UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended November 1, 2008

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

For the transition period from to

Commission file number 0-23071

THE CHILDREN’S PLACE RETAIL STORES, INC.

(Exact name of registrant as specified in its charter)

Delaware		31-1241495
(State or other jurisdiction of		(I.R.S. employer
Incorporation or organization)		identification number)

915 Secaucus Road
Secaucus, New Jersey		07094
(Address of Principal Executive Offices)		(Zip Code)

(201) 558-2400

(Registrant’s Telephone Number, Including Area Code)

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

Yes x No o

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

Large accelerated filer x		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Don’t check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares outstanding of the registrant’s common stock with a par value of $0.10 per share, as of December 5, 2008 was 29,378,535 shares.

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

THE CHILDREN’S PLACE RETAIL STORES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	(unaudited)					(unaudited)
	November 1,			February 2,		November 3,
	2008			2008		2007
ASSETS
Current assets:
Cash and cash equivalents	$	185,980		$	81,626	$	108,291
Accounts receivable	24,213			41,143		43,686
Inventories	232,776			196,606		263,301
Prepaid expenses and other current assets	81,460			67,589		79,499
Deferred income taxes	22,758			25,321		17,504
Restricted assets in bankruptcy estate of subsidiary	78,971			—		—
Assets held for sale	—			98,591		135,312
Total current assets	626,158			510,876		647,593
Long-term assets:
Property and equipment, net	336,921			354,141		374,432
Deferred income taxes	76,932			125,292		82,073
Other assets	6,298			3,065		2,509
Assets held for sale	—			4,163		76,065
Total assets	$	1,046,309		$	997,537	$	1,182,672

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Current liabilities:
Revolving loan	$	—		$	88,976	$	108,886
Short-term portion of term loan	30,000			—		—
Accounts payable	79,913			80,807		163,934
Income taxes payable	8,448			3,845		15,362
Accrued expenses, interest, and other current liabilities	114,731			136,867		151,240
Liabilities of bankruptcy estate of subsidiary	107,767			—		—
Total current liabilities	340,859			310,495		439,422
Long-term liabilities:
Deferred rent liabilities	107,349			136,708		134,928
Deferred royalty	—			42,988		43,436
Other tax liabilities	23,024			23,520		22,065
Long-term portion of term loan	55,000			—		—
Other long-term liabilities	10,611			11,593		6,988
Total liabilities	536,843			525,304		646,839
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $1.00 par value, 1,000,000 shares authorized, 0 shares issued and outstanding at November 1, 2008, February 2, 2008, and November 3, 2007	—			—		—
Common stock, $0.10 par value, 100,000,000 shares authorized, 29,377,783, 29,139,664 and 29,083,916 issued and outstanding at November 1, 2008, February 2, 2008, and November 3, 2007, respectively	2,938			2,914		2,909
Additional paid-in capital	204,912			195,591		194,348
Accumulated other comprehensive (loss) income	(1,764		)	13,934		20,289
Retained earnings	303,380			259,794		318,287
Total stockholders’ equity	509,466			472,233		535,833
Total liabilities and stockholders’ equity	$	1,046,309		$	997,537	$	1,182,672

See accompanying notes to these condensed consolidated financial statements.

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THE CHILDREN’S PLACE RETAIL STORES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	November 1,			November 3,			November 1,			November 3,
	2008			2007			2008			2007
Net sales	$	450,623		$	430,572		$	1,188,864		$	1,077,065
Cost of sales	254,239			258,251			692,839			659,326

Gross profit	196,384			172,321			496,025			417,739

Selling, general and administrative expenses	126,716			131,004			351,919			347,998
Asset impairment charges	954			947			1,081			1,582
Depreciation and amortization	17,791			17,063			53,152			46,814

Operating income	50,923			23,307			89,873			21,345
Interest (expense) income, net	(1,912		)	(796		)	(2,803		)	632

Income from continuing operations before income taxes	49,011			22,511			87,070			21,977
Provision for income taxes	20,563			7,586			36,466			7,789

Income from continuing operations	28,448			14,925			50,604			14,188
Loss from discontinued operations, net of income taxes	(4,391		)	(2,622		)	(7,018		)	(15,262		)
Net income (loss)	$	24,057		$	12,303		$	43,586		$	(1,074	)

Basic earnings (loss) per share amounts (1)
Income from continuing operations	$	0.97		$	0.51		$	1.73		$	0.49
Loss from discontinued operations	(0.15		)	(0.09		)	(0.24		)	(0.52		)
Net income (loss)	$	0.82		$	0.42		$	1.49		$	(0.04	)
Basic weighted average common share outstanding	29,364			29,084			29,173			29,084

Diluted earnings (loss) per share amounts (1)
Income from continuing operations	$	0.96		$	0.51		$	1.72		$	0.48
Loss from discontinued operations	(0.15		)	(0.09		)	(0.24		)	(0.51		)
Net income (loss)	$	0.81		$	0.42		$	1.48		$	(0.04	)
Diluted weighted average common share outstanding	29,726			29,357			29,444			29,766

(1) Table may not add due to rounding

See accompanying notes to these condensed consolidated financial statements.

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THE CHILDREN’S PLACE RETAIL STORES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

	Thirty-nine Weeks Ended
	November 1, 2008			November 3, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	43,586		$	(1,074	)
Less loss from discontinued operations	(7,018		)	(15,262		)
Income from continuing operations	50,604			14,188
Reconciliation of net income (loss) to net cash provided by (used in) operating activities of continuing operations:
Depreciation and amortization	53,152			46,814
Other amortization	477			211
(Gain) loss on disposal of property and equipment	(1,343		)	1,056
Asset impairment charges	1,081			1,582
Stock-based compensation	5,324			3,018
Deferred taxes	49,306			(8,725		)
Deferred rent expense and lease incentives	(12,115		)	(10,642		)
Changes in operating assets and liabilities:
Accounts receivable	7,907			(9,650		)
Inventories	(41,155		)	(87,855		)
Prepaid expenses and other current assets	(643		)	(4,005		)
Other assets	(194		)	(132		)
Accounts payable	53,602			42,887
Accrued expenses, interest and other current liabilities	18,372			8,321
Intercompany (discontinued operations)	(21,200		)	27,139
Income taxes payable, net of prepayments	(20,904		)	(35,150		)
Deferred rent liabilities	10,465			18,834
Other liabilities	(663		)	5,049
Total adjustments	101,469			(1,248		)
Net cash provided by operating activities of continuing operations	152,073			12,940
Net cash provided by (used in) operating activities of discontinued operations	20,410			(49,120		)
Net cash provided by (used in) operating activities	172,483			(36,180		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases, lease acquisition and software costs	(39,229		)	(144,945		)
Cash received for sale of store assets and leases	2,300			—
Purchase of investments	—			(776,405		)
Sale of investments	—			823,255
Net cash used in investing activities of continuing operations	(36,929		)	(98,095		)
Net cash (used in) provided by investing activities of discontinued operations	(19,213		)	12,811
Net cash used in investing activities	(56,142		)	(85,284		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities	691,718			311,568
Repayments under revolving credit facilities	(761,279		)	(215,560		)
Borrowings under term loan	85,000			—
Exercise of stock options and employee stock purchases	4,725			—
Capital contribution to subsidiary in discontinued operations	(8,250		)	—
Deferred financing costs	(3,839		)	—
Net cash provided by financing activities of continuing operations	8,075			96,008
Net cash (used in) provided by financing activities of discontinued operations	(11,878		)	12,877
Net cash (used in) provided by financing activities	(3,803		)	108,885
Effect of exchange rate changes on cash of continuing operations	(6,221		)	5,774
Effect of exchange rate changes on cash of discontinued operations	(1,963		)	1,080
Effect of exchange rate changes on cash	(8,184		)	6,854
Net increase (decrease) in cash and cash equivalents	104,354			(5,725		)
Cash and cash equivalents, beginning of year	81,626			114,016
Cash and cash equivalents, end of quarter	$	185,980		$	108,291

See accompanying notes to these condensed consolidated financial statements.

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THE CHILDREN’S PLACE RETAIL STORES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly The Children’s Place Retail Stores, Inc.’s (the “Company”) consolidated financial position as of November 1, 2008 and November 3, 2007, the results of its consolidated operations for the thirteen weeks and thirty-nine weeks ended November 1, 2008 and November 3 2007, and its consolidated cash flows for the thirty-nine weeks ended November 1, 2008 and November 3, 2007. Due to the seasonal nature of the Company’s business, the results of operations for the thirteen and thirty-nine weeks ended November 1, 2008 and November 3, 2007 are not necessarily indicative of operating results for a full fiscal year. The accompanying unaudited condensed consolidated financial statements have classified the Disney Store business (as defined below) as discontinued operations in accordance with U.S. GAAP, reflecting the Company’s exit of the Disney Store business (see Note 2-Discontinued Operations). Correspondingly, reclassifications have been made to conform to the current year’s presentation. Also, a reclassification of cash disbursement overdraft balances from accounts payable to cash to the extent a right of offset exists was made to the November 3, 2007 balances, which had the effect of reducing cash and accounts payable by $2.5 million. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the fiscal year ended February 2, 2008 included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2008 and the Company’s Current Report on Form 8-K filed with the SEC on August 6, 2008 to classify the Disney Stores as a discontinued operation.

2. DISCONTINUED OPERATIONS

After a thorough review of the Disney Store business (as defined below), its potential earnings growth, its capital needs and its ability to fund such needs from its own resources, the Company announced on March 20, 2008 that it had decided to exit the Disney Store business. The Company’s subsidiaries that operated the Disney Store business are referred to herein interchangeably and collectively as “Hoop.” After assessing the above factors and considering Hoop’s liquidity, Hoop’s Board of Directors determined that the best way to complete an orderly wind-down of Hoop’s affairs was for Hoop to seek relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) and pursuant to the Companies’ Creditors Arrangement Act (the “CCAA”). On March 26, 2008, Hoop Holdings, LLC, Hoop Retail Stores, LLC and Hoop Canada Holdings, Inc. each filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “U.S. Bankruptcy Court”) (Case Nos. 08-10544, 08-10545, and 08-10546, respectively, the “Cases”). On March 27, 2008, Hoop Canada, Inc. filed for protection pursuant to the CCAA in the Ontario Superior Court of Justice (Commercial List) (“Canadian Bankruptcy Court”) (Court File No. 08-CL-7453, and together with the Cases, the “Filings”). Each of the foregoing Hoop entities are referred to collectively herein as the “Hoop Entities.” After receiving the approval of the U.S. Bankruptcy Court and the Canadian Bankruptcy Court, on April 30, 2008, Hoop transferred the Disney Store business in the U.S. and Canada and a substantial portion of the Disney Store assets to affiliates of The Walt Disney Company (“Disney”) in an asset sale (the “Private Sale”), pursuant to section 363 of the Bankruptcy Code (and a similar provision under the CCAA.)

In November 2004, the Company had acquired, through two wholly-owned subsidiaries, certain assets used to operate the Disney Store retail chain in North America (the “Disney Store business”) from affiliates of Disney. As a result of this acquisition and a subsequent transaction, Hoop had acquired 315 Disney Stores, consisting of 313 mall-based existing Disney Stores in the United States and Canada and two Disney flagship stores (together, the “Original Acquisition”), along with certain other assets used in the Disney Store business. The Original Acquisition excluded stores located at Disney theme parks, other flagship stores and certain other Disney properties.

Concurrent with the Original Acquisition, the Company entered into a License Agreement (the “License Agreement”) and a Guaranty and Commitment (the “Guaranty and Commitment Agreement”). Under the License

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Agreement, Hoop had the right to use certain Disney intellectual property, subject to Disney approval, in the Disney Store business in exchange for ongoing royalty payments. These royalty payments commenced in November 2006, after a two-year royalty holiday period subsequent to the Original Acquisition. Royalty payments were equal to 5% of net sales at the physical Disney Store retail locations, subject to a royalty abatement with respect to a limited number of stores. The amortization of the estimated value of the two-year holiday under the License Agreement was recognized on a straight-line basis over the term of the License Agreement.

The License Agreement, as well as the Company’s credit facilities, placed certain liquidity restrictions on the Company. These agreements restricted the commingling of funds between The Children’s Place and Hoop, limited borrowings by Hoop from The Children’s Place, and limited distributions other than payment for the allocated costs of shared services from Hoop to The Children’s Place. From the time of the Original Acquisition, the Company segregated all cash receipts and disbursements, investments and credit facility borrowings and letter of credit activity.

In August 2007, the Company, Hoop and Disney amended the License Agreement by executing the Refurbishment Amendment (the “Refurbishment Amendment”). Subject to compliance with the terms and satisfaction of the conditions in the Refurbishment Amendment, Disney agreed to forbear from exercising any of its rights or remedies under the License Agreement based on previously asserted breaches of the License Agreement. If the Company breached any of the provisions of the Refurbishment Amendment on three or more occasions and Disney had not previously terminated the Refurbishment Amendment, the Company would have owed $18.0 million to Disney with respect to the breach fees called for by the License Agreement. If the Company violated any of the provisions of the Refurbishment Amendment on five or more occasions, the Refurbishment Amendment provided that Disney would have the right to immediately terminate the License Agreement, without any right by the Company to defend, counterclaim, protest or cure. The Refurbishment Amendment set forth specific requirements to remodel and otherwise refresh the Disney Stores while the Refurbishment Amendment remained in effect. In connection with the Refurbishment Amendment, the Company’s Board of Directors authorized an investment of $175 million to remodel and refresh stores through fiscal 2011. Prior to the Filings, Hoop had received notices of several material breaches under the License Agreement. Hoop had believed it had cured some of the asserted breaches and intended to cure or to assert defenses to the other asserted breaches.

Since the Filings, the Hoop Entities have managed their properties and have operated their businesses as “debtors-in-possession” under the jurisdiction of the U.S. Bankruptcy Court or the Canadian Bankruptcy Court, as applicable, and in accordance with the applicable provisions of the Bankruptcy Code or the CCAA, as applicable. Neither the Company, as Hoop’s parent company nor any of the Company’s other subsidiaries, has commenced or plans to commence a Chapter 11 case (or equivalent under applicable bankruptcy laws).

