There were no purchases of shares of Class A Common Stock or Class B Common Stock by the Company or affiliated purchasers during the fourth quarter ended January 31, 2004.

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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 Discussion and Analysis of Financial Condition and Results of Operations.” The data for the fiscal years ended January 31, 2004 and February 1, 2003, and February 2, 2002, and the income statement for the fiscal year ended January 29, 2000February 2, 2002 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, 1999February 3, 2001 and January 31, 1998,29, 2000, and the balance sheet data for the fiscal year ended January 29, 2000February 2, 2002 are derived from our consolidated financial statements for such years, which are not included herein. The selected financial data for all periods have been restated to reflect Zutopia as a discontinued operation.

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Five-Year Financial Summary

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

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Item 7.    Management’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 notes 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 “Statement Regarding Forward Looking Disclosure and Risk Factors” included elsewhere in this Form 10-K.

Current Trends and Outlook

Lower than expected sales in the fourth quarter of fiscal 2003 were a disappointment, given the progressively improving sales trend seen through the third quarter of fiscal 2003. The comparable store sales decrease in the fourth quarter was due to declining transaction counts, primarily in the Wet Seal division, which was a direct reflection of our inability to provide the fashions needed to win back our core customer. We believe that our December product was too holiday-specific, and did not provide enough transitional styles to lead us into the pre-spring months. In January we were not prepared for the continued cold weather in some parts of the country, and we did not have enough sweaters and jackets to adequately re-supply the stores. In addition, in January, the average dollar sale in the stores were depressed downward by the many promotions in place to move the goods remaining from the holiday season.

We believe that our available cash and investments aggregating $63.5 million at January 31, 2004 and other working capital and cash flows from operating activities will be sufficient to meet our operating and capital requirements for the next 12 months. However, we believe that if our sales do not improve, we may not be able to finance our inventory purchases pursuant to letters of credit issued under our existing bank credit facility, but instead may be required to obtain alternative financing at significantly higher costs. At the end of fiscal 2003, we had working capital of $38.6 million, including cash, cash equivalents, and short term investments of $44.3 million. This compares with working capital of $64.5 million, including cash, cash equivalents and short-term investments of $61.2 million at the end of fiscal 2002. The primary reason for these decreases is our loss from continuing operations of $39.0 million for fiscal 2003. (See Liquidity and Capital Resources).

During the past six months we have been focused on rebuilding an effective team for the Wet Seal brand and, in doing so, we have completely rebuilt our management structure. After the addition of our new chief executive officer who joined in July, many key management changes were made in strategic areas to assemble and build the creative, buying and planning teams necessary to execute the successful selection and presentation of fashion to gain consumer acceptance. A key strategy was the decision to hire an in-house designer for the Wet Seal division in order to have more control over our fashions and to develop more unique clothing. These individuals are highly qualified for the positions for which they were hired and bring with them extensive cross-functional management skills.

We believe that the benefits of these strategic efforts will begin to be seen with the Wet Seal customer during the 2004 back-to-school season.

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The performance of the Arden B. division gained momentum during the year with sequential improvement in comparable store sales each quarter resulting in comparable stores sales increases in the third and fourth quarters with corresponding increases in transaction counts and average unit retails. We attribute these results to our efforts to refocus on a more sophisticated offering. We concentrated on fashion jackets, coats, outerwear and cashmere sweaters. Arden B. has also delivered a fresh new gift-giving assortment of handbags and accessories that is adding to the complete wardrobe of their target customer.

We believe that our inventory position is good as we head into the first quarter of fiscal 2004 as a result of the aggressive markdowns taken in the Wet Seal division in the fourth quarter of fiscal 2003.

While we are evaluating our cost structure, we are continuing to make prudent investments in our management team in order to rebuild the Wet Seal business. Cost saving initiatives are also under way to reduce selling, general and administrative and distribution costs.

During fiscal 2004, we intend to scale back the number of new store openings to approximately 10 new locations, consisting of six Wet Seal locations and four Arden B. locations. Total capital expenditures anticipated for Fiscal 2004 are expected to be less than $12.0 million. This capital expenditure estimate includes the anticipated costs of renovating 11 stores, the leases for which will be renewed this year.

The Company will record a reserve in the first and second quarters of 2004 for all applicable charges associated with the closure of the Zutopia stores which primarily includes the buyout of leases.

