

Cash outflows for financing activities of $22.4 million were primarily for stock repurchases of $19.5 million and $4.8 million used for the principle payments on the note payable. Additionally, $4.8 million was borrowed on the operating facility and subsequently repaid during Fiscal 2002.

The remainder of the cash flow provided by operating activities is being retained for new store growth, store remodels, system enhancements, and other capital expenditures. We fund merchandise purchases through operating cash flow.

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The Company has an unsecured demand lending arrangement (the "facility") with a bank to provide a $118.6 million line of credit at either the lender's prime lending rate (4.3% at February 1, 2003) or a negotiated rate such as LIBOR.  The facility has a limit of $40.0 million that can be used for direct borrowing. No borrowings were required against the line for the current or prior period. At February 1, 2003, letters of credit in the amount of $46.8 million were outstanding leaving a remaining available balance on the facility of $71.8 million. The Company also has an uncommitted letter of credit facility for $50.0 million with a separate financial institution.  At February 1, 2003, letters of credit in the amount of $23.8 million were outstanding, leaving a remaining available balance on the uncommitted letter of credit facility of $26.2 million.

The Company has a $29.1 million non-revolving term facility (the "term facility") and a $11.2 million revolving operating facility (the "operating facility") in connection with its Canadian acquisition.  The term facility matures in December 2007 and bears interest at the one-month Bankers' Acceptance Rate (2.8% at February 1, 2003) plus 140 basis points.  At February 1, 2003, the remaining balance on the term facility was $20.6 million.  The operating facility is due in November 2003, has four additional one-year extensions, and bears interest at either the lender's prime lending rate (4.5% at February 1, 2003) or the Bankers' Acceptance Rate (2.8% at February 1, 2003) plus 120 basis points.  During Fiscal 2002, the Company borrowed and subsequently repaid $4.8 million under the operating facility.

Capital expenditures, net of construction allowances, totaled $61.4 million for Fiscal 2002. This amount consisted primarily of $41.6 million related to new and remodeled American Eagle stores in the United States and Canada. The remaining capital expenditures related primarily to fixtures and improvements to existing stores and technological improvements.

We expect capital expenditures for Fiscal 2003 to be approximately $80 to $90 million, which will relate primarily to approximately 60 new American Eagle stores in the United States and Canada, and the remodeling of approximately 60 to 70 American Eagle stores in the United States. Remaining capital expenditures will relate to new fixtures and enhancements to existing stores, improvements to our corporate headquarters, information technology upgrades and investments in our Canadian distribution facility. Additionally, in Fiscal 2003, we plan to pay $4.2 million in scheduled principal payments on the term facility. We plan to fund these capital expenditures and debt repayments primarily through existing cash and cash generated from operations. These forward-looking statements will be influenced by our financial position, consumer spending, availability of financing, and the number of acceptable leases that may become available.

Our growth strategy includes the possibility of acquisitions and/or internally developing new brands. We periodically consider and evaluate these options to support future growth. In the event we do pursue such options, we could require additional equity or debt financing. There can be no assurance that we would be successful in closing any potential transaction, or that any endeavor we undertake would increase our profitability.

Disclosure about Contractual Obligations and Commercial Commitments

The following table summarizes significant contractual obligations and commercial commitments of the Company as of February 1, 2003:

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which amends existing accounting guidance on asset impairment and provides a single accounting model for long-lived assets to be disposed of. Additionally, SFAS No. 144 broadens the reporting of discontinued operations and changes the timing of recognizing losses on such operations. This standard supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30. The Company adopted the new standard on February 3, 2002, the beginning of Fiscal 2002. Adoption of SFAS No. 144 did not have a material impact on the Company's earnings or its financial position.

SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002.

SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. The Company has adopted the statement's annual disclosure requirements for Fiscal 2002. The interim reporting requirements will be effective for the Company's Fiscal 2003 interim financial statements.