Upon the closing of the Private Sale, affiliates of Disney paid approximately $64 million for the acquired assets of the Disney Store business, subject to a post-closing inventory and asset adjustment. Approximately $6.0 million of the purchase price is being held in escrow for such true-up purposes. The Company anticipates finalizing the purchase price by the end of fiscal 2008. The proceeds received from the Private Sale will be utilized to settle the Hoop Entities’ liabilities as “debtors-in-possession” under the jurisdiction of the U.S. Bankruptcy Court or Canadian Bankruptcy Court, as applicable. As a “debtor-in-possession,” certain claims against Hoop that existed prior to the Filings are stayed under the jurisdiction of the U.S. Bankruptcy Court or Canadian Bankruptcy Court, as applicable, and are “liabilities subject to compromise” and are reflected in the November 1, 2008 balance sheet within “Liabilities of bankruptcy estate of subsidiary.”

According to the terms of the Private Sale, Hoop transferred 217 Disney Store leases to affiliates of Disney and granted such affiliates the right to operate and wind-down the affairs of the remaining 100 Disney Stores for a specified time period, after which Disney may choose to return such stores to Hoop’s bankruptcy estate for treatment as approved by the relevant bankruptcy court. Hoop recorded a liability of approximately $19.2 million for the potential settlement of these remaining Disney Stores leases. As of November 1, 2008, Disney has returned 88 stores to the Hoop Estate. Additional claims (liabilities subject to compromise) may arise as a result of the rejection of executory contracts, including leases for the stores returned to the Hoop estate, and from the determination by the U.S. Bankruptcy Court or Canadian Bankruptcy Court (or agreed to by Hoop’s creditors) of claims allowed for contingencies and other related amounts. Claims secured against Hoop’s assets (“secured claims”) also are stayed, although the holders of such claims have the right to petition the U.S. Bankruptcy Court or Canadian Bankruptcy Court, as applicable, for relief from the stay.

During the year ended February 2, 2008, the Company recorded $80.3 million in asset impairment charges related to the Company’s decision to exit the Disney Store business. In addition, during the year ended February 2, 2008, the Company recorded $6.1 million in costs primarily related to the cancellation of the Disney Store remodeling program. As a “debtor-in-possession,” Hoop has filed a plan of liquidation and the equivalent under the CCAA (the “Plans”) with the U.S. and

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Canadian bankruptcy courts, respectively. In accordance with such Plans, Hoop will settle its obligations through the distribution of its assets.

· Provide transitional services;

· Forgive all pre- and post-bankruptcy petition claims against Hoop, which included inter-company charges for shared services of approximately $24.1 million and a capital contribution the Company made to Hoop of approximately $8.3 million in cash on March 18, 2008;

· Pay severance and other employee costs for the Company’s employees servicing Hoop of approximately $7.8 million; and

· Pay certain other professional fees and other costs that may be attributed to the Company.

The Disney Store business has been segregated from continuing operations and included in “Discontinued operations, net of taxes” in the condensed consolidated statements of operations. Since the consummation of the Private Sale on April 30, 2008, Hoop has been in the process of winding down its affairs under the jurisdiction of the U.S. Bankruptcy Court or Canadian Bankruptcy Court, as applicable. In discontinued operations, the Company has reversed its historical allocation of shared services to the Disney Stores and has charged discontinued operations with the administrative and distribution expenses that were attributable to the Disney Stores. During the thirteen and thirty-nine weeks ended November 1, 2008, discontinued operations included certain one-time costs related to professional and restructuring fees, asserted claims, and severance and other employee costs. Discontinued operations for the thirteen and thirty-nine weeks ended November 1, 2008 and November 3, 2007 were comprised of (in thousands):

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	November 1, 2008			November 3, 2007			November 1, 2008			November 3, 2007
Net sales	$	—		$	157,956		$	129,177		$	414,623
Cost of sales	—			103,602			93,367			284,438

Gross profit	—			54,354			35,810			130,185

Selling, general and administrative expenses	3,129			53,926			49,556			143,307
Restructuring charges	1,624			—			17,608			—
Depreciation and amortization	—			3,489			—			10,042

Operating loss	(4,753		)	(3,061		)	(31,354		)	(23,164		)
Gain (loss) on disposal of assets and liabilities of discontinued operations	(655		)	—			22,480			—
Interest (expense) income, net	414			22			(377		)	478

Loss before income taxes	(4,994		)	(3,039		)	(9,251		)	(22,686		)
Benefit for income taxes	(603		)	(417		)	(2,233		)	(7,424		)

Loss from discontinued operations, net of income taxes	$	(4,391	)	$	(2,622	)	$	(7,018	)	$	(15,262	)

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As of November 1, 2008, the assets and liabilities of Hoop have been segregated and have been included in “Restricted assets in bankruptcy estate of subsidiary” and “Liabilities of bankruptcy estate of subsidiary” in the condensed consolidated balance sheet. They are detailed as follows (in thousands):

	November 1, 2008
Restricted assets in bankruptcy estate of subsidiary:
Cash and cash equivalents	$	67,741
Accounts receivable	10,395
Prepaid expenses	835
	$	78,971

Liabilities of bankruptcy estate of subsidiary:
Subject to compromise
Accounts payable - pre-petition	$	55,308
Accrued expenses and other current liabilities - pre-petition	39,792
Not subject to compromise
Accounts payable - post-petition	8,510
Accrued expenses and other current liabilities - post-petition	4,157
	$	107,767

For the condensed consolidated balance sheets as of February 2, 2008 and November 3, 2007, “Assets held for sale” reflect the assets subsequently sold to affiliates of Disney. They are detailed as follows (in thousands):

	February 2, 2008		November 3, 2007
Current assets held for sale:
Accounts receivable	$	4,555	$	1,007
Inventories	88,674		129,384
Prepaid expenses and other current assets	5,362		4,921
	$	98,591	$	135,312

Non-current assets held for sale:
Property and equipment, net	3,317		75,438
Other assets - security deposits	846		627
	$	4,163	$	76,065

For the condensed consolidated balance sheets as of February 2, 2008 and November 3, 2007, the remaining assets and liabilities of Hoop are included in their respective balance sheet categories and were included in the following asset and liability categories (in thousands):

	February 2, 2008		November 3, 2007

Cash and cash equivalents	$	12,644	$	10,363
Accounts receivable	8,627		9,405
Prepaid expenses and other current assets	11,214		8,621
Total current assets	32,485		28,389
Other assets	497		1,817
Total assets	$	32,982	$	30,206

Revolving loan	$	19,415	$	12,877
Accounts payable	51,795		65,093
Accrued expenses and other current liabilities	41,662		38,717
Total current liabilities	112,872		116,687
Deferred rent liabilities	25,518		22,416
Deferred royalty	42,988		43,436
Other long-term liabilities	1,863		1,877
Total liabilities	$	183,241	$	184,416

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Cash flows from the Company’s discontinued operations were as follows (in thousands):

	Thirty-nine Weeks Ended
	November 1, 2008			November 3, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from discontinued operations	$	(7,018	)	$	(15,262	)
Reconciliation of loss from discontinued operations to net cash provided by (used in) operating activities:
Depreciation and amortization	—			10,042
Deferred financing fees and related amortization	65			153
Gain on disposal of the Disney Store business	(22,480		)	—
Loss on disposal of assets	—			954
Stock compensation	297			292
Deferred royalty, net	(368		)	(734		)
Deferred rent expense and lease incentives	(709		)	(403		)
Changes in operating assets and liabilities:
Accounts receivable	3,550			925
Inventories	13,048			(58,340		)
Prepaid expenses and other current assets	11,026			1,612
Other assets	758			(116		)
Accounts payable	13,055			40,399
Accrued expenses, interest and other current liabilities	(13,721		)	1,133
Intercompany (continuing operations)	21,200			(27,139		)
Income taxes payable, net of prepayments	1,147			(935		)
Deferred rent liabilities	569			746
Other liabilities	(9		)	(2,447		)
Total adjustments	27,428			(33,858		)
Net cash provided by (used in) operating activities	20,410			(49,120		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases, lease acquisition and software costs	(9,520		)	(15,514		)
Cash received from sale of Disney Store assets	57,598			—
Restriction of cash	(67,291		)	—
Purchase of investments	—			(263,620		)
Sale of investments	—			291,945
Net cash (used in) provided by investing activities	(19,213		)	12,811
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities	160,237			85,358
Repayments under revolving credit facilities	(179,652		)	(72,481		)
Cash contribution from parent company	8,250			—
Deferred financing fees	(713		)	—
Net cash (used in) provided by financing activities	(11,878		)	12,877

Effect of exchange rate changes on cash	(1,963		)	1,080
Net decrease in cash and cash equivalents	(12,644		)	(22,352		)
Cash and cash equivalents, beginning of year	12,644			32,715
Cash and cash equivalents, end of quarter	$	—		$	10,363

3. STOCK-BASED COMPENSATION

The Company maintains several equity compensation plans under which it grants various forms of equity compensation, including stock options, deferred and restricted stock and performance awards.

The following tables summarize the Company’s equity compensation expense for the thirteen and thirty-nine weeks ended November 1, 2008 and November 3, 2007 (in thousands):

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	Thirteen Weeks Ended November 1, 2008
	Cost of Goods Sold		Selling, General & Administrative		Discontinued Operations			Total
Stock option expense (1)	$	—	$	177	$	(141	)	$	36
Deferred stock expense	447		1,251		—			1,698
Restricted stock expense	—		314		—			314
Performance award expense	—		350		—			350
Total stock-based compensation expense	$	447	$	2,092	$	(141	)	$	2,398

	Thirty-nine Weeks Ended November 1, 2008
	Cost of Goods Sold		Selling, General & Administrative		Discontinued Operations		Total
Stock option expense	$	—	$	481	$	55	$	536
Deferred stock expense	694		2,758		242		3,694
Restricted stock expense	—		580		—		580
Performance award expense	—		811		—		811
Total stock-based compensation expense	$	694	$	4,630	$	297	$	5,621

	Thirteen Weeks Ended November 3, 2007
	Cost of Goods Sold			Selling, General & Administrative			Discontinued Operations			Total
Stock option expense	$	—		$	283		$	—		$	283
Stock compensation expense related to the issuance of liability awards (2)	—			(26		)	(8		)	(34		)
Expense related to the modification of previously issued stock options, primarily tolling (3)	—			341			—			341
Fair market value adjustments of tolled stock options accounted for as liability awards (3)	(35		)	(36		)	(3		)	(74		)
Total stock-based compensation expense	$	(35	)	$	562		$	(11	)	$	516

	Thirty-nine Weeks Ended November 3, 2007
	Cost of Goods Sold			Selling, General & Administrative			Discontinued Operations			Total
Stock option expense	$	—		$	895		$	—		$	895
Stock compensation expense related to the issuance of liability awards (2)	—			139			(26		)	113
Expense related to the modification of previously issued stock options, primarily tolling (3)	383			2,369			339			3,091
Fair market value adjustments of tolled stock options accounted for as liability awards (3)	(543		)	(225		)	(21		)	(789		)
Total stock-based compensation expense	$	(160	)	$	3,178		$	292		$	3,310

(1) Stock option expense of discontinued operations for the thirteen weeks ended November 1, 2008 includes a reversal of expense related to the cancellation of 20,000 shares of unvested stock option awards.

(2) During fiscal 2006, the Company promised stock options and deferred stock awards for which it was unable to complete the granting process due to the suspension of equity award grants. Based on the Company’s commitment to honor these grants, a liability was recorded. In the fourth quarter of fiscal 2007 after the suspension was lifted, these liabilities were converted to equity awards.

(3) Under the terms of the Company’s equity compensation plans, terminated employees have 90 days from date of termination to exercise their vested options. Due to the suspension of stock option exercises on September 14,

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2006, the Company modified options held by terminated employees to extend their expiration dates until after the date the suspension was lifted (i.e., tolled stock options). After the suspension was lifted on December 10, 2007, terminated employees had the same number of days to exercise their options as if the suspension had not occurred. Options that were tolled for employees terminated prior to September 14, 2006 were accounted for as liability awards because the option holders were no longer employees at the time of the modification and because of the Company’s inability to provide shares upon exercise. These options were reclassified to equity awards after the suspension was lifted. Options that were tolled for employees terminated after September 14, 2006 were accounted for as equity awards because their options were tolled in conjunction with their termination.

The Company recognized a tax benefit related to stock-based compensation expense of $2.3 million and $1.3 million for the thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively.

2008 Long Term Incentive Plan

During the fourth quarter of fiscal 2007, the Company’s Board of Directors approved the 2008 Long Term Incentive Plan (the “LTIP”). The LTIP provides for the issuance of deferred stock awards and performance awards to key members of management (the “Participants”). The awards are based on salary level and the fair market value of the Company’s common stock on the grant date. Fair market value is equal to the average of the high and low trading price of the Company’s common stock. The deferred stock awards vest over three years and have a service requirement only. Key features of the performance awards are as follows:

· Each performance award has a defined number of shares that a Participant can earn (the “Target Shares”). Based on performance levels, Participants can earn up to 200% of their Target Shares.

· The awards have a service requirement and performance criteria that must be achieved for the awards to vest.

· The performance criteria are based on the Company’s achievement of operating income levels in each of the fiscal years 2008, 2009 and 2010, as well as in the aggregate.

· Awards may be earned in each of the fiscal years based upon meeting the established performance criteria for that year, however, except in certain circumstances, the Participants must be employed by the Company at the end of the three year performance period or their awards are forfeited.

During the thirty-nine weeks ended November 1, 2008, the Company awarded to key members of management: (a) 42,645 deferred stock awards; and (b) performance awards that provide for 42,645 Target Shares (assuming they are earned at 100%). Changes in the Company’s unvested Performance Awards for the thirty-nine weeks ended November 1, 2008 were as follows:

	Number of Performance Shares (1)		Weighted Average Grant Date Fair Value
	(in thousands)
Unvested performance shares, beginning of year (2)	210		$	20.97
Granted	43		31.92
Vested	—		—
Forfeited	(112	)	20.97
Unvested performance shares, November 1, 2008	141		$	24.28

(1) The number of unvested performance shares is based on the Participants earning their Target Shares at 100%. As of November 1, 2008, the Company estimates that Participants will earn 133% of their Target Shares. The cumulative expense recognized reflects that estimate.

(2) The performance criteria for the performance awards were established on March 6, 2008. The beginning balance represents those shares authorized in the fourth quarter of fiscal 2007.

Total unrecognized equity compensation expense related to unvested performance awards approximated $3.7 million as of November 1, 2008, which will be recognized over a weighted average period of approximately 2.3 years.

