UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended February 2, 20021, 2003

OR

Commission file number 0-18632

THE WET SEAL, INC.

(Exact name of registrant as specified in its charter)

(949) 583-9029

(Registrant'sRegistrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:

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  ýx    No  o¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K.    Yes  ýx    No  o¨

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

The aggregate market value of voting stock held by non-affiliates as of March 14, 200213, 2003 was approximately $497,987,000$178,140,000 based on the closing sale price of $33.70$7.21 per share as reported on the NasdaqNASDAQ National Market on such date.date.

The number of shares outstanding of the registrant'sregistrant’s Class A Common Stock and Class B Common Stock, par value $.10 per share, at March 14, 200213, 2003 was 16,849,17624,871,386 and 3,202,833,4,704,249, respectively. There were no shares of Preferred Stock, par value $.01 per share, outstanding at March 14, 2002.13, 2003.

DOCUMENTS INCORPORATED BY REFERENCE:

PART III incorporates information by reference from the Registrant'sRegistrant’s definitive Proxy Statement for its Annual Meeting of Stockholders'Stockholders’ to be filed with the Commission within 120 days of February 2, 2002.1, 2003.

PART I

Item 1.    Business

General

Founded in 1962 as a Delaware corporation, we are a national specialty retailer of fashionable and contemporary apparel and accessory items designed for female customers with a young, active lifestyle. As of March 14, 2002,13, 2003, we operated 572608 retail stores in 4446 states, Puerto Rico and Washington D.C. under the names Wet Seal®Seal^®, Contempo Casuals®Casuals^®, Arden B.^™ and Zutopia®Zutopia^®. Of the 572608 stores, 405452 were Wet Seal locations, 5126 were Contempo Casuals locations, 85100 were Arden B. locations and 3130 were Zutopia locations. Both the Wet Seal and Contempo Casuals stores are merchandised similarly and target the same fashion-conscious junior customer by providing a balance of moderately priced fashionable brand name and company-developed apparel and accessories. During fiscal 2001,2002, we converted 15222 of the Contempo Casuals locationsstores to the Wet Seal name in order to build a stronger brand presence for the Wet Seal. We believe that our company-developed apparel differentiates us from our competitors.

In the fourth quarter of fiscal 1998, we opened the first Arden B. location. Arden B. stores cater to the fashionable, sophisticated and contemporary customer. Arden B. stores offer a collection of fashion separates and accessories for all facets of the customer'scustomer’s lifestyle: everyday, wear-to-work, special occasion and casual, allpredominantly under the "Arden“Arden B."” brand name.

In the third quarter of fiscal 1999, we launched WetSeal.com, an online store, makingoffering Wet Seal merchandise available for direct retail sales to customers over the Internet. The online store was designed as an extension of the in-store experience, and offers a wide selection of our merchandise. Our online business was expanded August of 2002 to include ArdenB.com, offering Arden B. merchandise over the internet.

In the first quarter of fiscal 2001, we acquired the Zutopia brand name and 18 retail stores. Zutopia caters to the "tween"“tween” customer, those between the ages of 5 toand 12. The Zutopia concept complements the Wet Seal concept by introducing fun and fashionable female clothing and accessories at a prime age, creating a natural progression to the Wet Seal concept as the "tween"“tween” becomes a teenager.

 In

At the fallend of the second quarter of fiscal 2002, we are planning to launchlaunched the Wet Seal Catalogcatalog for the back-to-school season and a proprietary credit cardagain in the fourth quarter for the holiday season in an effort to further build the Wet Seal brand and enhance our relationship with our customers. We also believe these actions will increase the opportunity for sales to new and existing customers. However, due to relatively high costs and disappointing sales results, we are reevaluating the future of the catalog business.

Design, Buying and Product Development

Our experienced design and buying teams are responsible for identifying evolving fashion trends, and then developing themes to guide our merchandising strategy. Each retail concept has a separate buying team. The merchandising team for each retail concept develops fashion themes and strategies through the references of fashion services and publications, shopping the European market, shopping the appropriate domestic vendor base and through customer responses to current trends in each division. After selecting fashion themes to promote, the design and buying teams work closely with vendors to modify colors, materials and designs and create images consistent with the themes for our product offerings. Additionally, we have increased our focus on developing exclusive designs and brands to reinforce the fashion statements of our merchandise offerings, as well as to increase the perception of Wet Seal, Contempo Casuals, Arden B., and Zutopia as destination stores for the customer.

Sourcing and Vendor Relationships

We purchase our merchandise from both domestic and foreign vendors. Merchandise relating to approximately 18%Approximately 15% of our retail receipts isare imported from foreign vendors. Although in fiscal 20012002 no single vendor provided more than 10%5% of

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our merchandise, and only one vendor provided more than 5%, management believes we are the largest customer of many of our smaller vendors. Our

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management believes that our importance to these vendors allows us to provide significant input into their design, manufacturing and distribution processes, and has enabled us to negotiate favorable terms with such vendors. Quality control is monitored carefully at the distribution points of our largest vendors and manufacturers, and all merchandise is inspected upon arrival at our Foothill Ranch, California distribution center.

We do not maintain any long-term or exclusive commitments or arrangements to purchase merchandise from any single supplier. We believe we have a good relationship withsupplier and there are many vendors who could supply our suppliers and that, as the number of our stores increases, subject to the discussion above, there will continue to be adequate sources to produce a sufficient supply of quality goods in a timely manner and on satisfactory terms.merchandise.

Allocation and Distribution

Our merchandising effort primarily focuses on maintaining a regular flow of fresh, fashionable merchandise into our stores. Successful execution depends in large part on our integrated planning, allocation and distribution functions. By working closely with District and Regional Directors and merchandise buyers,Merchandise Buyers, our team of planners and allocators manage inventory levels and coordinate the allocation of merchandise to each of our stores based on sales volume, climate and other factors that may influence an individual store'sstore’s product mix.

All merchandise for retail stores is received from vendors at our Foothill Ranch, California distribution facility, where items are inspected for quality and fit and prepared for shipping to our stores. Merchandise for the e-commerce web-site and catalog is distributed through a third party fulfillment house.center. We ship all of our merchandise to our stores by common carrier. Consistent with our goal of maintaining the freshness of our product offerings, we ship new merchandise to each storestores daily, and markdowns are taken regularly to effect the rapid sale of slow-moving inventory. Merchandise that remains unsold is periodically shipped to our clearance stores where further markdowns are taken as needed in order to move the merchandise.