The Company and its subsidiaries engage in certain transactions with related parties. The Company believes that the terms of these transactions are as favorable to the Company as those that could be obtained from third parties. The Company's related party transactions are as follows:

• The Company leases its distribution center and headquarters offices from Linmar Realty Company, an affiliate of the Company and of SSC.
• The Company sells portions of its end-of-season, overstock and irregular merchandise to Value City Department Stores Inc. ("VCDS"), a publicly-traded subsidiary of SSC.
• SSC and its affiliates charge the Company for an allocated cost of various professional services provided to the Company, including certain legal, real estate and insurance services.
• The Company has entered into a cost-sharing arrangement with an affiliate of SSC for the acquisition of an interest in several corporate aircraft. The Company also incurs operating costs and usage fees under this arrangement.
• In connection with the liquidation of certain inventory from the Canadian acquisition, the Company contracted the services of a related party consultant, an affiliate of SSC, during Fiscal 2001.

See Note 4 of the Consolidated Financial Statements for additional information regarding related party transactions.

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Historically, our operations have been seasonal, with a significant amount of net sales and net income occurring in the fourth fiscal quarter, reflecting increased demand during the year-end holiday selling season and, to a lesser extent, the third quarter, reflecting increased demand during the back-to-school selling season. During Fiscal 2002, these periods accounted for approximately 59.2% of our sales. As a result of this seasonality, any factors negatively affecting us during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic conditions, could have a material adverse effect on our financial condition and results of operations for the entire year. Our quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new store openings, the amount of net sales contributed by new and existing stores, the timing and level of markdowns, store closings, refurbishments and relocations, competitive factors, weather and general economic conditions.

As of February 1, 2003, we had deferred tax assets of $5.6 million associated with foreign tax loss carryforwards. We anticipate that future taxable income in Canada will be able to utilize the full amount of the deferred tax assets. Assuming a 38% effective tax rate, we will need to recognize pretax net income of approximately $15 million in future periods to recover existing deferred tax amounts. See Note 13 of the Consolidated Financial Statements.

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

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

• the planned opening of roughly 60 American Eagle stores in the United States and Canada in Fiscal 2003,
• the selection of approximately 60 to 70 stores in the United States for remodeling,
• the sufficiency of existing cash and investment balances, cash flows and line of credit facilities to meet Fiscal 2003 cash requirements, and
• the possibility of growth through acquisitions and/or internally developing new brands.

We caution that these statements are further qualified by factors that could cause our actual results to differ materially from those in the forward-looking statements, including without limitation, the following:

The Company's future success depends, in part, upon its ability to anticipate and respond to fashion trends in a timely manner. The specialty retail apparel business fluctuates according to changes in the economy and customer preferences, dictated by fashion and season. These fluctuations especially affect the inventory owned by apparel retailers, since merchandise typically must be ordered well in advance of the selling season. While we endeavor to test many merchandise items before ordering large quantities, we are still susceptible to changing fashion trends and fluctuations in customer demands.

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In addition, the cyclical nature of the retail business requires that we carry a significant amount of inventory, especially prior to peak selling seasons, when we build up our inventory levels. We enter into agreements for the manufacture and purchase of our private label apparel well in advance of the applicable selling season. As a result, we are vulnerable to changes in consumer demand, pricing shifts, and the timing and selection of merchandise purchases. Changes in fashion trends, if unsuccessfully identified, forecasted or responded to by the Company, could, among other things, lead to lower sales, excess inventories and higher markdowns, which in turn could have a material adverse effect on the Company's results of operations and financial condition.

The specialty retail industry is highly competitive. The Company competes primarily on the basis of quality, fashion, service, selection and price. There can be no assurance that the Company will be able to successfully compete in the future.

The success of the Company's operations also depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions affecting disposable consumer income such as employment, consumer debt, interest rates, and consumer confidence. There can be no assurance that consumer spending will not be negatively affected by general or local economic conditions, thereby adversely impacting the Company's continued growth and results of operations.

The Company's continued growth and success will depend in part on its ability to open and operate new stores on a timely and profitable basis. During Fiscal 2003, the Company plans to open roughly 60 new American Eagle stores in the United States and Canada. Accomplishing the Company's new store expansion goals will depend upon a number of factors, including the ability to obtain suitable sites for new stores at acceptable costs, the hiring and training of qualified personnel, particularly at the store management level, the integration of new stores into existing operations, the expansion of the Company's buying and inventory capabilities and the availability of capital. There can be no assurance that the Company will be able to achieve its store expansion goals, manage its growth effectively, successfully integrate the planned new stores into the Company's operations or operate its new stores profitably.

