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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the Fiscal Year Ended January 29, 2005

OR

Commission File Number: 0-23760

American Eagle Outfitters, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (724) 776-4857

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Shares, without par value

(Title of class)

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  x    NO  ¨

The aggregate market value of voting stock held by non-affiliates of the registrant as of July 31, 2004 was $1,865,336,988.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 153,243,762 Common Shares were outstanding at March 31, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Part III - Proxy Statement for 2005 Annual Meeting of Stockholders, in part, as indicated.

Table of Contents

AMERICAN EAGLE OUTFITTERS, INC.

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Table of Contents

PART I

ITEM 1. BUSINESS.

Overview

American Eagle Outfitters, Inc., a Delaware corporation, is a leading lifestyle retailer that designs, markets and sells our own brand of relaxed, casual clothing for 15 to 25 year olds, providing high-quality merchandise at affordable prices. We opened our first American Eagle Outfitters store in the United States in 1977 and expanded the brand into Canada in 2001. We also distribute merchandise via our e-commerce operation, ae.com. Our collection offers modern basics like jeans, cargo pants, and graphic T’s as well as a stylish assortment of accessories, outerwear and footwear under our American Eagle Outfitters® and AE® brand names.

As of January 29, 2005, we operated 846 American Eagle Outfitters stores in the United States and Canada.

As used in this report, all references to “we,” “our,” and “the Company” refer to American Eagle Outfitters, Inc. and its wholly-owned subsidiaries. The term “American Eagle” refers to our U.S. and Canadian American Eagle Outfitters stores and the Company’s e-commerce operation. “Bluenotes” refers to the Bluenotes/Thriftys specialty apparel chain which we operated in Canada prior to its disposition during Fiscal 2004.

Information concerning the Company’s business segments and certain geographic information is contained in Note 2 of the Consolidated Financial Statements included in this Form 10-K and is incorporated herein by reference.

Organization

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, a Canadian brand which we disposed of during Fiscal 2004; the Braemar chain, with 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 stores and provides services to third parties.

In December 2004, we completed the disposition of Bluenotes to 6295215 Canada Inc. (the “Purchaser”), a privately held Canadian company. As a result, the Company’s Consolidated Statements of Operations and Consolidated Statements of Cash Flows reflect Bluenotes’ results of operations as discontinued operations for all periods presented (note that amounts in the Company’s Consolidated Balance Sheets have not been reclassified to reflect Bluenotes as discontinued operations). See Note 10 of the Consolidated Financial Statements for additional information regarding this transaction.

Our financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2004,” “Fiscal 2003” and “Fiscal 2002” refer to the fifty-two week periods ended January 29, 2005, January 31, 2004 and February 1, 2003, respectively. “Fiscal 2005” refers to the fifty-two week period ending January 28, 2006.

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Growth Strategy

Store Growth

Our primary store growth strategy is to continue our expansion throughout the United States and Canada by filling in existing markets. At the end of Fiscal 2004, we operated in 49 states, the District of Columbia and Puerto Rico. We opened 37 net new U.S. stores during Fiscal 2004, increasing our U.S. store base by approximately 5% to 777 stores. Additionally, our U.S. gross square footage increased by approximately 7% during Fiscal 2004 due to the new store openings as well as incremental square footage from 36 U.S. store remodels.

During Fiscal 2004, we continued to grow in the western U.S. with 40% of our store openings in that region. We added seven new stores in California, a market with strong demographics for our target customer. We continue to expand in our newer markets including Puerto Rico, where we opened an additional store during Fiscal 2004. We also opened our second “flagship” store in New York City this year, located on West 34^th Street in Herald Square. Our flagship locations utilize a larger store format in which we offer our customers a broader merchandise selection.

In Fiscal 2005, we plan to enter Alaska with two new store locations. These openings will expand our operations into all 50 states. We also plan to open our third “flagship” store in New York City, located in Union Square, and an additional “flagship” store in downtown Seattle next year. Our performance is strong in our new markets and we will continue to explore similar opportunities for new store growth. Our research has shown that there are still attractive retail locations where we can open American Eagle stores in enclosed regional malls, urban areas and lifestyle centers.

During Fiscal 2004, we opened five new stores in Canada, including four locations in the province of Quebec, which increased our total Canadian store base by approximately 6% to 69 stores. We also closed one Canadian store during the year. We remain pleased with the results of our American Eagle expansion into Canada and look to a long-term potential of approximately 80 stores across the country.

The table below shows certain information relating to our historical American Eagle store growth in the U.S. and Canada:

Store Remodeling and Refurbishment Opportunities

The Company continues to remodel its older stores into its new store format. In order to maintain a balanced presentation and to accommodate additional product categories, we selectively enlarge our stores during the remodeling process. We select stores for expansion based on market demographics and store volume forecasts. In most cases stores selected for expansion increase from an average of 4,000 gross square feet to an average of 6,000 gross square feet. We believe the larger format can better accommodate our new merchandise categories and support future growth. In certain cases, we also upgrade the store location within the mall. During Fiscal 2004 we remodeled 36 stores in the U.S. to the new store design, of which 9 stores were expanded, 13 stores were relocated within the mall and 14 stores were refurbished as further discussed below. As of January 29, 2005, approximately three-fourths of all American Eagle stores in the U.S. are in our new store format.

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During Fiscal 2004, the Company initiated a store refurbishment program, targeted towards our lower volume stores, typically located in smaller markets. Stores selected as part of this program maintain their current location and size but are updated with certain aspects of our new store format, including paint and certain new fixtures. This program provides a cost effective update for our lower volume stores. We refurbished 14 stores in the U.S. during Fiscal 2004.

Other Growth Opportunities

American Eagle sells merchandise via its e-commerce site, ae.com, which is an extension of the lifestyle that we convey in our stores. During Fiscal 2004, ae.com began shipping internationally to 24 countries, providing us an opportunity to grow in regions where we do not currently have store locations.