Marketing, Advertising and Promotion

We believe that our fourthree brands are among our most important assets. Our ability to successfully increase brand awareness is dependent upon our ability to address the changing needs and priorities of each brand'sbrand’s target customers. We continue to invest in the development of our brands through customer research, national print advertising, in-store marketing and the maintenance of an online (internet)internet presence.

 We believe we can further enhance brand awareness by communicating on a regular basis directly with our customer base. To achieve this, we are currently planning to launch a Wet Seal Catalog this fall and introduce a proprietary credit card in conjunction with a major financial institution.

During fiscal 2002, 2001 2000 and 1999,2000, we spent 1.0%1.5%, 0.5%1.0% and 1.0%,0.5% respectively, of our sales on marketing. As aThe increase in fiscal 2002 was the result of the continued investment in national print advertising and the roll out of the new Wet Seal catalog for the back-to-school and the proprietary credit card implementation, we expect our marketing costs to increase to approximately 1.2% in fiscal 2002.holiday seasons.

We introducedoffer a frequent shopper card in our Wet Seal, Contempo Casuals and Zutopia stores, in order to develop a marketing database that helps track customers. The cards, which are sold for $20 each for Wet Seal and Contempo Casuals, and $25 each for Zutopia, entitle customers to a 10% discount on purchases made within a one-year period.an in-house loyalty program. As part of these programs,this loyalty program, sales representatives telephone selected cardholders personally to notify them of special in-store promotions, such as preferred customer sales during which cardholders receive additional incentives. Our management believes these promotions foster customer loyalty and encourage frequent visits and multiple item purchases. We also sponsor special events that focus on

In the interestsspring of 2002, we launched Seal TV, our in-house fashion and active lifestylesentertainment network designed to broadcast original programming, exclusive video footage, music videos and red carpet interviews from today’s hottest music, film and television stars in Wet Seal stores nationwide.

The new Wet Seal catalog was introduced in the fall for the back-to-school season and again in November for the holiday season as a tool to further enhance brand awareness. Due to relatively high costs and disappointing sales results, we are reevaluating the future of the catalog business.

Given the decline in sales in the latter half of 2002, we have reduced our target customers.expected advertising expenditures for fiscal 2003 in an effort to curtail costs.

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Information and Control Systems

In the fall of fiscal 2000, we implemented a new comprehensive merchandising information system to provide improved systems support for our merchandising functions. This new system serves as our central source of information regarding merchandise items, inventory management, purchasing, replenishment, receiving and distribution.

 All

In the third quarter of ourfiscal 2002, all stores havewere converted to a new point-of-sale software system, which has enhanced customer service capabilities at the store level. Our point-of-sale system is operating on in-store computer hardware and internally developed software.is networked to the central office. The system features bar-coded ticket scanning, dial-out check and credit authorization, and provides nightly polling transmittal of sales and inventory data between the stores and our corporate office. We plan to convert to aIn addition, we installed new point-of-salesales audit and financial systems software program in the fall of fiscal 2002 in order to enhance customer service capabilities at the store level.provide a foundation for future growth as well as improved financial information.

Stores and Expansion Strategy

We also make investments to enhance our customers'customers’ experience through the opening of new stores and the renovation of existing stores.

The following table sets forth the number of our stores by state or territory as of March 14, 2002:13, 2003:

During fiscal 2002,2003, we expectanticipate opening approximately 35 new stores and closing approximately 10 to open15 stores. Of the approximately 5035 new Wet Seal stores, between 15 and 20it is anticipated that about 7 will be Arden B. stores, 1 will be a Zutopia store, and 10 to 15 Zutopiathe remainder will be Wet Seal stores. We believe that the new Wet Seal locationsstores will average approximately 3,800 square feet, the new Arden B. stores will average approximately 2,800 square feet and the new Zutopia storesstore will averagebe approximately 2,600 square feet. We plan to close approximately 27 stores during fiscal 2002.

During fiscal 2002,2003, we also plan to renovate approximately 2017 stores. Of these, approximately 14 will be Wet Seal locationsstores with completlycompletely new store frontage, flooring, wall and light fixtures and video displays. The resulting image of theseremaining renovations will be for Arden B. stores that mirror a new store. stores in appearance.

Our strategy for geographic expansion is to establish a presence in a particular geographic region with a base of two or three well-performing stores. Once we have established two or three well-performing stores, we may continue expansion in that geographic region. When deciding whether to open a new store, we typically

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target regional malls as well as prime street locations in select markets. In making our selection, we evaluate, among other factors, market area, demographics, "anchor“anchor stores," store” location, the volume of consumer traffic, rent payments and other costs associated with opening a new store. The average store size we intend to consider is

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approximately 3,300 square feet. However, inIn making our decision, management reviews all leases in order to match closely the store size to the sales potential of the store.

Our ability to expand in the future will depend, in part, on general business conditions, the demand for our merchandise, theour ability to find suitable mallsmall or other locations with acceptable sites on satisfactory terms, and continued satisfactory cash flows from existing operations. Our management does not believe there are significant geographic constraints on the locations of future stores. We believe thatOur expansion plans for fiscal 2003 have been scaled back due to fiscal 2002 financial results. At such time as there are approximately 600is reasonable growth of the U.S. economy and a satisfactory level of consumer acceptance of our offering, we expect to 800 potential Wet Seal locations, between 150 and 200 potential Arden B. locations and up to 300 potential Zutopia locations throughout the nation.accelerate store openings.

We may, in limited instances and to the extent we deem advisable, seek to acquire additional businesses that complement or enhance our operations. We currently have no commitments or understandings with respect to any business opportunities of this type.

Seasonal

Our business is seasonal by nature, with the Christmas season, beginning the week of Thanksgiving and ending the first Saturday after Christmas, and the back-to-school season, beginning the last week of July and ending the first week of September, historically accounting for a large percentage of sales volume. For the past three fiscal years, the Christmas and back-to-school seasons together accounted for an average of approximately 30% of our annual sales, after adjusting for sales increases related to new stores. Our profitability depends, to a significant degree, on the sales generated during these peak periods. Any decrease in sales or margins during these periods, whether as a result of economic conditions, poor weather or other factors, beyond our control, could have a material adverse effect on our company.