The Company's future earnings depend, in part, upon its ability to successfully reposition the Bluenotes brand. The Bluenotes business incurred operating losses during Fiscal 2002 due to a combination of factors, including (i) an abrupt change to the target customer and merchandising strategy, (ii) adjusting the merchandise fit to a smaller size, (iii) a merchandise product assortment that was skewed too high in price points and not consistent with the brand strategy, (iv) a marketing approach that was too narrow in scope, (v) a lack of sourcing efficiencies and (vi) increased competitive pressure. In addition, adverse economic conditions in general during the year had a negative impact on the operations of many Canadian retailers, including those of Bluenotes. The Company has made management changes in the Bluenotes division and is in the process of implementing new merchandising and operating strategies. However, there can be no assurance that the merchandising and operating strategies implemented by the Company's new management team will result in improved results of operations.

If the Company is not successful in repositioning the Bluenotes brand, the carrying value of certain assets assigned to the reporting unit, including but not limited to inventory, property, plant and equipment, and goodwill, including the related deferred tax asset, may exceed the fair value of those assets and result in an impairment loss. Additionally, a portion of the Company's deferred tax asset is attributed to a foreign tax loss carryforward. If Bluenotes does not generate future taxable income sufficient to recover the full amount of the respective deferred tax asset, we may be required to record additional tax provisions, which would have an adverse effect on the Company's future earnings.

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The interruption of the flow of merchandise from key vendors

Additionally, factors such as our ability to successfully acquire and integrate other businesses, an interruption of key business systems, any disaster or casualty resulting in the interruption of service from our distribution centers, changes in weather patterns, the change in currency, exchange rates and interest rates and international and domestic acts of terror could affect our financial performance.

The impact of the aforementioned factors, some of which are beyond our control, may cause our actual results to differ materially from expected results in these statements and other forward-looking statements we may make from time-to-time.

Not applicable.

(1) 250 million authorized, 74 million issued and 71 million outstanding, $.01 par value common stock at February 1, 2003. The Company had 74 million and 72 million shares issued and 72 million and 70 million shares outstanding at February 2, 2002 and February 3, 2001, respectively. The Company has 5 million authorized, with none issued or outstanding, $.01 par value preferred stock at February 1, 2003.

See Notes to Consolidated Financial Statements

See Notes to Consolidated Financial Statements

The Company designs, markets, and sells its American Eagle brand of relaxed, clean, and versatile clothing for 16 to 34 year olds in its United States and Canadian retail stores. We also operate via the Internet at ae.com. The American Eagle brand provides high quality merchandise at affordable prices. American Eagles's lifestyle collection offers casual basics like cargos complemented by fashion looks in stretch, denim, and other fabrications. The Bluenotes brand targets a slightly younger demographic, offering a more urban/suburban, denim-driven collection for 12 to 22 year olds. The Company operates retail stores located primarily in regional enclosed shopping malls in the United States and Canada.

The following table sets forth the approximate consolidated percentage of net sales attributable to each merchandise group for each of the periods indicated:

The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. The results of operations of the acquired Canadian businesses discussed in Note 3 are included in the Consolidated Financial Statements beginning October 29, 2000. All intercompany transactions and balances have been eliminated in consolidation.

The Company's financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, "Fiscal 2002" refers to the fifty-two week period ended February 1, 2003. "Fiscal 2001" and "Fiscal 2000" refer to the fifty-two and fifty-three week periods ended February 2, 2002 and February 3, 2001, respectively. "Fiscal 2003" refers to the fifty-two week period ending January 31, 2004.

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

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which amends existing accounting guidance on asset impairment and provides a single accounting model for long-lived assets to be disposed of. Additionally, SFAS No. 144 broadens the reporting of discontinued operations and changes the timing of recognizing losses on such operations. This standard supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30. The Company adopted the new standard on February 3, 2002, the beginning of Fiscal 2002. Adoption of SFAS No. 144 did not have a material impact on the Company's earnings or its financial position.

SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002.

SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. The Company has adopted the statement's annual disclosure requirements for Fiscal 2002. The interim reporting requirements will be effective for the Company's Fiscal 2003 interim financial statements.