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Stock Option Plans

The Company estimates the fair value of issued stock options using the Black-Scholes option pricing model using certain assumptions for stock price volatility, risk-free interest rates, and the expected life of the options as of each grant date. During the thirty-nine weeks ended November 1, 2008, 30,000 options were granted to two new members of the Company’s Board of Directors and the table below displays the assumptions that were used to estimate their fair value. Due to the Company’s suspension of equity awards during its stock option investigation, no options were granted during the thirty-nine weeks ended November 3, 2007.

		November 1,
		2008
Dividend yield		0%
Volatility factor (1)		45.6%
Weighted average risk-free interest rate (2)		3.2%
Expected life of options (3)		5.1 years
Weighted average fair value on grant date		$12.81 per share

(1) Expected volatility is based on a 50:50 blend of the historical and implied volatility with a two-year look back on the date of each grant.

(2) The risk-free interest rate is based on the risk-free rate corresponding to the grant date and expected term.

(3) The expected life used in the Black-Scholes calculation is based on a Monte Carlo simulation incorporating a forward-looking stock price model and a historical model of employee exercise and post-vest forfeiture behavior.

Changes in the Company’s stock options for the thirty-nine weeks ended November 1, 2008 were as follows:

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
					(in years)	(in thousands)
Options outstanding at February 2, 2008	2,220,904		$	31.72
Granted	30,000		29.05
Exercised (1)	(219,228	)	21.55
Forfeited	(807,669	)	35.56
Options outstanding at November 1, 2008	1,224,007		$	31.80	4.8	$	6,958
Options exercisable at November 1, 2008	1,112,338		$	32.29	4.4	$	6,099

(1) The aggregate intrinsic value of shares exercised was approximately $2.6 million.

Changes in the Company’s unvested stock options for the thirty-nine weeks ended November 1, 2008 were as follows:

	Number of Options		Weighted Average Grant Date Fair Value
	(in thousands)
Unvested options, beginning of year	128		$	11.43
Granted	30		12.81
Vested	—		—
Forfeited	(46	)	12.06
Unvested options, November 1, 2008	112		$	11.54

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Total unrecognized equity compensation expense related to unvested stock options approximated $0.5 million as of November 1, 2008, which will be recognized over a weighted average period of approximately 1.8 years.

Deferred and Restricted Stock

Changes in the Company’s unvested deferred stock and restricted stock for the thirty-nine weeks ended November 1, 2008 were as follows:

	Number of Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Unvested deferred and restricted stock, beginning of year	493		$	29.74
Granted	302		34.63
Vested (1)	(23	)	30.04
Forfeited	(179	)	30.09
Unvested deferred and restricted stock, November 1, 2008	593		$	32.11

(1) During the thirty-nine weeks ended November 1, 2008, the Company withheld approximately 4,400 shares from those that vested to satisfy withholding tax requirements. These shares were retired.

Total unrecognized equity compensation expense related to unvested deferred and restricted stock awards approximated $14.6 million as of November 1, 2008, which will be recognized over a weighted average period of approximately 2.5 years.

4. NET INCOME (LOSS) PER COMMON SHARE

In accordance with SFAS No. 128, “Earnings Per Share,”(“FAS 128”) the following table reconciles net income (loss) and share amounts utilized to calculate basic and diluted net income (loss) per common share (in thousands):

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	November 1,			November 3,			November 1,			November 3,
	2008			2007			2008			2007
Income from continuing operations	$	28,448		$	14,925		$	50,604		$	14,188
Loss from discontinued operations, net of taxes	(4,391		)	(2,622		)	(7,018		)	(15,262		)
Net income (loss)	$	24,057		$	12,303		$	43,586		$	(1,074	)

Basic weighted average common shares	29,364			29,084			29,173			29,084
Dilutive effect of stock awards	362			273			271			682
Diluted weighted average common shares	29,726			29,357			29,444			29,766
Antidilutive stock awards	553			1,550			1,088			555

Antidilutive stock awards (stock options, deferred stock awards and restricted stock awards) represent those awards that are excluded from the earnings per share calculation as a result of their antidilutive effect in the application of the treasury stock method. In accordance with FAS 128, income from continuing operations is the “control number” in determining whether potential common shares are dilutive or anti-dilutive. Consequently, the diluted weighted average common shares outstanding for the thirty-nine weeks ended November 3, 2007, includes the dilutive effect of stock awards.

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5. COMPREHENSIVE INCOME

The following table presents the Company’s comprehensive income (in thousands):

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	November 1,				November 3,		November 1,			November 3,
	2008				2007		2008			2007
Net income (loss)	$		24,057		$	12,303	$	43,586		$	(1,074	)
Cumulative translation adjustment	(13,250			)	9,276		(15,698		)	15,945
Comprehensive income	$	10,807			$	21,579	$	27,888		$	14,871

Decreases in foreign currency rates, primarily the Canadian dollar, during the thirteen and thirty-nine weeks ended November 1, 2008 has resulted in a decrease in net assets of the Company’s foreign subsidiaries as reflected in our cumulative translation adjustment. Consequently, increases in foreign currency rates, primarily the Canadian dollar, during the thirteen and thirty-nine weeks ended November 3, 2007 resulted in an increase in net assets of the Company’s foreign subsidiaries.

6. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

	Asset		November 1,			February 2,			November 3,
	Life		2008			2008			2007
Property and equipment:
Land and land improvements		—	$	3,403		$	3,403		$	3,403
Building and improvements		25 yrs	30,450			30,450			29,607
Material handling equipment		15 yrs	31,243			31,086			32,043
Leasehold improvements		Lease life	351,287			337,536			339,114
Store fixtures and equipment		3-10 yrs	242,867			243,552			236,468
Capitalized software		5 yrs	57,514			51,287			46,253
Construction in progress		—	16,500			12,032			38,293
			733,264			709,346			725,181
Less accumulated depreciation and amortization			(396,343		)	(355,205		)	(350,749		)
Property and equipment, net			$	336,921		$	354,141		$	374,432

During the thirty-nine weeks ended November 1, 2008, the Company recorded $1.1 million of impairment charges related primarily to 11 underperforming stores. During the thirty-nine weeks ended November 3, 2007, the Company recorded $1.6 million of impairment charges related primarily to six underperforming stores.

At November 1, 2008, February 2, 2008 and November 3, 2007, the Company had $11.3 million, $7.5 million and $15.7 million, respectively, of property and equipment for which payment had not been made. These amounts are included in accounts payable and accrued expenses and other current liabilities.

7. CREDIT FACILITIES

For the quarter ended November 1, 2008, the Company operated under its 2008 Credit Agreement, as defined below. The Company entered into the 2008 Credit Agreement on July 31, 2008 upon termination of the 2007 Amended Loan Agreement and Letter of Credit Agreement.

2008 Credit Agreement

On July 31, 2008, the Company and certain of its domestic subsidiaries entered into a credit agreement (the “2008 Credit Agreement”) with Wells Fargo Retail Finance, LLC (“Wells Fargo”), as Administrative Agent, Collateral Agent, and Swing Line Lender, Bank of America, N.A., HSBC Bank USA, National Association and JP Morgan Chase Bank, N.A. (collectively, the “Lenders”).

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The 2008 Credit Agreement consists of a $200 million asset based revolving credit facility, which includes a $175 million letter of credit sub-facility. Amounts outstanding under the 2008 Credit Agreement bear interest, at the Company’s option, at:

(i) the prime rate; or

(ii) LIBOR plus a margin of 1.50% to 2.00% based on the amount of the Company’s average excess availability under the facility.

In addition, an unused line fee of 0.25% will accrue on the unused portion of the commitments under the facility. Letter of credit fees range from 0.75% to 1.25% for commercial letters of credit and range from 1.50% to 2.00% for standby letters of credit. Letter of credit fees are determined based on the level of availability under the 2008 Credit Agreement and accrue on the undrawn amount of such outstanding letters of credit, respectively. The 2008 Credit Agreement will mature on July 31, 2013. The amount available to be borrowed under the 2008 Credit Agreement at any time depends on the Company’s levels of inventory and accounts receivable at such time.

The outstanding obligations under the 2008 Credit Agreement may be accelerated after the occurrence of (and, if applicable, the expiration of the cure period) certain events, including, among others, breach of covenants, the institution of insolvency proceedings, certain defaults under certain other indebtedness and a change of control. Should the maturity of the 2008 Credit Agreement be accelerated for any reason, the Company would be responsible for an early termination fee in the amount of (i) 0.50% of the revolving credit facility ceiling then in effect within the first year of the term of the facility and (ii) 0.25% of the revolving credit facility ceiling then in effect within the second year of the term of the facility. No early termination fee would be incurred after the completion of the second year of the term of the facility.

The 2008 Credit Agreement contains covenants, which include limitations on annual capital expenditures and limitations on the payment of dividends or similar payments. Credit extended under the 2008 Credit Agreement is secured by a first or second priority security interest in substantially all of the Company’s assets and substantially all of the assets of its domestic subsidiaries.

The following table presents the components (in millions) of the 2008 Credit Agreement as of November 1, 2008:

	November 1, 2008
2008 Credit Agreement
Credit facility maximum	$	200.0
Borrowing Base (1)	195.4

Borrowings outstanding	—
Letters of credit outstanding—merchandise	35.3
Letters of credit outstanding—standby	14.6
Utilization of credit facility at end of period	49.9

Availability	145.5

Average loan balance during the period	—
Highest borrowings during the period	1.0
Average interest rate	4.5		%
Interest rate at end of period	4.0		%

(1) The Borrowing Base is calculated based on certain credit card receivable and inventory balances at the end of each period. Under the 2008 Credit Agreement, the Company has the ability to borrow up to the lesser of $200 million or the Borrowing Base.

The Company capitalized approximately $1.6 million in deferred financing costs related to the institution of the 2008 Credit Agreement, which will be amortized on a straight line basis over the term of the 2008 Credit Agreement.

2007 Amended Loan Agreement; Letter of Credit Agreement

In June 2007, the Company and certain of its domestic subsidiaries entered into a Fifth Amended and Restated Loan and Security Agreement (the “2007 Amended Loan Agreement”) and a new letter of credit agreement (the “Letter of Credit Agreement”) with Wells Fargo as senior lender and administrative and syndication agent, and the Company’s other senior

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lenders to support The Children’s Place business and the seasonality of the Company’s capital needs and to reduce the fees associated with its credit facility borrowings. The 2007 Amended Loan Agreement provided a facility maximum of $100 million for borrowings and standby letters of credit, with a $30 million “accordion” feature that enabled the Company, at its option, to increase the facility to an aggregate amount of $130 million, subject to an availability covenant which restricted maximum borrowings to 90% of the facility maximum, or $117 million. The 2007 Amended Loan Agreement was terminated on July 31, 2008.

There was also a seasonal over-advance feature that enabled the Company to borrow up to an additional $20 million from July 1 through November 30, subject to satisfying certain conditions, including a condition related to earnings before interest, taxes, depreciation and amortization (“EBITDA”) on a trailing 12 month basis based upon the most recent financial statements furnished to Wells Fargo and the Company’s estimate of projected pro forma EBITDA for the over-advance period. The LIBOR margin was 1.00% to 1.50%, depending on the Company’s average excess availability, and the unused line fee was 0.25%.

Credit extended under the 2007 Amended Loan Agreement was secured by a first priority security interest in substantially all of the Company’s assets, other than assets in Canada and Puerto Rico and assets owned by Hoop. The amount that could be borrowed under the 2007 Amended Loan Agreement depended on levels of inventory and accounts receivable related to The Children’s Place business. The 2007 Amended Loan Agreement contained covenants, which included limitations on annual capital expenditures, maintenance of certain levels of excess collateral, and a prohibition on the payment of dividends.

Under the Letter of Credit Agreement, the Company was able to issue letters of credit for inventory purposes for up to $60 million to support The Children’s Place business. Interest was paid at the rate of 0.75% (or 1.00% during any period in which amounts remained outstanding under the seasonal over-advance feature) on the aggregate undrawn amount of all letters of credit outstanding thereunder. The Company’s obligations under the Letter of Credit Agreement were secured by a security interest in substantially all of the assets of The Children’s Place business, other than assets in Canada and Puerto Rico, and assets of Hoop.

Prior to the termination of the 2007 Amended Loan Agreement and Letter of Credit Agreement on July 31, 2008, the Company’s average loan balance was $41.6 million, its highest borrowings were $80.6 million and its average interest rate was 5.38% thereunder. The following table presents the components (in millions) of the Company’s credit facilities for its Children’s Place business as of February 2, 2008 and November 3, 2007:

	February 2, 2008			November 3, 2007
2007 Amended Loan Agreement
Outstanding borrowings	$	69.6		$	96.0
Letters of credit outstanding—merchandise	—			—
Letters of credit outstanding—standby	14.3			12.2
Utilization of credit facility at end of period	83.9			108.2
Availability covenant (1)	13.0			12.0
Availability	33.1			29.8
Facility maximum (2)	130.0			150.0
Average loan balance during the period	44.1			33.3
Highest borrowings during the period	116.8			116.8
Average interest rate	7.21		%	7.41		%
Interest rate at end of period	6.00		%	7.50		%
Letter of Credit Agreement (3)
Letters of credit outstanding—merchandise	26.5			36.0
Letter of credit facility maximum	60.0			60.0

(1) Under the 2007 Amended Loan Agreement, the Company was required to keep a minimum of additional availability of at least 10% of the facility maximum.

(2) Under the 2007 Amended Loan Agreement, the facility maximum as of February 2, 2008 was the lesser of $130 million, subject to an availability covenant which restricted maximum borrowings to 90% of the facility maximum, or The Children’s Place business’ defined borrowing base. Under the 2007 Amended Loan

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Agreement and using the seasonal over-advance feature, the facility maximum as of November 3, 2007 was the lesser of $150 million, or The Children’s Place business’ defined borrowing base.

(3) The Letter of Credit Agreement was cancelable at any time by Wells Fargo.

