The following is a discussion of the financial condition and results of operations of Fossil, Inc. and its wholly and majority-owned subsidiaries for the thirteen week period ended April 4, 2009 (the "First Quarter") as compared to the thirteen week period ended April 5, 2008 (the "Prior Year Quarter"). This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes thereto.

General

We are a global design, marketing and distribution company that specializes in consumer fashion accessories. Our principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, cold weather accessories, footwear and apparel. In the watch and jewelry product category, we have a diverse portfolio of globally recognized owned and licensed brand names under which our products are marketed. Our products are distributed globally through various distribution channels including wholesale, export and direct to the consumer at varying price points to service the needs of our customers, whether they are value-conscious or luxury oriented. Based on our extensive range of accessory products, brands, distribution channels and price points, we are able to target style-conscious consumers across a wide age spectrum on a global basis.

Domestically, we sell our products through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores, owned retail and factory outlet stores, mass market stores and through our FOSSIL® catalog and website. Our wholesale customer base includes, among others, Neiman Marcus, Nordstrom, Macy's,

Dillard's, JCPenney, Kohl's, Sears, Wal-Mart and Target. We also sell our products in the United States through a network of company-owned stores that included 126 retail stores located in premier retail sites and 71 outlet stores located in major outlet malls as of April 4, 2009. In addition, we offer an extensive collection of our FOSSIL brand products through our catalog and on our website, www.fossil.com, as well as proprietary and licensed watch and jewelry brands through other managed and affiliated websites.

Internationally, our products are sold to department stores, specialty retail stores and specialty watch and jewelry stores in over 100 countries worldwide through 23 company-owned foreign sales subsidiaries and through a network of 59 independent distributors. Our products are distributed in Africa, Asia, Australia, Europe, Central and South America, Canada, the Caribbean, Mexico, and the Middle East. Our products are offered on airlines, cruise ships and in international company-owned retail stores, which included 107 accessory retail stores, 12 multi-brand stores and 9 outlet stores in select international markets as of April 4, 2009. Our products are also sold through independently-owned and franchised FOSSIL retail stores and kiosks in certain international markets. In addition, we offer an extensive collection of our FOSSIL brand products on our websites in certain countries.

Our business is subject to global economic cycles and retail industry conditions. Purchases of discretionary fashion accessories, such as our watches, handbags, sunglasses and other products, tend to decline during recessionary periods when disposable income is low and consumers are hesitant to use available credit. The global economic environment has deteriorated over the last several quarters. The decreased values in real estate, reduced credit lending by banks, solvency concerns of major financial institutions, increases in unemployment levels and recent significant declines and volatility in the global financial markets have negatively impacted the level of consumer spending for discretionary items. This has affected our business as it is dependent on consumer demand for our products. In North America, we are experiencing a significant slowdown in customer traffic and a highly promotional environment. These same conditions are spreading to many international markets. If the global macroeconomic environment continues to be weak or deteriorates further, there will likely be a negative effect on our revenues and earnings across most of our segments for fiscal year 2009 and potentially continuing into fiscal year 2010.

Future sales and earnings growth are also contingent upon our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner while continuing to develop innovative products in the respective markets in which we compete. As is typical with new products, market acceptance of new designs and products that we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured.

The majority of our products are sold at price points ranging from $50 to $500. Although the current economic environment is expected to negatively impact consumer discretionary spending and, ultimately, our net sales, we believe that the price/value relationship of our products will allow us to maintain our market share in those markets in which we compete. Additionally, we are focusing on our opening price points across all brands and categories as we believe consumers of discretionary accessory goods are looking for even more value for their dollars and looking to spend less money than in the past. Historically, during recessionary periods, the strength of our balance sheet, our strong operating cash flow and the relative size of our business with our wholesale customers, in comparison to our competitors, have allowed us to weather such recessionary periods for longer periods of time and generally results in market share gains to us.

Our international operations are subject to many risks, including foreign currency. Generally, a strengthening of the U.S. dollar against currencies of other countries in which we operate will reduce the translated amounts of sales and operating expenses of our subsidiaries, which results in a reduction of our consolidated operating income. We anticipate that the current strengthening of the U.S. dollar against the currencies of international markets in which we operate will significantly impact our reported sales growth and earnings for the remainder of fiscal year 2009, as compared to fiscal year 2008, particularly during the second and third quarters of 2009.

For a more complete discussion of the risks facing our business, see "Part I, Item 1A" of our Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

Significant Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to product returns, bad debts, inventories, long-lived asset impairment, impairment of goodwill and income taxes. We base our estimates and judgments on

historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to the significant accounting policies disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K filed for the fiscal year ended January 3, 2009.