Trademarks

Our primary trademarks and service marks are WET SEAL®SEAL^®, CONTEMPO CASUALS®CASUALS^®, and ZUTOPIA®ZUTOPIA^®, which are registered in the U.S. Trademark Office. We have registrations pending in a number of classes for the Arden B. trademark, which were opposed by Agnes Trouble. The litigation, which gave rise to the opposition, was settled on March 20, 2002 and will allow the registration of the Arden B. trademark in a mutually acceptable form to proceed unopposed.trademark. We also use and have registered, or have pending applications for, a number of other U.S. trademarks, including, but not limited to, A. AUBREY™AUBREY^®, ACCESSORIES FOR LIFE®LIFE^®, ACCOMPLICE®ACCOMPLICE^®, BLUE ASPHALT®ASPHALT^®, CEMENT®CEMENT^®, CLUB CONTEMPO™CONTEMPO^™, EVOLUTION NOT REVOLUTION®REVOLUTION^®, FORMULA X®X^®, MEOW GENES®GENES^®, SEAL™SEAL^™, SEAL GLAMOUR™GLAMOUR^™, SEAL T.V.TV^™, SEAL MAGAZINE™MAGAZINE^™, UNCIVILIZED®UNCIVILIZED^®, URBAN LIFE®LIFE^®, URBAN VIBE®VIBE^®, and a particular flower design. In general, the registrations for these trademarks and service marks are renewable indefinitely, as long as we continue to use the marks as required by applicable trademark law. We are the owner of an allowed and currently pending service mark application for the mark SEAL PUPS. We are not aware of any adverse claims or infringement actions relating to our trademarks or service marks, other than those noted above.marks.

Competition

The women'swomen’s retail apparel industry is highly competitive, with fashion, quality, price, location, in-store environment and service being the principal competitive factors. We compete with specialty apparel retailers, department stores and certain other apparel retailers, including Charlotte Russe, Gap, Gadzooks, Pacific Sunwear, Forever 21, Express, bebe, Rampage and Limited Too. Many of our competitors are large national chains, which have substantially greater financial, marketing and other resources than we do. While we believe we compete effectively for favorable site locations and lease terms, competition for prime locations within malls, in particular, and within other locations is intense, and we cannot assure youensure that we will be able to obtain new locations on terms favorable to us, if at all.

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Employees

As of February 2, 2002,1, 2003, we had 7,2277,361 employees, consisting of 2,3522,447 full-time employees and 4,8754,914 part-time employees. Full-time personnel consisted of 1,2741,005 salaried employees and 1,0781,442 full-time hourly employees. All part-time personnel are hourly employees. Of the totalall employees, 6,9087,015 were sales personnel and 319346 were administrative and distribution center personnel. Personnel at all levels of store operations are provided with cash incentives based upon various individual store sales targets.

All of our employees are non-union, and, in management'smanagement’s opinion, are paid competitively with current standards in the industry. We believe that our relationship with our employees is good.

Statement Regarding Forward Looking Disclosure and Risk Factors

Certain sections of this Annual Report on Form 10-K, including "Item“Item 1. Business"Business” and "Item“Item 7 Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations,"” may contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events.

Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, which include words such as "believes," "plans," "anticipates," "estimates," "expects"“believes,” “plans,” “anticipates,” “estimates,” “expects” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our company, economic and market factors and the industry in which we do business, among other things. These statements are not guaranties of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Actual events and results may differ materially from those expressed in any forward-looking statements due to a number of factors. Factors that could cause our actual performance, future results and actions to differ materially from any forward-looking statements include, but are not limited to, those discussed in Exhibit 99.1 attached to this report and elsewhere in this report.We strongly urge you to review and consider the risk factors set forth in Exhibit 99.1.

Item 2.    Properties

Our corporate headquarters areis located at 26972 Burbank, Foothill Ranch, California, and has 283,200300,180 square feet of leased office and distribution facility space, including 74,500212,544 square feet of merchandise handling and storage mezzanine space in the distribution facility and 20,50087,636 square feet of second floor office space. This lease expires on December 4, 2007. Our former distribution facility was located in Los Angeles, California and was subleased beginning in fiscal 1998 for the remainder of the lease term. The Los Angeles lease was acquired along with our acquisition of Contempo Casuals and expires on July 31, 2002.

We lease all of our stores. Lease terms for our stores are typically 10 years in length and generally do not contain renewal options. The leases generally provide for a fixed minimum rental and additional rental based on a percentpercentage of sales once a minimum sales level has been reached. When a lease expires, we generally renew that lease at current market terms. However, each renewal is based upon an analysis of the individual store'sstore’s profitability and sales potential. At the end of fiscal 2001,2002, we had 2,212,1462,279,517 square feet of leased space, not including our corporate headquarters.

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The following table sets forth information with respect to store openings and closings since fiscal 1997:1998:

1999:    We acquired 78 stores on February 1, 1999 from Britches of Georgetowne, Inc.

1998:    We acquired 19 store locations from Mothers Work, Inc. on December 1, 1998.

Item 3.    Legal Proceedings

 We were a defendant in a lawsuit entitled Agnes Trouble versus The Wet Seal, Inc. in the United States District Court for the Southern District

Kathy Bronstein was relieved of New York contending the trademarkher duties as Chief Executive Officer on February 5, 2003. Ms. Bronstein continues to be on salary pending resolution of her employment contract. There can be no assurance that Ms. Bronstein and style, agnes b., were infringed by Arden B. The litigation was settledour company will reach an amicable agreement on March 20, 2002. The settlement cost and substantially all the costs of defense were covered by insurance. We agreed to change the styling of the Arden B. logo to a mutually acceptable form. We do not believe that changing the logo will have a material adverse effect on our results of operations.her status.

 In addition, from

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. Our management believes that, in the event of a settlement or an adverse judgment of any of the pending litigations, we are adequately covered by insurance. As of March 14, 2002,13, 2003, we were not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on us.

Item 4.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders through solicitations of proxies or otherwise during the fourth quarter of the fiscal year covered by this report.

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PART II

Item 5.    Market for the Registrant'sRegistrant’s Common Equity and Related Stockholder Matters

We have two classes of common stock: Class A and Class B. Our Class A Common Stock is listed on The NASDAQ Stock Market under the symbol "WTSLA."“WTSLA.” As of March 14, 2002,13, 2003, there were 287220 stockholders of record of the Class A Common Stock. Additionally, the number of beneficial owners of our Class A Common Stock was estimated to be in excess of 5,000.4,000. The closing price of our Class A Common Stock on March 14, 200213, 2003 was $33.70.$7.21. No established public trading market exists for our Class B Common Stock. As of March 14, 2002,13, 2003, there were threefour stockholders of record of our Class B Common Stock.