Amended Hoop Loan Agreement

In connection with the Original Acquisition of the Disney Store business in 2004, the domestic Hoop entity together with certain other Hoop entities entered into a Loan and Security Agreement (the “Hoop Loan Agreement”) with Wells Fargo as senior lender and syndication and administrative agent, and certain other lenders, establishing a senior secured credit facility for Hoop. In June 2007, concurrent with the execution of the 2007 Amended Loan Agreement, and in August 2007, Hoop entered into Second and Third Amendments to the Hoop Loan Agreement, both with Wells Fargo, as senior lender and administrative and syndication agent, and the other lenders (together with the Hoop Loan Agreement, the “Amended Hoop Loan Agreement”) to reduce the interest rates charged on outstanding borrowings and letters of credit. The Amended Hoop Loan Agreement provided a facility maximum of $75 million for borrowings and provided for a $25 million accordion feature that enabled the Company to increase the facility to an aggregate amount of $100 million, subject to an availability restriction which limited maximum borrowings to 90% of the facility maximum, or $90 million. The accordion feature was available at the Company’s option, subject to the amount of eligible inventory and accounts receivable of the domestic Hoop entity.

The Amended Hoop Loan Agreement was terminated on March 26, 2008 as a result of the filing of the Cases and Hoop was required to pay a termination fee of approximately $0.4 million.

Amounts outstanding under the Amended Hoop Loan Agreement bore interest at a floating rate equal to the prime rate or, at Hoop’s option, the LIBOR rate plus a pre-determined margin. Depending on the domestic Hoop entity’s level of excess availability, the LIBOR margin was 1.50% or 1.75%, commercial letter of credit fees were 0.75% or 1.00%, and standby letter of credit fees were 1.25% or 1.50%. The unused line fee was 0.25%.

Credit extended under the Amended Hoop Loan Agreement was secured by a first priority security interest in substantially all the assets of the domestic Hoop entity as well as a pledge of a portion of the equity interests in Hoop Canada. The Amended Hoop Loan Agreement also contained covenants, including limitations on indebtedness, limitations on capital expenditures and restrictions on the payment of dividends and indebtedness.

The following table presents the components (in millions) of the Company’s credit facility for its Disney Store business as of February 2, 2008 and November 3, 2007:

	February 2, 2008			November 3, 2007
Amended Hoop Loan Agreement/Hoop Loan Agreement
Outstanding borrowings	$	19.4		$	12.9
Letters of credit outstanding—merchandise	17.6			27.0
Letters of credit outstanding—standby	3.5			2.0
Utilization of credit facility at end of period	40.5			41.9
Availability (1)	18.1			33.1
Facility maximum (1)	58.6			75.0
Average loan balance during the period	3.1			0.4
Highest borrowings during the period	26.1			13.3
Average interest rate	7.41		%	7.83		%
Interest rate charged at end of period	6.00		%	7.50		%

(1) Under the Amended Hoop Loan Agreement, the facility maximum was the lesser of $75.0 million or Hoop’s defined borrowing base.

DIP Credit Facility

As of May 3, 2008, the Hoop estate had repaid all outstanding borrowings under the DIP Credit Facility (as defined below). On May 15, 2008, the DIP Credit Facility was closed.

As a result of the filing of the Cases, outstanding indebtedness under the Amended Hoop Loan Agreement, in the amount of approximately $9.3 million, was frozen and capped as of March 26, 2008. In order to fund the bankruptcy

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proceedings and all projected working capital needs, Wells Fargo and Hoop Retail Stores, LLC entered into a Debtor-In-Possession Loan and Security Agreement, which was approved by the U.S. Bankruptcy Court and dated as of March 28, 2008, consisting of a $35 million revolving credit facility (the “DIP Credit Facility”). In addition, all letters of credit issued under the Amended Hoop Credit Facility were deemed by the U.S. Bankruptcy Court to be issued under the DIP Credit Facility. Hoop was required to pay a closing fee of approximately $0.3 million for the DIP Credit Facility.

Amounts outstanding under the DIP Credit Facility bore interest at a floating rate equal to the prime rate plus 1.50%, and commercial letter of credit fees and standby letter of credit fees were 2.50%. The unused line fee was 0.375%. Credit extended under the DIP Credit Facility was secured by a first priority security interest in substantially all the assets of the domestic Hoop entity as well as a pledge of a portion of the equity interests in Hoop Canada.

Letter of Credit Fees

Letter of credit fees approximated $0.3 million and $0.4 million in the thirty-nine week periods ended November 1, 2008 and November 3, 2007, respectively. Letter of credit fees are included in cost of sales.

8. NOTE PURCHASE AGREEMENT

On July 31, 2008, concurrently with the execution of the 2008 Credit Agreement, the Company and certain of its domestic subsidiaries and Sankaty Credit Opportunities III, L.P., Sankaty Credit Opportunities IV, L.P., RGIP, LLC, Crystal Capital Fund, L.P., Crystal Capital Onshore Warehouse LLC, 1903 Onshore Funding, LLC, and Bank of America, N.A. (collectively, the “Note Purchasers”), together with Sankaty Advisors, LLC, as Collateral Agent, and Crystal Capital Fund Management, L.P., as Syndication Agent, entered into a note purchase agreement (“Note Purchase Agreement”).

Under the Note Purchase Agreement, the Company issued $85 million of secured notes (the “Notes”) with no amortization with a single payment of principal due on the maturity date, July 31, 2013. Amounts outstanding under the Note Purchase Agreement bear interest at LIBOR, with a floor of 3.00%, plus a margin between 8.50% and 9.75% depending on the Company’s leverage ratio. As of November 1, 2008, the interest rate on the Note Purchase Agreement was 12.20%.

The outstanding obligations under the Note Purchase Agreement may be accelerated after the occurrence of (and, if applicable, the expiration of the cure period) certain events, including, among others, breach of covenants, certain defaults under certain other indebtedness, the institution of insolvency proceedings and a material adverse effect. The Company is also required to make mandatory prepayments if a change of control occurs, if it receives cash in excess of certain defined thresholds for the sale of assets or other defined events, if it issues equity or other debt securities, or if annual cash flows are in excess of defined thresholds for each fiscal year. In addition, the outstanding obligations under the Note Purchase Agreement may be prepaid at any time at the discretion of the Company. For all prepayment types (including any made as a result of acceleration), except those relating to excess cash flows in a fiscal year and certain extraordinary receipts, the Company would be responsible for an early termination fee in the amount of (i) 2.00% of the aggregate principal amount of the Notes then prepaid within the first year of the term of the facility and (ii) 1.50% of the aggregate principal amount of the Notes then prepaid within the second year of the term of the facility. No early termination fee would be incurred after the completion of the second year of the term of the facility. Based on the Company’s estimated cash flow for fiscal year 2008, a prepayment of $30 million is expected to be made in the first half of fiscal 2009. Accordingly, $30 million of the Notes are classified as current on the Company’s condensed consolidated balance sheet at November 1, 2008.

The Note Purchase Agreement contains covenants, which include limitations on annual capital expenditures, a minimum EBITDA, a maximum leverage ratio, a minimum fixed charge coverage ratio and limitations on the payment of dividends or similar payments. The Company’s obligations under the Note Purchase Agreement are secured by a first or second priority security interest in substantially all of the Company’s assets and substantially all of the assets of its domestic subsidiaries.

On July 31, 2008, the proceeds from the Note Purchase Agreement were used in part to repay in full the borrowers’ outstanding obligations under the 2007 Amended Loan Agreement and the Letter of Credit Agreement; together with the 2007 Amended Loan Agreement, (collectively, the “2007 Facilities”) with Wells Fargo as senior lender and administrative and syndication agent, and the Company’s other senior lenders (collectively, the “2007 Lenders”). There were no prepayment penalties associated with such repayment. Upon receipt of such repayment by Wells Fargo for the benefit of the 2007 Lenders, the 2007 Facilities and the related guaranty and collateral agreements were terminated and the associated liens were released.

The Company capitalized approximately $2.2 million in deferred financing costs related to the institution of the Note Purchase Agreement, which will be amortized on a straight line basis over the term of the Note Purchase Agreement.

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9. LEGAL AND REGULATORY MATTERS

The Company is involved in various legal proceedings arising in the normal course of its business and reserves for litigation settlements and contingencies when it can determine that an adverse outcome is probable and can reasonably estimate associated losses. Estimates are adjusted as facts and circumstances require. In the opinion of management, any ultimate liability arising out of such proceedings will not have a material adverse effect on the Company’s financial condition.

Matters Related to Stock Option Practices

SEC and U.S. Attorney Investigations

On September 29, 2006, the Division of Enforcement of the SEC informed the Company that it had initiated an informal investigation into the Company’s stock option granting practices. In addition, the Office of the U.S. Attorney for the District of New Jersey has initiated an investigation into the Company’s option granting practices. The Company has cooperated with these investigations and has briefed both authorities on the results of an investigation conducted by a sub-committee appointed by the Board of Directors. There have been no developments in these matters since that time.

Shareholder Derivative Litigation

On January 17, 2007, a stockholder derivative action was filed in the United States District Court, District of New Jersey against certain current members of the Board and certain current and former senior executives. The Company was named as a nominal defendant. The complaint alleges, among other things, that certain of the Company’s current and former officers and directors (i) breached their fiduciary duties to the Company and its stockholders and were unjustly enriched by improperly backdating certain grants of stock options to officers and directors of the Company, (ii) caused the Company to file false and misleading reports with the SEC, (iii) violated the Exchange Act and common law, (iv) caused the Company to issue false and misleading public statements, and (v) were negligent and abdicated their responsibilities to the Company and its stockholders. The complaint sought money damages, an accounting by the defendants for the proceeds of sales of any allegedly backdated stock options, and the costs and disbursements of the lawsuit, as well as equitable relief. The plaintiff filed amended complaints adding, among other things, a claim for securities fraud under SEC rule 10b-5 and additional defendants and claims. In May 2008, the parties entered into a stipulation of settlement to resolve this action, which settlement was approved by the court on July 21, 2008. The only monetary portion of the settlement was $0.7 million of attorneys’ fees and reimbursement of expenses to plaintiffs’ counsel. The majority of this cost was covered by the Company’s insurance.

Class Action Litigation

On September 21, 2007, a second stockholder class action was filed against the Company and certain current and former senior executives in the United States District Court, Southern District of New York. This complaint alleges, among other things, that certain of the Company’s current and former officers made statements to the investing public which misrepresented material facts about the business and operations of the Company, or omitted to state material facts required in order for the statements made by them not to be misleading, causing the price of the Company’s stock to be artificially inflated in violation of provisions of the Exchange Act, as amended. It alleges that subsequent disclosures establish the misleading nature of these earlier disclosures. The complaint seeks monetary damages plus interest as well as costs and disbursements of the lawsuit. On October 10, 2007, a third stockholder class action was filed in the United States District Court, Southern District of New York, against the Company and certain of its current and former senior executives. This complaint alleges, among other things, that certain of the Company’s current and former officers made statements to the investing public which misrepresented material facts about the business and operations of the Company, or omitted to state material facts required in order for the statements made by them not to be misleading, thereby causing the price of the Company’s stock to be artificially inflated in violation of provisions of the Exchange Act, as amended. According to this complaint, subsequent disclosures establish the misleading nature of these earlier disclosures. This complaint seeks, among other relief, compensatory damages plus interest, and costs and expenses of the lawsuit, including counsel and expert fees. These two actions have been consolidated and the plaintiff filed a consolidated amended class action complaint on February 28, 2008. The Company’s motion to dismiss was denied by the Court on July 18, 2008. While we believe there are valid defenses to the claims and we will defend ourselves vigorously, no assurance can be given as to the outcome of this litigation. The litigation could distract our management and directors from the Company’s affairs, the costs and expenses of the litigation could unfavorably affect our net earnings, and an unfavorable outcome could adversely affect the reputation of the Company.

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On or about September 28, 2007, Meghan Ruggiero filed a complaint against the Company and its subsidiary, Hoop Retail Stores, LLC, in the United States District Court, Northern District of Ohio on behalf of herself and similarly situated individuals. The lawsuit alleges violations of the Fair and Accurate Credit Transactions Act (“FACTA”) and seeks class certification, an award of statutory and punitive damages, attorneys’ fees and costs, and injunctive relief. The plaintiff filed an amended complaint on January 25, 2008. Effective as of March 26, 2008, the prosecution of this lawsuit against Hoop was stayed under the automatic stay provisions of the U.S. Bankruptcy Code by reason of Hoop’s petition for relief filed that same day. While the Company believes there are valid defenses to the claims and will defend itself vigorously; no assurance can be given as to the outcome of this litigation.

Other Litigation

On or about July 12, 2006, Joy Fong, a former Disney Store manager in the San Francisco district, filed a lawsuit against the Company and its subsidiary Hoop Retail Stores, LLC in the Superior Court of California, County of Los Angeles. The lawsuit alleges violations of the California Labor Code and California Business and Professions Code and sought class action certification on behalf of Ms. Fong and other individuals similarly situated. The Company filed its answer on August 11, 2006 denying any and all liability, and on January 14, 2007, Ms. Fong filed an amended complaint, adding Disney as a defendant. The Company believes it has meritorious defenses to the claims. Effective as of March 26, 2008, the prosecution of this lawsuit against Hoop was stayed under the automatic stay provisions of the U.S. Bankruptcy Code by reason of Hoop’s petition for relief filed that same day. The case is currently proceeding against the other defendants. While the Company believes there are valid defenses to the claims, the Company cannot reasonably estimate the amount of loss or range of loss that might be incurred as a result of this matter.

Regulatory Matters

Nasdaq Proceedings

As the Company did not timely file its Quarterly Reports on Form 10-Q for the quarters ended July 29, 2006 and October 28, 2006, its Annual Report on Form 10-K for fiscal 2006, and its Quarterly Reports on Form 10-Q for the quarters ended May 5, 2007 and August 4, 2007 (collectively, the “Required Reports”), the Company was out of compliance with the reporting requirements of the SEC and the Nasdaq Global Select Market (“Nasdaq”) for more than one year. On December 5, 2007, the Company filed the Required Reports with the SEC.

On February 6, 2008, the Company received a notice of non-compliance with Nasdaq rules citing our failure to solicit proxies and hold an annual meeting of shareholders for the fiscal year ended February 3, 2007, no later than February 3, 2008. Nasdaq listing rules require that all issuers solicit proxies and hold an annual meeting of its shareholders within 12 months of the end of the issuer’s fiscal year end. The Company requested an exception to this rule and submitted a plan of compliance to Nasdaq whereby it anticipated holding its annual shareholders’ meeting on June 27, 2008. On April 3, 2008, the Nasdaq Listing Qualifications Panel granted the Company’s request for continued listing. The Company informed the Panel it had solicited proxies and had held its 2007 annual shareholders’ meeting on June 27, 2008.