New Accounting Standards

In April 2009, the Financial Accounting Standards Board ("FASB") issued Staff Position No. FAS 115-2 and FAS 124-2, and Emerging Issues Task Force ("EITF") 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments ("FSP 115-2"). FSP 115-2 provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. FSP 115-2 applies to debt securities, and is effective for periods ending after June 15, 2009. The Company does not believe this guidance will have a significant impact on our consolidated results of operations or financial condition.

In April 2009, the FASB released Staff Position FAS No. 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed ("FSP 157-4"). FSP 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP 157-4 provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed. FSP 157-4 is applied to all assets and liabilities (i.e. financial and non-financial) and will require enhanced disclosures. This standard is effective for periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company does not believe this guidance will have a significant impact on our consolidated results of operations or financial condition.

In April 2009, the FASB released Staff Position No. FAS 107-1 and Accounting Principles Board ("APB") Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments("FSP107-1"). FSP 107-1 amends FASB Statement No. 107, Disclosures about Fair Values of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. FSP 107-1 also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements. FSP 107-1 is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company does not believe this guidance will have a significant impact on our consolidated results of operations or financial condition.

Results of Operations

The following table sets forth, for the periods indicated, (i) the percentages of our net sales represented by certain line items from our condensed consolidated statements of income and comprehensive income and (ii) the percentage changes in these line items between the periods indicated.

RESULTS OF OPERATIONS



                                                    Percentage of Net Sales      Percentage
                                                    For the 13 Weeks Ended       Change from
                                                 April 4, 2009   April 5, 2008      2008

Net sales                                                100.0 %         100.0 %        (9.3 )%
Cost of sales                                             47.6            45.5          (5.1 )
Gross profit                                              52.4            54.5         (12.8 )

Operating expenses:
Selling and distribution                                  33.5            29.6           2.6
General and administrative                                11.6            11.2          (5.8 )
Operating income                                           7.3            13.7         (51.5 )
Interest expense                                             -               -         (68.5 )
Other income (expense) - net                               1.5               -             -
Income before income taxes                                 8.8            13.7         (42.0 )
Provision for income taxes                                 3.1             5.0         (44.5 )
Net income                                                 5.7             8.7         (40.6 )
Net income attributable to noncontrolling
interest, net of tax                                       0.3             0.2          25.9
Net income attributable to Fossil, Inc.                    5.4 %           8.5 %       (42.7 )%

Net Sales. The following table sets forth consolidated net sales by segment (excluding corporate, which had no net sales), and components of certain segments, and the percentage relationship of the components to consolidated net sales for the periods indicated (in millions, except percentage data):

                                                     Amounts                       Percentage of Total
                                              For the 13 Weeks Ended              For the 13 Weeks Ended
                                         April 4, 2009      April 5, 2008     April 4, 2009    April 5, 2008

International-Wholesale:
Europe                                  $         103.4    $         130.1             32.0 %           36.6 %
Other                                              52.4               65.7             16.2 %           18.4 %
Total International-Wholesale                     155.8              195.8             48.2 %           55.0 %

United States-Wholesale:
Watch products                                     49.1               49.6             15.2 %           13.9 %
Other products                                     51.6               55.3             16.0 %           15.5 %
Total United States-Wholesale                     100.7              104.9             31.2 %           29.4 %

Direct to Consumer                                 66.5               55.5             20.6 %           15.6 %

Total net sales                         $         323.0    $         356.2            100.0 %          100.0 %

The following table is intended to illustrate by factor the total of the percentage change in sales by segment and on a consolidated basis:

Analysis of Percentage Change in Sales during the First Quarter Versus Prior Year Quarter

                Attributable to Changes in the Following Factors



                                Exchange    Organic
                                 Rates      Growth     Total Change
Europe-Wholesale                   (14.2 )%    (6.3 )%        (20.5 )%
Other International-Wholesale       (5.9 )%   (14.3 )%        (20.2 )%
United States-Wholesale              0.0 %     (4.0 )%         (4.0 )%
Direct to Consumer                  (5.8 )%    25.6 %          19.8 %
Total                               (7.2 )%    (2.1 )%         (9.3 )%

Europe Wholesale Net Sales. The following discussion excludes the impact on sales growth attributable to foreign currency rate changes as noted in the above table. European net sales decreased 6.3% principally due to sales volume declines in FOSSIL and EMPORIO ARMANI® watches and jewelry and DKNY® watches. These decreases were partially offset by sales volume growth in BURBERRY® watches and sales from DKNY® jewelry that was launched during the third quarter of 2008. FOSSIL watches and jewelry declined 7.8% and 21.2%, respectively, while EMPORIO ARMANI watches and jewelry decreased 11.8% and 37.5%, respectively. These sales volume declines are primarily due to the economic downturn which has led to reduced levels of orders from our European wholesale customer base. BURBERRY sales volume rose 44.9%, representing increases across most major European markets in which we operate, as a result of the strong positive response to the new spring styles introduced during the First Quarter. DKNY jewelry contributed $2.1 million to net sales during the First Quarter.