The following table reflects the high and low sale prices of our Class A Common Stock as reported by NASDAQ for the last two fiscal years. Fiscal 20012002 and fiscal 20002001 sales prices have been adjusted for the three-for-two stock split effective July 24, 2001.

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May 9, 2002.

We have reinvested earnings in the business and have never paid any cash dividends to holders of our Common Stock. The declaration and payment of future dividends, which are subject to the terms and covenants contained in our bank line of credit, are at the sole discretion of the Board of Directors and will depend upon our profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors.

Item 6.    Selected Financial Data

The following table of certain selected data should be read in conjunction with the consolidated financial statements and notes thereto and with "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations."” The data for the fiscal years ended February 1, 2003 and February 2, 2002, and the income statement for the fiscal year ended January 29, 2000 are derived from the financial statements included herein. The data (other than store, square footage and related data) for the fiscal years ended January 30, 1999 and January 31, 1998, and the balance sheet data for the fiscal year ended January 29, 2000 are derived from our consolidated financial statements for such years, which are not included herein.

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Five-Year Financial Summary

        (In(In thousands, except per share and per square foot amounts, ratios, share data and square footage data)

(1)

Fiscal 2000 consisted of 53 weeks.

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(2)

Per share data, net income per share and the weighted average shares have been adjusted to account for the three-for-two stock split effected as of July 24, 2001.

(3)

The decrease in working capital in fiscal 1998 was due to the classification of $37,973,000 of cash investments as long-term in fiscal 1998.

(4)

Sales during the 53rd week of fiscal 2000 were excluded from "Sales" for purposes of calculating "Average sales per square foot" and "Average sales per store" in order to make fiscal 2000 comparable.

(5)

"Comparable store sales" for fiscal 2001 were calculated by excluding sales during the last week of fiscal 2000 (a 53-week year) in order to make fiscal 2000 comparable to fiscal 2001. "Comparable store sales" are defined as sales in stores that were open at least 14 months.

Item 7.    Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and Notesnotes thereto included elsewhere in this Form 10-K. The following discussion contains forward-looking statements which involve risks and uncertainties, and our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading "Statements“Statement Regarding Forward-Looking DisclosuresForward Looking Disclosure and Risk Factors," those set forth in Exhibit 99.1 of the Form 10-K, and thoseFactors” included elsewhere in this Form 10-K.

Critical Accounting Policies and Estimates

 We prepared the

Our consolidated financial statements of The Wet Seal, Inc.were prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differ from our estimates.

 We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimates are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change is warranted.

Our accounting policies are generally straightforward, but inventory valuation requires more fully described in Note 1 to the Consolidated Financial statements included herein.

Current Trendssignificant management judgments and Outlookestimates.

 Our current fiscal year began on February 3, 2002. Our comparable store sales as well as total sales were up significantly in February and March. We have provided guidance with respect to our anticipated first quarter results in releases made public during this period.

        We believe that consumer acceptance of our fashion offering continues to be positive resulting in increased sales in all of our operating divisions, especially our Arden B. division. Consequently, our Board of Directors has authorized capital expenditures of $50,000,000 in the current fiscal year to cover new store openings, store renovations and other capital expenditures described in Liquidity and Capital Resources in this Management Discussion and Analysis and elsewhere in this report.

        In a release dated February 28, 2002 we stated that the average new store will be approximately 3,300 square feet and each will require an investment of $308,000. We believe we can achieve sales of $300 per square foot in these stores and, if we are successful, the return on the Company's investment in the first full year of operations of the new stores is estimated to be approximately 75%.

Inventory Valuation

Merchandise inventories are stated at the lower of cost (first in, first out) or market. Cost is calculated using the retail inventory method. The retail inventory method is used to estimate the ending inventory at cost by employing a cost to retail (selling price) ratio. The ending inventory is first determined at selling price and then converted to cost. Purchases, sales, net markdowns (less mark-ups), charity, discounts and estimated shrink are considered in arriving at the cost to retail ratio. Inventories include items that have been marked down to management'smanagement’s best estimate of their fair market value. Management'sManagement’s decision to mark down

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merchandise is based on maintaining the freshness of our product offering. Markdowns are taken regularly to effect the rapid sale of slow moving inventory and to make room for new merchandise arriving daily to the stores. To the extent that management'smanagement’s estimates differ from actual results, additional markdowns may be required whichthat could reduce our gross margin, operating income and operating income.carrying value of inventories. Our success is largely dependent on our ability to anticipate the changing fashion tastes of our customers and to respond to those changing tastes in a timely manner. If we fail to anticipate, identify or react appropriately to changing styles, trends or brand preferences of our customers, we may experience lower sales, excess inventories and more frequent and extensive markdowns which would adversely affect our operating results.

We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimates are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 to the Consolidated Financial statements included herein.

Current Trends and Outlook

Sales in the fourth quarter of fiscal 2002 continued to be weak in all three divisions with continued declining comparable store sales following the lower than expected results of the third quarter. The holiday selling season for fiscal 2002 did not meet our expectations. There was no dominant fashion trend driving sales, compared to fiscal 2001. Starting with the back-to-school season, we were not able to capitalize on a fashion trend to replace the “bohemian” style apparel, which was the dominant fashion trend for spring of fiscal 2002.

We have made substantial efforts to evaluate our key customers in the Wet Seal division, and concluded that our Wet Seal division focused on a sophisticated product line while girls and young women were gravitating toward a more basic and junior look. The initial stages of the Wet Seal division’s change in presentation to reach out to its customers and carry basics are reflected in its spring assortment.

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Our gross margins during the second through fourth quarters were further eroded by the large amount of markdowns necessary to move the poor performing merchandise in order to make room for new receipts. This was especially true during the fourth quarter, including a write-down of inventory at year-end through a mark-out-of-stock process.

We are also evaluating our cost structure, given the disappointing results for fiscal 2002. Cost saving strategies are being developed and implemented. We recently reduced our staffing levels, and plan to continue this process by eliminating positions where practical. Other cost saving initiatives are also under way to reduce selling, general and administrative and distribution and buying costs.

During fiscal 2003, we anticipate opening fewer stores than originally anticipated, with approximately 35 new locations, consisting of 7 Arden B. locations, 1 Zutopia location with the remainder of the openings being Wet Seal locations. Total capital expenditures anticipated for Fiscal 2003 are now expected to be less than $17.5 million. This capital expenditure estimate includes the anticipated costs of renovating 17 stores whose leases will expire but that we expect to renew.