Following the resignation of an independent member of the Company’s Board of Directors in February 2008, the Company had six directors, three of whom were independent directors. As a result of this resignation, the Company’s Board was no longer comprised of a majority of independent directors and therefore was not in compliance with Nasdaq Marketplace Rule 4350(c)(1). On March 5, 2008, the Company received a notice of non-compliance with Nasdaq’s independent director requirements. On May 9, 2008, the Company appointed two additional independent directors to the Company’s Board of Directors. On May 16, 2008, the Company received a letter from Nasdaq stating that the Company was in compliance with Nasdaq Marketplace Rule 4350(c)(1) as of that date.

10. INCOME TAXES

The Company computes income taxes using the liability method. This method requires recognition of deferred tax assets and liabilities, measured by enacted rates, attributable to temporary differences between financial statement and income tax basis of assets and liabilities. Deferred tax assets and liabilities are comprised largely of book tax differences relating to depreciation, rent expense, inventory and various accruals and reserves.

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The Company’s effective tax rate from continuing operations for the thirteen weeks and thirty-nine weeks ended November 1, 2008 was 42.0% and 41.9%, respectively. During the thirteen weeks and thirty-nine weeks ended November 3, 2007 the Company’s effective tax rate from continuing operations was 33.7% and 35.4%, respectively. The effective tax rate is higher in the current year primarily because as of the fourth quarter of 2008, the Company is no longer permanently reinvested in certain Asian subsidiaries.

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement 109” (“FIN 48”) on February 4, 2007. FIN 48 clarifies the accounting and reporting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement criteria for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

During the thirteen weeks and thirty-nine weeks ended November 1, 2008, the Company recognized approximately $0.3 million and $0.9 million, respectively of additional interest expense related to its unrecognized tax benefits. During the thirteen weeks and thirty-nine weeks ended November 3, 2007, the Company recognized approximately $0.3 million and $0.8 million, respectively of additional interest expense related to its unrecognized tax benefits. The Company recognizes accrued interest and penalties related to unrecognized income tax liabilities in income tax expense.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. With limited exception, the Company is no longer subject to U.S. federal, state, local or non-U.S. income tax audits by taxing authorities for years through 2003. The Internal Revenue Service (“IRS”) commenced an examination of the Company’s U.S. consolidated income tax returns for the years 2004 through 2006 during the second quarter of fiscal 2007. The Company believes it is reasonably possible due to the timing of audit settlements and negotiations with state taxing authorities that there may be a significant change to the total amount of unrecognized tax benefits within the next 12 months. The Company estimates the amount of this change to be approximately $5 to $8 million.

11. INTEREST (EXPENSE) INCOME, NET

The following table presents the components of the Company’s interest (expense) income, net (in thousands):

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	November 1,			November 3,			November 1,			November 3,
	2008			2007			2008			2007
Interest income	$	977		$	816		$	2,231		$	1,997
Tax-exempt interest income	17			28			38			928
Total interest income	994			844			2,269			2,925

Less:
Interest expense — term loan	2,523			—			2,605			—
Interest expense — credit facilities	—			1,451			1,113			1,868
Capitalized interest	—			(234		)	—			(594		)
Unused line fee	97			19			189			121
Amortization of deferred financing fees	192			22			318			48
Other fees	94			382			847			850
Interest (expense) income, net	$	(1,912	)	$	(796	)	$	(2,803	)	$	632

12. NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which provides guidance for using fair value to measure assets and liabilities, defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years, with the exception of all non-financial assets and liabilities which will be effective for years beginning after November 15, 2008. The Company adopted SFAS 157 on

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of federal securities laws, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, the discussions of the Company’s operating and growth strategy. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, those set forth under the caption “Risk Factors” in the Business section of the Company’s Annual Report on Form 10-K for the year ended February 2, 2008 and other filings with the Securities and Exchange Commission. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. The Company undertakes no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

The following discussion should be read in conjunction with the Company’s unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the annual audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended February 2, 2008 and the Company’s Current Report on Form 8-K filed with the SEC on August 6, 2008 to classify the Disney Stores as a discontinued operation. The Disney Store business has been reported as discontinued operations in accordance with U.S. GAAP in this Quarterly Report on Form 10-Q, reflecting the Company’s exit of the Disney Store business.

RECENT DEVELOPMENTS

In the fourth quarter of fiscal 2007, our Board of Directors (the “Board”) engaged an investment banking firm to act as its financial advisor in undertaking a review of strategic alternatives to improve operations and enhance shareholder value. As part of this review, our Board and management have been assessing a wide variety of options to maximize shareholder value, including, but not limited to, opportunities for organizational and operational improvement, and the potential sale of the Company. As a result of this review, we have disposed of our Disney Store business and entered into an $85 million term loan and a new credit facility to increase our liquidity. The strategic review is ongoing and the Board has not set any specific timeline for its completion. There is no assurance that as a result of this review, the Board will decide to further change the Company’s course of action or engage in any other specific transactions.

To enable the evaluation of all strategic options for the Company, our Board has granted a request from Mr. Dabah, a member of our Board, and Golden Gate Private Equity, Inc. for approval under Delaware law to facilitate their working together to develop and make a proposal to acquire the Company. There is no assurance that any such proposal will be made or, if made, would lead to an agreement providing for a sale of the Company.

After a thorough review of the Disney Store business, its potential earnings growth, its capital needs and its ability to fund such needs from its own resources, we announced on March 20, 2008 that we had decided to exit the Disney Store business. After assessing the above factors and Hoop’s liquidity, Hoop’s Board of Directors determined that the best way to complete an orderly wind-down of Hoop’s affairs was for Hoop to seek relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”). On March 26, 2008, Hoop Holdings, LLC, Hoop Retail Stores, LLC and Hoop Canada Holdings, Inc. each filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “U.S. Bankruptcy Court”) (Case Nos. 08-10544, 08-10545, and 08-10546, respectively, the “Cases”). On March 27, 2008, Hoop Canada, Inc. filed for protection pursuant to the Companies’ Creditors Arrangement Act (the “CCAA”) in the Ontario Superior Court of Justice (Commercial List) (“Canadian Bankruptcy Court”) (Court File No. 08-CL-7453, and together with the Cases, the “Filings”). Each of the foregoing Hoop entities are referred collectively herein as the “Hoop Entities.”

Since these Filings, the Hoop Entities have managed their properties and have operated their businesses as “debtors-in-possession” under the jurisdiction of the U.S. Bankruptcy Court or the Canadian Bankruptcy Court, as applicable, and in accordance with the applicable provisions of the Bankruptcy Code or the CCAA, as applicable. Neither we, as Hoop’s parent company, nor any of our other subsidiaries, have commenced or plans to commence a Chapter 11 case (or equivalent under applicable bankruptcy laws).

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After receiving approval from the U.S. Bankruptcy Court and the Canadian Bankruptcy Court, on April 30, 2008, Hoop transferred the Disney Store business in the U.S. and Canada and a substantial portion of the Disney Store assets to affiliates of Disney in an asset sale (the “Private Sale”), pursuant to section 363 of the Bankruptcy Code (and a similar provision under the CCAA). Upon closing, affiliates of Disney paid a purchase price of $64 million for the acquired assets of the Disney Store business, subject to a post-closing inventory and asset adjustment. Approximately $6 million of the purchase price was placed in escrow for such true-up purposes. Hoop anticipates finalizing the purchase price by the end of fiscal 2008. The proceeds received from the Private Sale will be utilized to settle the Hoop Entities’ liabilities as “debtors-in-possession” under the jurisdiction of the U.S. Bankruptcy Court and the Canadian Bankruptcy Court, as applicable.

In connection with the closing of the Private Sale, Disney’s relevant affiliates released Hoop from its rights and obligations under the License Agreement, as amended by the Refurbishment Amendment, the Guaranty and Commitment Agreement, and any related future liabilities and unlimited claims. Further, in connection with the closing of the Private Sale and the satisfaction of other conditions, Disney and its affiliates released us from our obligations under the Guaranty and Commitment Agreement and the Refurbishment Amendment. We also agreed to provide certain transition services through the end of October 2008 to assist Disney in transitioning the Disney Stores to its administrative and distribution systems. During the thirteen weeks and thirty-nine weeks ended November 1, 2008, we received $5.7 million and $11.1 million, respectively, net of variable expenses for these transition services.

Separately, we entered into a settlement and release of claims with Hoop and its creditors’ committee, which was approved by the U.S. Bankruptcy Court on April 29, 2008. We have agreed to provide transitional services and to forgive all pre- and post-bankruptcy petition claims against Hoop, which include inter-company charges for shared services and to pay severance and other employee costs for our employees servicing Hoop, and certain other professional fees and other costs we may incur during the Hoop Entities’ bankruptcy proceedings, as well as claims that might be asserted against us in such bankruptcy proceedings.

Our annual profitability is highly dependent on our sales and gross margin performance during the third and fourth quarters. During the four weeks ended November 29, 2008, our comparable store sales decreased 7% as compared to an increase of 8% in the four weeks ended December 1, 2007.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the fiscal period. Actual results could differ from our estimates. The accounting policies that we believe are the most critical to aid in fully understanding and evaluating reported financial results include the following:

Revenue Recognition—Sales are recognized upon purchase by customers at our retail stores or when received by the customer if the product was purchased via the Internet, net of coupon redemptions and anticipated sales returns. Actual sales return rates have historically been within our expectations and the allowance established. However, in the event that the actual rate of sales returns by customers increased significantly, our operational results could be adversely affected.

Our policy with respect to gift cards is to record revenue as gift cards are redeemed for merchandise. Prior to their redemption, unredeemed gift cards for The Children’s Place business are recorded as a liability, included within accrued expenses and other current liabilities. We recognize income from gift cards that are not expected to be redeemed based upon an extended period of dormancy where statutorily permitted.

We offer a private label credit card to our The Children’s Place customers that provides a discount on future purchases once a minimum annual purchase threshold has been exceeded. We estimate the future discounts to be provided based on history, the number of customers who have earned or are likely to earn the discount and current year sales trends on the private label credit card. We defer a proportionate amount of revenue from customers based on an estimated value of future discounts. We recognize such deferred revenue as future discounts are taken on sales above the minimum. This is done by utilizing estimates based upon sales trends and the number of customers who have earned the discount privilege. Our private label customers must earn the discount privilege on an annual basis and this privilege expires at our fiscal year end. Accordingly, all deferred revenue is recognized by the end of the fiscal year.

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Inventory Valuation—Merchandise inventories are stated at the lower of average cost or market using the retail inventory method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio by merchandise department to the retail value of inventories. At any one time, inventories include items that have been marked down to our best estimate of their fair market value and an estimate of our inventory shrinkage.

We base our decision to mark down merchandise upon its current rate of sale, the season, and the age and sell-through of the item. To the extent that our markdown estimates are not adequate, additional markdowns may have to be recorded, which could reduce our gross margins and operating results. Our success is largely dependent upon our ability to gauge the fashion taste of our customers and to provide a well-balanced merchandise assortment that satisfies customer demand. Any inability to provide the proper quantity of appropriate merchandise in a timely manner could increase future markdown rates.

We adjust our inventory balance based on an annual physical inventory and shrinkage is estimated in interim periods based on the historical results of physical inventories in the context of current year facts and circumstances. To the extent our shrinkage estimate is not adequate, we would be required to reduce our gross profits and operating results.

Equity Compensation—In applying SFAS 123(R), we use the Black-Scholes option pricing model based on a Monte Carlo simulation, which requires extensive use of accounting judgment and financial estimates, including estimates of how long employees will hold their vested stock options before exercise, the estimated volatility of the Company’s common stock over the expected term, and the number of options that will be forfeited prior to the completion of vesting requirements. Application of other assumptions could result in significantly different estimates of fair value of stock-based compensation and consequently, the related expense recognized in our financial statements. We also award key management deferred stock awards, restricted stock awards and performance share awards (“Performance Awards”) which, if earned, would be satisfied by the issuance of shares of common stock (“Performance Shares”). The vesting of Performance Shares is dependant upon the Company achieving defined levels of earnings over a period of time. Our cumulative expense is dependant upon our assessment of future earnings. That assessment could differ from actual results.

Accounting for Liabilities subject to compromise—As a “debtor-in-possession,” certain claims against Hoop that existed prior to the Filings are stayed under the jurisdiction of the U.S. Bankruptcy Court or Canadian Bankruptcy Court, as applicable, and are “liabilities subject to compromise” and are reflected in the November 1, 2008 balance sheet within “liabilities of bankruptcy estate of subsidiary.” Additional claims (liabilities subject to compromise) may arise as a result of the rejection of executory contracts, including leases for the stores returned to the Hoop estate, and from the determination by the U.S. Bankruptcy Court or Canadian Bankruptcy Court (or agreed to by the Hoop’s creditors) of claims allowed for contingencies and other related amounts.

Accounting for Royalties—In exchange for the right to use certain Disney intellectual property, we were required to make royalty payments pursuant to the License Agreement to a Disney subsidiary after a two-year royalty holiday period that ended in November 2006. The amortization of the estimated value of the royalty holiday was recognized on a straight-line basis as a reduction of royalty expense over the term of the License Agreement. During the thirty-nine weeks ended November 1, 2008, our discontinued operations included the reversal of approximately $42.3 million in deferred royalty expense in conjunction with the termination of the License Agreement in accordance with the Private Sale.

Insurance and Self-Insurance Liabilities—Based on our assessment of risk and cost efficiency, we self-insure and purchase insurance policies to provide for workers’ compensation, general liability, property losses, director’s and officer’s liability, vehicle liability and employee medical benefits. We estimate risks and record a liability based upon historical claim experience, insurance deductibles, severity factors and other actuarial assumptions. While we believe that our risk assessments are appropriate, to the extent that future occurrences and claims differ from our historical experience, additional charges for insurance may be recorded in future periods.

Impairment of Assets—We periodically review our assets when events indicate that their carrying value may not be recoverable. Such events include a history of cash flow losses or a future expectation that we will sell or dispose of an asset significantly before the end of its previously estimated useful life. We periodically evaluate each store’s performance and compare the carrying value of each location’s fixed assets, principally leasehold improvements and fixtures, to its projected cash flows. An impairment loss is recorded if the projected future cash flows are insufficient to recapture the net book value of their assets. To the extent our estimates of future cash flows are incorrect, additional impairment charges may be recorded in future periods.