The Canadian dollar is the functional currency for the Canadian businesses. In accordance with SFAS No. 52, Foreign Currency Translation, assets and liabilities denominated in foreign currencies were translated into U.S. dollars at the exchange rate prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars (the reporting currency) at the monthly average exchange rate for the period. Gains or losses resulting from foreign currency transactions are included in the results of operations, whereas, related translation adjustments are reported as an element of other comprehensive income, net of income taxes, in accordance with SFAS No. 130, Reporting Comprehensive Income (see Note 9 of the Consolidated Financial Statements).

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

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Cash in excess of operating requirements is invested in marketable equity or government debt obligations. As of February 1, 2003, short-term investments included investments with an original maturity of greater than three months (averaging approximately ten months) and consisted primarily of tax-exempt municipal bonds and taxable agency bonds classified as available for sale.

Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses.

The Company reviews its inventory levels in order to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have an adverse impact on earnings, depending on the extent and amount of inventory affected.

Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line method over the estimated useful lives as follows:

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, management evaluates the ongoing value of leasehold improvements and store fixtures associated with retail stores which have been open longer than one year. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. When events such as these occur, the impaired assets are adjusted to estimated fair value and an impairment loss is recorded in selling, general and administrative expenses.

The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on February 3, 2002, the beginning of Fiscal 2002. In accordance with SFAS No. 142, management evaluates goodwill quarterly for impairment by comparing the fair value of the reporting unit to the book value. The book value of goodwill has been assigned to the Company's two reporting units, American Eagle and Bluenotes. Approximately $10.3 million and $13.7 million in goodwill was assigned to American Eagle and Bluenotes, respectively. The fair value of the Company's reporting units is estimated using discounted cash flow methodologies and market comparable information. Based on the analysis, if the implied fair value of each reporting unit exceeds the book value of the goodwill, no impairment loss is recognized. There were no impairment losses relating to goodwill recognized for Fiscal 2002, Fiscal 2001 or Fiscal 2000. The Company did make a final adjustment to goodwill for approximately $0.4 million during Fiscal 2002 related to the Canadian acquisition lease costs (see Note 3 of the Consolidated Financial Statements).

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Other assets consist primarily of deferred taxes, lease buyout costs, trademark costs and acquisition costs. The lease buyout costs are amortized over the remaining life of the leases, generally for no greater than ten years. The trademark costs are amortized over five to fifteen years. Acquisition costs are amortized over five years. These assets, net of amortization, are presented as other assets (long-term) on the Consolidated Balance Sheets.

The Company's interest rate swap agreement is used to manage interest rate risk. The derivative effectively changes the interest rate on the borrowings under the non-revolving term facility from a variable rate to a fixed rate. The Company recognizes its derivative on the balance sheet at fair value at the end of each period. Changes in the fair value of the derivative that is designated and meets all the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income (loss). During Fiscal 2002, unrealized net gains on derivative instruments of approximately $0.3 million, net of related tax effects, were recorded in other comprehensive income (loss). The Company does not currently hold or issue derivative financial instruments for trading purposes.

Stock Repurchases

On February 24, 2000, the Company's Board of Directors authorized the repurchase of up to 3,750,000 shares of its stock. As part of this stock repurchase program, the Company purchased 1,140,000, 63,800 and 1,809,750 shares of common stock for approximately $17.8 million, $1.1 million and $22.3 million on the open market during Fiscal 2002, Fiscal 2001 and Fiscal 2000, respectively. Additionally, during Fiscal 2002 and 2001, the Company purchased 58,000 shares and 44,000 shares, respectively, from certain employees at market prices totaling $1.6 million and $1.4 million, respectively, for the payment of taxes in connection with the vesting of restricted stock as permitted under the 1999 Stock Incentive Plan. These repurchases have been recorded as treasury stock.

The Company calculates income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates in effect in the years when those temporary differences are expected to reverse.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. The Company continues to account for its stock-based employee compensation plan using the intrinsic value method under Accounting Principles Board Opinion No. 25.