Critical Accounting Policies and Estimates

Our consolidated financial statements 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.

Our accounting policies are generally straightforward, but inventoryset forth further in Note 1 of the consolidated financial statements included herein. Inventory valuation, requires morerecovery of deferred tax and long lived assets require significant management judgments and estimates.

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,charitable donations of merchandise, discounts and estimated shrink are considered in arriving at the cost to retail ratio. Inventories include items that have been marked down to management’s best estimate of their fair market value. Management’s decision to mark down 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 toin the stores.

To the extent that management’s estimates of markdowns necessary to rapidly sell inventory differ from actual results, additional markdowns may be required that could reduce our gross margin, operating income and the carrying value of inventories. Our success is largely dependent onupon 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.

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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 Consolidatedconsolidated financial statements and in Management’s Discussion and Analysis of Financial statementsCondition and Results of Operations, respectively, included herein.

Current Trends and OutlookLong-lived assets

SalesDuring the normal course of business, we acquire tangible long-lived assets. We periodically evaluate the recoverability of the carrying amount of these assets. An impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. Impairments are recognized in operating income as they are realized. Management uses its best judgment, based upon the most current facts and circumstances surrounding the specific assets, when applying these impairment rules. Changes 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 resultsassumptions used could have a significant impact on management’s assessments of the third quarter. The holiday selling season for fiscal 2002 did not meet our expectations. There was no dominant fashion trend driving sales, comparedrecoverability. Many factors, including changes to fiscal 2001. Starting with the back-to-school season, we were not ablecompany’s business and consumer preferences, could significantly impact management’s decision to capitalize on a fashion trend to replace the “bohemian” style apparel, which was the dominant fashion trend for springretain or dispose of fiscal 2002.certain of its long-lived assets.

Deferred income taxes

We have made substantial effortsevaluate the reliability of our deferred tax assets and assess the need for a valuation allowance quarterly. We record a valuation allowance to evaluatereduce our key customersdeferred tax assets to the net amount that is more likely than not to be realized. Our assessment of the need for a valuation allowance is based upon our expectations of future taxable income and the ongoing prudent and feasible tax planning strategies available to us. In the event that we determine that we will not be able to realize all or part of our deferred tax assets 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 offuture, an adjustment to the Wet Seal division’s changedeferred tax assets would be charged against income 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.period such determination is made.

Results of Operations

Fiscal 2002Except as otherwise noted, the following discussion of our financial position and 2001 consistedresults of operations excludes our discontinued Zutopia division, which is expected to be closed by the end of the 52 week periods ended February 1, 2003 and February 2, 2002, respectively andfirst quarter or early in the second quarter of fiscal 2000 consisted of the 53 week period ended February 3, 2001. Comparable store sales are defined as sales in stores that were open at least 14 months.2004.

The following table sets forth selected income statement data expressed as a percentpercentage of net sales for the years indicated:fiscal year indicated. The discussion that follows should be read in conjunction with the table below:

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

SalesNet sales

The decrease in sales in fiscal 2002 were $608.5 million2003 was due to the comparable store sales decline of 16.4% compared to a comparable store sales fordecrease of 5.5% in fiscal 2001 of $601.9 million, an increase of $6.6 million, or 1.1%.2002. The dollar increaseoverall decline in comparable store sales was due to a reduction in the number of transactions per store, a lower average dollar sale, and a reduction in the average unit retail price compared to the prior year. The average dollar sale in the stores was driven downward by the many promotions put in place in reaction to slow-selling merchandise. The average unit retail declined as a result of the aggressive markdowns taken during the year as well as deterioration in the initial markup after allowances, primarily in our Wet Seal division.

Cost of sales (including buying, merchandise planning/allocation, distribution and occupancy)

Our cost of sales, in addition to the direct merchandise cost, also includes our buying, merchandise planning/allocation, distribution and occupancy costs. The increase as a percentage of sales in fiscal 2003 compared to fiscal 2002 was the result of several key factors:

Selling, general and administrative expenses

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Our selling, general and administrative (SG&A) expenses are comprised of two components. The selling expense component includes store and field support costs including personnel, advertising, and merchandise delivery costs as well as internet/catalog processing costs. The general and administrative (G&A) expense component includes the cost of corporate functions such as legal, accounting, information systems, human resources, real estate, and other centralized services.