Income Taxes—We compute income taxes using the liability method. This method requires recognition of deferred tax assets and liabilities, measured by enacted rates, attributable to temporary differences between financial statement and

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income tax basis of assets and liabilities. Temporary differences result primarily from depreciation and amortization differences between book and tax and the non-deductibility of certain reserves and accruals in the current tax period for tax purposes. In assessing the need for a valuation allowance, management considers all available evidence including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. When we change our determination of the amount of deferred tax assets that can be realized, a valuation allowance is established or adjusted with a corresponding impact to income tax expense in the period in which such determination is made.

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite our belief that our tax positions are supportable, we believe that certain positions are likely to be challenged and may not be fully sustained upon review by tax authorities. We believe that our accruals for tax liabilities are adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made.

We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (FIN 48) on February 4, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected income statement data expressed as a percentage of net sales. We primarily evaluate the results of our operations as a percentage of net sales rather than in terms of absolute dollar increases or decreases by analyzing the year over year change in our business expressed as a percentage of net sales (i.e., “basis points”). For example, our selling, general and administrative expenses decreased approximately 230 basis points to 28.1% of net sales during the thirteen weeks ended November 1, 2008 from 30.4% during the thirteen weeks ended November 3, 2007. Accordingly, to the extent that our sales have increased at a faster rate than our costs (i.e., “leveraging”), the more efficiently we have utilized the investments we have made in our business. Conversely, if our sales decrease or if our costs grow at a faster pace than our sales (i.e., “de-leveraging”), we have less efficiently utilized the investments we have made in our business.

	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	November 1, 2008		November 3, 2007		November 1, 2008		November 3, 2007
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	56.4		60.0		58.3		61.2
Gross profit	43.6		40.0		41.7		38.8
Selling, general and administrative expenses	28.1		30.4		29.6		32.3
Asset impairment charges	0.2		0.2		0.1		0.1
Depreciation and amortization	3.9		4.0		4.5		4.3
Operating income	11.3		5.4		7.6		2.0
Interest (expense) income, net	(0.4	)	(0.2	)	(0.2	)	0.1
Income from continuing operations before income taxes	10.9		5.2		7.3		2.0
Provision for income taxes	4.6		1.8		3.1		0.7
Income from continuing operations	6.3		3.5		4.3		1.3
Loss from discontinued operations, net of taxes	(1.0	)	(0.6	)	(0.6	)	(1.4	)
Net income (loss)	5.3	%	2.9	%	3.7	%	(0.1	)%
Number of stores of continuing operations, end of period	920		907		920		907

Table may not add due to rounding.

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Thirteen Weeks Ended November 1, 2008 (the “Third Quarter 2008”) Compared to Thirteen Weeks Ended November 3, 2007 (the “Third Quarter 2007”)

Net sales increased by $20.0 million, or 5%, to $450.6 million during the Third Quarter 2008 from $430.6 million during the Third Quarter 2007. Our Third Quarter 2008 sales increase resulted from a comparable store sales increase of 2%, which accounted for $6.2 million of our sales increase, a $7.3 million increase in sales from new stores and other stores that did not qualify as comparable stores, and a $6.5 million increase in our e-commerce business. During the Third Quarter 2007, our comparable store sales increased 1%. We define comparable store sales as net sales from stores that have been open at least 14 full months and that have not been substantially remodeled during that time. During the Third Quarter 2008, we opened 19 stores and closed one store.

Our 2% comparable store sales increase was primarily the result of a 6% increase in our average dollar transaction size partially offset by a 4% decrease in the number of comparable store sales transactions. The increase in our average dollar transaction was due to a 10% increase in our average unit retail price offset by a 4% decrease in units per transaction. The increase in our average retail price was primarily the result of reduced markdowns taken in the Third Quarter 2008 versus the Third Quarter 2007. During the Third Quarter 2008, comparable same store sales increased in most geographic regions except for the Midwest, where it was flat, and the West, Southeast and Canada, where we experienced decreases. Similarly, all departments had increases in comparable same store sales except Newborn. Street and strip stores were our strongest store types. Our e-commerce sales grew by more than 40% in Third Quarter 2008 versus the Third Quarter 2007.

Gross profit increased by $24.1 million to $196.4 million during the Third Quarter 2008 from $172.3 million during the Third Quarter 2007. As a percentage of net sales, gross profit increased approximately 360 basis points to 43.6% of net sales during the Third Quarter 2008 from 40.0% of net sales during the Third Quarter 2007. The increase in consolidated gross profit, as a percentage of net sales, resulted from lower markdowns of approximately 370 basis points, lower production, design and other costs of approximately 20 basis points, partially offset by the impact of the lower Canadian exchange rate, a lower initial markup of approximately 10 basis points, and a slight de-leverage of occupancy of approximately 20 basis points.

Selling, general and administrative expenses decreased $4.3 million to $126.7 million during the Third Quarter 2008 from $131.0 million during the Third Quarter 2007. As a percentage of net sales, selling, general and administrative expenses decreased approximately 230 basis points to 28.1% of net sales during the Third Quarter 2008 from 30.4% of net sales during the Third Quarter 2007. Our decrease in selling, general and administrative expenses benefited from the following items, which we consider to be unusual:

· Transition service income, net of variable expenses approximated 130 basis points and was approximately $5.7 million;

· Lower professional fees incurred during the Third Quarter 2008 of approximately 60 basis points, or approximately $2.6 million lower than the Third Quarter 2007. During the Third Quarter 2008, we had a net credit related to professional fees of approximately $0.2 million as a result of the recovery of certain legal costs through our insurance carrier, compared to approximately $2.4 million in professional fees incurred during the Third Quarter 2007 related to the stock option investigation and related restatements, and our strategic review;

· Severance costs incurred in the Third Quarter 2007, which approximated 90 basis points and $4.0 million, associated with the resignation of our former CEO; and

· Tolling of stock options expense incurred in the Third Quarter 2007, which approximated 10 basis points and $0.3 million.

Excluding the effect of the above items, our selling, general and administrative expenses increased approximately $8.3 million during the Third Quarter 2008. Excluding the effect of the above items, as a percentage of net sales, selling, general and administrative expenses increased approximately 60 basis points to 29.4% of net sales during the Third Quarter 2008 from 28.8% of net sales during the Third Quarter 2007. The de-leveraging in selling, general and administrative expenses in the Third Quarter 2008, as a percentage of net sales, resulted primarily from the following:

· Transaction losses associated with foreign currency denominated liabilities had an unfavorable impact of approximately 70 basis points. In the Third Quarter 2008 we had approximately $2.3 million of such losses, primarily in our Canadian subsidiary, as a result of the US dollar strengthening against the Canadian dollar. In the Third Quarter 2007, we had approximately $0.8 million of gains associated with foreign currency denominated liabilities;

· Equity compensation was unfavorable by approximately 40 basis points or $1.8 million. We began issuing equity awards again in the fourth quarter of fiscal 2007 upon completion of the stock option investigation;

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· Incentive bonus expense was unfavorable by approximately 40 basis points or $1.8 million as a result of improved performance in the Third Quarter 2008 versus the Third Quarter 2007;

· Business taxes and other costs were unfavorable by approximately 20 basis points or $0.7 million; and

· Marketing expenses were unfavorable approximately 20 basis points, or $1.7 million, as we shifted the bulk of our magalog mailing from the second quarter of fiscal 2008 to the Third Quarter 2008.

These increases were partially offset by reductions in expenses resulting from management initiatives, including:

· Store expenses were favorable approximately 80 basis points. The increased leverage of store expenses results from increased sales on fewer transactions, as noted above and a reduction of headcount through the elimination of a layer of management;

· Store opening and remodel costs were favorable approximately 40 basis points or $1.8 million, reflecting fewer new store openings in the Third Quarter 2008; and

· Administrative payroll was favorable by 20 basis points or $0.3 million.

Asset impairments charges were $1.0 million, or 0.2% of net sales, during the Third Quarter 2008, compared to $0.9 million, or 0.2% of net sales, during the Third Quarter 2007. During the Third Quarter 2008, we fully impaired four under performing stores and partially impaired five others. During the Third Quarter 2007, we fully impaired four under performing stores and partially impaired one other.

Depreciation and amortization was $17.8 million, or 3.9% of net sales, during the Third Quarter 2008, compared to $17.1 million, or 4.0% of net sales, during the Third Quarter 2007. Depreciation expense increased $0.7 million during the Third Quarter 2008 due primarily to our new stores.

Interest expense, net was $1.9 million, or 0.4% of net sales, during the Third Quarter 2008, compared to $0.8 million, or 0.2% of net sales, during the Third Quarter 2007. Interest expense during the Third Quarter 2008 includes interest on our new $85 million term loan at an average rate of 11.9% per annum. In the Third Quarter 2007, our average debt outstanding was approximately $78.8 million and accrued interest at an average rate of 7.4% per annum.

Loss from discontinued operations, net of taxes was $4.4 million in the Third Quarter 2008 compared to a loss from discontinued operations, net of taxes of $2.6 million in the Third Quarter 2007. During the Third Quarter 2008, selling, general and administrative expenses of discontinued operations primarily reflected additional reserves for legal settlements of $1.9 million and settlement of certain landlord claims and other obligations of $1.2 million. Restructuring charges included professional fees of $1.6 million. Net taxes for discontinued operations were a benefit of approximately $0.6 million, which includes a provision of $1.6 million Canadian tax proof of claim filed against the Hoop estate. During the Third Quarter 2007, our loss from discontinued operations reflects the operational results of the Disney Store business, adjusted for our historical allocation of shared services and the administrative and distribution expenses that were attributable to the Disney Stores.

Our provision for income taxes from continuing operations was $20.6 million during the Third Quarter 2008 compared to $7.6 million during the Third Quarter 2007. This increase of $13.0 million is the result of higher pre-tax earnings from continuing operations and a higher effective tax rate. Our effective tax rate was 42.0% in the Third Quarter 2008 as compared to 33.7% in the Third Quarter 2007. The increase in our effective tax rate in the Third Quarter 2008 reflects that as of the fourth quarter 2008, we are no longer permanently reinvested in certain of our Asian subsidiaries and, as such, we are required to provide U.S. tax on these earnings.

We reported net income of $24.1 million and $12.3 million during the Third Quarter 2008 and Third Quarter 2007, respectively, due to the factors discussed above.

Thirty-Nine Weeks Ended November 1, 2008 Compared to Thirty-Nine Weeks Ended November 3, 2007

Net sales increased by $111.8 million, or 10%, to $1,188.9 million during the thirty-nine weeks ended November 1, 2008 from $1,077.1 million during the thirty-nine weeks ended November 3, 2007. Our sales increase during the thirty-nine weeks ended November 1, 2008 resulted from a comparable store sales increase of 5%, which accounted for $47.2 million of our sales increase, a $44.0 million increase in sales from new stores, as well as other stores that did not qualify as comparable stores, a $21.9 million increase in our e-commerce business, partially offset by the impact of closed stores which represented $1.3 million. During the thirty-nine weeks ended November 3, 2007, our comparable store sales increased 1%. During the thirty-nine weeks ended November 1, 2008, we opened 22 The Children’s Place stores and closed 6 The Children’s Place stores.

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Our 5% comparable store sales increase was primarily the result of a 2% increase in the number of comparable store sales transactions and a 3% increase in our average dollar transaction size. The increase in our average dollar transaction was due to a 2% increase in our average unit retail price and a 1% increase in units per transaction. During the thirty-nine weeks ended November 1, 2008, comparable same store sales increased in all geographical regions except for the West and Canada, which each experienced a slight decline. Comparable same store sales increased in all departments and store types.

Gross profit increased by $78.3 million to $496.0 million during the thirty-nine weeks ended November 1, 2008 from $417.7 million during the thirty-nine weeks ended November 3, 2007. As a percentage of net sales, gross profit increased approximately 290 basis points to 41.7% during the thirty-nine weeks ended November 1, 2008 from 38.8% during the thirty-nine weeks ended November 3, 2007. The increase in consolidated gross profit, as a percentage of net sales, resulted primarily from lower markdowns of approximately 290 basis points. The leveraging of our occupancy and our production and design of approximately 60 basis points were offset by higher distribution costs of approximately 30 basis points and a lower initial markup of approximately 30 basis points.

Selling, general and administrative expenses increased $3.9 million to $351.9 million during the thirty-nine weeks ended November 1, 2008 from $348.0 million during the thirty-nine weeks ended November 3, 2007. As a percentage of net sales, selling, general and administrative expenses decreased approximately 270 basis points to 29.6% of net sales during the thirty-nine weeks ended November 1, 2008 from 32.3% of net sales during the thirty-nine weeks ended November 3, 2007. Our increase in selling, general and administrative expenses resulted from the following items, which we consider to be unusual:

· In the thirty-nine weeks ended November 1, 2008:

· Transition service income, net of variable expenses, incurred, approximated 90 basis points or $11.1 million; and

· A sale of a store lease approximated 20 basis points or $2.3 million.

· In the thirty-nine weeks ended November 3, 2007:

· Severance expense incurred, that approximated 40 basis points or $4.0 million, associated with resignation of our CEO; and

· Non-cash equity compensation incurred, that approximated 20 basis points or $2.1 million, associated with option terms that were extended due to the suspension of option exercises.

· Professional fees related to the stock option investigation and corporate restructuring decreased $2.3 million or 20 basis points. These amounts totaled $3.5 million and $5.8 million in the thirty-nine weeks ended November 1, 2008 and November 3, 2007, respectively.

Excluding the effect of the above items, our selling, general and administrative expenses increased approximately $25.7 million during the thirty-nine weeks ended November 1, 2008 and as a percentage of net sales, decreased approximately 80 basis points to 30.4% during the thirty-nine weeks ended November 1, 2008 from 31.2% during the thirty-nine weeks ended November 3, 2007. The decrease in selling, general and administrative expenses, as a percentage of net sales, resulted primarily from the leveraging of:

· Store expenses were favorable approximately 80 basis points, or $11.7 million. The increased leverage of store expenses results from increased sales, as noted above and a reduction of headcount through the elimination of a layer of store management;

· Store opening and remodel costs, which were favorable approximately 60 basis points, or approximately $5.5 million lower than the thirty-nine weeks ended November 3, 2007, reflecting fewer new store openings in the thirty-nine weeks ended November 1, 2008;

· Marketing expenses, which were favorable approximately 40 basis points and were approximately $1.0 million lower than during the thirty-nine weeks ended November 3, 2007; and

· Administrative payroll was favorable approximately 30 basis points and were higher approximately $0.3 million.