Pro forma information regarding net income and earnings per share is required by SFAS No. 148, which also requires that the information be determined as if the Company has accounted for its employee stock options granted beginning in the fiscal year subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

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The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:

Costs associated with the production of television advertising are expensed when the advertising first takes place. All other advertising costs are expensed as incurred. The Company recognized $46.5 million, $45.3 million and $36.3 million in advertising expense during Fiscal 2002, Fiscal 2001 and Fiscal 2000, respectively.

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The following table shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of potential dilutive common stock (stock options and restricted stock).

Options to purchase 5,438,000, 779,000 and 72,000 shares of common stock during Fiscal 2002, Fiscal 2001 and Fiscal 2000, respectively, were outstanding, but were not included in the computation of net income per diluted share because the options' exercise prices were greater than the average market price of the underlying shares.

Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the Fiscal 2002 presentation.

Effective October 29, 2000, the Company purchased certain assets associated with three Canadian businesses of Dylex Limited. The total purchase price, including fees and expenses, was $78.2 million. The results of operations of the acquired businesses are included in the Consolidated Financial Statements beginning October 29, 2000. The acquisition was accounted for using the purchase method and the resulting goodwill of approximately $20.1 million was amortized through February 2, 2002 (see Note 2 of the Consolidated Financial Statements).

In connection with the acquisition, the Company announced its intention to convert certain retail locations to American Eagle retail stores. Management finalized and approved a plan related to this conversion during Fiscal 2000. The Company accrued approximately $7.3 million in exit costs consisting primarily of operating losses of the discontinued businesses, lease costs, and severance costs. The conversion plan was completed during the third quarter of Fiscal 2001 with an increase to goodwill of approximately $0.6 million. Additionally, during Fiscal 2002, the Company made a final adjustment to goodwill, resulting in a decrease of approximately $0.4 million related to lease costs.

The following unaudited pro forma consolidated results of operations of the Company assume that the purchase occurred on January 31, 1999. These amounts are based upon certain assumptions and estimates, which the Company believes are reasonable. The pro forma results do not necessarily represent results which would have occurred if the business combination had taken place at the date and on the basis assumed above.

Effective January 31, 2000, the Company acquired importing operations from an affiliate, SSC. The purpose of the acquisition was to integrate the expertise of the importing operation into the Company's supply chain process, and to streamline and improve the efficiency of the process.

The import services company was acquired from SSC for a payment of $8.5 million, which was made on March 6, 2000. The majority of the acquisition price was recorded as goodwill, which was amortized through February 2, 2002 (see Note 2 of the Consolidated Financial Statements).

The Company has various transactions with related parties. The Company believes that the terms of these transactions are as favorable to the Company as those that could be obtained from third parties.

The Company has an operating lease for its corporate headquarters and distribution center with Linmar Realty Company, an affiliate of SSC. The lease, which expires on December 31, 2020, provides for annual rental payments of approximately $2.4 million through 2005, $2.6 million through 2015, and $2.7 million through the end of the lease. Rent expense was $2.4 million during Fiscal 2002 and $2.5 million during Fiscal 2001 and Fiscal 2000, under the lease.

In addition, the Company and its subsidiaries sell end-of-season, overstock and irregular merchandise to various parties, including VCDS. These sell-offs are typically sold below cost and the proceeds are reflected in cost of sales.  During Fiscal 2002, Fiscal 2001 and Fiscal 2000, proceeds from sell-offs to VCDS were $7.6 million, $4.8 million and $11.5 million, respectively.

The Company had approximately $1.3 million and $2.3 million included in accounts receivable at February 1, 2003 and February 2, 2002, respectively, that pertained to related parties. The majority of the receivable related to merchandise sell-offs.

SSC and its affiliates charge the Company for various professional services provided to the Company, including certain legal, real estate and insurance services. For Fiscal 2002, Fiscal 2001 and Fiscal 2000, the Company paid approximately $0.5 million, $1.4 million and $0.6 million, respectively, for these services.

During October 2001, the Company made a deposit with SSC of approximately $1.2 million in a cost sharing arrangement for the acquisition of an interest in several corporate aircraft.  The Company made an additional deposit of approximately $1.3 million during October 2002 for the acquisition of an interest in additional corporate aircraft.  These deposits are included in other assets, net of accumulated amortization.  Additionally, the Company paid $1.0 million, $1.1 million and $0.6 million during Fiscal 2002, Fiscal 2001 and Fiscal 2000, respectively, to cover its share of operating costs based on usage of the corporate aircraft.  