Results of Operations

Fiscal 2002 and 2001 consistsconsisted of the 52 week periodperiods ended February 1, 2003 and February 2, 2002, respectively and fiscal 2000 consistsconsisted of the 53 week period ended February 3, 2001 and fiscal 1999 consists of the 52 week period ended January 29, 2000.2001. Comparable store sales are defined as sales in stores that were open at least 14 months.

The following table sets forth selected income statement data expressed as a percent of sales for the years indicated:

Fiscal 2002 (year ended February 1, 2003) compared to Fiscal 2001 (year ended February 2, 2002).

Sales in fiscal 2002 were $608.5 million compared to sales for fiscal 2001 of $601.9 million, an increase of $6.6 million, or 1.1%. The dollar increase in sales was due to the net increase of 35 stores; 606 stores were open and operating at the end of fiscal 2002 compared to 571 stores at the end of fiscal 2001. Comparable store sales decreased 5.6% for fiscal 2002 compared to an increase of 4.7% for fiscal 2001. The comparable store sales decrease reflected the negative sales trends in the second half of fiscal 2002, which did not have a dominant fashion trend to drive sales as compared to fiscal 2001. Sales in the first half of fiscal 2002 were fueled by the “bohemian” trend. As the “bohemian” trend waned during the period leading up to the “back-to-school” season, we had a more sophisticated product offering, while we believe our competitors were gaining ground with a more basic presentation.

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Cost of sales, including buying, distribution and occupancy costs, was $431.0 million for fiscal 2002 compared to $405.2 million for fiscal 2001, an increase of $25.8 million, or 6.4%. Cost of sales was 70.8% of sales for fiscal 2002, compared to 67.3% of sales in fiscal 2001, an increase of 3.5%. The increase in cost of sales as a percent of sales for fiscal 2002 was driven by an increase in markdowns and in shrink, offset partially by a slight improvement in the cumulative mark-up. The increased markdowns in the third and fourth quarters were the result of reacting to the declining comparable store sales, and included a substantial markdown reserve at year-end to reduce the value of inventory marked out of stock in February 2003. In addition, the de-leverage stemming from negative comparable store sales caused fixed costs such as buying, distribution and occupancy to rise as a percentage of sales in fiscal 2002, versus fiscal 2001.

Selling, general and administrative expenses were $174.1 million in fiscal 2002, compared to $151.8 million in fiscal 2001, an increase of $22.3 million or 14.7%. Selling, general and administrative expenses were 28.6% of sales in fiscal 2002, 3.4% above the 25.2% of sales for fiscal 2001. The increase in selling expenses was primarily due to higher store wages and benefits. This was due to supporting more stores as well as actions taken early in the year to improve the quality and therefore the average salary of many of the store-level employees. The catalog business also contributed to higher selling expenses for the promotion, production and distribution support costs, reflecting our entry into the catalog business in fiscal 2002. In addition, we have incurred higher advertising costs in fiscal 2002 to support the retail locations. The increase in general and administrative costs was primarily caused by a reserve established for costs we expect to incur relating to Kathy Bronstein’s employment status. The remaining increase was due to central office payrolls, reflecting salary increases and an increase in the number of employees, offset partially by savings in legal fees incurred in negotiating store leases as a result of establishing an in-house legal department. Selling, general and administrative expenses rose, as a percent of sales, due to de-leveraging of fixed costs caused by lower sales per store than in the same stores in the prior year.

Interest income, net, was $3.1 million in fiscal 2002, compared to $5.1 million in fiscal 2001, a decrease of $2.0 million. This decrease was due to a reduction in market interest rates on the invested balances, as well as a drop later in the year in the amount invested. Total cash and investments were $94.8 million at the end of fiscal 2002, compared to $132.3 million at fiscal 2001.

The income tax provision was $2.3 million in fiscal 2002, compared to $19.0 million in fiscal 2001. The effective income tax rate for fiscal 2002, was 35% compared to 38% in fiscal 2001. This decrease reflected the net loss during the fourth quarter, which increased the proportion of the full year net income that was in the form of tax exempt interest, as well as the proportion of income offset by charitable deductions of merchandise.

Based on the factors noted above, net income was $4.2 million in fiscal 2002, compared to $31.0 million in fiscal 2001, a decrease of $26.8 million, or 86.5%. As a percentage of sales, net income was 0.7% in fiscal 2002, compared to 5.2% in fiscal 2001.

Fiscal 2001 Compared(year ended February 2, 2002) compared to Fiscal 2000 (year ended February 3, 2001).

Sales in fiscal 2001 were $601,895,000$601.9 million for the 52 week fiscal year compared to sales in fiscal 2000 of $580,182,000$580.2 million for the 53 week fiscal year, an increase of $21,713,000,$21.7 million, or 3.7%. On a proformapro forma basis, comparing the 52 week period ended February 2, 2002 to the 52 week period ended January 27, 2001, the increase in sales would have been $30,505,000,$30.5 million, or 5.3%. The dollar increase in sales in fiscal 2001 compared to fiscal 2000 was due to the impact of 51 new store openings and the acquisition of 18 stores in fiscal 2001. The increase in sales was also due to the increase in comparable store sales of 4.7% for the 52 weeks ended February 2, 2002 compared to the 52 weeks ended January 27, 2001. These increases were somewhat offset by the closing of 50 stores in fiscal 2001.

Cost of sales, including buying, distribution and occupancy costs, was $405,187,000$405.2 million in fiscal 2001 compared to $419,310,000$419.3 million in fiscal 2000, a decrease of $14,123,000,$14.1 million, or 3.4%. As a percentage of sales, cost of

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sales decreased to 67.3% in fiscal 2001 from 72.3% in fiscal 2000, a decrease of 5.0%. The decrease in cost of sales as a percentage of sales related primarily to an increase in the initial mark up over the prior year and a decrease in markdowns from the prior year. We also experienced a decrease in occupancy costs due to the leverage on landlord expenses resulting from an increase in comparable

10

store sales and due to a decrease in distribution costs resulting from lower depreciation as the original distribution equipment was fully depreciated in the prior year. Offsetting the overall decrease in cost of sales was an increase in buying costs. The increase in buying costs was due to additional headcount added to support new divisions and to further augment current infrastructure.