Other International Wholesale Net Sales. The following discussion excludes the impact on sales growth attributable to foreign currency rate changes as noted in the above table. Other international wholesale sales include sales from our Asia Pacific, Mexico and Canada subsidiaries and export sales from the United States. Other international wholesale sales declined 14.3% during the First Quarter primarily as a result of declines in shipments to third-party distributors. We believe sales declines are related to deteriorating economic conditions and currency declines in many of the regions in which our third-party distributors distribute our brands. Sales from our Asia Pacific wholesale operations, excluding shipments to third-party distributors, increased by 7.1% as we continued to expand our offerings and market share despite difficult economic conditions across much of this region. Our growth in Asia during the First Quarter principally related to further penetration into our newer markets of China, Korea and India as well as a 12% increase generated in our Australian wholesale business primarily related to sales volume growth in our women's leathers business.

United States Wholesale Net Sales. U.S. wholesale watch net sales decreased 1.0% during the First Quarter representing declines across most major brands, we believe primarily as a result of the weak economic environment. However, we did experience sales volume growth in our MICHAEL KORS® and mass market offerings. MICHAEL KORS sales volume increased 85.8% as a result of further penetration in the department store channel and new door growth. The 22.5% increase in the mass market business primarily reflects a timing shift of approximately $2.0 million of shipments from the second quarter of fiscal 2009 into the First Quarter in comparison to the comparable Prior Year Quarter. The domestic accessory businesses experienced a sales volume decline of 6.7% which is primarily attributable to reduced eyewear and women's handbag shipments, partially offset by sales volume growth in FOSSIL accessory jewelry and sales related to the launch of our FOSSIL men's footwear line. We primarily attribute the sales volume declines in eyewear and women's handbags to the challenging economic environment resulting in decreased consumer demand and retailers lowering inventory levels. Additionally, eyewear sales volume was unfavorably impacted by certain of our customers consolidating vendors in their sunglass departments and discontinuing the RELIC® men's eyewear line. FOSSIL accessory jewelry sales increased 86.7% principally as a result of increased penetration in the department store channel as well as an increase in the number of customers we sell to in comparison to the Prior Year Quarter. FOSSIL men's footwear contributed $0.8 million to the First Quarter.

Direct to Consumer Net Sales. The following discussion excludes the impact on sales growth attributable to foreign currency rate changes as noted in the above table. Direct to consumer sales increased 25.6% in comparison to the Prior Year Quarter, primarily as a result of a 31.4% increase in the average number of company-owned stores open during the First Quarter and constant dollar comparable store sales gains of 5.1%. Net sales through our e-commerce businesses increased 26.4% during the First Quarter principally as a result of a 62.5% increase in sales from our German website and a 16.6% increase from our U.S. based e-commerce site. Comparable store sales related to our global full price accessory concept increased by 4.5% for the First Quarter. We ended the First Quarter with 325 stores, including 195 full price accessory stores, 107 of which are outside the U.S., 80 outlet locations, including 9 outside the U.S., 33 apparel stores, and 17 multi-brand stores, including 12 outside the U.S. This compares to 250 stores at the end of the Prior Year Quarter, which included 118 full price accessory stores, 60 located outside the U.S., 81 outlet locations, including 6 outside the U.S., 33 apparel stores, and 18 multi-brand stores, including 13 outside the U.S. During the First Quarter, we opened 7 new stores and closed 6. During fiscal 2009, we anticipate opening approximately 40 to 50 additional retail stores globally. This growth will be almost exclusively related to our FOSSIL full price accessory concept with more stores to be opened in international markets than in the U.S.

A store is included in comparable store sales in the thirteenth month of operation. Stores that experience a gross square footage increase of 10% or more due to an expansion and/or relocation are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation.

Gross Profit. Gross profit of $169.4 million represents a decrease of 12.8% over the $194.3 million in the Prior Year Quarter as a result of a decline in net sales and gross profit margin contraction. Gross profit margin decreased 210 basis points to 52.4% in the First Quarter compared to 54.5% in the Prior Year Quarter. The decrease in gross profit margin was primarily driven by a stronger U.S. dollar, which impacted gross profit margin unfavorably by over 300 basis points, and an increase in low margin sales through off-price liquidation channels in comparison to the Prior Year Quarter. Partially offsetting the decline in gross profit margin was an increase in the sales mix of higher margin direct to consumer segment sales. During the First Quarter, direct to consumer sales increased to 20.6% of consolidated net sales in comparison to 15.5% of consolidated net sales in the Prior Year Quarter. Gross profit margin was also favorably impacted by a reduction in shipments to third-party distributors that generate lower gross profit margins than our consolidated historical gross profit margin.