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In connection with the liquidation of certain inventory from the Canadian acquisition, the Company contracted the services of a related party consultant, an affiliate of SSC. The contract was in effect until July 2001, when certain stores closed and were turned over to the Company for conversion to American Eagle stores (see Note 3 of the Consolidated Financial Statements). During Fiscal 2001, the Company paid $1.7 million to the consultant. As of February 2, 2002, all services have been completed under this contract. As a result, there were no payments made during Fiscal 2002.

5. Accounts and Note Receivable

Accounts and note receivable is comprised of the following:

Property and equipment consists of the following:

Depreciation expense is summarized as follows:

The Company has an unsecured demand lending arrangement (the "facility") with a bank to provide a $118.6 million line of credit at either the lender's prime lending rate (4.3% at February 1, 2003) or a negotiated rate such as LIBOR. The facility has a limit of $40.0 million to be used for direct borrowing. Because there were no borrowings during any of the past three years, there were no amounts paid for interest on this facility. At February 1, 2003, letters of credit in the amount of $46.8 million were outstanding on this facility, leaving a remaining available balance on the line of $71.8 million.

During June 2001, the Company entered into an agreement with a separate financial institution for an uncommitted letter of credit facility for $50.0 million. At February 1, 2003, letters of credit in the amount of $23.8 million were outstanding on this facility, leaving a remaining available balance on the line of $26.2 million.

The Company has a $29.1 million non-revolving term facility (the "term facility") and a $11.2 million revolving operating facility (the "operating facility"). The term facility was used to partially fund the purchase price of the Canadian acquisition and the operating facility is used to support the working capital and capital expenditures of the acquired businesses. The term facility has an outstanding balance, including foreign currency translation adjustments, of $20.6 million as of February 1, 2003. The facility requires annual payments of $4.2 million and matures in December 2007. The term facility bears interest at the one-month Bankers' Acceptance Rate (2.8% at February 1, 2003) plus 140 basis points. Interest paid under the term facility was $1.6 million and $1.8 million for the years ended February 1, 2003 and February 2, 2002, respectively. The operating facility is due in November 2003, has four additional one-year extensions and bears interest at either the lender's prime lending rate (4.5% at February 1, 2003) or the Bankers' Acceptance Rate (2.8% at February 1, 2003) plus 120 basis points. During Fiscal 2002, the Company borrowed and subsequently repaid $4.8 million under the operating facility. Interest paid under the operating facility was $0.1 million for the year ended February 1, 2003. There were no borrowings under the operating facility for the years ended February 2, 2002 and February 3, 2001.

Both the term facility and the operating facility contain restrictive covenants related to financial ratios. As of February 1, 2003, the Company was in compliance with these covenants.

On November 30, 2000, the Company entered into an interest rate swap agreement totaling $29.2 million in connection with the term facility. The swap amount decreases on a monthly basis beginning January 1, 2001 until the termination of the agreement in December 2007. The Company utilizes the interest rate swap to manage interest rate risk. The Company pays a fixed rate of 5.97% and receives a variable rate based on the one-month Bankers' Acceptance Rate. This agreement effectively changes the interest rate on the borrowings under the term facility from a variable rate to a fixed rate of 5.97% plus 140 basis points.

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the Company recognizes its derivative on the balance sheet at fair value at the end of each period. Changes in the fair value of the derivative that is designated and meets all the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income (loss). For the year ended February 1, 2003, unrealized net gains on derivative instruments of approximately $0.3 million, net of related tax effects, were recorded in other comprehensive income (loss).

The Company does not believe there is any significant exposure to credit risk due to the creditworthiness of the bank. In the event of non-performance by the bank, the Company's loss would be limited to any unfavorable interest rate differential.

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The accumulated balances of other comprehensive income (loss) included as part of the Consolidated Statements of Stockholders' Equity follow:

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new standard, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives.

In accordance with the requirements of SFAS No. 142, the Company tested its goodwill for impairment as of February 3, 2002, the beginning of Fiscal 2002. The Company had a goodwill balance of $24.0 million, net of accumulated amortization, as of February 3, 2002, which related to the American Eagle and Bluenotes segments.