The SG&A expense included the following:

Net interest income

The decrease in net interest income was primarily due to a decrease in the invested balance compared to the prior year. Total cash and investments were open and operating$63.5 million at the end of fiscal 20022003 compared to 571 stores$94.8 million at the end of fiscal 2001. 2002. In addition, there was a reduction in market interest rates on the invested balance.

Income taxes

The income tax benefit of $21.6 million for fiscal 2003 compares to a $4.5 million provision for fiscal 2002, reflecting a benefit on pre-tax losses this year compared to a charge on pre-tax income last year. The effective income tax rate for fiscal 2003 was 35.7% and 35% for fiscal 2002.

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Discontinued Operations

Discontinued operations is comprised of two components; the net loss from the Zutopia division operations for the year, net of income taxes, and the loss on disposal, net of income taxes, which is derived from the $5.4 million pre-tax write off of the Zutopia assets.

Fiscal 2002 compared to Fiscal 2001

Net sales

Comparable store sales decreased 5.6%5.5% 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, in which we 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 hadreplaced it with a more sophisticated product offering, while we believe our competitors were gaining ground with a more basic presentation.offering.

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Cost of sales including(including buying, merchandise planning/allocation, distribution and occupancy)

Our cost of sales, which encompasses merchandise cost, also includes our buying, merchandise planning/allocation, distribution and occupancy costs, was $431.0 million forcosts. The increase as a percentage of sales in 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, compareddue to 67.3% of sales in fiscal 2001, an increase of 3.5%. the following factors:

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,

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Our selling, general and administrative (SG&A) expenses were 28.6%are comprised of salestwo components. The selling expense component includes store and field support related costs including personnel, advertising, and merchandise delivery costs, as well as internet/catalog processing costs. The general and administrative (G&A) expense component includes the cost of corporate functions such as legal, accounting, information systems, human resources, real estate, and other centralized services.

The increase in fiscal 2002, 3.4% above the 25.2% of sales for fiscal 2001. SG&A expenses are as follows:

Net interest income

InterestThe decrease in the net 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 dropdecrease 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 the end of fiscal 2001.

Income taxes

The income tax provision was $2.3 milliondecrease in fiscal 2002, compared to $19.0 million in fiscal 2001. Thethe 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 (year ended February 2, 2002) compared to Fiscal 2000 (year ended February 3, 2001).

Sales in fiscal 2001 were $601.9 million for the 52 week fiscal year compared to sales in fiscal 2000 of $580.2 million for the 53 week fiscal year, an increase of $21.7 million, or 3.7%. On a pro 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 $30.5 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 $405.2 million in fiscal 2001 compared to $419.3 million in fiscal 2000, a decrease of $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 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 $151.8 million in fiscal 2001 compared to $134.0 million in fiscal 2000, an increase of $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 $5.1 million in fiscal 2001 compared to $4.9 million in fiscal 2000, an increase of $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.

The income tax provision was $19.0 million in fiscal 2001 compared to $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 $31.0 million in fiscal 2001 compared to $19.5 million in fiscal 2000, an increase of $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.

Liquidity and Capital Resources

Working capital at the end ofNet cash used in operating activities for continuing operations was $17.7 million for fiscal 2002, 2001 and 2000 was $64.5 million, $77.2 million and $44.2 million, respectively. The decrease in working capital of $12.7 million in fiscal 20022003, compared to fiscal 2001 was primarily due to a reduction in cash and short-term investments,$7.3 million net of reductions in construction payables, merchandise payables, and an income tax payable in the prior year compared to an income tax receivable in the current year.

Net cash provided by operating activities for fiscal 2002, 2001,2002. Fiscal 2003 operating cash flows were directly impacted by our loss from continuing operations of $39.0 million, partially offset by non-cash charges (depreciation, amortization and 2000 was $6.0 million, $58.3disposal expense, stock compensation and deferred taxes) of $12.2 million and $46.4 million, respectively. a net increase in the cash components of our working capital of approximately $8.2 million.

The $52.3fiscal 2003 changes in the cash components of working capital included a $2.9 million decrease in net cashreceivables, principally due to the reduction of tenant allowances resulting from less construction of new and remodeled stores, a reduction of $8.3 million in prepaid accounts (primarily prepaid rents), a $5.1 million decrease in merchandise and other payables, and a $1.8 million increase in income tax payable. Merchandise inventory decreased by $1.8 million.