During Fiscal 2004, the Company announced plans to develop a new brand (the “new concept”) that will target a different demographic than the American Eagle brand. The Company currently has creative and operational teams in place and we expect to open test stores for the new concept in 2006.

Store Locations

Our stores average approximately 5,400 gross square feet and approximately 4,400 on a selling square foot basis. At January 29, 2005, we operated 846 stores in the United States and Canada as shown below:

United States, including the Commonwealth of Puerto Rico - 777 stores

Purchasing

The Company purchases merchandise from suppliers who either manufacture their own merchandise or supply merchandise manufactured by others, or both. During Fiscal 2004, the Company purchased a majority of its merchandise from non-North American suppliers.

All of our merchandise suppliers receive a vendor compliance manual that describes our quality standards and shipping instructions. We maintain a quality control department at our distribution centers 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 to identify quality problems prior to shipment of merchandise.

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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.

Security Compliance

During recent years, there has been an increasing focus within the international trade community on concerns related to global terrorist activity. The security issues posed by 9/11 and other terrorist threats have brought increased demands from the Bureau of Customs and Border Protection (“CBP”) and other agencies within the Department of Homeland Security that importers take responsible action to secure their supply chains. In response, the Company became a certified member of the Customs – Trade Partnership Against Terrorism program (“C-TPAT”) during 2004. C-TPAT is a voluntary program offered by CBP in which an importer agrees to work with CBP to strengthen overall supply chain security. As a result, the Company’s internal security procedures were validated by CBP during February 2005 and a validation of processes with respect to our external partners will be completed in June 2005. Additionally, the Company took significant steps to expand the scope of our security procedures during 2004, including, but not limited to, a significant increase in the number of factory audits performed; a revision of the factory audit format to include a review of all critical security issues as defined by CBP; a review of security procedures of our other international trading partners, including forwarders, consolidators, shippers and brokers; and a requirement that all of our international trading partners be members of C-TPAT.

Trade Compliance

During 2003, the Company was selected by CBP for a Focused Assessment Audit. The purpose of this audit was to review and evaluate our adherence to CBP’s rules and regulations regarding trade compliance issues such as merchandise classification, valuation and origin. The Company’s audit was completed during May 2004 and resulted in no unacceptable risks of non-compliance being found.

Merchandise Inventory, Replenishment and Distribution

Purchase orders, executed by our buyers, are entered into the merchandise system at the time of order. Merchandise is normally shipped directly from vendors 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 operation, uses a third-party vendor for its fulfillment services.

Our stores in Canada receive merchandise from NLS, our Canadian distribution network which consists of a 400,000 square foot central distribution center near Toronto and five smaller sub-centers located in Toronto and across Canada totaling approximately 120,000 square feet. Merchandise is shipped to the stores two to five times per week depending upon the season and store requirements.

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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 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 American Eagle store growth in the western U.S. as well as the store growth of our new concept. This second facility increases our potential capacity to roughly 1,100 stores and gives the Company one or two day shipping times to approximately 85% of our stores. We also operate a facility near Puebla, Mexico, which supports our knit and denim production with warehousing, deconsolidation, product development and testing, quality control, and other value added services.

Customer Credit and Returns

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.

Gift cards can be purchased in our American Eagle stores in the U.S. and Canada, as well as through our e-commerce site, ae.com. When the recipient uses the gift card, the value of the purchase is electronically deducted from the card and any remaining value can be used for future purchases. If a gift card remains inactive for greater than twenty-four months, the Company assesses the recipient a one dollar per month service fee, where allowed by law, which is automatically deducted from the remaining value of the card. This service fee is recorded within selling, general and administrative expenses on the Company’s Consolidated Statements of Operations.

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

Competition

The retail apparel industry is very competitive. We compete primarily on the basis of quality, fashion, service, selection and price. Our stores in the U.S. compete with various divisions of The Limited, The Gap, Abercrombie & Fitch, Pacific Sunwear and Hot Topic as well as with retail chains such as 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 and discount retailers.

Our 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. An application for American Eagle^™ is pending for a variety of clothing items and we have also registered a number of other marks used in our business.

We have registered American Eagle Outfitters® in the Canadian Trademark Office for a wide variety of clothing products, as well as for retail clothing store services. In addition, we are exclusively licensed in Canada to use AE® and AEO® in connection with the sale of a wide range of clothing products.

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Employees

As of January 29, 2005, we had approximately 20,600 employees in the United States, of whom approximately 16,100 were part-time and seasonal hourly employees. We consider our relationship with our employees to be satisfactory.

Seasonality

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 2004, the third and fourth fiscal quarters accounted for approximately 61% of our sales and approximately 74% of our income from continuing operations. 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.

Available Information

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available, free of charge, under the “About AE” section of our website at www.ae.com. These reports are available as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission.

The Company’s corporate governance materials, including our corporate governance guidelines; the charters of our audit, compensation, and nominating and corporate governance committees; and our code of ethics may also be found under the “About AE” section of our website at www.ae.com. A copy of the corporate governance materials are also available upon written request.

Additionally, the Company’s investor presentations are available under the “About AE” section of our website at www.ae.com. These presentations are available as soon as reasonably practicable after they are presented at investor conferences.

ITEM 2. PROPERTIES.

During Fiscal 2004, the Company acquired Linmar Realty Company II (“Linmar Realty”), a general partnership that owned the Company’s corporate headquarters and distribution facility near Pittsburgh, PA. Prior to the acquisition, the Company had an operating lease with Linmar Realty for these properties. 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. We lease additional office and storage space near our headquarters totaling 38,000 square feet. The leases for this additional office and storage space expire in March 2010 and August 2009, respectively.