Selling, general and administrative expenses were $151,815,000$151.8 million in fiscal 2001 compared to $134,002,000$134.0 million in fiscal 2000, an increase of $17,813,000,$17.8 million, or 13.3%. As a percentage of sales, selling, general and administrative expenses were 25.2% in fiscal 2001 compared to 23.1% in fiscal 2000, an increase of 2.1%. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to an increase in advertising costs related to the use of print media campaigns and a television sponsorship not used in the prior year. The increase is also due to an increase in selling wages in an effort to improve customer service. Delivery charges increased due to the change in the freight strategy to use three-day air in fiscal 2001 versus the use of ground transportation in fiscal 2000.

Interest income, net, was $5,127,000$5.1 million in fiscal 2001 compared to $4,857,000$4.9 million in fiscal 2000, an increase of $270,000.$0.2 million. This increase was due primarily to an increase in the average cash balance invested during the year offset in part by lower interest rates during fiscal 2001 versus fiscal 2000.

 Income

The income tax provision was $19,005,000$19.0 million in fiscal 2001 compared to $12,215,000$12.2 million in fiscal 2000. The effective income tax rate in fiscal 2001 was 38.0% compared to 38.5% in fiscal 2000. The decrease in the effective tax rate in fiscal 2001 compared to fiscal 2000 was due to the apportionment among various states, resulting in lower effective state tax rates.

Based on the factors noted above, net income was $31,015,000$31.0 million in fiscal 2001 compared to $19,512,000$19.5 million in fiscal 2000, an increase of $11,503,000,$11.5 million, or 59.0%. As a percentage of sales, net income was 5.2% in fiscal 2001 compared to 3.4% in fiscal 2000.

Fiscal 2000 Compared to Fiscal 1999

        Sales in fiscal 2000 were $580,182,000 for the 53 week fiscal year compared to sales in fiscal 1999 of $524,407,000 for the 52 week fiscal year, an increase of $55,775,000, or 10.6%. The dollar increase in sales in fiscal 2000 compared to fiscal 1999 was due to the impact of the 36 new store openings in fiscal 2000 and the full year impact in 2000 of the 94 net new stores openings in fiscal 1999. On a proforma basis, the increase in sales was also due to the increase in comparable store sales of 3.9% for the 52 weeks ended January 27, 2001 compared to the 52 weeks ended January 29, 2000. These increases were somewhat offset by the closing of 32 stores in fiscal 2000.

        Cost of sales, including buying, distribution and occupancy costs, was $419,310,000 in fiscal 2000 compared to $380,012,000 in fiscal 1999, an increase of $39,298,000, or 10.3%. As a percentage of sales, cost of sales decreased to 72.3% in fiscal 2000, from 72.5% in fiscal 1999, a decrease of 0.2%. The dollar increase in cost of sales in fiscal 2000 compared to fiscal 1999 was due primarily to the increase in the number of new stores and the increase in total sales. The decrease in cost of sales as a percentage of sales related primarily to a decrease in markdowns from the prior year. The prior year markdowns were higher due to the need to clear excess merchandise. Offsetting this decrease in the cost of sales were increases in buying costs, distribution costs and, to a lesser extent, occupancy costs. The increase in buying costs as a percentage of sales was due to additional headcount added to support the new divisions and further augment current infrastructure. Occupancy costs as a percentage of sales increased slightly as a result of an increase in depreciation.

        Selling, general and administrative expenses were $134,002,000 in fiscal 2000 compared to $124,712,000 in fiscal 1999, an increase of $9,290,000, or 7.4%. As a percentage of sales, selling, general and administrative expenses was 23.1% in fiscal 2000 compared to 23.8% in fiscal 1999, a decrease of 0.7%. The dollar increase in selling, general and administrative expenses in fiscal 2000 compared to fiscal 1999 was primarily due to leveraging expenses against the increase in total sales. The decrease as

11

a percentage of sales was related to a decrease in advertising from the prior year, a decrease in costs related to the catalog which was discontinued and a decrease in the merchandise delivery cost. Offsetting this decrease to selling, general and administrative expenses as a percentage of sales were an increase in executive salaries due to the separation payment to our former president and an increase in office wages related to the additional headcount added to support a larger organization. Included in selling, general and administrative expenses was the loss on disposal of the assets for the Limbo Lounge division of $2.0 million and the income derived from the reversal of a reserve for self insurance (see Note 11 of Notes To Consolidated Financial Statements).

        We had no other income, net, in fiscal 2000 compared to $1,154,000 in fiscal 1999. Other income, net, for fiscal 1999 was related to the sale of one store lease.

        Interest income, net, was $4,857,000 in fiscal 2000 compared to $3,005,000 in fiscal 1999, an increase of $1,852,000. This increase was due primarily to an increase in the average cash balance invested during the year as well as an increase in the effective interest rates for the year.

        Income tax provision was $12,215,000 in fiscal 2000 compared to $9,659,000 in fiscal 1999. The effective income tax rate in fiscal 2000 was 38.5% compared to 40.5% in fiscal 1999. The decrease in the effective tax rate in fiscal 2000 compared to fiscal 1999 was due to an increase in income generated from states with lower effective tax rates.

        Based on the factors noted above, net income was $19,512,000 in fiscal 2000 compared to $14,183,000 in fiscal 1999, an increase of $5,329,000, or 37.6%. As a percentage of sales, net income was 3.4% in fiscal 2000 compared to 2.7% in fiscal 1999.

Liquidity and Capital Resources

Working capital at the end of fiscal 2002, 2001 and 2000 was $64.5 million, $77.2 million and 1999 was $77,191,000, $44,213,000 and $47,707,000,$44.2 million, respectively. The increasedecrease in working capital of $12.7 million in fiscal 20012002 compared to fiscal 20002001 was primarily due to a net increasereduction in cash and short-term investments, net of $29,463,000, as well as the timing of maturity dates, an increasereductions in construction allowancepayables, merchandise payables, and an income tax payable in the prior year compared to an income tax receivable an increase in prepaid property taxes and system maintenance agreements and a decrease in income taxes payable. the current year.