Cash provided by operatinginvesting activities in fiscal 2002 compared to fiscal 2001 was largely the result of lower net income of $26.8 million, offset slightly by $2.4 million in non-cash depreciation expense increase. Accounts payable and accrued liabilities, whose balance changes increased cash flow by nearly $10$7.4 million in fiscal 2001, dropped nearly $132003 included the net sales of marketable securities of $21.1 million duringoffset by capital expenditures of $13.7 million. Cash provided by financing activities of $3.0 million due to the exercise of stock options of $3.9 million, offset by $0.9 million paid to repurchase of company stock earlier in the year.

Net cash used in discontinued operations for the Zutopia division in fiscal 2002. This shift reflects nearly $112003 was $1.2 million, which included the division’s loss of $8.3 million, largely offset by non-cash charges of $6.6 million, a net increase in the cash components of our working capital of approximately $0.8 million, and capital expenditures of $0.3 million.

The cash and investment balance for the fiscal year 2003 was $63.5 million, $31.3 million less in accrued construction coststhan 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 an increase of approximately $10.6 million2002. This change resulted from the enddecline in sales and the resulting use of fiscal 2001 to the end of fiscal 2002 in other receivables due to an income tax receivable of $11.8 million, reflecting the drop in income in the latter part of fiscal 2002.

cash described above.

In fiscal 2002, 20012003 and 2000,2002, we invested $39.0 million, $39.0$13.7 million and $18.1$38.2 million, respectively, in property and equipment and leasehold improvements.improvements for continuing operations. These expenditures related primarily to new store openings

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and remodels. In fiscal 2002,2003 for continuing operations, we opened 6930 stores and remodeled 2220 stores. In fiscal 2002 for continuing operations, we opened 62 stores and remodeled 23 stores. There were no acquisitions in either fiscal 2002. In fiscal 2001, we opened 51 stores, remodeled 32 stores and we acquired the leases, merchandise inventory and furniture and fixtures of 18 Zutopia stores from Gymboree, Inc. for $3.6 million.year. Capital expenditures for fiscal 20032004 are currently projected to be $17.5$12 million or less, relating primarily to planned new store openings remodels and minor store renovations, as well as implementing a planningremodels.

Our working capital at January 31, 2004 was $38.6 million compared to $64.5 million at February 1, 2003. The overall reduction in our working capital primarily reflects cash used in the continuing operations and allocation system and other key store support programs.the discontinued Zutopia division operations.

In September 1998, the Company’sour Board of Directors authorized the repurchase of up to 20% of the outstanding shares of our Class A 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 Stocktreasury 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 Octoberfiscal 2002, wethe Company repurchased 947,400 shares under the new repurchase plan for $8.2 million. Thesemillion and retired these shares. An additional 124,500 shares were repurchased for $0.9 million in the first quarter of fiscal 2003 and these shares under the new plan were immediately retired as authorized by our Board of Directors.also retired. As of the end of fiscal 2002,January 31, 2004, there were approximately 4.5 million4,328,100 shares remaining that are authorized for future repurchases under the October 1, 2002 authorization. As of the date of this report, all treasury shares have been retired.repurchase. Presently, there are no plans to repurchase additional shares.

We have a revolving line-of-credit arrangement with Bank of America, N.A. in an aggregate principal amountunder which we may borrow up to a maximum of $50 million maturing on a revolving basis through July 1, 2004. We renegotiated and revised certain of the covenants included in this secured line of credit on January 29, 2004, primarily as a result of the decision

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to divest the Zutopia division. The amended line-of-credit arrangement is secured by our merchandise inventory. At February 1, 2003,January 31, 2004, there were no outstanding borrowings under the credit arrangement, and therearrangement. There were $7.6$17.2 million in open letters of credit related to imported inventory orders and an insuranceas well as standby letterletters of credit for $0.7totaling $1.0 million. As of the date of this reportJanuary 31, 2004, we arewere in compliance with all financial covenants of the credit arrangement. We were required for the fourth fiscal quarter 2003 to meet a net worth covenant of $168.5 million adjusted for the disposition of the Zutopia division, the class action legal settlement, and year-end markdowns. We are also required to maintain a minimum cash and investment balance under the line of credit. To the extent that our cash and investment balance falls below the $50.0 million required cash covenant, the line of credit may not be available, and therefore we would have to rely upon our cash and investments to meet our operating requirements.