Operating Expenses. First Quarter operating expenses as a percentage of net sales increased to 45.1% compared to 40.7% in the Prior Year Quarter. Total operating expenses increased by approximately $0.5 million in the First Quarter to $145.6 million and included a $9.6 million decrease from the translation of foreign-based expenses as a result of the stronger U.S. dollar as compared to the Prior Year Quarter. On a constant dollar basis, the increase in operating expenses was primarily driven by an $11.4 million increase in our direct to consumer segment as a result of carrying an additional eighty plus new stores opened during fiscal 2008 and the First Quarter. Operating expenses related to our wholesale operations and corporate department decreased by approximately $1.3 million primarily due to decreased payroll expenses despite $1.5 million of severance charges during the First Quarter and continued expansion of infrastructure in China, Korea and India.

The following table sets forth operating expenses on a segment basis and the relative percentage of operating expenses to net sales for each segment for the periods indicated (in millions, except for percentage data):

                                                Amounts                     Percentage of Net Sales
                                         For the 13 Weeks Ended              For the 13 Weeks Ended
                                    April 4, 2009      April 5, 2008     April 4, 2009    April 5, 2008
Europe-Wholesale                   $          34.8    $          39.3             33.7 %           30.2 %
Other International-Wholesale                 17.1               16.9             32.6 %           25.7 %
United States-Wholesale                       28.5               31.4             28.3 %           29.9 %
Direct to Consumer                            47.3               38.4             71.1 %           69.2 %
Corporate                                     17.9               19.1                -                -
Total                              $         145.6    $         145.1             45.1 %           40.7 %

Operating Income. Operating income decreased to 7.4% of net sales in the First Quarter compared to 13.8% of net sales in the Prior Year Quarter as a result of a decline in net sales, decreased gross profit margin and higher operating expenses as a percentage of sales. During the First Quarter, operating income was negatively impacted by approximately $14.5 million in comparison to the Prior Year Quarter as a result of the translation of foreign-based sales and expenses into U.S. dollars.

Other Income (Expense) - Net. Other income (expense) increased favorably by $4.6 million during the First Quarter in comparison to the Prior Year Quarter. This increase was primarily driven by foreign currency transaction gains as opposed to currency losses in the Prior Year Quarter, as a result of settling a portion of inventory purchases by utilizing forward contracts previously entered into by us at forward rates above the relative prevailing currency rate at the time of settlement. These gains were partially offset by decreased interest income as a result of lower average invested cash balances and reduced yields earned on these balances in comparison to the Prior Year Quarter.

Provision For Income Taxes. Our income tax expense net of amounts attributable to noncontrolling interest for the First Quarter was $9.3 million, resulting in an effective income tax rate of 35.0%. For the Prior Year Quarter, income tax expense was $17.2 million, resulting in an effective rate of 36.3%. The lower effective rate for the First Quarter, as compared to the Prior Year Quarter, is the result of the recognition of previously unrecognized tax benefits due to the settlement of foreign tax audits. We estimate our fiscal year 2009 effective tax rate will approximate 37% to 38%, excluding any discrete events.

Net Income Attributable to Fossil, Inc. First Quarter net income attributable to Fossil, Inc. decreased by 42.7% to $17.3 million, or $0.26 per diluted share, inclusive of an unfavorable $0.07 per diluted share impact related to the stronger U.S. dollar.

2009 Net Sales and Earnings Estimates. As we continue to grow our retail store base and e-commerce businesses, sales from our direct to consumer segment increase as a percentage of the total sales mix, benefiting our profitability in the fourth quarter, generally at the expense of the first and second quarter when, due to seasonality, it is more difficult to leverage direct to consumer expenses against direct to consumer sales. Additionally, our reported net sales and operating income for the second and third quarters of fiscal year 2009 are expected to be negatively impacted in comparison to the same periods of fiscal year 2008 as the U.S. dollar has significantly strengthened against other major currencies since September of 2008. As a result, we are currently estimating reported net sales for the second quarter of fiscal 2009 to decrease 8% to 10%, with constant dollar sales expected to be in a range from flat to minus 2%. Second quarter reported diluted earnings per share are expected to be in a range of $0.18 to $0.20, despite an expected $0.13 per share negative impact to reported earnings as a result of the stronger U.S. dollar in comparison to the Prior Year Quarter. Our 2008 second quarter diluted earnings per share was $0.36. For fiscal year 2009, we are currently estimating reported net sales to decrease in a range from 5% to 8%, with constant dollar sales expected to be in a range from minus 3% to positive 1%. Fiscal year 2009 diluted earnings per share are expected to be in a range of $1.50 to $1.70 as compared to $2.02 diluted earnings per share for fiscal 2008. This guidance is based upon currency rates slightly below the current prevailing rate of the U.S. dollar compared to other foreign currencies for countries in which we operate.

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