Net cash provided by operating activities infor fiscal 2002, 2001, and 2000 was $6.0 million, $58.3 million, and 1999 was $54,328,000, $46,395,000 and $28,795,000,$46.4 million, respectively. The increase$52.3 million decrease in net cash provided by operating activities in fiscal 20012002 compared to fiscal 20002001 was due primarily tolargely the increaseresult of lower net income of $26.8 million, offset slightly by $2.4 million in net earnings. Further contributing to the increase was the increase in accountsnon-cash depreciation expense increase. Accounts payable and accrued liabilities.liabilities, whose balance changes increased cash flow by nearly $10 million in fiscal 2001, dropped nearly $13 million during fiscal 2002. This shift reflects nearly $11 million less in accrued construction costs at the end of fiscal 2002 compared to fiscal 2001, and $4.7 million more in net owned inventory at the end of fiscal 2002 compared to fiscal 2001. Finally, there was offsetan increase of approximately $10.6 million from the end of fiscal 2001 to some extent by the decreaseend of fiscal 2002 in other receivables due to an income tax receivable of $11.8 million, reflecting the drop in income taxes payable. The decrease in income taxes payable was due to the timinglatter part of tax payments.fiscal 2002.

In fiscal 2002, 2001 2000 and 19992000, we invested $38,953,000, $18,134,000$39.0 million, $39.0 million and $26,819,000,$18.1 million, respectively, in property and equipment and leasehold improvements. These expenditures related primarily to new store openings

13

and remodels. In fiscal 2002, we opened 69 stores and remodeled 22 stores. There were no acquisitions in fiscal 2002. In fiscal 2001, we opened 51 stores, and remodeled 32 stores. In fiscal 2001,stores and we acquired the leases, merchandise inventory and furniture and fixtures forof 18 Zutopia stores from Gymboree, Inc. for $3,550,000. In fiscal 2000, there were no acquisitions. In fiscal 1999, we acquired the leases and equipment and leasehold improvements for 78 store locations from Britches of Georgetowne, Inc. for $15,704,000, of which $6,972,000 was classified as goodwill. In fiscal 1998, we acquired the leases and equipment and leasehold improvements for 19 store locations from Mothers Work, Inc. for $1,911,000. The majority of the locations acquired were converted to Arden B. stores.$3.6 million. Capital expenditures for fiscal 20022003 are currently estimatedprojected to be $50,000,000, related$17.5 million or less, relating primarily to planned new store openings, remodels and minor Wet Seal store renovations, as well as new point of sale systems for all stores,implementing a planning and allocation system and other key financial system conversions.store support programs.

In September 1998, ourthe Company’s Board of Directors authorized the repurchase of up to 20% of the outstanding shares of our Class A Common Stock.common stock. From this authorized plan, 3,077,100 shares (split adjusted) were repurchased at a cost of $20.3 million. These repurchased shares were reflected as Treasury Stock in our consolidated balance sheets, until they were retired on December 2, 2002, as authorized by the Board of Directors. On October 1, 2002, our Board of Directors authorized the repurchase of up to 5.4 million shares of our outstanding Class A common stock. This amount included the remaining shares previously authorized for repurchase by the Board of Directors. During October 2002, we repurchased 947,400 shares under the new repurchase plan for $8.2 million. These repurchased shares under the new plan were immediately retired as authorized by our Board of Directors. As of February 2,the end of fiscal 2002, 2,051,400there were approximately 4.5 million shares hadremaining for future repurchases under the October 1, 2002 authorization. As of the date of this report, all treasury shares have been repurchased at an aggregate cost of $20,349,000. Such repurchased shares are reflected as treasury

12

stock in the accompanying consolidated financial statements. The number of shares has been adjusted for the three-for-two stock split which was effected July 24, 2001.retired.

We have a secured revolving line of creditline-of-credit arrangement with a major financial institution,Bank of America, N.A. in an aggregate principal amount of $50,000,000,$50 million, maturing on JanuaryJuly 1, 2004. At February 2, 2002,1, 2003, there were no outstanding borrowings under the credit arrangement, and there were $7,250,000$7.6 million open letters of credit related to imported inventory orders. We believeorders and an insurance standby letter of credit for $0.7 million. As of the date of this report we are in compliance with all material terms andfinancial covenants of the credit arrangement. We invest our excess funds primarily in short-term investment grade money market funds, investment grade commercial paper and U.S. Treasury and Agency obligations. Our management believesThe long-term marketable securities consist of high credit quality municipal and corporate bonds. We believe that our working capital investments and cash flows from operating activities will be sufficient to meet our operating and capital requirements in the fiscal 2002. However, if cash flow from operations should decline significantly or we accelerate our store expansion program or launch of our Wet Seal catalog, it may be necessary to seek additional capital.foreseeable future.

Seasonality and Inflation

Our business is seasonal by nature with the Christmas season, beginning the week of Thanksgiving and ending the first Saturday after Christmas, and the back-to-school season, beginning the last week of July and ending the first week of September, historically accounting for the largest percentage of sales volume. For the past three fiscal years, the Christmas and back-to-school seasons together accounted for an average of approximately 30% of our annual sales, after adjusting for sales increases related to new stores. We do not believe that inflation has had a material effect on the results of operations during the past three years. However, we cannot assure you that our business will not be affected by inflation in the future.

Commitments and Contingencies

 We lease retail stores, automobiles, computers and corporate office and warehouse facilities under operating lease agreements expiring at various times through 2013. Substantially all

Our principal contractual obligations consist of our leases require us to pay maintenance, insurance, property taxes and percentage rent based on sales volume over certain minimum sales levels. Effective February 1998, we entered into a sublease agreement for our former warehouse facility, which expires July 31, 2002.

        Minimum annual rental commitments under non-cancelable leases, including theour corporate office, and warehouse facility, lease are; $65,800,000 for fiscal 2002, $61,900,000 for fiscalautomobiles, computer equipment and copiers. At February 1, 2003, $55,700,000 for fiscal 2004, $49,700,000 for fiscal 2005, $47,100,000 for fiscal 2006 and $135,400,000 thereafter.our contractual obligations under these leases were as follows (in thousands):

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Our principal commercial commitments consist primarily of open letters of credit, related to imported inventory orders, secured by our revolving line-of-credit arrangement. At February 1, 2003, our contractual commercial commitments under these letters of credit arrangements were as follows (in thousands):

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

New Accounting Pronouncements

In June 1998,2001, the Financial Accounting Standards Board ("FASB")(FASB) issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133," which delayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. We adopted SFAS No. 133 effective February 4, 2001. The adoption of SFAS No. 133 did not have a material effect on our consolidated results of operations or financial condition.

        In July 2001, the FASB issued SFAS No. 141 "Business Combinations", which, among other things, requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, no longer permits the use of the pooling-of-interests method of accounting for business

13

combinations and broadens the criteria for recording intangible assets separate from goodwill. The adoption of SFAS No. 141 during the third quarter of 2001 did not have a material impact on the Company's consolidated results of operations, financial position or cash flows.