We invest our excess funds in short-term investment grade money market funds, investment grade municipal and commercial paper and U.S. Treasury and Agencyagency obligations. TheAssets listed as long-term marketable securitiesinvestments on our balance sheet consist of high credit quality municipal and corporate bonds. bonds with maturities extending no further than three years out.

We believe that our available cash and investments aggregating $63.5 million at January 31, 2004 and other working capital and cash flows from operating activities will be sufficient to meet our operating and capital requirements infor the foreseeable future.next 12 months.

Seasonality and Inflation

Our business is seasonal byin 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 largesta large percentage of sales volume. For the past three fiscal years, the Christmas and back-to-school seasons together accounted for an average of approximatelyslightly less than 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

Our principal contractual obligations consist of minimum annual rental commitments under non-cancelable leases includingfor our stores, our corporate office, warehouse facility, automobiles, computer equipment and copiers. At February 1, 2003,January 31, 2004, our contractual obligations under these leases were as follows (in thousands):

14Operating leases include remaining commitments open for the “Zutopia” division. Negotiations of early lease buyouts are anticipated to be completed by the end of the second quarter of fiscal 2004.

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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,January 31, 2004, 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 JuneNovember 2001, the Financial Accounting Standards Board, (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 142 “Goodwill and Other Intangible 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 on February 3, 2002. Upon completion of the impairment test, we determined that there was no impairment of goodwill.

In November 2001, theor FASB issued SFAS No. 143 “Accounting for Asset Retirement 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. We believe the adoption of SFAS No. 143 will not have a material impact on our consolidated results of operations, financial position or cash flows.

Effective February 3, 2002, theThe Company adopted SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived 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. The adoption of SFAS No. 144 did not have a143 without material impact on ourthe Company’s 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. WeThe Company 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 See Note 4 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 interimconsolidated 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.statements.

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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 andof 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. The2002 while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We believe theThe adoption of suchthis interpretation willdid not have a material impact on ourits results of operations or financial position and we intendposition. See Note 7 to adopt the recognition provisions of such interpretation on February 2, 2003, as required.consolidated financial statements.

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” an interpretationEntities” and in December 2003, issued Interpretation No. 46 (revised in December 2003) “Consolidation of ARBVariable Interest Entities—An Interpretation of APB No. 51.” In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires thatcertain variable interest entities to be consolidated by a company if that company is subject to a majoritythe primary beneficiary of the entity if the investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk of lossfor the entity to finance its activities without additional subordinated financial support from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both.other parties. FIN No. 46 also requires disclosures about variable interest(R) clarifies the application of Accounting Research Bulletin (“APB”)

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No. 51, “Consolidated Financial Statements,” to certain entities that companies are not required to consolidate but in which equity investors do not have the characteristics of a company has a significant variable interest.controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without subordinated financial support from other parties. The consolidation requirements of FIN No. 46 will applyapplies immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to older entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. TheCertain of the disclosure requirements will apply in all financial statements issued after January 31, 2003. We believe2003, regardless of when the variable interest entity was established. FIN No. 46(R) applies immediately to variable interest entities created after December 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies no later than the first reporting period ending after December 15, 2004, to variable interest entities in which an enterprise holds a variable interest (other than special purpose) that it acquired before January 1, 2004. FIN No. 46(R) applies to public enterprises as of the beginning of the applicable interim or annual period. The Company believes that the adoption of FIN No. 46 and FIN No. 46(R) will not have noa material impact on ourits financial position or results of operations or financial position, as we haveoperation because the Company has no interests in variable interest entities.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity,” (“SFAS 150”) which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 for public companies. In October 2003, the FASB deferred implementation of paragraphs 9 and 10 of SFAS 150 regarding parent company treatment of minority interest for certain limited life entities. This deferral is for an indefinite period. The adoption of SFAS 150 did not have a material impact on the Company’s financial statements.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

To the extent that we borrow under our credit facility, we will beare exposed to market risk related to changes in interest rates. At February 1, 2003,January 31, 2004, no borrowings were outstanding under theour credit facility. See Notes 1 and 2 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. WeHowever, we are exposed to market risk related to changes in interest rates on our investments in short-termthe investment grade interest-bearing securities. These investments are considered to be cash equivalents and are shown that way on our balance sheet.securities in which we invest. 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 15.