The Company rents office space in New York, NY for its designers, sourcing, and production team. This lease was expanded to approximately 75,000 square feet during Fiscal 2004 and expires in May 2016. We previously occupied office space of approximately 18,000 square feet in New York, NY, which has been subleased to a tenant through the expiration of the lease term in December 2008. During Fiscal 2004, we entered into a lease for an additional 9,500 square feet of office space in New York, NY, which expires in September 2005.

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In June 2001, we purchased a second U.S. distribution facility in Ottawa, Kansas comprising of 290,000 square feet. This facility was expanded to approximately 400,000 square feet during Fiscal 2001. Additionally, we own NLS, a 400,000 square foot distribution facility near Toronto, which is also used for the American Eagle Canada administrative offices. We also rent five smaller distribution sub-centers located in Toronto and across Canada as part of NLS with a total of approximately 120,000 square feet. The sub-center leases expire with various terms through 2010. A warehousing and deconsolidation facility and office near Puebla, Mexico of approximately 94,000 square feet is also leased until 2008.

In connection with the disposition of Bluenotes, the Company is currently subleasing the related headquarters, consisting of approximately 40,000 square feet in Toronto, Ontario, to the Purchaser. The sublease and lease expire in November 2005 and February 2007, respectively.

All of our stores in the United States and Canada are leased. The store leases generally have initial terms of 10 years. Certain leases also include early termination options which can be exercised under specific conditions. 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.

ITEM 3. LEGAL PROCEEDINGS.

The Company is a party to litigation incidental to its business. At this time, management does not expect the results of the litigation to be material to the Company’s financial position or results of operations.

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

Not applicable.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

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 April 1, 2005, there were 715 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 60,000. The following information reflects the March 2005 two-for-one stock split.

During the third quarter of Fiscal 2004, our Board of Directors (the “Board”) authorized the Company’s first-ever quarterly cash dividend of three cents per share, which was paid on October 8, 2004. A second quarterly dividend of three cents per share was paid on January 7, 2005. During the first quarter of Fiscal 2005, the Board voted to raise the Company’s cash dividend to an annual rate of twenty cents per share. A quarterly dividend of five cents per share was paid on April 8, 2005. The payment of future dividends is at the discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation and other relevant factors. It is anticipated that any future dividends paid will be declared on a quarterly basis.

The Company did not repurchase any shares of its Common Stock during Fiscal 2004.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

The following Selected Consolidated Financial Data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included under Item 7 below and the Consolidated Financial Statements and notes thereto, included in Item 8 below. Most of the selected data presented below is derived from the Company’s Consolidated Financial Statements, which are filed in response to Item 8 below. The selected consolidated income statement data for the years ended February 2, 2002 and February 3, 2001 and the selected consolidated balance sheet data as of February 1, 2003, February 2, 2002 and February 3, 2001 are derived from audited consolidated financial statements not included herein.

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The five-year selected consolidated financial data presented below has been revised to reflect the Company’s restatement related to lease accounting and the two-for-one stock split distributed on March 7, 2005. See Note 2 and Note 16 of the accompanying Consolidated Financial Statements for additional information regarding the restatement and the stock split, respectively.

See footnotes on page 10.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of financial condition and results of operations are based upon the Company’s Consolidated Financial Statements and should be read in conjunction with those statements and notes thereto.

Restatement of Prior Financial Information

On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their application under generally accepted accounting principles (“GAAP”). In light of this letter, the Company’s management initiated a review of its lease-related accounting and determined that its historical method of accounting for rent holidays and tenant allowances, as more fully described below, was not in accordance with GAAP. As a result, the Company restated its previously filed Consolidated Financial Statements for the years ended January 31, 2004 and February 1, 2003. The Company also restated its quarterly financial information for Fiscal 2003 and the first three quarters of Fiscal 2004, as shown in Note 15 of the Consolidated Financial Statements. The restatement also affects periods prior to Fiscal 2002. The impact of the restatement on prior periods has been reflected as a cumulative adjustment of $5.3 million to retained earnings as of February 2, 2002 in the Consolidated Statement of Stockholders’ Equity.

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

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

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The Company did not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the restatement. Accordingly, the financial statements and related financial information contained in such reports should no longer be relied upon. All referenced amounts for prior periods in this Annual Report on Form 10-K are presented on a restated basis.

Critical Accounting Policies

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 involve a higher degree of judgment and complexity. See also Note 2 of the Consolidated Financial Statements.

Revenue Recognition. The Company records revenue for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue at the time the goods are shipped. Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase and revenue is recognized when the gift card is redeemed for merchandise. Revenue is recorded net of sales returns.

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. See Note 3 of the Consolidated Financial Statements for further discussion.

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

The Company 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 may have a material adverse impact on earnings, depending on the extent and amount of inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve can be affected by changes in merchandise mix and changes in actual shrinkage trends.

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. Assets are evaluated for impairment when undiscounted future cash flows are projected to be less than the carrying value of those assets. When events such as these occur, the 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.

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. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets may not be realized.

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Legal Proceedings and Claims. The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with SFAS No. 5, Accounting for Contingencies, Management records a reserve for estimated losses when the amount is probable and can be reasonably estimated. If a range of possible loss exists, the Company records the accrual at the low end of the range, in accordance with FIN 14, an interpretation of SFAS No. 5. As the Company has provided adequate reserves, it believes that the ultimate outcome of any matter currently pending against the Company will not materially affect the financial position or results of operations of the Company.

Self Insurance Reserve. The Company is self-insured for certain losses related to employee medical benefits. Costs for self-insurance claims filed and claims incurred but not reported are accrued based on known claims and historical experience. Management believes that it has adequately reserved for its self-insurance liability, which is capped through the use of stop loss contracts with insurance companies. However, any significant variation of future claims from historical trends could cause actual results to differ from the accrued liability.

Key Performance Indicators

Management of the Company evaluates the following items, which are considered key performance indicators, in assessing the Company’s performance:

Comparable store sales – 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 a remodel 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 remodel.