These decreases were partially offset by reductions in expenses resulting from management initiatives, including:

· Increased incentive bonus expense for management of approximately 50 basis points, or $6.1 million due to improved performance in the thirty-nine weeks ended November 1, 2008;

· Higher equity compensation expense, which was unfavorable approximately 30 basis points and were approximately $3.6 million higher than the thirty-nine weeks ended November 3, 2007 as a result of equity issuances made in the fourth quarter of fiscal 2007 and the second quarter of fiscal 2008; and

· Transaction losses associated with foreign currency denominated liabilities had an unfavorable impact of approximately 40 basis points. In the thirty nine weeks ended November 1, 2008, we had approximately $2.7

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million of such losses, primarily in our Canadian subsidiary, as a result of the US dollar strengthening against the Canadian dollar. In the thirty nine weeks ended November 3, 2007, we had approximately $1.8 million of gains associated with foreign currency denominated liabilities.

Asset impairments charges were $1.1 million, or 0.1% of net sales, during the Third Quarter 2008, compared to $1.6 million, or 0.1% of net sales, during the Third Quarter 2007. During the Third Quarter 2008, we fully impaired five under performing stores and partially impaired six others. During the Third Quarter 2007, we fully impaired five under performing stores and partially impaired one other.

Depreciation and amortization was $53.2 million, or 4.5% of net sales, during the thirty-nine weeks ended November 1, 2008, compared to $46.8 million, or 4.3% of net sales, during the thirty-nine weeks ended November 3, 2007. Depreciation expense increased $6.4 million during the thirty-nine weeks ended November 1, 2008 due primarily to our new stores and our distribution centers, particularly our new distribution center in Fort Payne, Alabama, which opened in the third quarter of fiscal 2007.

Loss from discontinued operations, net of taxes was $7.0 million in the thirty-nine weeks ended November 1, 2008 compared to $15.3 million in the thirty-nine weeks ended November 3, 2007. During the thirty-nine weeks ended November 1, 2008, our loss from discontinued operations, before taxes was approximately $9.3 million, compared to approximately $22.7 million during the thirty-nine weeks ended November 3, 2007. Our loss before taxes during the thirty-nine weeks ended November 1, 2008 included approximately $8.5 million of operating losses in the first quarter of fiscal 2008, approximately $17.6 million in professional, restructuring and severance expenses associated with the Hoop bankruptcy filings, a $1.9 million reserve for legal settlements, and a gain on the disposal of the Disney Store business of approximately $22.5 million. We recorded a gain primarily as a result of the write-off of certain non-cash liabilities, such as deferred royalties and rent liabilities. During the thirty-nine weeks ended November 1, 2008, interest expense from discontinued operations includes approximately $0.7 million in fees related to the termination of the Hoop credit facility and the establishment of a credit facility as a debtor-in-possession. The effective tax rate for discontinued operations for the thirty-nine weeks ended November 1, 2008 and November 3, 2007 was 24.1% and 32.7%, respectively. In the thirty-nine weeks ended November 1, 2008, the benefit for income taxes is net of a $1.6 million Canadian tax proof of claim filed against the Hoop estate.

Interest expense, net was $2.8 million, or 0.2% of net sales, during the thirty-nine weeks ended November 1, 2008, compared to interest income, net of $0.6 million, or 0.1% of net sales, during the thirty-nine weeks ended November 3, 2007. Interest expense during the thirty-nine weeks ended November 1, 2008 includes interest on our new $85 million term loan beginning at the end of the second quarter at an average rate of 11.9%. In the thirty-nine weeks ended November 3, 2007, our average debt outstanding was approximately $33.3 million, which accrued interest at an average rate of 7.4%, and we capitalized approximately $0.6 million of interest in conjunction with certain capital projects.

Our provision for income taxes from continuing operations was $36.5 million and $7.8 million during the thirty-nine weeks ended November 1, 2008 and the thirty-nine weeks ended November 3, 2007, respectively. This increase is the result of higher pre-tax earnings and a higher effective rate. Our effective tax rate was 41.9% for the thirty-nine weeks ended November 1, 2008 as compared to 35.4% for the thirty-nine weeks ended November 3, 2007. The effective tax rate in the thirty-nine weeks ended November 1, 2008 reflects that as of the fourth quarter of 2008, we are no longer permanently reinvested in certain of our Asian subsidiaries and we are required to provide U.S. tax on these earnings.

Net income in the thirty-nine weeks ended November 1, 2008 was $43.6 million, compared to a net loss in the thirty-nine weeks ended November 3, 2007 of $1.1 million. The increase in net earnings is due to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Debt Service/Liquidity

Our working capital needs follow a seasonal pattern, peaking during the third quarter when inventory is purchased for the back-to-school and holiday selling seasons. Our primary uses of cash are the financing of new store openings and providing working capital, principally used for inventory purchases. As of November 1, 2008, we had no short-term borrowings under our credit facility and had $85 million in borrowings under a five year term loan which we entered into at the end of the second quarter of fiscal 2008. Concurrent with the term loan, we also replaced our credit facility, the 2007 Amended Loan Agreement, with the 2008 Credit Agreement (as defined below), which provides for borrowings up to $200 million, to increase our liquidity. We expect to be able to meet our capital requirements principally by using the proceeds

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from our term loan, cash flows from operations and seasonal borrowings under our credit facility. Of the $50 million that we estimate in costs to wind down the Disney Store business, approximately 90% has been paid during the thirty-nine weeks ended November 1, 2008. (See “—Estimated Costs to Exit the Disney Store Business” below for additional information regarding these costs). Under the terms of the Note Purchase Agreement, we are required to make mandatory prepayments if annual cash flows are in excess of defined thresholds for each fiscal year. This is likely to result in the payment of approximately $30 million in the first half of fiscal 2009.

Termination of the License Agreement

After receiving approval from the U.S. Bankruptcy Court and the Canadian Bankruptcy Court on April 30, 2008, Hoop transferred the Disney Store business in the U.S. and Canada and a substantial portion of the Disney Store assets to affiliates of Disney in an asset sale (the “Private Sale”), pursuant to section 363 of the Bankruptcy Code (and a similar provision under the CCAA). Upon closing, affiliates of Disney paid a purchase price of $64 million for the acquired assets of the Disney Store business, subject to a post-closing inventory and asset adjustment. Approximately $6 million of the purchase price was placed in escrow for such true-up purposes. The proceeds received from the Private Sale will be utilized to settle the Hoop Entities’ liabilities as “debtors-in-possession” under the jurisdiction of the U.S. Bankruptcy Court and the Canadian Bankruptcy Court, as applicable.

In connection with the closing of the Private Sale, Disney’s relevant affiliates released Hoop from its rights and obligations under the License Agreement, as amended by the Refurbishment Amendment, the Guaranty and Commitment Agreement, and any related future liabilities and unlimited claims. Further in connection with the closing of the Private Sale and the satisfaction of other conditions, Disney and its affiliates released us from our obligations under the Guaranty and Commitment Agreement and the Refurbishment Amendment. Separately, we entered into a settlement and release of claims with Hoop and its creditors’ committee, which was approved by the U.S. Bankruptcy Court on April 29, 2008. We have agreed to provide transitional services and to forgive all pre- and post-bankruptcy petition claims against Hoop, which include inter-company charges for shared services and also included a capital contribution we made to Hoop of approximately $8.3 million in cash, and to pay severance and other employee costs for our employees servicing Hoop, and to pay certain professional fees and other costs that may be attributed to us.

Estimated Costs to Exit the Disney Store Business

We estimate that our continuing Children’s Place business will make cash outlays of approximately $50 million to exit the Disney Store business, which will include:

· Severance and other employee costs for our employees servicing Hoop Entities of approximately $7.8 million;

· Forgiveness of all pre- and post- petition claims against the Hoop estate, including inter-company charges for shared services of approximately $24.1 million, and a cash capital contribution of approximately $8.3 million that was made to Hoop on March 18, 2008, prior to its bankruptcy filings;

· Legal and other costs we incur during the Hoop entities’ bankruptcy proceedings; and

· Claims that have been or may be asserted against us in the bankruptcy proceedings.

As of November 1, 2008, the Company had accruals of $1.9 million, $1.3 million, and $1.5 million related to severance, asserted claims and related legal expenses, and workers compensation, respectively. During the quarter ended November 1, 2008, the Company recorded $1.2 million of reserves for asserted claims and $0.3 million in related legal expenses. The Company may incur other professional fees, asserted claims or costs during the Hoop Entities’ bankruptcy proceedings. As of November 1, 2008, we have disbursed approximately 90% of our estimated exit costs.

2008 Credit Agreement

For the quarter ended November 1, 2008, the Company operated under its 2008 Credit Agreement. The Company entered into the 2008 Credit Agreement on July 31, 2008 upon termination of the 2007 Amended Loan Agreement and Letter of Credit Agreement. The following section outlines the key terms of the 2008 Credit Agreement.

On July 31, 2008, we, together with certain of our domestic subsidiaries, entered into a credit agreement (the “2008 Credit Agreement”) with Wells Fargo Retail Finance, LLC (“Wells Fargo”), as Administrative Agent, Collateral Agent, and

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Swing Line Lender, Bank of America, N.A., HSBC Bank USA, National Association and JP Morgan Chase Bank, N.A. (collectively, the “Lenders”).

(i) the prime rate; or

(ii) LIBOR plus a margin of 1.50% to 2.00% based on the amount of our average excess availability under the facility.

In addition, an unused line fee of 0.25% will accrue on the unused portion of the commitments under the facility. Letter of credit fees range from 0.75% to 1.25% for commercial letters of credit and range from 1.50% to 2.00% for standby letters of credit. Letter of credit fees are determined based on the level of availability under the 2008 Credit Agreement and accrue on the undrawn amount of such outstanding letters of credit, respectively. The 2008 Credit Agreement will mature on July 31, 2013. The amount that could be borrowed under the 2008 Credit Agreement at any time depends on our levels of inventory and accounts receivable at such time.

The outstanding obligations under the 2008 Credit Agreement may be accelerated after the occurrence of (and, if applicable, the expiration of the cure period) certain events, including, among others, breach of covenants, the institution of insolvency proceedings, certain defaults under certain other indebtedness and a change of control. Should the maturity of the 2008 Credit Agreement be accelerated for any reason, we would be responsible for an early termination fee in the amount of (i) 0.50% of the revolving credit facility ceiling then in effect within the first year of the term of the facility and (ii) 0.25% of the revolving credit facility ceiling then in effect within the second year of the term of the facility. No early termination fee would be incurred after the completion of the second year of the term of the facility.

As of November 1, 2008, we had no outstanding borrowings under the 2008 Credit Agreement and had $35.3 million in commercial letters of credit outstanding and $14.6 million in standby letters of credit outstanding. Availability under the 2008 Credit Agreement was $145.5 million at November 1, 2008. We capitalized approximately $1.6 million in deferred financing costs related to the institution of the 2008 Credit Agreement, which will be amortized on a straight line basis over the term of the 2008 Credit Agreement.

Note Purchase Agreement

On July 31, 2008, concurrently with the execution of the 2008 Credit Agreement, we, together with certain of our domestic subsidiaries entered into an $85 million term loan (the “Note Purchase Agreement”) with Sankaty Credit Opportunities III, L.P., Sankaty Credit Opportunities IV, L.P., RGIP, LLC, Crystal Capital Fund, L.P., Crystal Capital Onshore Warehouse LLC, 1903 Onshore Funding, LLC, and Bank of America, N.A. (collectively, the “Note Purchasers”), together with Sankaty Advisors, LLC, as Collateral Agent, and Crystal Capital Fund Management, L.P., as Syndication Agents.

Under the Note Purchase Agreement, we issued $85 million of secured notes (the “Notes”) with no amortization with a single payment of principal due on the maturity date, July 31, 2013. Amounts outstanding under the Note Purchase Agreement bear interest at LIBOR, with a floor of 3.00%, plus a margin between 8.50% and 9.75% depending on the Company’s leverage ratio. As of November 1, 2008, the interest rate on the Note Purchase Agreement was 12.2%.

The outstanding obligations under the Note Purchase Agreement may be accelerated after the occurrence of (and, if applicable, the expiration of the cure period) certain events, including, among others, breach of covenants, certain defaults under certain other indebtedness, the institution of insolvency proceedings and a material adverse effect. We are also required to make mandatory prepayments if a change of control occurs, if we receive cash in excess of certain defined thresholds for the sale of assets or other defined events, if we issue equity or other debt securities, or if our annual cash flows are in excess of defined thresholds for each fiscal year. In addition, the outstanding obligations under the Note Purchase Agreement may be prepaid at any time at our discretion. For all prepayments types (including any made as a result of acceleration) except those relating to excess cash flows in a fiscal year and certain extraordinary receipts, we would be responsible for an early termination fee in the amount of (i) 2.00% of the aggregate principal amount of the Notes then prepaid within the first year of the term of the facility and (ii) 1.50% of the aggregate principal amount of the Notes then

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prepaid within the second year of the term of the facility. No early termination fee would be incurred after the completion of the second year of the term of the facility. Based on our estimated cash flow for fiscal year 2008, a prepayment of $30 million is expected to be made in the first half of fiscal 2009. Accordingly, $30 million of the Notes are classified as current on our condensed consolidated balance sheet at November 1, 2008.

The Note Purchase Agreement contains covenants, which include limitations on annual capital expenditures, a minimum EBITDA, a maximum leverage ratio, a minimum fixed charge coverage ratio and limitations on the payment of dividends or similar payments. Our obligations under the Note Purchase Agreement are secured by a first or second priority security interest in substantially all of our assets and substantially all of the assets of our domestic subsidiaries.

On July 31, 2008, the proceeds from the Note Purchase Agreement were used in part to repay in full our outstanding obligations under the 2007 Amended Loan Agreement and the Letter of Credit Agreement. There were no prepayment penalties associated with this repayment. Upon receipt by Wells Fargo of this repayment, the 2007 Amended Loan Agreement, the Letter of Credit Agreement and the related guaranty and collateral agreements were terminated and the associated liens were released.

We capitalized approximately $2.2 million in deferred financing costs related to the institution of the Note Purchase Agreement, which will be amortized on a straight line basis over the term of the Note Purchase Agreement.