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

Not Applicable.

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PART III

Item 9A.    Controls and Procedures

Disclosure Controls and Internal Controls

Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) (“Disclosure Controls”) are controls and 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 Chief Executive Officer and our interim Chief Financial Officer, as appropriate to

21

allow timely decisions regarding required disclosure. Our internal control over financial reporting (“Internal Controls”) is a process designed by, or under the supervision of, our Chief Executive Officer and interim Chief Financial Officer, and effected by our Board of Directors, management and other personnel, with the objective of providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal Controls also include policies and procedures that:

1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of our company;

2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of management and directors of our company; and

3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our company’s assets that could have a material effect on the financial statements.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and our interim Chief Financial Officer, does not expect that our Disclosure Controls or Internal Controls will prevent all errors 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 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 a 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. Moreover, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events.

Notwithstanding the foregoing limitations, we believe that our Disclosure Controls and Internal Controls provide reasonable assurances that the objectives of our control system are met.

Quarterly Evaluation of the Company’s Disclosure Controls

As of January 31, 2004, the last day of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our interim Chief Financial Officer, of the effectiveness of the design and operation of our Disclosure Controls. Based upon that evaluation, our Chief Executive Officer and our interim Chief Financial Officer concluded, subject to the limitations noted above, that the design and operation of our Disclosure Controls were effective to ensure that material information related to our company which is required to be disclosed in reports filed under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

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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 20032004 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 1, 2003.January 31, 2004.

The Company has adopted a written code of ethics, “The Wet Seal, Inc. Code of Conduct,” which is applicable to all directors, officers and employees of the Company, including the Company’s principal executive officer, principal financial officer, principal accounting officer or controller and other executive officers identified pursuant to this Item 10 who perform similar functions (collectively, the “Selected Officers”). In accordance with the rules and regulations of the SEC, a copy of the code is filed as an exhibit to this Annual Report and is available on the Company’s website. The Company will disclose any changes in or waivers from its code of ethics applicable to any Selected Officer on its website athttp://www.wetsealinc.com or by filing a Form 8-K.

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 20032004 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 1, 2003.January 31, 2004.

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 20032004 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 1, 2003.January 31, 2004.

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 20032004 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 1, 2003.January 31, 2004.

Item 14.    Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the information set forth in our proxy statement for our 2004 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended January 31, 2004.

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PART IV

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

No reportsOn November 21, 2003, we filed a current report on Form 8-K were filed duringreporting the lastissuance of two press releases. In the first press release, we announced that William B. Langsdorf had resigned as Chief Financial Officer. In the second press release, we reported our financial results for the third quarter ended November 1, 2003 and announced estimated financial results for the fourth quarter of the fiscal year ended February 1, 20032003.

19On January 9, 2004, we filed a current report on Form 8-K reporting the issuance of two press releases. In the first press release, we announced strategic initiatives involving the potential sale or closure of all 31 Zutopia stores and that Jennifer Pritchard had been named president of the Arden B. division, following the resignation of Greg Scott. In the second press release, we reported our net sales for the five-week period ended January 3, 2004 and announced estimated financial results for the fourth quarter of fiscal 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.

20

SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATIONS

I, Irving Teitelbaum, certify that:

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SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATIONS

I, William B. Langsdorf, certify that:

2225

THE WET SEAL, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULES

F-1

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 January 31, 2004 and February 1, 2003 and February 2, 2002 and the related consolidated statements of income, comprehensive income,operations, stockholders’ equity and cash flows for each of the three fiscal years in the period ended February 1, 2003.January 31, 2004. These financial statements are the responsibility of the Company’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 January 31, 2004 and February 1, 2003 and February 2, 2002 and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 2003January 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 4 to the consolidated financial statements, on January 6, 2004 the Company’s board of directors approved a plan to discontinue the operations of the Company’s Zutopia division (the Plan). The consolidated financial statements, referred to above have been restated to report the Zutopia business as a discontinued operation for all periods presented.

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 & TOUCHE LLP

Costa Mesa, California

March 13, 200317, 2004

F-2

THE WET SEAL, INC.

CONSOLIDATED BALANCE SHEETS