Management considers comparable store sales to be an important indicator of the Company’s current performance. Comparable store sales results are important in achieving leveraging of our costs, including store payroll, store supplies, rent, etc. Positive comparable store sales contribute to greater leveraging of costs while negative comparable store sales contribute to deleveraging of costs. Comparable store sales also have a direct impact on the Company’s total net sales, cash and working capital.

Gross profit – Gross profit measures whether the Company is appropriately optimizing the price of its merchandise. Gross profit is the difference between net sales and cost of sales. Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage, promotional costs and buying, occupancy and warehousing costs. Buying, occupancy and warehousing costs consists of compensation and travel for our buyers; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; and compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs. Any inability to obtain acceptable levels of initial markups or any significant increase in the Company’s use of markdowns could have an adverse effect on the Company’s gross profit and results of operations.

Operating income – Management views operating income as a key indicator of the Company’s success. The key drivers of operating income are comparable store sales, gross profit and the Company’s ability to control operating costs.

Store productivity – Store productivity, including sales per square foot, average unit retail price, number of transactions per store, number of units sold per store and number of units per transaction, is evaluated by Management in assessing the operational performance of the Company.

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

Cash flow and liquidity – Management evaluates cash flow from operations, investing and financing in determining the sufficiency of the Company’s cash position. Cash flow from operations has historically been sufficient to cover the Company’s uses of cash. Management believes that cash flow from operations will be sufficient to fund anticipated capital expenditures and working capital requirements.

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Results of Operations

Overview

Fiscal 2004 was a record year. Our merchandise assortments were fashion right and clearly focused on our target customers. Strong full-priced selling led to significantly reduced markdowns which drove our earnings improvement throughout the year.

Net sales for Fiscal 2004 increased 31.1% to $1.881 billion from $1.435 billion for Fiscal 2003 and our consolidated comparable store sales increased 21.4% compared to the corresponding period last year. Our comparable store sales increase was driven by a higher realized average unit retail price as well as increased transactions per store and increased units sold per store.

Operating income as a percent to sales rose to a record rate of 19.3% for Fiscal 2004 from 9.3% for the same period last year, driven by an improvement in our gross margin and leveraging of selling, general and administrative expenses. In addition to significantly lower markdowns, we achieved an increase in markon due to lower product costs. Strong comparable store sales also enabled us to leverage fixed expenses including rent and selling, general and administrative expenses.

Income from continuing operations for Fiscal 2004 increased 170% to $224.2 million, or $1.49 per diluted share, from $83.1 million, or $0.57 per diluted share last year. Income from continuing operations was 11.9% as a percent to net sales during Fiscal 2004, which is our highest rate to net sales ever.

Loss from discontinued operations for Fiscal 2004 decreased to $10.9 million, or $0.07 per diluted share, from $23.5 million, or $0.16 per diluted share last year. The Fiscal 2004 loss from discontinued operations represents the Bluenotes loss from operations of $6.1 million, as well as a $4.8 million loss recorded on the disposition. The Fiscal 2003 loss from discontinued operations represents Bluenotes’ loss from operations for the period, including a goodwill impairment charge of $14.1 million.

We ended Fiscal 2004 with $674.0 million in cash and short and long-term investments, an increase of $311.9 million from last year. During the year we continued to make significant investments in our business, including $97.3 million in capital expenditures, which related primarily to our new and remodeled stores in the U.S. and Canada, as well as the purchase of our corporate headquarters and distribution center near Pittsburgh, PA.

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.

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As a result of the Bluenotes’ disposition during Fiscal 2004, the Company’s operations are now conducted in one reportable segment. Prior to the disposition, Bluenotes was presented as a separate reportable segment. The American Eagle segment includes the Company’s 846 U.S. and Canadian retail stores and the Company’s e-commerce operation, ae.com.

Comparison of Fiscal 2004 to Fiscal 2003

Net Sales

Net sales increased 31.1% to $1.881 billion from $1.435 billion. The sales increase was due to a 21.4% comparable store sales increase as well as a 7.1% increase in gross square feet, consisting primarily of the addition of 41 net new stores. The comparable store sales increase was driven by a higher average unit retail price, resulting primarily from fewer markdowns and an increase in the number of transactions per average store. Additionally, both the number of units sold per average store and the number of units sold per transaction increased during the year. Comparable store sales percentages increased in the mid-twenties in the women’s business over last year and the men’s comparable store sales percentage increased in the high teens.

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 a remodel 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 remodel.

Gross Profit

Gross profit as a percent to net sales increased to a record rate of 46.7% from 38.3% last year. The percentage increase was primarily attributed to an improvement in merchandise margins. Merchandise margins increased significantly for the period due primarily to lower markdowns as well as an improved markon, reflecting better sourcing and a continuation of our cost control initiatives, including reduced freight costs and lower sell-offs. Buying, occupancy and warehousing expenses declined as a percent to net sales due primarily to the leveraging of rent expense.

The Company’s gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales. Other retailers may exclude a portion of these costs from cost of sales, including them in a line item such as selling, general and administrative expenses. See Note 2 of the Consolidated Financial Statements for a description of the Company’s accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percent to net sales decreased to 23.8% from 24.8% due to our strong comparable store sales results, as well as our cost control initiatives. During the period, we leveraged direct salaries, advertising, leasing costs, asset write-offs related to store closings, communications, travel and services purchased. These improvements were partially offset by the deleveraging of incentive compensation, which was not incurred in the prior year, as well as the deleveraging of holiday packaging.

Depreciation and Amortization Expense

Depreciation and amortization expense as a percent to net sales decreased to 3.6% from 4.2% due primarily to the comparable store sales increase.

Other Income, Net

Other income, net increased to $4.1 million from $2.0 million due primarily to increased investment income resulting from higher cash and investment balances this year compared to last year as well as improved investment rates.