Cash Flows/Capital Expenditures

During the thirty-nine weeks ended November 1, 2008, cash flows provided by operating activities were $172.5 million compared to $36.2 million in cash flows used by operating activities in the thirty-nine weeks ended November 3, 2007.

Cash provided by operating activities of continuing operations were $152.1 million in the thirty-nine weeks ended November 1, 2008 compared to $12.9 million in the thirty-nine weeks ended November 3, 2007. During the thirty-nine weeks ended November 1, 2008, operating activities of continuing operations included $4.0 million in taxes paid compared to $40.2 million during the thirty-nine weeks ended November 3, 2007. During the thirty-nine weeks ended November 1, 2008, we reported income from continuing operations of $50.6 million compared to $14.2 million in the thirty-nine weeks ended November 3, 2007. In the thirty-nine weeks ended November 1, 2008, cash flows provided by operating activities of continuing operations were also favorably impacted by a lower seasonal build-up of inventory, a decrease in accounts receivable, an increase in our accounts payable, partially offset by a higher intercompany balance with Hoop.

Cash provided by operating activities of discontinued operations was $20.4 million in the thirty-nine weeks ended November 1, 2008 compared to cash used by operating activities of discontinued operations of $49.1 million in the thirty-nine weeks ended November 3, 2007. The increase in cash provided by operating activities of discontinued operations in the thirty-nine weeks ended November 1, 2008 reflects the Private Sale of Hoop’s assets, the elimination of prepayments and reduced payments of liabilities (including intercompany liabilities) due to the Filings. During the thirty-nine weeks ended November 3, 2007, cash used by operating activities was primarily due to Hoop’s net loss, the seasonal build-up of inventory and the payment of intercompany balances, partially offset by an increase in accounts payable.

Cash flows used in investing activities were $56.1 million in the thirty-nine weeks ended November 1, 2008 compared to $85.3 million during the thirty-nine weeks ended November 3, 2007.

Cash flows used in investing activities of continuing operations were $36.9 million and $98.1 million in the thirty-nine weeks ended November 1, 2008 and the thirty-nine weeks ended November 3, 2007, respectively. During the thirty-nine weeks ended November 1, 2008, our lower cash flows used in investing activities of continuing operations reflect lower capital expenditures as well as proceeds from the sale of a store lease. During the thirty-nine weeks ended November 3, 2007, cash flows used in investing activities on capital expenditures were partially offset by a net sale of short-term investments. The number of new store openings has a significant impact on our cash flows used in investing activities. During the thirty-nine weeks ended November 1, 2008, we opened 22 stores compared to 47 new store openings in the thirty-nine weeks ended November 3, 2007. Additionally, capital expenditures in the thirty-nine weeks ended November 3, 2007 included expenditures made for our new distribution center in Fort Payne, Alabama, which was completed at the end of the second quarter of fiscal 2007, and the Emerson office facility. We decided not to proceed with the Emerson office facility and fully impaired the assets associated with the building in the fourth quarter of fiscal 2007, but we are still obligated under the operating leases.

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Cash flows used in investing activities of discontinued operations were $19.2 million in the thirty-nine weeks ended November 1, 2008 compared to cash provided by investing activities of $12.8 million in the thirty-nine weeks ended November 3, 2007. During the thirty-nine weeks ended November 1, 2008, cash flows used in investing activities of discontinued operations reflected the restriction of all cash to settle liabilities in bankruptcy and payments of capital expenditures, partially offset by the proceeds from the Private Sale. During the thirty-nine weeks ended November 3, 2007, cash flows provided by investing activities of discontinued operations reflected a $28.3 million net sale of short term investments, partially offset by $15.5 million in capital expenditures.

Cash flows used in financing activities were $3.8 million in the thirty-nine weeks ended November 1, 2008 compared to $108.9 million provided by financing activities in the thirty-nine weeks ended November 3, 2007.

Cash flows provided by financing activities of continuing operations were $8.1 million during the thirty-nine weeks ended November 1, 2008 compared to $96.0 million during the thirty-nine weeks ended November 3, 2007. In the thirty-nine weeks ended November 1, 2008, cash flows provided by financing activities of continuing operations reflected $85 million of proceeds received from the Note Purchase Agreement, $4.7 million of proceeds from the exercise of stock options partially offset by $69.6 million of net repayments under our credit facility, an $8.3 million capital contribution to our subsidiary in bankruptcy and $3.8 million of deferred financing costs associated with the Note Purchase Agreement. During the thirty-nine weeks ended November 3, 2007, cash flows provided by financing activities reflected $96.0 million of net borrowings under our credit facility. In the thirty-nine weeks ended November 3, 2007, there were no stock option exercises due to the suspension of such activity during the Company’s stock option investigation.

During the thirty-nine weeks ended November 1, 2008, cash flows used in financing activities of discontinued operations were $11.9 million and reflected the net repayment of the DIP Credit Facility and deferred financing fees paid to terminate the Amended Hoop Loan Agreement and to establish the DIP Credit Facility, partially offset by the capital contribution from the parent company. During the thirty-nine weeks ended November 3, 2007, cash flows provided by financing activities of discontinued operations were $12.9 million of net borrowings under the Amended Hoop Loan Agreement.

We anticipate that total capital expenditures for continuing operations will be approximately $70 million in fiscal 2008. Approximately $55 million of our planned capital expenditures will provide for the opening of approximately 27 new stores and 16 store remodelings at The Children’s Place. We also anticipate receiving approximately $12 million in lease incentives in fiscal 2008. The remainder of our 2008 capital expenditure budget will be utilized for information technology and other initiatives.

Our ability to meet our capital requirements in fiscal 2008 will depend on our ability to generate cash flows from operations and seasonal borrowings under our credit facilities. Cash flow generated from operations will depend on our ability to achieve our financial plans. We believe that the proceeds from our Note Purchase Agreement, cash on hand, cash generated from operations and funds available to us through our credit facility will be sufficient to fund our capital and other cash flow requirements over the next 12 months.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

In the normal course of business, the Company’s financial position and results of operations are routinely subject to market risk associated with interest rate movements on borrowings and investments and currency rate movements on non-U.S. dollar denominated assets, liabilities and income. The Company utilizes cash from operations and short-term borrowings to fund its working capital and investment needs. Cash, cash equivalents and investments are normally invested in short-term financial instruments that will be used in operations within a year of the balance sheet date. Because of the short-term nature of these investments, changes in interest rates would not materially affect the fair value of these financial instruments.

The Company has operations in Canada and Asia. While currency rates with the Canadian dollar have generally moved in the Company’s favor over the past three years, currency rates in the thirteen and thirty-nine weeks ended November 1, 2008 moved against the Company. Foreign currency fluctuations could have a material adverse effect on our business and results of operation.

The Company’s revolving credit facility with Wells Fargo provides a source of financing for its working capital requirements. The Company’s revolving credit facility bears interest at the Company’s option at either a floating rate equal to the prime rate or a floating rate equal to the prime rate plus a pre-determined spread. As a result, the Company’s interest expense is subject to fluctuations in the prime rate and LIBOR rate. As of November 1, 2008, the Company had no

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Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Management, including our principal executive officers (our Interim Chief Executive Officer and our Executive Vice President—Finance and Administration, who is also our principal financial officer), evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of November 1, 2008. Based on that evaluation, our principal executive officers and principal financial officer concluded that our disclosure controls and procedures were effective as of November 1, 2008 to ensure that all information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding disclosure.

The Company’s management, including our principal executive officers (our Interim Chief Executive Officer and our Executive Vice President—Finance and Administration, who is also our principal financial officer), does not expect that our disclosure controls and procedures or our internal controls will prevent all error and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during our most recently completed fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

During the thirty-nine weeks ended November 1, 2008, we exited Disney Store operations and Disney Store business has been classified as discontinued operations in accordance with the generally accepted accounting principles. This change had no material impact on our internal controls over financial reporting.

Part II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

We are involved in various legal proceedings arising in the normal course of business and reserve for litigation settlements and contingencies when we can determine that an adverse outcome is probable and can reasonably estimate associated losses. Estimates are adjusted as facts and circumstances require. In the opinion of management, any ultimate liability arising out of such proceedings will not have a material adverse effect on the Company’s financial condition.

On September 29, 2006, the Division of Enforcement of the SEC informed us that it had initiated an informal investigation into our stock option granting practices. In addition, the Office of the U.S. Attorney for the District of New Jersey has initiated an investigation into our option granting practices. We have cooperated with these investigations and have briefed both authorities on the results of an investigation conducted by a sub-committee appointed by the Board of Directors. There have been no developments in these matters since that time.

On January 17, 2007, a stockholder derivative action was filed in the United States District Court, District of New Jersey against certain current members of the Board of Directors and certain current and former senior executives. The Company has been named as a nominal defendant. The complaint alleges, among other things, that certain of our current and former officers and directors (i) breached their fiduciary duties to the Company and its stockholders and were unjustly enriched by improperly backdating certain grants of stock options to officers and directors of the Company, (ii) caused the Company to file false and misleading reports with the SEC, (iii) violated the Securities Exchange Act of 1934 (the “Exchange Act”) and common law, (iv) caused the Company to issue false and misleading public statements and (v) were negligent and abdicated their responsibilities to the Company and its stockholders. The complaint sought money damages, an accounting by the defendants for the proceeds of sales of any allegedly backdated stock options, and the costs and disbursements of the lawsuit, as well as equitable relief. The plaintiff filed amended complaints adding, among other things, a claim for securities fraud under SEC rule 10b-5 and additional defendants and claims. In May 2008, the parties entered into a stipulation

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settlement to resolve this action, which settlement was approved by the court on July 21, 2008. The only monetary portion of the settlement was to pay $0.7 million of attorneys’ fees and reimbursement of expenses to plaintiffs’ counsel. The majority of this cost was covered by the Company’s insurance.

On September 21, 2007 a second stockholder class action was filed in the United States District Court, Southern District of New York against the Company and certain of its current and former senior executives. The complaint alleges, among other things, that certain of the Company’s current and former officers made statements to the investing public which misrepresented material facts about the business and operations of the Company, or omitted to state material facts required in order for the statements made by them not to be misleading, causing the price of the Company’s stock to be artificially inflated in violation of provisions of the Exchange Act, as amended. It alleges that subsequent disclosures establish the misleading nature of these earlier disclosures. The complaint seeks monetary damages plus interest as well as costs and disbursements of the lawsuit. On October 10, 2007, a third stockholder class action was filed in the United States District Court, Southern District of New York, against the Company and certain of its current and former senior executives. This complaint alleges, among other things, that certain of the Company’s current and former officers made statements to the investing public which misrepresented material facts about the business and operations of the Company, or omitted to state material facts required in order for the statements made by them not to be misleading, thereby causing the price of the Company’s stock to be artificially inflated in violation of provisions of the Exchange Act, as amended. According to this complaint, subsequent disclosures establish the misleading nature of these earlier disclosures. This complaint seeks, among other relief, compensatory damages plus interest, and costs and expenses of the lawsuit, including counsel and expert fees. These two actions have been consolidated and the plaintiff filed a consolidated amended class action complaint on February 28, 2008. The Company’s motion to dismiss was denied by the court on July 18, 2008. While we believe there are valid defenses to the claims and we will defend ourselves vigorously, no assurance can be given as to the outcome of this litigation. The litigation could distract our management and directors from the Company’s affairs, the costs and expenses of the litigation could unfavorably affect our net earnings, and an unfavorable outcome could adversely affect the reputation of the Company.

On or about July 12, 2006, Joy Fong, a former Disney Store manager in the San Francisco district, filed a lawsuit against the Company and its subsidiary Hoop Retail Stores, LLC in the Superior Court of California, County of Los Angeles. The lawsuit alleges violations of the California Labor Code and California Business and Professions Code and sought class action certification on behalf of Ms. Fong and other individuals similarly situated. We filed our answer on August 11, 2006 denying any and all liability, and on January 14, 2007, Ms. Fong filed an amended complaint, adding Disney as a defendant. We believe we have meritorious defenses to the claims. Effective as of March 26, 2008, the prosecution of this lawsuit against Hoop was stayed under the automatic stay provisions of the U.S. Bankruptcy Code by reason of Hoop’s petition for relief filed that same day. The case is currently proceeding against the other defendants. While we believe there are valid defenses to the claims, we cannot reasonably estimate the amount of loss or range of loss that might be incurred as a result of this matter.

On or about September 28, 2007, Meghan Ruggiero filed a complaint against the Company and its subsidiary, Hoop Retail Stores, LLC, in the United States District Court, Northern District of Ohio on behalf of herself and other similarly situated individuals. The lawsuit alleges violations of the Fair and Accurate Credit Transactions Act (“FACTA”) and seeks class certification, an award of statutory and punitive damages, attorneys’ fees and costs, and injunctive relief. The plaintiff filed an amended complaint on January 25, 2008. Effective as of March 26, 2008, the prosecution of this lawsuit against Hoop was stayed under the automatic stay provisions of the U.S. Bankruptcy Code by reason of Hoop’s petition for relief filed that same day. While we believe there are valid defenses to the claims and will defend ourselves vigorously, no assurance can be given as to the outcome of this litigation.

Item 6. Exhibits.

Exhibits

Exhibit No.		Description of Document

31.1(+)		Certificate of Principal Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934.

31.2(+)		Certificate of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934.

32(+)		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(+) Filed herewith.

	Thirty-nine Weeks Ended
	November 1, 2008		November 3, 2007
OTHER CASH FLOW INFORMATION:
Net cash paid during the year for income taxes	$	4,012	$	40,237
Cash paid during the year for interest	4,507		973
Increase (decrease) in accrued purchases of property and equipment, lease acquisition and software costs	3,880		(7,547		)
Land received for distribution center	—		1,800

	THE CHILDREN’S PLACE
	RETAIL STORES, INC.


Date: December 9, 2008	By:	/S/ CHARLES CROVITZ
	CHARLES CROVITZ
	Interim Chief Executive Officer
	(A Principal Executive Officer)


Date: December 9, 2008	By:	/S/ SUSAN RILEY
	SUSAN RILEY
	Executive Vice President, Finance and Administration

	(A Principal Executive Officer and
	Principal Financial Officer)

PART I – FINANCIAL INFORMATION		1

Item 1.	Condensed Consolidated Financial Statements:	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	36

PART II – OTHER INFORMATION		36

Item 1.	Legal Proceedings	36
Item 6.	Exhibits	37
Signatures		38