The fair value of the Company's goodwill was estimated using discounted cash flow methodologies and market comparable information. As a result of the impairment test at February 3, 2002, the Company determined that no goodwill impairment existed. In the fourth quarter of Fiscal 2002, the Company also performed the required annual impairment test of the carrying amount of goodwill and determined that no goodwill impairment existed.

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In accordance with SFAS No. 142, the Company did not restate the fiscal years ended February 2, 2002 or February 3, 2001 to add back the amortization expense of goodwill. If the Company had been accounting for its goodwill under SFAS No. 142 for all prior periods presented, the Company's net income and income per common share would have been as follows for the years ended February 1, 2003, February 2, 2002 and February 3, 2001:

All store operations are conducted from leased premises. These leases generally provide for base rentals and the payment of a percentage of sales as additional rent when sales exceed specified levels. Minimum rentals relating to these leases are recorded on a straight-line basis. In addition, the Company is typically responsible under its leases for common area maintenance charges, real estate taxes and certain other expenses. These leases are classified as operating leases.

Store rent expense charged to operations, including amounts paid under short-term cancelable leases, was $162.2 million, $138.5 million and $103.6 million during Fiscal 2002, Fiscal 2001 and Fiscal 2000, respectively, and includes $5.5 million, $10.8 million and $13.1 million, respectively, of contingent rental expense.

The table below summarizes future minimum lease obligations under operating leases in effect at February 1, 2003:

The Company has segmented its operations in a manner that reflects how its chief operating decision-makers review the results of the operating segments that make up the consolidated entity.

The Company has two reportable segments, its American Eagle segment and its Bluenotes segment. The American Eagle segment includes the Company's 753 U.S. and Canadian retail stores and the Company's e-commerce business, ae.com. The Bluenotes segment includes the Company's 111 retail stores in Canada. Both segments derive their revenues from the sale of women's and men's apparel. However, each segment is identified by a distinct brand name and target customer.

* Includes certain other businesses that support American Eagle.
** Bluenotes includes the results of operations beginning October 29, 2000, the effective date of the acquisition (see Note 3 of the Consolidated Financial Statements).

During Fiscal 2002 and Fiscal 2001, approximately 90% and 10% of the Company's net sales were derived from sales in the United States and Canada, respectively. During Fiscal 2000, approximately 97% of the Company's net sales were derived from sales in the United States and approximately 3% were derived from sales in Canada.

The components of income from continuing operations before taxes on income were:

The significant components of the Company's deferred tax assets and liabilities were as follows:

Significant components of the provision for income taxes are as follows:

A tax benefit has been recognized as contributed capital, in the amount of $1.2 million for the year ended February 1, 2003, $11.3 million for the year ended February 2, 2002 and $12.0 million for the year ended February 3, 2001 resulting from additional tax deductions related to vested restricted stock grants and stock option exercises.

Of the $6.5 million operating loss carryforwards, $5.6 million is associated with foreign tax loss carryforwards, of which $0.6 million expires over the next five tax years and $5.0 million expires over the next seven tax years. In addition, the Company recorded a deferred tax asset of $1.5 million related to capital loss carryforwards. The use of the capital loss carryforward is dependent on the Company's ability to generate capital gains. Management believes that the Company will generate sufficient capital gains prior to the capital loss expiring. The capital loss carryforward will expire in July 2006.

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A reconciliation between statutory federal income tax and the effective tax rate follows:

The Company maintains a 401(k) retirement plan and profit sharing plan. Full-time employees and part-time employees are automatically enrolled to contribute 3% of their salary if they have attained twenty and one-half years of age, have completed sixty days of service, and work at least twenty hours per week. Individuals can decline enrollment or can contribute up to 30% of their salary to the 401(k) plan on a pretax basis, subject to IRS limitations. After one year of service, the Company will match up to 4.5% of participants' eligible compensation.

Contributions to the profit sharing plan, as determined by the Board of Directors, are discretionary. The Company recognized $3.1 million, $0.9 million and $1.0 million in expense during Fiscal 2002, Fiscal 2001 and Fiscal 2000, respectively, in connection with these plans.