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Income from Continuing Operations

Income from continuing operations increased 170% to a record of $224.2 million, or 11.9% as a percent to net sales, from $83.1 million, or 5.8% as a percent to net sales last year. Income from continuing operations per diluted share increased to $1.49 from $0.57 last year. The increase in income from continuing operations was attributable to the factors noted above.

Loss from Discontinued Operations

Loss from discontinued operations for Fiscal 2004 decreased to $10.9 million, or $0.07 per diluted share, from $23.5 million, or $0.16 per diluted share last year. The Fiscal 2004 loss from discontinued operations represents the Bluenotes loss from operations of $6.1 million, as well as a $4.8 million loss recorded on the disposition. The Fiscal 2003 loss from discontinued operations represents Bluenotes’ loss from operations for the period, including a goodwill impairment charge of $14.1 million.

Comparison of Fiscal 2003 to Fiscal 2002

Net Sales

Net sales increased 3.8% to $1.435 billion from $1.383 billion. The sales increase was due to an 11.1% increase in gross square feet, consisting primarily of the addition of 52 net new stores, offset by a comparable store sales decline of 6.6%. The comparable store sales decrease was driven by a lower average unit retail price as well as a decline in the number of transactions per average store, while the number of units sold per average store increased compared to a year ago. Comparable store sales in the women’s business declined in the mid single-digits for the period while the men’s comparable store sales decreased in the low double-digits.

Gross Profit

Gross profit as a percent to net sales declined to 38.3% from 39.1%. The percentage decrease was attributed to the deleveraging of buying, occupancy and warehousing costs offset by an improvement in merchandise margins. Buying, occupancy and warehousing expenses deleveraged due primarily to the deleveraging of rent expense. Merchandise margins increased for the period due primarily to an improved markon offset by increased markdowns as well as an increase in the liquidation of sell-off merchandise. Additionally, a reduction in the sales returns reserve contributed to the higher merchandise margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percent to net sales increased to 24.8% from 23.8% due primarily to the deleveraging of compensation expense. Compensation expense deleveraged due primarily to the 6.6% decline in comparable store sales. Additionally, insurance expense and services purchased deleveraged. These increases were partially offset by the leveraging of communications, advertising and chargecard fees.

Depreciation and Amortization Expense

Depreciation and amortization expense as a percent to net sales increased to 4.2% from 3.8% due primarily to our store expansion, including new and remodeled stores.

Other Income, Net

Other income, net decreased to $2.0 million from $2.4 million due primarily to lower interest income partially offset by lower interest expense.

Income from Continuing Operations

Income from continuing operations decreased to $83.1 million, or 5.8% as a percent to net sales, from $99.6 million, or 7.2% as a percent to net sales. Income from continuing operations per diluted share decreased to $0.57 from $0.68. The decline in income from continuing operations was attributable to the factors noted above.

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Loss from discontinued operations

Loss from discontinued operations increased to $23.5 million, or $0.16 per diluted share, from $11.5 million, or $0.08 per diluted share. The Fiscal 2003 loss from discontinued operations included a goodwill impairment charge of $14.1 million, which was not incurred during the prior year.

Liquidity and Capital Resources

The Company’s uses of cash are primarily for working capital, the construction of new stores and the remodeling of existing stores, information technology upgrades, distribution center improvements, the purchase of both short and long-term investments and the payment of dividends. Historically, these uses of cash have been met through cash flow from operations.

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

Net cash provided by operating activities from continuing operations totaled $368.7 million during Fiscal 2004. The Company’s major source of cash from operations was merchandise sales. Our primary outflows of cash for operations were for the purchase of inventory, operational costs, and the payment of taxes.

Investing activities from continuing operations for Fiscal 2004 included $97.3 million for capital expenditures and $173.9 million for the net purchase of investments. Capital expenditures consisted primarily of $56.8 million related to 50 new and 36 remodeled stores in the United States and Canada, as well as $20.0 million for the acquisition of our corporate headquarters and distribution center. The remaining capital expenditures related primarily to fixtures and improvements to existing stores and technological improvements.

The Company purchased both short and long-term investments during Fiscal 2004. We invest primarily in tax-exempt municipal bonds, taxable agency bonds and corporate notes with an original maturity between three and twenty-four months and an expected rate of return of approximately a 3% taxable equivalent yield. The Company places an emphasis on investing in tax-exempt and tax-advantaged asset classes. Additionally, all investments must have a highly liquid secondary market.

Cash provided by financing activities from continuing operations for Fiscal 2004 resulted from $57.5 million in proceeds from stock option exercises during the year partially offset by $16.9 million used for the early retirement of debt and termination of the related swap agreement, as further described below, as well as $8.8 million used for the payment of dividends.

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 (5.25% at January 29, 2005) or at LIBOR plus a negotiated margin rate. The facility has a limit of $40.0 million to be used for direct borrowing. No borrowings were required against the line for the current or prior periods. At January 29, 2005, letters of credit in the amount of $55.0 million were outstanding on this facility, leaving a remaining available balance on the line of $63.6 million. The Company also has an uncommitted letter of credit facility for $50.0 million with a separate financial institution. At January 29, 2005, letters of credit in the amount of $17.6 million were outstanding on this facility, leaving a remaining available balance on the line of $32.4 million.

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During Fiscal 2004, the Company retired its $29.1 million non-revolving term facility (the “term facility”) that it had in connection with its Canadian acquisition. The term facility required annual payments of $4.8 million, with interest at the one-month Bankers’ Acceptance Rate plus 140 basis points, and was originally scheduled to mature in December 2007. At redemption, the term facility had an outstanding balance, including foreign currency translation adjustments, of $16.2 million.

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 decreased on a monthly basis beginning January 1, 2001 until the early termination of the agreement during Fiscal 2004. During Fiscal 2004, the interest rate swap was terminated at its fair value, which represented a net loss of $0.7 million, in conjunction with the payoff of the term facility. As a result, the Company reclassified approximately $0.4 million, net of tax, of unrealized net losses from other comprehensive income into earnings during Fiscal 2004.