        In July 2001, the FASB issued SFAS(SFAS) No. 142 "Goodwill“Goodwill and Other Intangible Assets",Assets,” which, among other things, establishes new standards for goodwill acquired in a business combination, eliminates the amortization of goodwill and requires the carrying value of goodwill and identifiable intangibles to be evaluated for impairment on, at least, an annual basis. Identifiable intangible assets with a determinable useful life will continue to be amortized over that period. We adopted SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Management does not believeon February 3, 2002. Upon completion of the adoptionimpairment test, we determined that there was no impairment of SFAS No. 142 will have a material impact on the Company's consolidated results of operations, financial position or cash flows.goodwill.

In AugustNovember 2001, the FASB issued SFAS No. 143 "Accounting“Accounting for Asset Retirement Obligations",Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management does notWe believe the adoption of SFAS No. 143 will not have a material impact on the Company'sour consolidated results of operations, financial position or cash flows.

 In October 2001,

Effective February 3, 2002, the FASB issuedCompany adopted SFAS No. 144 "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets",Assets,” which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of either by sale or other than by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management does not believe theThe adoption of SFAS No. 144 willdid not have a material impact on the Company'sour consolidated results of operations, financial position or cash flows.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. We adopted the provisions of SFAS 146 for exit or disposal activities initiated after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123.” This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirement of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years ending after December 15, 2002. We have determined not to adopt the fair value based method of accounting for stock-based employee compensation but have adopted the additional disclosure requirements of SFAS 148 in fiscal 2002.

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In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” an interpretation of FASB Statements No. 5, 57 and 107, and rescission of FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.”FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We believe the adoption of such interpretation will not have a material impact on our results of operations or financial position and we intend to adopt the recognition provisions of such interpretation on February 2, 2003, as required.

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51. FIN No. 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN No. 46 will apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The disclosure requirements will apply in all financial statements issued after January 31, 2003. We believe the adoption of FIN No. 46 will have no impact on our results of operations or financial position, as we have no interests in variable interest entities.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

To the extent we borrow under our credit facility, we will be exposed to market risk related to changes in interest rates. At February 2, 2002,1, 2003, no borrowings were outstanding under the credit facility. See Notes 1 and 32 to our consolidated financial statements for further discussion of our accounting policies for financial instruments. We are not a party to any derivative financial instruments. Additionally, weWe are exposed to market risk related to changes in interest rate riskrates on the short-term investment of excess cashour investments in short-term investment grade interest-bearing securities. These investments are considered to be cash equivalents and are shown that way on our balance sheet. If there are changes in interest rates, those changes would affect the investment income we earn on those investments.

Item 8.    Financial Statements and Supplementary Data

Information with respect to this item is set forth under Item 14.15.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable.

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PART III

Item 10.    Directors and Executive Officers of the Registrant

The information required by this item is incorporated by reference to the information set forth in our proxy statement for our 20022003 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended February 2, 2002.1, 2003.

Item 11.    Executive Compensation

The information required by this item is incorporated by reference to the information set forth in our proxy statement for our 20022003 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended February 2, 2002.1, 2003.

Item 12.    Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated by reference to the information set forth in our proxy statement for our 20022003 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended February 2, 2002.1, 2003.

Item 13.    Certain Relationships and Related Transactions

The information required by this item is incorporated by reference to the information set forth in our proxy statement for our 20022003 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended February 2, 2002.1, 2003.

Item 14.    Controls and Procedures

Disclosure Controls and Internal Controls

Our disclosure controls and procedures (as defined in Rule 13a-14(c) under Exchange Act) (“Disclosure Controls”) are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this annual report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our interim Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls and procedures for financial reporting (“Internal Controls”) are designed with the objective of providing reasonable assurance that:

These controls and procedures are designed to enable the preparation of our financial statements in conformity with U.S. generally accepted accounting principles.

Limitations on the Effectiveness of Controls

Our management, including our interim Chief Executive Officer and our Chief Financial Officer, does not expect that our Disclosure Controls or Internal Controls will prevent all error and all fraud. A control system, no matter how well conceived 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

17

limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures related to the control may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error may occur and not be detected.

Annual evaluation of the Company’s Disclosure Controls and Internal Controls

Within the 90-day period prior to the filing of this annual report, an evaluation was carried out under the supervision and with the participation of our management, including our interim Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our Disclosure Controls. Based upon that evaluation, our interim Chief Executive Officer and our Chief Financial Officer concluded, subject to the limitations noted above, that:

No significant changes were made to our Internal Controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

18

PART IV

Item 14.15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)

The following documents are filed as part of this report:

1.

Financial Statements: The financial statements listed in the "Index to Consolidated Financial Statements and Financial Statement Schedules" at page F-1 are filed as part of this report.

2.

Financial Statement Schedules: All schedules are omitted as they are not required, or the required information is shown in the consolidated financial statements or notes thereto.

3.

Exhibits; See "Exhibit Index."

(b)

Reports on Form 8-K.

No reports on Form 8-K were filed during the last quarter of the fiscal year ended February 2, 2002.1, 2003

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SIGNATURES

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

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

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20

SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATIONS

I, Irving Teitelbaum, certify that:

21

SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATIONS

I, William B. Langsdorf, certify that:

22

THE WET SEAL, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULES

F-1

INDEPENDENT AUDITORS’ REPORT

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders

The Wet Seal, Inc.:

We have audited the accompanying consolidated balance sheets of The Wet Seal, Inc. and subsidiary (the Company) as of February 2, 20021, 2003 and February 3, 20012, 2002 and the related consolidated statements of income, comprehensive income, stockholders'stockholders’ equity and cash flows for each of the three fiscal years in the period ended February 2, 2002.1, 2003. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Wet Seal, Inc. and subsidiary as of February 1, 2003 and February 2, 2002 and February 3, 2001 and the results of itstheir operations and itstheir cash flows for each of the three fiscal years in the period ended February 2, 20021, 2003 in conformity with accounting principles generally accepted in the United States of America.

Deloitte

As discussed in Note 1 to the financial statements, the Company changed its method of accounting for goodwill and other intangible assets during the year ended February 1, 2003 as a result of adopting Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

DELOITTE & ToucheTOUCHE LLP

Costa Mesa, California

March 20, 200213, 2003

F-2

THE WET SEAL, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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