The Employee Stock Purchase Plan is a non-qualified plan that covers employees who are at least 18 years old, have completed sixty days of service, and work at least twenty hours a week. Contributions are determined by the employee, with a maximum of $60 per pay period, with the Company matching 15% of the investment. These contributions are used to purchase shares of Company stock in the open market.

The 1999 Stock Incentive Plan (the "Plan") was approved by the shareholders on June 8, 1999. The Plan authorized 6,000,000 shares for issuance in the form of stock options, stock appreciation rights, restricted stock awards, performance units, or performance shares. The Plan was subsequently amended, in June 2001, to increase the shares available for grant to 11,000,000. Additionally, the Plan provides that the maximum number of shares awarded to any individual may not exceed 3,000,000 shares. The Plan allows the Compensation and Stock Option Committee to determine which employees and consultants will receive awards and the terms and conditions of these awards. The Plan provides for a grant of 15,000 stock options annually to each director who is not an officer or employee of the Company. At February 1, 2003, 7,293,720 non-qualified stock options and 453,288 shares of restricted stock were granted under the Plan to employees and certain non-employees. Approximately half of the options granted vest eight years after the date of grant but can be accelerated to vest over three years if the Company meets annual performance goals. The remaining options granted under the Plan vest primarily over five years. All options expire after ten years. Restricted stock is earned if the Company meets annual performance goals for the year. For Fiscal 2002, Fiscal 2001 and Fiscal 2000, the Company recorded approximately $1.4 million, $3.1 million and $7.0 million, respectively, in compensation expense related to stock options and restricted stock in connection with the Plan.

During Fiscal 2000, a senior executive assumed a new position within the Company. As a result of this change, the Company accelerated the vesting on grants covering 780,000 shares of stock for this individual. This acceleration does not result in additional compensation expense unless this executive ceases employment with the Company prior to the original vesting dates. As of February 1, 2003, under the original terms of this executive's option agreements, 256,200 shares would have remained unvested which could result in compensation expense and a reduction to net income by $0.3 million based on the February 1, 2003 stock value if the executive ceases employment with the Company.

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Stock Option Plan

On February 10, 1994, the Company's Board of Directors adopted the American Eagle Outfitters, Inc. 1994 Stock Option Plan (the "Plan"). The Plan provided for the grant of 4,050,000 incentive or non-qualified options to purchase common stock. The Plan was subsequently amended to increase the shares available for grant to 8,100,000 shares. Additionally, the amendment provided that the maximum number of options which may be granted to any individual may not exceed 2,700,000 shares. The options granted under the Plan are approved by the Compensation and Stock Option Committee of the Board of Directors, primarily vest over five years, and are exercisable for a ten-year period from the date of grant.

A summary of the Company's stock option activity under all plans follows:

(1) As of February 1, 2003, February 2, 2002 and February 3, 2001, the Company had 3,621,266 shares, 4,981,106 shares and 845,195 shares, available for grant, respectively.
(2) Options exercised during Fiscal 2002 ranged in price from $1.00 to $26.29 with an average of $9.35.
(3) As of February 1, 2003, the exercise price of 1,872,925 options outstanding ranged between $0.93 and $15.58 with weighted-average remaining contractual lives between approximately 1 and 10 years. The exercise price of 2,645,146 options outstanding ranged between $15.77 and $21.67 with weighted-average remaining contractual lives between approximately 6 and 10 years. The exercise price of 1,637,180 options outstanding ranged between $16.46 and $24.35 with weighted-average remaining contractual lives between 6 and 9 years. The exercise price of 1,950,605 options outstanding ranged between $24.55 and $40.41 with weighted-average remaining contractual lives between 6 and 9 years.
(4) As of February 1, 2003, the exercise price of 1,761,831 options that were currently exercisable ranged between $0.93 and $19.85 and the exercise price of 2,007,994 options that were currently exercisable ranged between $21.67 and $40.41.

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Restricted Stock Grants

The Company maintains a restricted stock plan for compensating certain employees. Through February 1, 2003, a total of 2,503,233 shares of restricted stock had been granted at prices ranging from $0.93 to $35.30, and, through Fiscal 2002, a total of 2,482,833 shares have vested.