The Company also had an $11.2 million revolving operating facility (the “operating facility”) that was used to support the working capital and capital expenditures of the acquired Canadian businesses. The operating facility was due in November 2003 and had four additional one-year extensions. During Fiscal 2003, the Company chose not to extend the operating facility.

On February 24, 2000, the Company’s Board of Directors authorized the repurchase of up to 7,500,000 shares of its stock. The Company did not purchase any shares of common stock on the open market during Fiscal 2004 as part of this stock repurchase program. The Company purchased 80,000 and 2,280,000 shares of common stock for approximately $0.6 million and $17.8 million on the open market during Fiscal 2003 and Fiscal 2002, respectively. Prior to Fiscal 2002, the Company had purchased approximately 3,740,000 shares of common stock on the open market under this stock repurchase program. As of January 31, 2005, approximately 1,400,000 shares remain authorized for repurchase. Additionally, during Fiscal 2003 and Fiscal 2002, the Company purchased 16,000 shares and 116,000 shares, respectively, from certain employees at market prices totaling $0.1 million and $1.6 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.

During the third quarter of Fiscal 2004, our Board of Directors authorized the Company’s first-ever quarterly cash dividend of three cents per share, which was paid on October 8, 2004. A second quarterly dividend of three cents per share was paid on January 7, 2005. During the first quarter of Fiscal 2005, the Board voted to raise the Company’s cash dividend to an annual rate of twenty cents per share. A quarterly dividend of five cents per share was paid on April 8, 2005. The payment of future dividends is at the discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation and other relevant factors. It is anticipated that any future dividends paid will be declared on a quarterly basis.

We expect capital expenditures for Fiscal 2005 to be approximately $100 million, which will relate primarily to approximately 35 to 40 new American Eagle stores in the United States and Canada, and the remodeling of approximately 60 American Eagle stores in the United States. Remaining capital expenditures will relate to new fixtures and enhancements to existing stores, information technology upgrades, distribution center improvements and the construction of a new data center. We plan to fund these capital expenditures through existing cash and cash generated from operations.

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.

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Obligations and Commitments

Disclosure about Contractual Obligations

The following table summarizes significant contractual obligations of the Company as of January 29, 2005:

In addition to the above purchase obligations, the Company has outstanding letters of credit attributed to inventory purchases, as stated in the table below.

Disclosure about Commercial Commitments

The following table summarizes significant commercial commitments of the Company as of January 29, 2005:

Guarantees

In connection with the disposition of Bluenotes, the Company has provided guarantees related to two store leases that were assigned to 6295215 Canada Inc. (the “Purchaser”). These guarantees were provided to the applicable landlords and will remain in effect until the leases expire in 2007 and 2015, respectively. The lease guarantees require the Company to make all required payments under the lease agreements in the event of default by the Purchaser. The maximum potential amount of future payments (undiscounted) that the Company could be required to make under the guarantees is approximately $1.6 million as of January 29, 2005. In the event that the Company would be required to make any such payments, it would pursue full reimbursement from YM, Inc., a related party of the Purchaser, in accordance with the Bluenotes Asset Purchase Agreement.

In accordance with FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 (“FIN 45”), as the Company issued the guarantees at the time it became secondarily liable under a new lease, no amounts have been accrued in the Company’s Consolidated Financial Statements related to these guarantees. Additionally, Management believes that the likelihood of having to perform under the guarantees is remote.

New Accounting Pronouncements

FIN No. 46, Consolidation of Variable Interest Entities

The FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Instruments, in January 2003 and subsequently issued a revision of the Interpretation in December 2003 (“FIN 46R”). FIN 46R requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient

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equity at risk for the entity to finance its activities without additional financial support from other parties. All provisions of FIN 46R were effective for the first reporting period ended after March 15, 2004. The Company fully adopted the provisions of FIN 46R during the three months ended May 1, 2004, which did not have an impact on the Company’s consolidated financial position, results of operations or liquidity because the Company has no interest in any variable interest entities.

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

In December 2004, the FASB issued Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“FSP No. 109-2”). FSP No. 109-2 allows additional time for companies to determine how the American Jobs Creation Act of 2004 (the “Act”) affects a company’s accounting for the deferred tax liabilities on un-remitted foreign earnings. The Act provides for a special one-time deduction of 85% of certain foreign earnings that are repatriated and which meet certain requirements. The Company is currently evaluating whether any of the earnings of our non-U.S. operations will be repatriated in accordance with the terms of the Act. At this time, the Company has not yet identified qualified earnings that would be beneficial to repatriate. The Company will continue to monitor its foreign earnings during Fiscal 2005 to determine whether it is beneficial to repatriate earnings under the Act.

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

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (“SFAS No. 123(R)”). SFAS No. 123(R) is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. SFAS No. 123(R) requires that companies recognize all share-based payments to employees, including grants of employee stock options, in the financial statements. The recognized cost will be based on the fair value of the equity or liability instruments issued. Pro forma disclosure of this cost will no longer be an alternative under SFAS No. 123(R).

SFAS No. 123(R) is effective for public companies at the beginning of the first interim or annual period beginning after June 15, 2005. Transition methods available to public companies include either the modified prospective or modified retrospective adoption. The modified prospective transition method requires that compensation cost be recognized beginning on the effective date, or date of adoption if earlier, for all share-based payments granted after the date of adoption and for all unvested awards existing on the date of adoption. The modified retrospective transition method, which includes the requirements of the modified prospective transition method, additionally requires the restatement of prior period financial information based on amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures. The Company will adopt SFAS No. 123(R) in its third quarter of Fiscal 2005, beginning July 31, 2005, as required. The Company is currently in the process of determining the transition method that it will use to adopt the new standard.

The Company currently accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, using the intrinsic value method. As a result of using this method, the Company generally recognizes no compensation cost for employee stock options. The adoption of SFAS No. 123(R) and the use of the fair value method will have a significant impact on our results of operations. The impact of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact would have approximated the amounts in our pro forma disclosure as shown in Note 2 of the Consolidated Financial Statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current standards. This requirement will reduce net operating cash flows and increase net financing cash flows in the periods after adoption. We cannot estimate what those amounts will be in the future because they are dependent on, among other things, when employees exercise stock options. The amount of operating cash flows recognized for such excess tax deductions was $28.8 million, $0.7 million and $1.2 million in Fiscal 2004, Fiscal 2003 and Fiscal 2002, respectively.

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Certain Relationships and Related Party Transactions

The Company and its wholly-owned subsidiaries historically had various transactions with related parties. The nature of the Company’s relationship with the related parties and a description of the respective transactions is stated below.

As of January 29, 2005, the Schottenstein-Deshe-Diamond families (the “families”) owned 17% of the outstanding shares of Common Stock of the Company. The families also own a private company, Schottenstein Stores Corporation (“SSC”), which includes a publicly-traded subsidiary, Retail Ventures, Inc. (“RVI”), formerly Value City Department Stores, Inc., and also owned 99% of Linmar Realty Company II (“Linmar Realty”) until June 4, 2004. During Fiscal 2004, the Company implemented a strategic plan to eliminate related party transactions with the families. As a result, we did not have any material transactions remaining with the families as of January 29, 2005. We believe that the terms of the prior transactions were as favorable to the Company as those that could have been obtained from unrelated third parties. The Company had the following transactions with these related parties during Fiscal 2004, Fiscal 2003 and Fiscal 2002.

See Note 3 of the Consolidated Financial Statements and Part III, Item 13 of this Form 10-K for additional information regarding related party transactions.

Income Taxes

As of January 29, 2005, the Company had deferred tax assets of $9.6 million associated with Canadian tax loss carryforwards. We anticipate that future taxable income in Canada will be sufficient to utilize the full amount of the deferred tax assets. Assuming a 37% effective tax rate, we will need to recognize pretax net income of approximately $26 million in future periods to realize this deferred tax asset.

For the year ended January 31, 2004, a valuation allowance was provided against the deferred tax asset that resulted from a capital loss carryforward in the amount of $1.4 million. Management believes that it is no longer more likely than not that the previously identified tax strategies will enable the Company to utilize the capital loss carryforward prior to its July 2006 expiration date. The effective tax rate used for the provision of income tax approximated 39%.

The recently enacted American Jobs Creation Act of 2004 allows U.S. companies to repatriate earnings from their foreign subsidiaries and receive an 85% deduction for eligible dividends. At this time, the Company has not yet identified qualified earnings that would be beneficial to repatriate. The Company will continue to monitor its foreign earnings during Fiscal 2005 to determine whether it is beneficial to repatriate earnings under the Act.

Impact of Inflation/Deflation

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

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Safe Harbor Statement, Seasonality and Risk Factors

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:

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:

Our ability to anticipate and respond to changing consumer preferences and fashion trends in a timely manner

The Company’s future success depends, in part, upon its ability to identify 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.

In addition, the cyclical nature of the retail business requires that we carry a significant amount of inventory, especially during our peak selling seasons. 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 effect of competitive pressures from other retailers and other business factors

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.

Our ability to grow through new store openings and existing store remodels and expansions

The Company’s continued growth and success will depend in part on its ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis. During Fiscal 2005, the Company plans to open approximately 35 to 40 new American Eagle stores in the U.S. and Canada. Additionally, the Company plans to remodel or expand approximately 60 existing stores during Fiscal 2005. Accomplishing the Company’s new and existing store expansion goals will depend upon a number of

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factors, including the ability to obtain suitable sites for new and expanded stores at acceptable costs, the hiring and training of qualified personnel, particularly at the store management level, the integration of new stores into existing operations and the expansion of the Company’s buying and inventory capabilities. 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 and remodeled stores profitably.

Our ability to grow through the internal development of a new brand

During Fiscal 2004, the Company announced that it would begin development of a new brand concept. The ability to succeed in this new concept requires significant capital expenditures and management attention. Additionally, any new concept is subject to certain risks including customer acceptance, competition, product differentiation and the ability to attract and retain qualified personnel, including management and designers. There can be no assurance that the Company will be able to develop a new concept that will grow or become profitable. If we are unable to succeed in developing a profitable new brand, this could adversely impact the Company’s continued growth and results of operations.

Our ability to continue the Company’s current level of sales and earnings growth

During Fiscal 2004, the Company realized substantial growth in both sales and earnings. A number of factors have historically affected, and will continue to affect, the Company’s rate of growth and performance. These factors include, among other things, customer trends and preferences, competition, economic conditions and new store openings. There can be no assurance that the Company will be able to continue the rates of growth or performance experienced in its last fiscal year. Additionally, any decline in the Company’s future growth or performance could have a material adverse effect on the market price of the Company’s common stock.

The interruption of the flow of merchandise from key vendors, including the effect of the elimination of quota restraints

The Company purchases merchandise from domestic and foreign suppliers. Historically, a majority of the Company’s merchandise has been purchased from foreign suppliers. Since we rely on a small number of foreign sources for a significant portion of our purchases, any event causing the disruption of imports including the insolvency of a significant supplier or a significant labor dispute could have an adverse effect on our operations. Other events which could also cause a disruption of imports include the imposition of additional trade law provisions or import restrictions, such as increased duties, tariffs, anti-dumping provisions, increased Custom’s enforcement actions, or political or economic disruptions.

Since the time of the attack on the World Trade Centers in 2001, the Company believes that there has been an increased risk of terrorist activity on a global basis. Such activity might take the form of a physical act that impedes the flow of imported goods or the insertion of a harmful or injurious agent to an imported shipment. The Company has instituted policies and procedures to prevent such actions including, but not limited to, a significant increase in the number of factory audits performed; the revision of our factory audit protocol to include all critical security issues; the review of security procedures of our other international trading partners, including forwarders, consolidators, shippers and brokers; and the cancellation of agreements with entities who fail to meet our security requirements. In addition, the Company has become a certified member of the Customs – Trade Partnership Against Terrorism program, a voluntary program in which an importer agrees to work with Customs to strengthen overall supply chain security. The Company cannot predict at this time the likelihood of such events, the extent of their impact, if any, and the possible effect on the Company’s operations.

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As a member of the World Trade Organization (“WTO”), the U.S. agreed to a world wide phase out of textile quotas on January 1, 2005, resulting in the removal of country specific restrictions on the quantity of goods being imported into the U.S. Notwithstanding these general phase outs, under the terms of the People’s Republic of China’s accession agreement to the WTO, the U.S. was empowered to impose “Temporary Safeguard” quotas on certain categories of textile merchandise manufactured in China if there was an affirmative determination by government agencies that imports of such products were disruptive to the U.S. market. The Company believes that such temporary quotas may be applied during Fiscal 2005. In addition, the Company believes that further steps may be taken, such as the application for imposition of anti-dumping or countervailing duties, to impede the importation of textile goods from China. Any of the foregoing actions could have a significant impact on worldwide sourcing patterns during Fiscal 2005; however, the likelihood of such events, the extent of their impact, if any, and the possible effect on the Company’s purchasing patterns and costs, cannot be determined at this time.

We do not maintain any long-term or exclusive commitments or arrangements to purchase from any single supplier.

Seasonality

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 2004, the third and fourth fiscal quarters accounted for approximately 61% of our sales and approximately 74% of our income from continuing operations. 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.

The effect of expensing employee stock option grants

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (“SFAS No. 123(R)”). The Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Under SFAS No. 123(R), all forms of share-based payments to employees, including grants of employee stock options, are treated the same as other forms of compensation by recognizing the related cost in the Statement of Operations.

Currently, the Company accounts for its stock-based compensation plans under APB No. 25 and provides the related pro forma information regarding net income and earnings per share, as required by SFAS No. 123, as amended by SFAS No. 148, in Note 2 of the Consolidated Financial Statements. The Company will adopt SFAS No. 123(R) in its third quarter of Fiscal 2005, beginning July 31, 2005, as required. The Company is currently in the process of determining the transition method that it will use to adopt the new standard. When we implement SFAS No. 123(R), the requirement to recognize the cost of share-based payments in our Consolidated Statement of Operations will have an adverse affect on our reported net income.

Our reliance on key personnel

The Company’s success depends to a significant extent upon the continued services of its key personnel, including senior management, as well as its ability to attract and retain qualified key personnel and skilled employees in the future. The Company’s operations could be adversely affected if, for any reason, one or more key executive officers ceased to be active in the Company’s management.

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Our ability to successfully upgrade and maintain our information systems

The Company relies upon its various information systems to manage its operations and regularly makes investments to upgrade, enhance or replace these systems. Any delays or difficulties in transitioning to these or other new systems, or in integrating these systems with the Company’s current systems, or any other disruptions affecting the Company’s information systems, could have a material adverse impact on the Company’s business.

Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002

In order to meet the requirements of the Sarbanes-Oxley Act of 2002 in future periods, the Company must continuously document, test, monitor and enhance its internal control over financial reporting. There can be no assurance that the periodic evaluation of our internal controls required by Section 404 of the Sarbanes-Oxley Act will not result in the identification of significant control deficiencies and/or material weaknesses or that our auditors will be able to attest to the effectiveness of our internal control over financial reporting. Failure to maintain the effectiveness of our internal control over financial reporting or to comply with the requirements of this Act could have a material adverse effect on our reputation, financial condition and market price of our common stock. See Part II, Item 9A of this Form 10-K for additional information.

Other risk factors

Additionally, other factors could adversely affect our financial performance, including factors such as: our ability to successfully acquire and integrate other businesses; any interruption of our key business systems; any disaster or casualty resulting in the interruption of service from our distribution centers or in a large number of our stores; any interruption of key services provided by third party vendors; changes in weather patterns; the effects of changes in current exchange rates and interest rates; and international and domestic acts of terror.

The impact of all of the previously discussed 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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company has market risk exposure related to interest rates and foreign currency exchange rates. Market risk is measured as the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates or foreign currency exchange rates over the next year.

Interest Rate Risk

We are exposed to the impact of interest rate changes on cash equivalents and investments. The impact on cash and investments held at the end of Fiscal 2004 from a hypothetical 10% decrease in interest rates would have been a decrease in net income of approximately $1.1 million during Fiscal 2004.

Foreign Exchange Rate Risk

We are exposed to the impact of foreign exchange rate risk primarily through our Canadian operations where the functional currency is the Canadian dollar. The recent weakening of the U.S. dollar compared to the Canadian dollar has positively impacted our net sales and any operating income generated by our Canadian businesses. As of January 29, 2005, a 10% change in the Canadian foreign exchange rate would have resulted in an increase or decrease in net income of approximately $1.6 million during Fiscal 2004.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Consolidated Financial Statements

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

American Eagle Outfitters, Inc.

We have audited the accompanying consolidated balance sheets of American Eagle Outfitters, Inc. (the Company) as of January 29, 2005 and January 31, 2004, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended January 29, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Eagle Outfitters, Inc. at January 29, 2005 and January 31, 2004, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 29, 2005, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, during the period ended January 29, 2005, the Company corrected its policies for accounting for leases and tenant allowances. The prior periods presented have been restated for this correction.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 29, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 8, 2005 expressed an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of internal control over financial reporting.

Ernst & Young LLP

Pittsburgh, Pennsylvania

April 8, 2005

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See Notes to Consolidated Financial Statements

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AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

See Notes to Consolidated Financial Statements

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AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY