UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended January 29, 200528, 2006

OR

Commission file number 0-18632

THE WET SEAL, INC.

(Exact name of registrant as specified in its charter)

(949) 583-9029699-3900

(Registrant’s telephone number, including area code)

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

Title of Each Class		Name of Each Exchange on Which Registered
Class A Common Stock, $0.10 par value per share		NASDAQ National Market

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

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in the Rule 405 of the Securities Act of 1933.    Yes  ¨    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Securities Exchange Act.    Yes  ¨    No  þ

Indicate by check mark whether the registrantregistrant: (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  xþ    No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

Large accelerated filer:  ¨

Accelerated filer:  þ         Non-accelerated filer:¨

Indicate by check mark whether the registrant is an accelerated filera shell company (as defined in Rule 12b-2 of the Exchange Act).    Yesx    No  ¨

    No  þ

The aggregate market value of voting stock held by the registrant’s non-affiliates as of July 31, 200430, 2005, was approximately $176,769,000$313,076,000 based on the closing sale price of $5.10$6.20 per share as reported on the NASDAQ National Market on July 30, 2004, the last business day of the registrant’s most recently completed second fiscal quarter.

29, 2005.

The number of shares outstanding of the Registrant’sregistrant’s Class A Common Stock, par value $.10$0.10 per share, outstanding at April 27, 200510, 2006, was 41,250,582.69,071,412. There were no shares outstanding of the registrant’s Class B Common Stock, par value $.10 per share, or Preferred Stock, par value $.01$0.10 per share, outstanding at April 27, 2005.

10, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

PART III of this Annual Report incorporates information by reference from the Registrant’sregistrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be filed with the SEC within 120 days of January 29, 2005.28, 2006.

THE WET SEAL, INC.

Annual Report on Form 10-K

For the Fiscal Year Ended January 28, 2006

TABLE OF CONTENTS

PART I

Item 1.    Business

General

We are a national specialty retailer operating stores selling fashionable and contemporary apparel and accessory items designed for female customers. We are a Delaware corporation that operates two nationwide, primarily mall-based, chains of retail stores under the names “Wet Seal” and “Arden B.” At January 29, 2005,28, 2006, we had 502400 retail stores in 46 states, Puerto Rico and Washington D.C. Of the 502400 stores, there were 408 locations within the Wet Seal chain and 94 were Arden B. locations. As a part of our financial turn-around strategy to improve our company’s operating results, we announced on December 28, 2004 our plans to close approximately 150 Wet Seal stores. We completed the closure of 153308 Wet Seal stores related to our announced store closure plans by March 5, 2005. We ceased use of the property at 103 stores on or about January 29, 2005 with the remaining 50 stores closing in February and March 2005. (See Item 7 “Store Closures”).

92 Arden B. stores.

All references to “we”, “our”, “us”,“we,” “our,” “us,” and “our company” in this Annual Report mean The Wet Seal, Inc. and its wholly owned subsidiaries. The use ofAll references to trademarks or service marks in this Annual Report that are owned by any other person should not be understood to indicate any claim over or ownership of such marks by our company.“fiscal 2005,” “fiscal 2004” and “fiscal 2003” mean the fiscal years ended January 28, 2006, January 29, 2005, and January 31, 2004, respectively. Our Annual Report on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K and all amendments to those reports and the proxy statement for our annual meeting of stockholders are made available, free of charge, on our corporate web site,www.wetsealinc.com, as soon as reasonably practicable after such reports have been filed with or furnished to the Securities and Exchange Commission, or the Commission. Our Code of Conduct is also located within the Corporate Information section of our corporate website. These documents are also available in print to any stockholder who requests a copy from our Investor Relations department. The public may also read and copy any materials that we have filed with the Commission at the Commission’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. In addition, these materials may be obtained from the Commission at the website maintained by the SEC at sec.gov. The content of our websites (the Wet Seal, Inc.(www.wetsealinc.com,www.wetseal.com, Wet Seal and Arden B.www.ardenb.com) is not intended to be incorporated by reference in this Annual Report.

Store Formats

Wet Seal.Founded in 1962, Wet Seal targets the fashion-conscious junior customer by providing a balance of moderately priced fashionable brand name and company-developed apparel and accessories. While Wet Seal targets fashion-forward teens, we believe that Wet Seal’s core customer is between the ages of 17 and 1925 years old. Wet Seal stores average approximately 4,000 square feet in size. As of April 27, 2005,10, 2006, we operated 307308 Wet Seal stores.

Arden B.In the fourth quarter of fiscal 1998, we opened our first Arden B. store. Arden B. stores cater to the fashionable, sophisticated contemporary woman. With a unique mix of high quality European and custom in-house designs, Arden B. delivers a hip,feminine, contemporary, sophisticated wardrobe of branded fashion separates and accessories for all facetsevery facet of the customer’s lifestyle:lifestyle, from everyday wear-to-work,to special occasion, and casual,by offering unique, high quality, European-inspired designs, predominantly under the “Arden B.” brand name. Arden B. stores average approximately 3,200 square feet in size. As of April 27, 2005,10, 2006, we operated 9392 Arden B. locations.stores.

Internet Operations.In 1999,addition to our store locations, we established Wet Seal online, a web-based store located atwww.wetseal.com, offering Wet Seal merchandise 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. We expanded our online businessconcept in August of 2002 with the launch ofwww.ardenb.com, offering Arden B. apparel and accessories comparable to those carried in the store collections.stores.

Our Stores

In December 2004, we announced that we would close approximately 150 Wet Seal stores as part of our turn-around strategy. We completed our inventory liquidation sales and the closing of 153 Wet Seal stores in March 2005. During fiscal 2004,2005, we also closed an additional nine Wet Seal stores, of which one was due to lease expiration, and closed five Arden B. stores, which were all due to lease expirations.

Although we re-opened eight previously closed Wet Seal Stores during fiscal 2005, we scaled back our earlier plans to open new stores in an effort to limit capital expenditures and concentrate our efforts on expanding our core business. Through November 30, 2004, we had closed 18 Wet Seal and 7We opened three new Arden B. stores asduring fiscal 2005, and also renovated seven Arden B. stores.

We operated a resultchain, Zutopia, which was not successful in generating profits. We decided to discontinue this chain of natural lease expirations. As a result31 stores at the end of our analysesfiscal 2003. Fiscal 2004 and fiscal 2003 included losses from discontinued operations, net of the financial performanceincome taxes, of our Wet Seal stores$7.0 million and other qualitative measures, we announced on December 28, 2004, that

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we would close approximately 150 underperforming Wet Seal stores. Since that announcement, we closed 153 underperforming Wet Seal stores. Any future closures will be the result of natural lease expirations where we decide not to extend, or are unable to extend, a store lease.

In connection with the store closures, we entered into an Agency Agreement with Hilco Merchant Resources, LLC (“Hilco”) pursuant to which Hilco would liquidate closing store inventories through promotional, store closing or similar sales. Under the terms of our arrangement with Hilco, we are to receive cash proceeds from the liquidating stores of not less than 22.9% of the initial retail value of the merchandise inventory in the closing stores. We also entered into a consulting and advisory services agreement with Hilco Real Estate, LLC (“Hilco Advisors”)$8.3 million, respectively, for the purpose of selling, terminating or otherwise mitigating our lease obligations related to the closing stores. Under our arrangement with Hilco, as of April 27, 2005, we have terminated the leases or have agreed in principle to terminate the leases on 134 of the 153 stores closed. Hilco Advisors is continuing its negotiations with the landlords associated with the remaining 19 stores for which a lease termination agreement has not been reached.

Zutopia chain.

The following table sets forth our 400 stores by state or territory as of April 27, 2005:January 28, 2006:

During fiscal 2004, we renovated 8 stores. Of these, 4 were Wet Seal stores in which completely new store frontage, flooring, wall and light fixtures and video displays were installed. The remaining renovations were for Arden B. stores, which upgraded the interiors to mirror new stores in appearance. In addition, due to commitments made early in the year, we opened 8 new stores, 2 of which were Arden B. stores and the remainder Wet Seal stores.

Our ability to expand in the future will depend, in part, on satisfactory cash flows from existing operations, the demand for our merchandise, our ability to find suitable mall or other locations with acceptable sites and satisfactory terms, and general business conditions. Our management does not believe there are significant geographic constraints on the locations of future stores. For fiscal 2005,2006, we intend to open 4,20 to 25 new Wet Seal and/or Arden B. stores and to remodel or relocate 5 and remodel 210 to 15 Wet Seal and/or Arden B. stores. In addition, we have approximately 45 existing store leases scheduled to our store closures with Hilco, weexpire in fiscal 2006. We expect to close 4 Arden B. stores and 2 Wet Seal stores asnegotiate new leases that will allow us to remain in a resultsubstantial majority of natural lease expirations during fiscal 2005.these locations. 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.

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Merchandising Initiatives

Michael Gold, a well-regarded retailer, has assistedWe report our company with our merchandising initiatives. Underresults of operations as one reportable segment representing the direction of Michael Gold, our Wet Seal division has introduced a new merchandising strategy to attract teen-aged girls to our stores.

We are offering current trend merchandise at low prices and we have accelerated the delivery of fresh merchandise to our stores to ensure new merchandise in the stores every week. In addition, our buyers are instructed to be awareaggregation of our competitor’s “best sellers” andtwo retail brands due to obtain similar merchandise for our stores as soon as practicable. We are also more closely involved with domestic contractors in Los Angeles and New York to obtain from them their most current “hot” items.

While we have had credit constraints on our ability to obtain merchandise, we have been able to obtain sufficient inventory to demonstrate that this strategy has the potential for success. Our vendor credit situation is still tight, but it has improved sufficiently to enable us to build inventory in our Wet Seal stores for delivery in the current cycle.

Onesimilarities of the most significant measureseconomic and operating characteristics of the success of a retailer is sales per square foot. For us, this is determined by dividing the total sales of our company by the number of square feet. The sales per square foot of our Wet Seal division were impacted negatively and significantly by the decline in revenue we experienced in the past two years in that division. Our merchandising strategy is to increase our sales per square foot at reasonable gross margins. At the same time, we are working to reduce our non-store expenses, including our general and administrative overhead, to be more in line with our reduced store count and projected revenues.

The growth of our Arden B. division has been constrainedoperations represented by our financial condition and by credit constraints. Our board of directors has been exploring and will continue to explore ideas to accelerate the growth of the Arden B. division.

Mr. Gold and our company have been negotiating an agreement with regard to Mr. Gold’s incentive compensation, the amount of which would be significant, for his efforts to date and in the future. However, as of April 27, 2005, we have not reached an agreement with Mr. Gold and there is no assurance that a mutually satisfactory agreement can be reached, (See “Risk Factors—We need to employ personnel with requisite merchandising skills to continue our merchandising strategy implemented by Mr. Gold” and “The shares to be issued under our 2005 Stock Incentive Plan will result in a substantial dilution of our earnings per share”).

two store concepts.

Design, Buying and Product Development

Our 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,assessing customer responses to current trends, shopping the European market shoppingand the appropriate domestic vendor base and through customer responses to current trends in each division.fashion services and gathering references from industry publications. After selecting fashion themes, to promote, the design and buying teams work closely with vendors to modifyuse colors, materials and designs andthat create images consistent with the themes for our product offerings.

We expect to decrease

Since fiscal 2004, we have decreased our dependency on internally designedinternally-designed merchandise as it relates toin our Wet Seal division.concept. This shift will allowallows us more flexibility to respond to the changing fashion trends of the junior customer, to buy in smaller lots and to reduce product development lead times. See also “—Allocation“Allocation and Distribution” below.

Marketing, Advertising and Promotion

We believe that our brands, Wet Seal and Arden B., 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’s target customers. We continue to invest in the development of our brands through customer research, print advertising, in-store marketing and the maintenance of an Internet presence.

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During fiscal 2005, 2004 2003 and 2002,2003, we spent 1.9%0.8%, 1.0%1.9% and 1.5%1.0%, respectively, of net sales on marketing.advertising. In fiscal 2004,2005, our primary marketing focus was on in-store promotion programs for the Wet Seal divisionconcept and print media for the Arden B., concept, which included publications in Vogue^® throughout the year. In addition, the Wet Seal division advertised key brands for back-to-school on MTV^®.

We offer a frequent buyer card in our Wet Seal stores in order to build loyalty to the brand, increase the frequency of visits, promote multiple item purchases and gain direct access to the customer. As part of this program sales representatives telephone selectedwe send e-mails to cardholders personally to notify them of special in-store promotions, such as preferred customer sales during which cardholders receive additional incentives. LateAs discussed further in the third quarterNote 1 of fiscal 2004,Notes to Consolidated Financial Statements contained elsewhere within this Annual Report, our Arden B. division introducedconcept also offers a loyalty program, “B Rewarded”,Rewarded,” designed for the same purposes as thatthose of our Wet Seal division.

In the Spring of 2002, we launched Seal TV, our in-house fashion and entertainment 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. As part of our efforts to reduce costs and return our company to profitability, we decided to discontinue the use of Seal TV in fiscal 2005 in favor of lower cost in-store branding and communication.

In fiscal 2002, we also introduced a Wet Seal catalog 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 did not produce or distribute a catalog during fiscal 2003 or fiscal 2004, and we do not plan on pursuing this type of marketing in the near future.

concept.

Sourcing and Vendor Relationships

We purchase our merchandise from both domestic and foreign vendors. Approximately 27%14% of our retail receipts are directly imported from foreign vendors. Although in fiscal 20042005 no single vendor provided more than 10% of our merchandise, management believes we are the largest customer of many of our smaller vendors. Quality control is monitored 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, and there are many vendors who could supply our 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 Districtstore operations management and Regional Directors and Merchandise Buyers,merchandise buyers, our team of planners and allocators managemanages inventory levels and coordinatecoordinates the allocation of merchandise to each of our stores based on sales volume, store size, demographics, climate and other factors that may influence an individual store’s product mix.

All merchandise for retail stores is received from vendors at our Foothill Ranch, California distribution facility,center, where items are inspected for quality and fit and prepared for shipping to our stores. 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 stores daily, and markdowns are taken regularly to effect the rapid sale of slow movingslow-moving inventory. Marked-down merchandise that remains unsold is either sold to an outside clearance company or given to charity in order to move the merchandise. The fulfillment process and distribution of merchandise for the e-commerce web-siteour online concept is performed at our Foothill Ranch distribution center.

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Information and Control Systems

Our merchandise, financial and store computer systems are fully integrated and operate using primarily Oracle^® technology. We have invested in a large data warehouse that provides management, buyers and planners

comprehensive data that helps them identify emerging trends and manage inventories. The core merchandise system is provided by the nation’sa leading retail enterprise resource planning, “ERP”or “ERP,” software company,provider, and is frequently upgraded and enhanced to support strategic business initiatives.

All of our stores have a point-of-sale system operating on software provided by a leading provider of specialty retailing point-of-sale systems. TheThis system features bar-coded ticket scanning, automatic price look-uplook-ups and centralized credit authorizations. All stores are networked to the corporate office via a centrally managed virtual private network. In the fall of fiscal 2003, we developedWe utilize a store portal that is integrated with the corporate merchandise ERP system to provide the stores and corporate staff with real-time information regarding sales, promotions, inventory and shipments, and enableenables more efficient communications with the corporate office. In fiscal 2004, we did not invest in new systems. The2005, the majority of our information technology efforts centered around maintaining and enhancing existing systems. We do notIn fiscal 2006, we anticipate significant capital expenditures forimplementing a new systems development in fiscal 2005.

online business order fulfillment system and upgrading our company-wide payroll system.

Seasonality

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 slightly lessmore than 30% of our annual sales, after adjusting for sales increases related to new stores.sales. 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, could have a material adverse effect on our company.

Trademarks

Our primary trademarks and servicemarksservice marks are WET SEAL^® and ARDEN B^®, which are registered in the U.S. Patent and Trademark Office. We also use and have registered, or have applications pending for, a number of other U.S. trademarks, including, but not limited to, A. AUBREY^®, ACCOMPLICE^®, ARDEN B SPORT^™, BLUE ASPHALT^®, CONTEMPO CASUALS^®, EVOLUTION NOT REVOLUTION^®, ENR EVOLUTION NOT REVOLUTION^®, FASHIONABLY IT^®, FORMULA X^®, GET IT.WEAR IT.FLAUNTIT. WEAR IT. FLAUNT IT.^®, MEOW GENESHUG ME^®™, SEALLIMBO LOUNGE^™®, SEAL GLAMOUR^™, SEAL PUPSSTASH^™, SEAL MAGAZINE^™®, SEAL TV^™, UNCIVILIZEDSTYLIZER^®, URBAN VIBE^®, ARDEN B SPORT^™, ENR EVOLUTION NOT REVOLUTION^®, LIMBO LOUNGE^®, PANTIES FOR LIFE^®, SOCKS FOR LIFE^®, STYLIZER^®, TIGHTS FOR LIFE^®, NEXT^® (State of California only) and ZUTOPIA^®. In general, the registrations for these trademarks and servicemarksservice marks are renewable indefinitely, as long as we continue to use the marks as required by applicable trademark laws. We are not aware of any adverse claims or infringement actions relating to our trademarks or service marks.

Competition

The women’s retail apparel industry is highly competitive, with fashion, quality, price, location, in-store environment and service being the principal competitive factors. WeOur Wet Seal and Arden B. stores compete with specialty apparel retailers, department stores and certain other apparel retailers, including Aeropostale, Charlotte Russe, Gap, Banana Republic, H&M, Old Navy, Pacific Sunwear, American Eagle, Urban Outfitters, Forever 21, Express, J.C. Penney, bebe, and BCBG. Many of our competitors are large national chains that 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 other locations is intense, and we cannot ensure that we will be able to obtain new locations on terms favorable to us, if at all.

Customers

6Our company’s business is not dependent upon a single customer or small group of customers.

Environmental Matters

We are not aware of any federal, state or local environmental laws or regulations that will materially affect our earnings or competitive position, or result in material capital expenditures. However, we cannot predict the effect on our operations of possible future environmental legislation or regulations. During fiscal 2005, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated for fiscal 2006.

Government Regulation

Our company is subject to various federal, state and local laws affecting our business. Each of our company’s stores must comply with licensing and regulation by a number of governmental authorities, in which the store is located. To date, our company has not been significantly affected by any difficulty, delay or failure to obtain required licenses or approvals.

Our company is also subject to federal and state laws governing such matters as employment and pay practices, overtime and working conditions. The bulk of our company’s employees are paid on an hourly basis at rates related to the federal and state minimum wages. In the past, we have been assessed penalties or paid settlements to gain dismissal of lawsuits for non-compliance with certain of these laws, and future non-compliance could result in a material adverse effect on our company’s operations.

We continue to monitor our facilities for compliance with the Americans with Disabilities Act, or the ADA, in order to conform to its requirements. Under the ADA, we could be required to expend funds to modify stores to better provide service to, or make reasonable accommodation for the employment of, disabled persons. We believe that expenditures, if required, would not have a material adverse effect on our company’s operations.

Employees

As of January 29, 2005,28, 2006, our continuing operations had 5,4335,312 employees, consisting of 1,7911,735 full-time employees and 3,6423,577 part-time employees. Full-time personnel consisted of 588562 salaried employees and 1,203 full-time1,173 hourly employees. All part-time personnel are hourly employees. Of all employees, 5,1404,992 were sales personnel and 293320 were administrative and distribution center personnel. Personnel at all levels of store operations are provided withvarious opportunities for cash and/or other incentives based upon various individual store sales targets. All of our employees are non-union, and, in management’s opinion, are paid competitively with current standards in the industry.industry standards. We believe that our relationship with our employees is good.

On December 28, 2004, we announced the closure of approximately 150 Wet Seal stores, as a part of a store-closing program designed to improve our company’s return to profitability. By March 5, 2005 we had closed 153 Wet Seal stores and approximately 2,000 positions were eliminated as result of the store closures.

Recent Developments

April 2005 Private Placement

On April 29, 2005, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with several investors that participated in our January 2005 private placement (as described below—“January 2005 Private Placement”). Under terms of the Securities Purchase Agreement, we have agreed to issue 24,600 shares of our Series C Convertible Preferred Stock (the “Preferred Stock”) for an aggregate purchase price of $24.6 million and new warrants (the “New Warrants”) to purchase up to 7.5 million shares of our Class A common stock.

The Preferred Stock will be convertible into 8.2 million shares of our Class A common stock, reflecting an initial $3.00 per share conversion price. The New Warrants will be exercisable beginning six months following the closing and will expire on the fifth anniversary of the date upon which they became initially exercisable. The New Warrants will have an initial exercise price equal to $3.68, reflecting the closing bid price of the our Class A common stock on the business day immediately before the signing of the Securities Purchase Agreement. The Preferred Stock has customary weighted average anti-dilution protection, while the New Warrants will be adjusted from time to time for stock splits, stock dividends, distributions and similar transactions.

Under the terms of the Securities Purchase Agreement, the investors who received warrants in the January 2005 Private Placement agreed to exercise all of their outstanding Series A Warrants and a pro rata portion of the outstanding Series B Warrants. Approximately 3.4 million shares of our Class A common stock will be issued in the warrant exercise at an aggregate exercise price of approximately $6.4 million.

We will receive approximately $18.0 million in net proceeds (after transaction expenses and retirement of the Bridge Loan Facility described below) in connection with the financing (the “April Private Placement”). As of April 29, 2005, the outstanding principal and capitialized interest of the Bridge Loan Facility was approximately $12.0 million which was provided by certain participants of our January 2005 Private Placement. The remainder of the proceeds will be used for general working capital purposes. We intend to close the financing on or before May 3, 2005.

Registration Statement—Extension of Filing Obligations

Under the terms of the Securities Purchase Agreement, the investors in this April 2005 Private Placement have agreed to extend the deadline for the filing of a registration statement with the Securities and Exchange Commission (the “SEC”) as required by the registration rights agreement entered into in connection with our January 2005 private placement (as described below—“January 2005 Private Placement”). Our company will now be required to file a registration statement with the SEC that includes the securities issued in the January 2005 private placement and the shares of our Class A common stock issuable upon conversion or exercise of the Preferred Stock and the New Warrants, as the case may be. The new registration statement must be filed no later

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than ten business days after the earlier of (i) the closing of the April 2005 Private Placement or (ii) May 3, 2005 (the “Filing Deadline”). In the event our company does not file the registration statement on or before the Filing Deadline or the registration statement is not declared effective by no later than 60 days (or in the event the SEC reviews the registration statement and requires modifications thereto, 90 days) after the Filing Deadline, our company will be required to make registration delay payments at the rate of $61,000 per day with regard to the securities issued in the January Private Placement from April 21, 2005 through the date of compliance. Alternatively, registration delay payments for the securities issued in the April Private Placement will accrue at the rate of $34,000 per day from the date of non-compliance through the date of compliance with our registration obligations.

January 2005 Private Placement

On January 14, 2005, we issued $56.0 million in aggregate principal amount of Secured Convertible Notes due January 14, 2012 (the “Notes”) to certain investors (“January 2005 Private Placement”). The Notes have an initial conversion price of $1.50 per share of our Class A common stock. The Notes are immediately exercisable and bear interest at an annual rate of 3.76%, which may be paid in cash or capitalized. On January 14, 2005, we also issued the Series B Warrants, Series C Warrants and Series D Warrants (collectively with the Series A Warrants described below, the “Warrants”) to acquire initially up to 3.4 million, 4.5 million and 4.7 million shares of our Class A common stock, respectively. The Series A Warrants, Series B Warrants, Series C Warrants and Series D Warrants have initial exercise prices of $1.75, $2.25, $2.50 and $2.75 per share, respectively. On November 9, 2004, the date we initially signed our investment agreements for the January 2005 Private Placement, we issued the Series A Warrants to acquire initially up to 2.3 million shares of our Class A common stock. Series A Warrants were subsequently reissued on December 13, 2004 in connection with amendments to our investment agreements. The conversion prices and the exercise prices of the Notes and Warrants have full ratchet anti-dilution protection. This type of anti-dilution protection requires that the conversion price or exercise price, as the case may be, be adjusted from time to time in the event of the issuance of Class A common stock or securities convertible into Class A common stock at prices below the respective conversion price or exercise price.

The Warrants are exercisable on any date following their issuance. The exercise period of the Series A Warrants, Series B Warrants, Series C Warrants and Series D Warrants will terminate on December 13, 2008, January 14, 2009, January 14, 2010 and January 14, 2010, respectively.

The terms of our existing senior credit facility with Fleet Retail Group, Inc. were modified to permit the issuance of the Notes and the Warrants and to allow for the bridge loan facility (as described below in “—Extension of Bridge Loan Facility”).

We have used the proceeds from the January 2005 Private Placement and the bridge loan facility (as described below in “—Extension of Bridge Loan Facility”) to implement our strategy to return our company to profitability.

Extension of Bridge Loan Facility

On November 9, 2004, we received a $10.0 million bridge loan to be used for working capital purposes prior to the closing of the January 2005 Private Placement. Interest accrues on the bridge loan facility at the rate of 25.0%. Originally, the proceeds of the bridge loan (the “Bridge Loan Facility”) were to be applied at the closing of the January 2005 Private Placement as partial payment of the aggregate purchase price for the Notes and the Warrants. However, on January 14, 2005, we entered into agreements with the investors in the January 2005 Private Placement and the lenders under our existing senior credit facility to extend the maturity of the Bridge Loan Facility.

Pursuant to the terms of the amendments, the initial maturity of the Bridge Loan Facility was extended to March 31, 2005, which since then has been extended and shall be further extended on a month to month basis, subject to the right of the administrative agent under the loan documents to terminate it on 10 days’ notice, with

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the final maturity date of the Bridge Loan Facility being March 31, 2009. Interest will continue to accrue on the Bridge Loan Facility at the rate of 25.0% through July 31, 2005, but will increase to 30.0% effective August 1, 2005 if the bridge loan remains outstanding. Interest may be paid in cash or capitalized at our discretion.

Beginning February 1, 2005, we were obligated to pay the bridge lenders supplemental interest payments on the outstanding principal amount of the Bridge Loan Facility (including capitalized interest). These payments have been made at the beginning of each month during which the Bridge Loan Facility has been extended. The supplemental interest payment rate was 1.45% and 0.70% for the months of February and March,, respectively, and 1.50% thereafter. Supplemental interest payments may also be paid in cash or capitalized at our discretion.

We intend to retire the outstanding Bridge Loan Facility in connection with our April 2005 Private Placement.

Changes in Board Composition and Management

Since October 2004, we have experienced significant management changes. In November 2004, Peter Whitford resigned from his position as Chief Executive Officer and Chairman of our board of directors and Allan Haims resigned as President of our Wet Seal division. In December 2004, we appointed Joel N. Waller, the former Chief Executive Officer of Wilsons Leather, to the positions of President and Chief Executive Officer, effective February 1, 2005. Mr. Waller was appointed to the Board of Directors effective December 27, 2004. In addition, in March 2005, Joseph Deckop resigned from his position as Executive Vice President of Central Planning and Allocation.

As a part of our turn-around strategy, all of the members of our board of directors, other than Henry Winterstern, our Chairman, and Alan Siegel, have either retired or resigned. Recently we have appointed Messers. Waller, Sidney M. Horn, Harold D. Kahn and Kenneth M. Reiss to our board of director’s. Mr. Horn is a leading corporate lawyer and a partner at the law firm Stikeman Elliot LLP, located in Montreal, Canada. Mr. Kahn is currently a director of Steven Madden, Ltd. Until March 2004, Mr. Kahn served as Chairman and Chief Executive Officer of Macy’s East. Mr. Reiss is currently a director of Guitar Center, Inc. Mr. Reiss is a former partner of Ernst & Young LLP, retired since June 2003. The board of directors appointed Mr. Reiss as Chairman of the Audit Committee. The entire board of directors, with the exception of Mr. Waller, will act as the Compensation Committee until such time as the board of directors is expanded.

Statement Regarding Forward Looking Disclosure and Risk Factors

Certain sections of this Annual Report on Form 10-K, including “Item 1. Business” and “Item 7. Management’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, and Section 21E of the Exchange Act, 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, and/or which include words such as “believes,” “plans,” “anticipates,” “estimates,” “expects” or similar expressions. In addition, any statements concerning future financial performance, ongoing businessconcept 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 or forecasted in forward-looking statements due to a number of factors. Factors that could cause our actual performance, future results and actions

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to differ materially from any forward-looking statements include, but are not limited to, those discussed in “—Risk“Risk Factors” below and discussed elsewhere in this Annual Report.

Risk Factors

Risks Related to our Business

We may be unable to reverse declinesOur improvements in comparable store sales and net losses from continuing operations, bothoperating results in fiscal 2005 may not be indicative of which could significantly impact our economic viability.future performance trends, and we cannot assure you that we will be able to sustain such rate of improvement and achieve profitability.

The economic survival of our company is significantly dependent on our ability to reverse declines inDuring fiscal 2003 and 2004, the comparable store sales and then sustain comparable store sales growth. Our comparable store sales results have declined significantly during the past two years and a substantial portion of these declines have been attributable to our Wet Seal division. These declines in comparable store sales haveconcept declined significantly, which resulted in a net loss from continuing operations in 2004. both fiscal years. In fiscal 2005, comparable store sales of our company as a whole increased by 44.7%, as compared to a 13.0% decline during fiscal 2004, resulting in a narrowed loss from continuing operations. However, we can provide no assurance that comparable store sales increases will continue or that we will achieve profitability in the future.

Our ability to improvemaintain the success of our comparable store sales resultsWet Seal and Arden B. concepts depends in large part on a number of factors, some of which are outside of our control, including improving our forecasting of demand and fashion trends, hiring of a full-time chief merchant for the Wet Seal concept, providing an appropriate mix of appealing merchandise for our targeted customer base, managing inventory effectively, using more effective pricing strategies, selecting effective marketing techniques, optimizing store performance, by closing under-performing stores, calendar shiftsnegotiating acceptable renewals of holiday periodsexpiring leases and general economic conditions. WeAs a result, we cannot assure you that we will not experience future declinesbe able to sustain the recent rate of improvement in comparable store sales and net losses from continuingresults of operations both of which would significantly impact our ability to continue as a going concern.

in the future.

We have incurred significant operating losses and negative cash flows in the past two years and we may not be able to reverse these losses.recent years.

We have incurred significant operating losses and negative cash flows during each of fiscal 2003 and 2004. Although2004 which caused liquidity problems and resulted in very tight vendor payment terms. In 2005, we have received approximately $59.4 million in net proceeds after transaction expensesraised additional capital, generated a smaller operating loss and had positive cash flow from the investorsoperations, which improved our liquidity substantially. If, in the January 2005 Private Placement and expectfuture, we were to receive approximately $18.0 million (after transaction expenses and retirement of the Bridge Loan Facility) in net proceeds in the April 2005 Private Placement, we will encounter liquidity constraints if ourexperience operating losses and negative cash flows, continue. In such event,resulting in renewed concern about our ability to pay vendors, we willmight need additional financing. Such financing would likely be forced to seek alternatives to address these constraints, including seeking additional debt financing or equity financing or a potential reorganization under Chapter 11 of the United States Bankruptcy Code. In the event we need to seek additional financing, we will need to obtain the prior approval of our lendersvery costly, and there is no assurance we will receive such approvalswould potentially be unavailable, on terms acceptable to us.

reasonable terms.

As a resultThe closing of our operating losses and negative cash flows, we have experienced a tightening of credit extended to us by vendors, factors and others for merchandise and services, which could cause us to experience delays or disruption in merchandise flow.

Due to our recent financial results, we have experienced a tightening of credit extended to us by vendors, factors, and others for merchandise and services. The impact of this credit tightening has required us to issue letters of credit outside of the ordinary course of business, or, in many instances, shorten vendor credit terms. If supply difficulties arise due to this credit tightening we could experience delays or disruption in merchandise flow, which, in turn, could have an adverse effect on our financial condition and results of operations.

Our decision to close certain Wet Seal stores may not significantly improve our future financial condition or results of operations.

OnIn December 28, 2004, we announced that we would close approximately 150 Wet Seal stores as part of our turn-around strategy. We appointed Hilcocompleted our inventory liquidation sales and the closing of 153 Wet Seal stores in March 2005. During fiscal 2005, we also closed an additional nine Wet Seal stores, of which one was due to manage the inventory liquidations forlease expiration, and closed five Arden B. stores, which were all due to lease expirations. We also re-opened eight previously closed Wet Seal stores during fiscal 2005. Although the stores that we have closed and Hilco Advisors to negotiate with the respective landlords. We completed the store closing effort on March 5,in 2005 and through that date we closed a total of 153 stores. Upon the decision to close these stores, we wrote down the carrying value of these impaired assets to realizable value, a non-cash event that negatively

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impacted our earnings and earnings per share. Further, by closing these stores before the expiration of the applicable lease term, we are required in most instances to make payments to the landlords in the form of cash and/or equity payments to terminate or “buy out” the remaining term of the applicable lease. Although Hilco is in negotiations with the landlords on our behalf, we cannot assure you that we will be able to reach an agreement with all the landlords on terms acceptable to us.

Moreover, although these stores havehad been underperforming as compared with our other Wet Seal stores, there is no assurance that in the long term these store closures will have a significant positive impact uponon our operating results or that we will not have to close additional stores in the future. Furthermore,

Historically we have grown through opening new stores; however, due to our financial condition in the past three years we have not recently opened a significant number of additional stores and, while we are planning to open new stores this year, we cannot be certain that future store openings will be successful.

Our company has historically expanded by opening new stores, remodeling existing stores and acquiring other store locations or businesses that complement and enhance our operations. From time to time, we have

created new retail concepts such as Arden B. While we plan to open 20 to 25 new Wet Seal and/or Arden B. stores during fiscal 2006, we cannot be certain that we will be successful in opening that number of stores or that such stores will be profitable.

We have had significant management changes over the last eighteen months and these changes may impact our ability to execute our business strategy in the near term.

In general, our success depends to a significant extent on the performance of our senior management, particularly personnel engaged in merchandising and store operations, and on our ability to identify, hire and retain additional key management personnel. In November 2004, the Chairman and Chief Executive Officer and the President of our Wet Seal concept resigned from our company.

In December 2004 and January 2005, we appointed a new President and Chief Executive Officer and four members to our board of directors. In August 2005, our Executive Vice President and Chief Financial Officer resigned from our company, and was replaced by a new Executive Vice President and Chief Financial Officer in December 2005. On March 6, 2006, two new members joined our Board of Directors. Effective March 1, 2006, the president of our Arden B. concept resigned and was replaced by a new president of merchandise for the Arden B. concept on March 13, 2006. We are also in the process of recruiting a chief merchant for the Wet Seal concept.

We anticipate that we will continue to experience a transition period as this new management team is fully integrated. Due to the intense competition for qualified personnel in the retail apparel industry, we cannot assure you that we will be able to identify, hire or retain key personnel with the merchandising and management skills necessary to consistently offer appealing products to our target market.

We need to employ personnel with the requisite merchandising skills to continue our merchandising strategy implemented by Mr. Gold.

Michael Gold, a well-regarded retailer, has assisted our company with our recent merchandising initiatives. Under the direction of Mr. Gold, our Wet Seal concept introduced and implemented a new merchandising strategy to attract teenage girls to our stores. On July 6, 2005, we entered into an agreement with Mr. Gold to confirm his continuing services as a consultant to our company and to secure his services until January 31, 2007.

Although our agreement with Mr. Gold provides him with significant financial incentives that he would forfeit if he terminates his agreement with us before January 31, 2007, if Mr. Gold terminates his agreement and he elects not to continue his relationship with our company, or if we do not agree with Mr. Gold to extend his consulting agreement beyond January 2007 and are not successfulunable to employ personnel with similar merchandising skills by that time, our results of operations may be significantly and adversely impacted.

Our company has been a defendant in reducinga class action and the subject of an investigation by the Securities and Exchange Commission.

As previously reported, our non-store expenses, includingcompany and certain of our generalformer directors and administrative overhead,former officers have been named as defendants in lineseveral securities class actions filed on behalf of persons who purchased our common stock between January 7, 2003, and August 19, 2004. These actions have been consolidated in the United States District Court for the Central District of California.

The consolidated complaint alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act by, among other allegations, making false and misleading statements concerning the progress of our company to stem the losses of our Wet Seal concept and return that business to profitability as well as the illegal use of material non-public information by former directors and a company controlled by them. The plaintiff sought class certification, compensatory damages, interest, costs and attorneys’ fees and expenses.

On September 15, 2005, the consolidated class action was dismissed against all defendants in the lawsuit. However, plaintiffs were granted leave to file an amended complaint, which they did file on November 23, 2005. We filed an additional motion to dismiss the amended complaint, and it is anticipated that the motion will be argued this year. In the event plaintiffs achieve a favorable outcome, and even though we have insurance coverage for such claims, significant damages could be assessed against our company that exceed available insurance coverage, which would have a material adverse effect on the financial condition of our company and our results of operations.

In February 2005, we announced that the Securities and Exchange Commission had commenced an informal, non-public inquiry regarding our company. We indicated that the Securities and Exchange Commission’s inquiry generally related to the events and announcements regarding our company’s 2004 second quarter earnings and the sale of Class A common stock by La Senza Corporation and its affiliates during 2004. On April 19, 2005, the Securities and Exchange Commission advised us that it issued a formal order of investigation in connection with its review of matters relating to our company. Consistent with the previous announcement, we intend to cooperate fully with the Securities and Exchange Commission’s inquiry. To date we have complied with the Securities and Exchange Commission’s requests by providing to them relevant documentation and written responses to their questions. It is too soon to determine whether the outcome of this inquiry will have a material adverse effect on our financial condition or our results of operations.

The issuance of restricted shares under our 2005 Stock Incentive Plan has resulted in and will result in substantial dilution of our earnings per share, significant charges to our company and volatility in our operating results.

In January 2005, we established our 2005 Stock Incentive Plan to attract and retain directors, officers, employees and consultants, which, as amended, reserves 12,500,000 shares of Class A common stock for issuance. As of January 28, 2006, an aggregate of 10,260,000 shares of restricted Class A common stock had been granted to Joel N. Waller, the Chief Executive Officer; Gary White, our Executive Vice President of Wet Seal; John J. Luttrell, our Executive Vice President and Chief Financial Officer; Michael Gold and our non-employee directors. A total of 5,700,000 of these shares have vested as of April 10, 2006, and are fully transferable by the holders.

As a result of our granting of restricted shares, we have incurred and will continue to incur non-cash compensation charges to our earnings over the vesting periods or when the restrictions lapse, which has had and will continue to have a significant adverse effect on our results of operations and on our earnings per share. In addition, the non-cash compensation charges for certain of the restricted shares are based on our common stock price on the vesting date for such shares, which could result in significant volatility in the amount of such charges.

Our reported earnings and earnings per share will be significantly impacted as a result of the issuance of the securities in the January 2005 and May 2005 private placements and their subsequent conversion or exercise.

As a result of our issuance of the securities in the January 2005 and May 2005 private placements, as discussed further in Note 6 and Note 7 of the Notes to Consolidated Financial Statements included elsewhere within this Annual Report, and in accordance with accounting guidelines noted in Emerging Issues Task Force (EITF) Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” EITF Issue No. 00-27, “Application of EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, to Certain Convertible Instruments” and Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt issued with Stock Purchase Warrants,” we determined the fair market value of the warrants as well as the value of the beneficial conversion features associated with our secured convertible notes. The value assigned to our warrants and the beneficial conversion features reduced store countthe face values of our secured convertible notes, resulting in a discount that will be amortized over the life of our secured convertible notes. The amortization of the discount will result in significant non-cash charges and projected revenues, itwill have an adverse effect on our earnings and earnings per share.

Prior to the conversion or the exercise of the securities in the January 2005 private placement and the warrants issued in the May 2005 private placement, the shares of Class A common stock underlying these securities will be included in the calculation of fully diluted earnings per share, provided their inclusion is unlikely that wenot anti-dilutive. Prior to the conversion of the convertible preferred stock issued in the May 2005 private placement, the shares of Class A common stock underlying the convertible preferred stock will be included in the calculation of basic and diluted earnings per share, provided their inclusion is not anti-dilutive. In addition, although the holders of these securities may not convert or exercise the respective securities if they would achieveown (together with any of their respective affiliates) more than 9.99% of Class A common stock, upon such conversion and/or exercise, as applicable, our basic and diluted earnings per share would be affected by the inclusion of the underlying shares of Class A common stock in our per share calculations.

Also, since a majority of our secured convertible notes remained outstanding as of the end of fiscal 2005, interest expense, whether amortized, capitalized or paid, including acceleration of discount and deferred financing cost amortization and reversal of accrued interest upon conversions of secured convertible notes, will have a significant profitability even ifimpact on our net sales revenue increases.

financial results.

Covenants contained in agreements governing our existing indebtedness restrict the manner in which we conduct our business, and our failure to comply with these covenants could result in a default under these agreements, which would have a material adverse effect on our business, financial condition, growth prospects and ability to procure merchandise for our stores.

Our senior credit facility Bridge Loan Facility and the indenture governing our Notessecured convertible notes contain covenants that restrict the manner in which we conduct our business. Subject to certain exceptions, these covenants restrict, among other things, our ability, and the ability of certain of our subsidiaries, to:

A breach of any of these covenants could result in a default under the agreements governing our existing indebtedness, acceleration of any amounts then outstanding, the foreclosure upon collateral securing the debt obligations, or the unavailability of the lines of credit. As a result, our ability to continue as a going concern would be significantly impacted and may require our company to file for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code.

We may not have sufficient funds to make required payments on the Notes.

Although we anticipate receiving approximately $18.0 million in net proceeds after transaction expenses and the retirement of the Bridge Loan Facility from the April 2005 Private Placement, we may not have sufficient funds to make the interest and principal payments on the Notes when due, either at maturity or upon the occurrence of certain events. If we do not have sufficient funds to make these payments, we will have to obtain an alternative source of funds, including sales of our assets or assets of our subsidiaries or sales of our equity securities or capital. We cannot assure you that we will be able to obtain sufficient funds to meet our payment obligations on the Notes through any of these alternatives or that we will be permitted by our senior lenders to obtain funds through any of these alternatives. In the event that we are not able to make the required payments at maturity or otherwise, we will be forced to seek alternatives, including seeking additional debt financing or equity financing or a potential reorganization under Chapter 11 of the United States Bankruptcy Code.

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Our company is a defendant in a class action and the subject of an investigation by the Securities and Exchange Commission.

As previously reported, our company, certain of our former directors, and former and current officers, have been named as defendants in several securities class actions. These actions have now been consolidated in the United States District Court for the Central District of California.

On or about February 1, 2005, the District Court appointed lead plaintiffs in the consolidated action, filed their Consolidated Class Action Complaint for Violation of the Federal Securities Laws, entitled “Laborer’s International Union of North America Local Union and District Counsel Fund, Laborer’s National (Industrial) Pension Fund, et. al, plaintiffs, v. Wet Seal Inc., Irving Teitelbaum, Peter D. Whitford, Douglas C. Felderman, Walter Parks, Joseph E. Deckop, Allan Haims, Stephen Gross, and La Senza Corporation, defendants.”

The consolidated complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act by, among other allegations, making false and misleading statements concerning the progress of our company to stem the losses of our Wet Seal division and return that business to profitability as well as the illegal use of material non-public information by former directors and a company controlled by them. The plaintiff seeks class certification, compensatory damages, interest, costs and attorney’s fees and expenses.

We intend to make a motion to dismiss the consolidated complaint but there is no assurance it will be successful. If significant damages are assessed against our company it may, in the future, have a material adverse effect on the financial condition of our company and the results of operations.

In February, we announced that the Pacific Regional Office of the Securities and Exchange Commission (“SEC”) had commenced an informal, non-public inquiry regarding our Company. We indicated that the SEC’s inquiry generally related to the events and announcements regarding our Company’s 2004 second quarter earnings and the sale of our Class A common stock by La Senza Corporation and its affiliates during 2004. The SEC has advised us that on April 19, 2005 it issued a formal order of investigation in connection with its review of matters relating to the company.

Consistent with the previous announcement, the Company intends to cooperate fully with the SEC’s inquiry. It is too soon to determine whether the outcome of this inquiry will have a material adverse effect on our business, financial condition, results of operations or cash flows.

We have had significant management changes recently and these changes may impact our ability to execute our turn-around strategy in the near term.

In general, our success depends to a significant extent on the performance of our senior management, particularly personnel engaged in merchandising and store operations, and on our ability to identify, hire and retain additional key management personnel. In November 2004, the Chairman and Chief Executive Officer and the President of our Wet Seal division resigned from our company. In addition, as part of our turn-around strategy, all of the members of our board of directors, other than Henry D. Winterstern and Alan Siegel, have either resigned or retired. In December 2004 and January 2005, we appointed a new President and Chief Executive Officer and four members to our board of directors. We anticipate that we will experience a transition period before this new management team is fully integrated with our company, which could impact our ability to confront the financial challenges that impact our company. In addition, there is a risk that we may lose additional members of our senior management team. If so, due to the intense competition for qualified personnel in the retail apparel industry, we cannot assure you that we will be able to identify, hire or retain the key personnel with the merchandising and management skills necessary to implement our turn-around strategy and offer appealing products to our target market.

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We need to employ personnel with the requisite merchandising skills to continue our merchandising strategy implemented by Mr. Gold.

Michael Gold has been responsible for developing and implementing the new merchandising strategy for our Wet Seal division. Mr. Gold and our company have not yet entered into a formal agreement to compensate Mr. Gold for these efforts. If we reach an agreement, we intend to provide him with a significant incentive based compensation package which may take the form of restricted stock grants, warrants or options in order to compensate him for his efforts to date and in the near term future.

Mr. Gold’s commitment to our company has been and will continue to be part-time. We, therefore, are actively seeking personnel with sufficient merchandising skills to continue the merchandising strategy implemented by Mr. Gold. In the event we are unable to reach an agreement with Mr. Gold and he elects not to continue his relationship with our company, the results of our operations may be significantly and adversely impacted. In addition, if we are unable to identify and retain personnel with outstanding merchandising skills to replace Mr. Gold, our comparable store sales and sales revenue could decline.

The shares to be issued under our 2005 Stock Incentive Plan will result in a substantial dilution of our earnings per share.

We recently established our 2005 Stock Incentive Plan to attract and retain directors, officers, employees and consultants. We have reserved 10.0 million shares of our Class A common stock for issuance under this incentive plan. As of April 27, 2005, 4.8 million shares of restricted Class A common stock had been granted to Joel N. Waller, our Chief Executive Officer, our Executive Vice President of Wet Seal and our non-employee directors. In the near term we anticipate granting additional restricted shares in connection with the hiring or appointment of individuals, as well as company management who will assist us in returning our company to profitability, including Mr. Gold. As a result of the granting of restricted shares, we will incur non-cash compensation expense charges to our earnings over the vesting periods or when the restrictions lapse. As a result, the shares to be issued under the 2005 Stock Incentive Plan will have a significant adverse effect on our results of operation and on our earnings per share.

Our issuance of the Notes and Warrants, the incurrence of obligations under the Bridge Loan Facility, and the proposed issuance of the Preferred Stock and New Warrants will have a significant adverse effect on our earnings and earnings per share.

As a result of our issuance of the Notes and related Warrants and the proposed issuance of the Preferred Stock and New Warrants and in accordance with accounting guidelines noted in Emerging Issues Task Force (EITF) 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF 00-27 “Application of EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, to Certain Convertible Instruments” and Accounting Principles Board No. 14 “Accounting for Convertible Debt issued with stock Purchase Warrants”, we determined the fair market value of the Warrants issued as well as the value of the beneficial conversion feature. The value assigned to the Warrants and the beneficial conversion feature reduced the face value of the Notes resulting in a discount that will be amortized over the life of the Notes. The amortization of the discount will result in significant non-cash charges and will have an adverse effect on our earnings and earnings per share.

The Notes accrue interest at an annual rate of 3.76%, while the loans made under the Bridge Loan Facility accrue interest at an annual rate of 25.0% through July 31, 2005 and 30.0% thereafter. Since February 1, 2005, we have been required to pay supplemental interest on the outstanding principal amount (including capitalized interest). The monthly supplemental interest rate was 1.45% for February 2005, 0.70% for March 2005 and 1.5% thereafter. If the Bridge Loan Facility and the Notes remain outstanding for all of fiscal 2005, interest expense, whether capitalized or paid, will have a significant impact on our financial results.

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Prior to the conversion of the Notes and the Preferred Stock (if issued) and the exercise of the Warrants and the New Warrants (if issued), the shares of Class A common stock underlying these securities would not be included in the calculation of basic or fully diluted per share results in the event of a net loss. Conversely, these securities would be included in the determination of fully diluted per share results in the event the Company has net income. Although the holders of these securities may not convert or exercise the respective securities if they would own (together with any affiliates) more than 9.99% of our Class A common stock, upon such conversion and/or exercise, as applicable, our earnings per share would be expected to decrease, or our net loss per share to decrease, as a result of the inclusion of the underlying shares of Class A common stock in our per share calculations.

Our internal controls have material weaknesses.

We have received an adverse opinion on the effectiveness of our internal controls over financial reporting because of material weaknesses identified in management’s assessment of the effectiveness of such controls. These material weaknesses, if not remediated, create increased risk of misstatement of our financial results which, if material, may require restatement thereof.

If we are unable to anticipate and react to new fashion trends and/or if there is a decrease in the demand for fashionable, casual apparel, our financial condition and results of operations could be adversely affected.

Our brand image is dependent upon our ability to anticipate, identify and provide fresh inventory reflecting current fashion trends. If we fail to anticipate, identify or react appropriately or in a timely manner to these fashion trends, we could experience reduced consumer acceptance of our products, a diminished brand image and higher markdowns. These factors could result in lower selling prices and sales volumes for our products, which could adversely affect our financial condition and results of operations. This risk is particularly acute because we rely on a limited demographic customer base for a large percentage of our sales.

Our sales also depend upon the continued demand by our customers for fashionable, casual apparel. Demand for our merchandise could be negatively affected by shifts in consumer discretionary spending to other goods, such as electronic equipment, computers and music. If the demand for apparel and related merchandise were to decline, our financial condition and results of operations would be adversely affected by any resulting decline in sales.

Our failure to effectively compete with other retailers for sales and locations could have a material adverse effect on our financial condition and results of operations.

The women’s retail apparel industry is highly competitive, with fashion, quality, price, location, in-store environment and service being the principal competitive factors. WeOur Wet Seal and Arden B. stores compete for sales with specialty apparel retailers, department stores and certain other apparel retailers, such as American Eagle,including Aeropostale, Charlotte Russe, Gap, Banana Republic, BCBG, bebe, Charlotte Russe, Express, Forever 21, Gap, H&M, Old Navy, Pacific Sunwear, American Eagle, Urban Outfitters, Forever 21, Express, J.C. Penney, bebe, and Urban Outfitters.BCBG. Many of our competitors are large national chains that have substantially greater financial, marketing and other resources than we do. We face a variety of competitive challenges, including:

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In addition to the competitive challenges specified above, many of our competitors are large national chains, which have substantially greater financial, marketing and other resources than we do and which may be better able to adapt to changing conditions that affect the competitive market. Also, our industry has low barriers to entry that allowsallow the introduction of new products or new competitors at a fasterfast pace. Any of these factors could result in reductions in sales or the prices of our products which, in turn, could have a material adverse effect on our financial condition and results of operations.

Further, although we believe that we compete effectively for favorable site locations and lease terms in shopping malls, and other locations, competition for prime locations and lease terms within shopping malls, in particular, and at other locations is intense, and we cannot assure you that we will be able to obtain new locations or maintain our existing locations on terms favorable to us, if at all.

Historically we have grown through opening new stores; however, due to our financial condition we do not anticipate opening a significant number of additional stores in the immediate future which could adversely affect the growth of our business.

Our company has historically expanded by opening new stores, remodeling existing stores and acquiring other store locations or businesses that complement and enhance our operations. From time to time we have created new retail concepts such as Arden B. However, as result of our financial condition we may not be able to take advantage of certain business opportunities in the same manner as we have historically. While a conservative approach to opening new stores may assist our efforts in the return to profitability, it may have a negative impact upon our growth within certain markets or require us to expend more capital to gain entry in the future.

Because of the importance of our brand names, we may lose market share to our competitors if we fail to adequately protect our intellectual property rights.

We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We have registered trademarks for Wet Seal and Arden B. (which are registered in the retail store services class and pending in others). We take actions to establish and protect our intellectual property. However, we cannot assure you that others will not imitate our products or infringe on our intellectual property rights. In addition, we cannot assure you that others will not resist or seek to block the sale of our products as violative of their intellectual property rights. If we are required to stop using any of our registered or non-registered marks, our sales could decline and, consequently, our business and results of operations could be adversely affected.

Our business is affected by local, regional and national economic conditions.

Our business is sensitive to consumer spending patterns and preferences. Various economic conditions affect the level of spending on the merchandise we offer, including general business conditions, interest rates, taxation, and the availability of consumer credit and consumer confidence in future economic conditions. Our growth, sales and profitability may be adversely affected by unfavorable occurrences in these economic conditions on a local, regional or national level. We are especially affected by economic conditions in California, where approximately 13% of our stores are located.

Further, the majority of our stores are located in regional shopping malls. We derive sales, in part, from the high volume of traffic in these malls. The inability of mall “anchor” tenants and other area attractions to generate consumer traffic around our stores, or the decline in popularity of malls as shopping destinations, would reduce our sales volume and, consequently, adversely affect our financial condition and results of operations.

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Our business is seasonal in nature, and any decrease in our sales or margins during these periods could have a material adverse effect on our company.

The retail apparel industry is highly seasonal. We generate our highest levels of sales during the Christmas season, which begins the week of Thanksgiving and ends the first Saturday after Christmas, and the “back-to-school” season, which begins the last week of July and ends the first week of September. 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.

We depend upon key vendors to supply us with merchandise for our stores, and the failure of these vendors to provide this merchandise could have a material adverse effect on our business, financial condition and results of operations.

Our business depends on our ability to purchase current season apparel in sufficient quantities at competitive prices. The inability or failure of our key vendors to supply us with adequate quantities of desired merchandise, the loss of one or more key vendors or a material change in our current purchase terms could adversely affect our financial condition and results of operations by causing us to experience excess inventories and higher markdowns. We have no long-term purchase contracts or other contractual assurances of continued supply, pricing or access to new products. We cannot assure you that we will be able to acquire desired merchandise in sufficient quantities or on terms acceptable to us in the future, and any failure to do so could have a material adverse effect on our business, financial condition and results of operations.

We depend upon a single distribution facility,center, and any significant disruption in the operation of this facilitycenter could harm our business, financial condition and results of operations.

The distribution functions for all of our stores are handled from a single, leased facility in Foothill Ranch, California. Any significant interruption in the operation of this facility due to a natural disaster, accident, system failure or other unforeseen event could delay or impair our ability to distribute merchandise to our stores and, consequently, lead to a decrease in sales. As a result, our business, financial condition and results of operations could be harmed.

adversely affected.

We do not authenticate the license rights of our suppliers.

We purchase merchandise from a number of vendors who hold manufacturing and distribution rights under the terms of license agreements. We generally rely upon each vendor’s representation concerning those manufacturing and distribution rights and do not independently verify whether each vendor legally holds adequate rights to the licensed properties they are manufacturing or distributing. If we acquire unlicensed merchandise, we could be obligated to remove it from our stores, incur costs associated with destruction of the merchandise if the vendor is unwilling or unable to reimburse us and be subject to civil and criminal liability. The occurrence of any of these events could adversely affect our financial condition and results of operations.

We experience business risks as a result of our Internet business.

We compete with Internet businesses that handle similar lines of merchandise. These competitors have certain advantages, including the inapplicability of sales tax and the absence of retail real estate and related costs. As a result, increased Internet sales by our competitors could result in increased price competition and decreased margins. Our Internet operations are subject to numerous risks, including:

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Our inability to effectively address these risks and any other risks that we face in connection with our Internet business could adversely affect the profitability of our Internet business.

We are subject to risks associated with our procurement of products from non-U.S. based vendors, any of which could have a material adverse effect on our business, financial condition or results of operations.

A significant portion of our products is manufactured outside the United States. As a result, we are susceptible to greater losses as a result of a number of risks inherent in doing business in international markets and from a

number of factors beyond our control, any of which could have a material adverse effect on our business, financial condition or results of operations. These factors include:

Our imports are limited by textile agreements between the United States and a number of foreign jurisdictions, including Hong Kong, China, Taiwan and South Korea. These agreements impose quotas on the amounts and types of merchandise that may be imported into the United States from these countries. These agreements also allow the United States to limit the importation of categories of merchandise that are not now subject to specified limits. The United States and the countries in which our products are produced or sold may also, from time to time, impose new quotas, duties, tariffs or other restrictions, or adversely adjust prevailing quota, duty or tariff levels. In addition, none of our international suppliers or international manufacturers supplies or manufactures our products exclusively. As a result, we compete with other companies for the production capacity of independent manufacturers and import quota capacity. If we were unable to obtain our raw materials and finished apparel from the countries where we wish to purchase them, either because room or space under the necessary quotas was unavailable or for any other reason, or if the cost of doing so should increase, it could have a material adverse effect on our business, financial condition or results of operations.

Increases in Federal and state statutory minimum wages could increase our expenses, which could adversely affect our results of operations.

Connecticut, Illinois, Oregon, District of Columbia, New York, and Washington have each increased their state minimum wages to a level that significantly exceeded the Federal minimum wage as of January 1, 2005. As of April 27, 2005, we operated 57 stores in those states. These recent increases in the state statutory minimum wage and any future Federal or state minimum wage increases could raise minimum wages above the current wages of some of our employees. As a result, competitive factors could require us to make corresponding increases in our employees’ wages. Increases in our wage rates increase our expenses, which could adversely affect our results of operations.

Violation of labor laws and practices by our suppliers could harm our business and results of operations.

As part of our commitment to human rights, we require our domestic and foreign suppliers to abide by a Code of Conduct for Vendors and Suppliers, which sets forth guidelines for acceptable factory policies and procedures regarding workplace conditions, including wages and benefits, health and safety, working hours, working age, environmental conditions and ethical and legal matters. If one of our suppliers fails to comply with this Code, we may be required to discontinue our relationship with that supplier, which could result in a shortfall in our inventory levels. Further, if the supplier’s non-compliance were publicly disclosed, our customers may refuse to purchase our products. Either of these events could harmadversely affect our business and results of operations.

We experience business risks as a result of our Internet concept.

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Our inability to effectively address these risks and any other risks that we face in connection with our Internet concept could adversely affect the profitability of our Internet concept.

Our involvement in lawsuits, both now and in the future, could negatively impact our business.

We are currently a defendant in a number of lawsuits, including a class action lawsuit, and we have been involved in a variety of other legal proceedings in the past. Although we intend to vigorously defend the claims against us, if any of the claims in

these lawsuits or any future lawsuitlawsuits are resolved unfavorably to us, we may be required to pay substantial monetary damages or pursue alternative business strategies. This could have a material adverse effect on our business. In addition, our defense of these actions has resulted, and may continue to result, in substantial costs to us as well as require the significant dedication of management resources. If we choose to settle any of these lawsuits, the settlement costs could have a material adverse effect on our cash resources and financial condition.

Risks Related to our Class A Common Stock

Our stockholders may experience significant dilution.additional dilution due to previous private placements of convertible securities.

Since May 2004, we have completed private placements which are potentially very dilutive to our stockholders.

On

Although certain conversion and exercise restrictions are placed upon the holders of the Notes,securities issued in the Warrants, the Preferred StockJanuary 2005 private placement and the New Warrants,securities issued in the May 2005 private placement, the issuance of the additional shares of Class A common stock will cause our existing stockholders to experience significant dilution in their investment in our company. In addition, if the cash liquidity issues described elsewhere in these risk factors require us to obtain additional financing involving the issuance of equity securities or securities convertible into equity securities, our existing stockholders’ investmentinvestments would be further diluted. Such dilution could cause the market price of our Class A common stock to decline, which could impair our ability to raise additional financing.

The price of our Class A common stock has fluctuated significantly during the past few years and may fluctuate significantly in the future, which may make it difficult for you to resell the shares of our Class A common stock.

Our Class A common stock, which is traded on the NASDAQ National Market, has experienced and may continue to experience significant price and volume fluctuations that could adversely affect the market price of

Class A common stock. The market price of Class A common stock is likely to fluctuate, both because of actual and perceived changes in our operating results and prospects and because of general volatility in the stock market. The market price of Class A common stock could continue to fluctuate widely in response to factors such as:

Fluctuations in the price and trading volume of Class A common stock in response to factors such as those set forth above could be unrelated or disproportionate to our actual operating performance.

Our Class A common stock could be subject to short selling and other hedging techniques and, if this occurs, the market price of our Class A common stock could be adversely affected.

Our company’sIn general, Class A common stock could be subject to a number of hedging transactions including the practice of short selling. Short selling, or “shorting,” occurs when stock is sold which is not owned directly by the seller; instead, the stock is “loaned” for the sale by a broker-dealer to someone who “shorts” the stock. In most situations, this is a short-term strategy by a seller, and based upon volume, may at times drive stock values down.

Based upon a review of the current stock ownership filings with the SEC made by our stockholders with the Securities and Exchange Commission, we have identified several investment firms that own equity interests in our company. These firms may actively engage in hedging transactions, including the short selling of our Class A common stock.stock from time to time. Moreover, a significant percentage of the convertible securities issued in our recent private placement transactions are held by investment firms who may engage in such transactions. Any such hedging activities could reduce the value of our current stockholders’ equity interests in our company at and after the time the hedging transactions have occurred.

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We have never paid dividends on our Class A common stock and do not plan to do so in the future.

Holders of shares of our Class A common stock are entitled to receive any dividends that may be declared by our board of directors. However, we have not paid any cash dividends on our Class A common stock and we do not expect to do so in the future. Also, our agreements with our senior lenders and the indenture governing the Notesour notes prohibit us from paying dividends to our stockholders. We intend to retain any future earnings to provide funds for operations of our business. Investors who anticipate the need for dividends from investments should not purchase our Class A common stock.

Our charter provisions, shareholder rights plan and Delaware law may have anti-takeover effects.

Our certificate of incorporation and bylaws authorizeauthorizes our board of directors to designate and issue, without stockholder approval, preferred stock with voting, conversion and other rights and preferences that could differentially and adversely affect the voting power or other rights of the holders of ourClass A common stock, which could be used to discourage an unsolicited acquisition proposal. In addition, under certain circumstances our board of directors may grant rights to our stockholders under our shareholder rights plan. Furthermore, certain provisions of Delaware law applicable to our company could also delay or make more difficult a merger, tender offer or proxy

contest involving our company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless certain conditions are met.

The possible issuance of preferred stock, the granting of rights granted to stockholders under our shareholder rights plan and the application of anti-takeover provisions of Delaware law could each have the effect of delaying, deferring or preventing a change in control of our company, including, without limitation, discouraging a proxy contest, making more difficult the acquisition of a substantial block of ourClass A common stock and limiting the price that investors might in the future be willing to pay for shares of ourClass A common stock.

We have not received written comments regarding our periodic or current reports from the staff of the Commission that were issued 180 days or more preceding the end of fiscal 2005 that remain unresolved.

Item 2.    Properties

Our principal executive offices are located at 26972 Burbank, Foothill Ranch, California, with 301,408 square feet of leased office and distribution facility space, including 215,192 square feet of merchandise handling and storage mezzanine space in the distribution facility and 86,216 square feet of office space. This lease expires on December 4, 2007. The lease allows forgrants our company one five-year renewal option.

We lease all of our stores. Lease terms for our stores typically are 10 years in length and generally contain renewal options.years. The leases generally provide for a fixed minimum rental and additional rental based on a percentage of sales once a minimum sales level has been reached. Certain leases include cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives. 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’s profitability and sales potential. Due to poor performance and and/or non-renewal of a lease, we closed 72108 Wet Seal stores and 75 Arden B. stores during the year ended January 29, 2005.28, 2006. Of these closures, 256 were due to natural lease expirations and 54102 were related to our previously announced plans to close 150 Wet Seal stores. In addition, we closed another 99stores or to identification of additional Wet Seal stores by March 5, 2005 (in 49 of these 99 stores, we had ceased use of the properties at January 29, 2005 and were preparing the locations for return to the respective landlords).close due to their poor performance. At the end of fiscal 2004,2005, we had 1,920,4601,498,638 square feet of leased space for continuing operations, not including our principal executive offices.

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The following table sets forth information with respect to store openings and closings since fiscal 2000:2001:

Item 3.    Legal Proceedings

Between August 26, 2004, and October 12, 2004, six securities class action lawsuits were filed in the United States District Court for the Central District of California, (the “Court”),or the Court, on behalf of persons who purchased our common stock between January 7, 2003, and August 19, 2004. Our companyWe and certain of our present and former directors and

executives were named as defendants. The complaints allege violations of SectionSections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 of the Exchange Act, on the grounds that, among other things, we failed to disclose and misrepresented material adverse facts that were known to the defendantsus or disregarded by them.us. On November 17, 2004, the Court consolidated the actions and appointed lead plaintiffs and counsel. On January 29, 2005, the lead plaintiffs filed their consolidated class action complaint with the Court, which consolidated all of the previously reported class actions. The consolidated complaint alleges that the defendants, including our company,we violated the federal securities laws by making material misstatements of fact or failing to disclose material facts during the class period, from March 2003 to August 2004, concerning itsour prospects to stem ongoing losses in itsour Wet Seal divisionconcept and return that business to profitability. The consolidated complaint also alleges that certainour former directors and La Senza Corporation, a Canadian company controlled by them, unlawfully utilized material non-public information in connection with the sale of our common stock by La Senza. The consolidated complaint seeks class certification, compensatory damages, interest, costs, attorney’s fees and injunctive relief. Our Company is vigorously defending this litigation andWe filed a motion to dismiss the consolidated complaint in April 2005. On September 15, 2005, the consolidated class action was dismissed against us in the lawsuit. However, plaintiffs were granted leave to file an amended complaint, which they did file on November 23, 2005. We filed a motion to dismiss the amended complaint on January 25, 2006, and a court hearing is scheduled for June 12, 2006. There can be no assurance that this litigation will be resolved in a favorable manner. We are vigorously defending this litigation and are unable to predict the likely outcome in this matter and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued at January 28, 2006.

InOn February 8, 2005, we announced that the Pacific Regional Office of the Securities and Exchange Commission (“SEC”) had commenced an informal, non-public inquiry regarding the Company.our company. We indicated that the SEC’sCommission’s inquiry generally related to the events and announcements regarding the Company’sour 2004 second quarter earnings and the sale of Companyour stock by La Senza Corporation and its affiliates during 2004. The SECCommission has advised us that on April 19, 2005, it issued a formal order of investigation in connection with its review of matters relating to our Company.company. Consistent with the previous announcement,announcements, we intend to cooperate fully with the SEC’sCommission’s inquiry. To date, we have complied with the Commission’s requests by providing to them relevant documentation and written responses to their questions. It is too soon to determine, and we are unable to predict, the likely outcome in this matter and whether thesuch outcome of this inquiry will have a material adverse effect on our business, financial condition, results of operations or cash flows.

On September 30, 2004, Louis Vuitton Malletier (“Louis Vuitton”) and Marc Jacobs International, L.L.C. (“Marc Jacobs”) filed suit against our company in the United States District Courtfinancial condition. Accordingly, no provision for the Southern District of New York for trade dress infringement, unfair competition and misappropriation under federal and state law. Plaintiffs’ claims all arise from our company’s sale of three handbags, which plaintiffs allege infringe upon two well-known Louis Vuitton handbags and one Marc Jacobs handbag. Plaintiffs requested that the court direct our company to pay them the net profits derived by our company from the sale of its allegedly infringing handbags and reasonable attorney’s fees incurred by plaintiffs in connection with the action. The parties have recently executed a Settlement Agreement and an order dismissing the action with prejudice was entered on February 24,

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2005. Pursuant to the Settlement Agreement, our company is required to provide Louis Vuitton and Marc Jacobs with an affidavit stating that all allegedly infringing bags have been destroyed. Our company met all the requirements of the Settlement Agreement.

In May 2004, our company was notified by a consumer group, alleging that five products consisting of certain rings and necklaces contained an amount of lead that exceeded the maximum .1 parts per million of lead under Proposition 65 of the California Health and Safety Code; however, no money damages were requested. Each such contact constitutes a separate violation. The maximum civil penalty for each such violation is $2,500. The vendor of the products confirmed that the jewelry in question contained some lead. The vendor has confirmed, however, that it will accept our tender of liability. Our company has no outstanding invoices with the vendor. Our company has placed all future jewelry orders, effective October 2004, as lead free orders, which may lead to a 10% to 30% increase in cost. On June 22, 2004, the California Attorney General filed a complaint on behalf of the Center for Environmental Health. On June 24, 2004, our company was added to that complaint as a named defendant. The case is currently being mediated for resolution on industry standards.

We were served with a class-action lawsuit in the Orange County Superior Court by previously employed store managers alleging non-exempt status under California state labor laws during fiscal 2003. Through non-binding mediation, we agreed to settle the litigation and pay approximately $1.3 million, which chargeloss contingency has been recorded in our fourth quarter earnings of fiscal 2003. Upon approval by the court and all parties, we proceeded with the process to administer the notice of settlement to class members, and determine the claims to award. We have substantially completed this administrative process, including payments to the class members onaccrued at January 29, 2005. To mitigate future related complaints, we have converted all of our California store managers to non-exempt status.

28, 2006.

From time to time, we are involved in other litigation matters relating to claims arising out of our operations in the normal course of business. Our management believesWe believe that, in the event of a settlement or an adverse judgment of any of the pending litigation, we are adequately covered by insurance. As of April 27, 2005,January 28, 2006, we were not engaged in any such other legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on us.our results of operations or financial condition.

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, other than the matters submitted for stockholder approval at our January 10, 2005 Special Meeting of Stockholders.

Pursuant to applicable NASDAQ rules and regulations, our company’s stockholders approved (1) the issuance of the Notes and the Warrants, (2) an amendment to our certificate of incorporation that provided for an increase in the number of authorized shares of our common stock, and (3) our company’s new 2005 stock incentive plan. The number of votes for each matter was as follows: for the first matter, 15,490,958 votes were cast ‘for’, 1,042,888 votes were cast ‘against’, and there were 1,194,344 abstentions and 19,713,790 broker non-votes; for the second matter, 34,194,787 votes were cast ‘for’, 1,650,410 votes were cast ‘against’, and there were 1,596,783 abstentions and zero broker non-votes; and for the third matter, 13,622,641 votes were cast ‘for’, 2,501,484 votes were cast ‘against’, and there were 1,605,065 abstentions and 19,713,790 broker non-votes.

21report.

PART II

We have two classes of common stock: Class A and Class B. Our Class A common stock is listed on The NASDAQ National Stock Market under the symbol “WTSLA.” As of April 27, 2005,10, 2006, there were 280351 stockholders of record of the Class A common stock. The number of beneficial owners of our Class A common stock was estimated to be approximately 5,814.stock. The closing price of our Class A common stock on April 27, 200510, 2006, was $3.47$6.30 per share. As of April 27, 200510, 2006, there were no stockholders of recordshares of our Class B common stock.

stock outstanding.

Price Range of Stock

The following table reflects the high and low closing sale prices of our Class A common stock as reported by NASDAQ for the last two fiscal years:

Dividend Policy

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 the agreements governing our existing indebtedness, 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. Neither ourOur senior credit facility norand the indenture associated with our Bridge Loan Facilitynotes do not allow us to declare or pay any dividends on any of our shares nor to purchase, redeem or otherwise acquire for value any of our shares.

without consent from the lenders.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of January 29, 200528, 2006, about our company’s common stock that may be issued upon the exercise of options, warrants and rights granted to employees, consultants or members of our board of directors under all of our company’s existing equity compensation plans, including our company’s 1996 Long-Term Incentive Plan, as amended, the 2000 Stock Incentive Plan and the 2005 Stock Incentive Plan:Plan, as amended:

There were no purchases of shares of Class A common stock or Class B common stock by our company or affiliated purchasers during the fiscal quarteryear ended January 29, 2005.

2228, 2006.

Unregistered Sales of Equity Securities

On April 29,May 3, 2005, we entered into a Securities Purchase Agreement under which we have agreed to issue at closingissued 24,600 shares of Preferred Stockpreferred stock for an aggregate purchase price of $24.6 million, and New Warrantswarrants to acquire initially up to 7.5 million shares of our Class A common stock. The Preferred Stock will bepreferred stock is convertible into 8.2 million shares of our Class A common stock, reflecting an initial $3.00 per share conversion price (subject to anti-dilution adjustments). As of April 10, 2006, 15,159 shares of preferred stock have been converted into common stock. The New Warrants will bewarrants are exercisable beginning six months following the closingfrom November 3, 2005, to November 3, 2010, and will expire on the fifth anniversary of the date upon which they became initially exercisable. The New Warrants will have an initial exercise price equal to $3.68 (subject to anti-dilution adjustments). In connection with the issuance of the Preferred Stockpreferred stock and the New Warrants,warrants, the investors who received warrants in the January 2005 Private Placement agreed to exercise all of their outstanding Series A Warrantswarrants and a pro rata portion of thetheir outstanding Series B Warrants.warrants. Approximately 3.4 million shares of our Class A common stock will bewere issued inas a result of the warrant exercise at an aggregate exercise price of approximately $6.4 million.

We have agreed to registerregistered the shares of the Class A common stock issuable upon conversion and exercise of the Preferred Stockpreferred stock and the New Warrants,warrants, as the case may be, pursuant to the terms of a Registration Rights Agreement among our company and the investors in the AprilMay 2005 Private Placement. The shares of Class A common stock issuable upon exercise of the Series A Warrantswarrants and the Series B Warrants will also bewarrants were included in such registration statement.The securities were issued pursuant to Regulation D of the SEC’s RulesCommission’s rules and Regulationsregulations under the Securities Act of 1933.Act.

On January 14, 2005, we issued $56.0 million in aggregate principal amount of Notes to certain investors. The Notes mature on January 14, 2012 and have an initial conversion price of $1.50 per share of our Class A common stock. The conversion price of the Notes is subject to full-ratchet anti-dilution protection. The Notes are immediately exercisable. On November 9, 2004, our company issued to certain investors in the January 2005 Private Placement Series A Warrants to acquire 2.3 million shares of our Class A common stock, which were issued on December 13, 2004. The initial exercise price of the Series A Warrants is $1.75 per share, with full ratchet anti-dilution protection. The Series A Warrants are exercisable until December 13, 2008. On January 14, 2005, we also issued the Series B Warrants, Series C Warrants and Series D Warrants to acquire up to 3.4 million, 4.5 million and 4.7 million shares of our Class A common stock, respectively. The Series B Warrants, Series C Warrants and Series D Warrants have an initial exercise price of $2.25, $2.50 and $2.75 per share, respectively. The Warrants have full ratchet anti-dilution protection for any Class A common stock issuances below the exercise price. The Warrants are immediately exercisable. The exercise period of the Series B Warrants, Series C Warrants and Series D Warrants will terminate on January 14, 2009, January 14, 2010 and January 14, 2010, respectively. We have agreed to register the Notes and the Warrants and the shares of Class A common stock issuable upon conversion of the Notes and exercise of the Warrants. The net proceeds from the offering of approximately $50.2 were used for working capital and general corporate purposes. The securities were issued pursuant to Regulation D of the SEC’s Rules and Regulations under the Securities Act of 1933.

On June 29, 2004, we completed a private placement of shares of our Class A common stock and warrants to acquire shares of Class A common stock. Financo, Inc. and Financo Securities, LLC acted as financial advisor and placement agent. In connection with the June 2004 private placement, we issued 6.0 million shares of our Class A common stock at $4.51 per share and warrants to acquire 2.1 million additional shares of Class A common stock at an exercise price of $5.41 per share, subject to adjustment from time to time for stock splits, stock dividends, distributions and similar transactions. The warrants issued in the June 2004 Private Placement became exercisable beginning on December 30, 2004 and expire on December 29, 2009. Our company filed a registration statement on July 30, 2004 covering resales of the purchased shares of Class A common stock and the shares of Class A common stock underlying the June 2004 Warrants. The net proceeds from the offering of approximately $25.6 million were used for working capital and general corporate purposes. The securities were issued pursuant to Regulation D of the SEC’s Rules and Regulations under the Securities Act of 1933.

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Item 6.    Selected Financial Data

The following table sets forth selected consolidated financial and other data as of and for the 2001 through 2005 fiscal years. The following selected financial data has been derived from the Company’sour consolidated financial statements. The data for the periods prior to fiscal year 2004 has been restated to reflect corrections as described in Note 2 “Restatement of Financial Statements” under Notes to Consolidated Financial Statements included in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K. The data set forth below should be read in conjunction with the consolidated financial statements and notes thereto.

thereto, which are included elsewhere in this Annual Report on Form 10-K.

Five-Year Financial Summary

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

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(2)

Per share data, netNet (loss) income per share and the weighted averageweighted-average shares outstanding have been adjusted to account for the three-for-two stock split effected as ofon July 24, 2001, and subsequent three-for-two stock split on May 9, 2002.

(3)

Sales during the 53rd weekLong-term debt is presented net of unamortized discount of $35.6 million and $44.3 million for fiscal 2000 were excluded from “Sales” for purposes of calculating “Average sales per square foot”2005 and “Average sales per store” in order to make fiscal 2000 comparable.2004, respectively.

(4)

“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. “Comparable store sales”Stores are defined as sales indeemed comparable stores that were open at least 14 months.on the first day of the month following the one-year anniversary of their opening or expansion/relocation.

(5)

The Zutopia division was designated as a discontinued operation, which had an insignificant impact to the comparable store sales.

(6)

As restated, see Note 2 to the Notes to the Consolidated Financial Statements.

(7)

Long-term debt is presented net of unamortized discount of $44.3 million.

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

The following discussion should be read in conjunction with our audited 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.

Executive Overview

The accompanying Management’s DiscussionWe are a national specialty retailer operating stores selling fashionable and Analysiscontemporary apparel and accessory items designed for female customers. We operate two nationwide, primarily mall-based, chains of Financial Conditionretail stores under the names “Wet Seal” and Results of Operations gives effect“Arden B.” At January 28, 2006, we had 400 retail stores in 46 states, Puerto Rico and Washington D.C. Of the 400 stores, there were 308 Wet Seal stores and 92 Arden B. stores.

We consider the following to the restatements discussedbe key performance indicators in Note 2 to the Notes to the Consolidated Financial Statements.

evaluating our performance:

Current TrendsComparable store sales—Stores are deemed comparable stores on the first day of the month following the one-year anniversary of their opening or expansion/relocation. Comparable store sales results are important in achieving operating leverage on certain expenses such as store payroll, store occupancy, depreciation, general and Outlook

The 13 weeks ended January 29, 2005 constituted our tenth consecutive quarter reflectingadministrative expenses, and other costs that are at least partially fixed. Positive comparable store sales results generate greater operating leverage on expenses while negative comparable store sales andresults negatively affect operating losses. This operating performance was primarily due to negative sales trends at our Wet Seal division. We believe the comparableleverage. Comparable store sales decline was due toresults also have a number of factors, including missed fashion trends bydirect impact on our total net sales, cash, and working capital.

Transaction counts—We consider the Wet Seal division, our attempt at re-establishing Wet Seal’s presence in the junior market and a more competitive environment for the Wet Seal target customer. Overall, we experienced a comparable store sales decline of 11.4% for the 13 weeks ended January 29, 2005. The 13-week decline resulted primarily from a decreasetrend in the number of sales transactions associated withoccurring in our stores to be a key performance metric. To the Wet Seal division. The continued sales decline has eroded operatingextent we are able to increase transaction counts in our stores that more than offsets any decrease in the average dollar sale per transaction, we will generate increases in our comparable store sales.

Gross margins primarily—We analyze the components of gross margin, specifically initial markups and markdowns, buying costs, planning and allocation costs, distribution costs, and store occupancy costs, as a resultpercentage of the de-leveragingnet sales. Any inability to obtain acceptable levels of initial markups, a significant increase in our company’suse of markdowns or an inability to generate sufficient sales leverage on other components of cost structure and higher markdown volume. These factors plus a $16.4 million charge for store closures were the principal contributors to our net loss of $47.8 million, or $1.31 per share for the 13-week period ended January 29, 2005.

January 2005 Private Placement; Bridge Loan Facility

In light of our poor operating performance, diminished liquidity and poor credit standing, we initiated a series of steps for the purpose of maximizing shareholder value. This began with the appointment of a special committee of our board of directors mandated to engage a financial advisor and evaluate strategic alternatives, including a potential reorganization under Chapter 11 of the United States Bankruptcy Code. On November 9, 2004, we announced the terms of a financing agreement (pursuant to a Securities Purchase Agreement), subject to shareholder approval, with investors to issue and sell an aggregate of $40.0 million of our company’s secured convertible notes, having an initial conversion price of $1.50 per share, and two series of Additional Investment Right Warrants (“AIRS”) to purchase up to an additional $15.8 million of secured convertible notes, all of which were convertible into Class A common stock of our company. In addition, we agreed to issue multiple tranches of warrants to the investors to purchase up to 13.6 million shares of Class A common stock of our company,

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exercisable for up to five years from the date of issuance at exercise prices ranging from $1.75 to $2.75 per share. Concurrently, we entered into an arrangement with the investors whereby a secured term loan of $10.0 million was made to our company on November 9, 2004, as a Bridge Loan Facility.

On December 13, 2004, we announced an amendment to the securities purchase agreement we had entered into on November 9, 2004 with the investors. Pursuant to the terms of the amended Securities Purchase Agreement, the aggregate principal amount of the secured convertible notes to be issued at the closing was increased from $40.0 million to $56.0 million. As a result of receiving an additional $16.0 million at closing, we did not issue the AIRS provided for under the original terms of the Securities Purchase Agreement. In consideration of the agreement to provide additional funds at closing, the participating investors received warrants to acquire an additional 1.3 million shares of Class A common stock of our company. The additional warrants, which were issued at closing, are exercisable for five years andsales could have an initial exercise price of $2.75 per share. We believed that the access to greater funds at closing would allow our company to implement its turn-around strategy for the Wet Seal division at an earlier stage.

On January 7, 2005, we announced discussions with the bridge lenders that provided our $10.0 million Bridge Loan Facility to us on November 9, 2004, to extend the maturity of the bridge facility. Under the terms discussed, the initial maturity date of the Bridge Loan Facility, as extended, would be March 31, 2005, and the maturity date will be further extended automatically on a month to month basis until notice is received from the bridge lenders, but in any event, would mature on March 31, 2009. The purpose of the extension of the Bridge Loan Facility was to allow us to have additional capital available after the closing of the Financing. This transaction was subject to approval by our stockholders regarding the issuance of an aggregate amount of $56.0 million in Notes and the issuance of the Warrants. On January 10, 2005, our stockholders approved the Financing, which closed and funded on January 14, 2005. (See Item 1 Business—Recent Developments).

Management Changes

Since October 2004, we have experienced significant management changes. In November 2004, Peter Whitford resigned from his position as Chief Executive Officer and Chairman of our board of directors and Allan Haims resigned as President of our Wet Seal division. In December 2004, we appointed Joel N. Waller, the former Chief Executive Officer of Wilsons Leather, to the positions of President and Chief Executive Officer, effective February 1, 2005. Mr. Waller became a director of our company effective December 27, 2004. In addition, in March 2005, Joseph Deckop resigned from his position as Executive Vice President of Central Planning and Allocation.

As a part of our turn-around strategy, all of the members of our board of directors, other than Henry D. Winterstern, our Chairman, and Alan Siegel, have either retired or resigned. Recently we have appointed Mr. Waller, Sidney M. Horn, Harold D. Kahn and Kenneth M. Reiss to our board of directors. The board of directors appointed Mr. Reiss as Chairman of the Audit Committee. The entire board of directors, with the exception of Mr. Waller, will act as a Compensation Committee until such time as the board of directors is expanded. (See Item 1 Business—Recent Developments).

Store Closures

In December 2004, we announced that we would close approximately 150 Wet Seal stores as part of our turn-around strategy. We appointed Hilco to manage the inventory liquidations for the store closures and Hilco Advisors to negotiate with the respective landlords for purposes of lease terminations and buyouts. We completed the store closing effort on March 5, 2005. We closed a total of 153 stores related to our turn-around strategy and any future closures will be the result of natural lease expirations where we decide not to extend, or are unable to extend, a store lease. We ceased use of property at 103 stores on or about January 29, 2005 and took a charge of approximately $13.2 million for the estimated cost of lease buyouts and related costs. In addition, for all the stores we identified for closure, we took a non-cash charge of approximately $4.4 million in the fourth

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quarter ended January 29, 2005 for the write down of the carrying value of these impaired assets to realizable value. We also recognized a non-cash benefit of $1.2 million, related to the write-off of deferred rent associated with the closing stores. We expect to take a charge of $6.1 million for the balance of store closures that will occur in our first quarter ending April 30, 2005.

Credit Extensions

Due to our recent financial results, we continue to experience a tight credit environment. Credit extended to us by vendors, factors, and others for merchandise and services is extremely limited. Theadverse impact of this credit tightening has required us to issue letters of credit outside of the ordinary course of business, or, in many instances, shorten vendor credit terms. The lack of credit has placed a considerable need for working capital. This tight credit environment has resulted, in some cases, in delays or disruption in merchandise flow, which in turn has had an adverse effect on our salesgross margin results and results of operations.

January 2005 marked the initiationOperating income (loss)—We view operating income (loss) as a key indicator of our new merchandising strategy. During the 13-week period ending January 29, 2005, we experienced heavy markdown volume as a resultsuccess. The key drivers of disappointing sales and a repositioning of merchandise price points. Our price point repositioning is a key element to our go forward merchandising strategy. For the 4-week sales period ended January 29, 2005, we reported aoperating income (loss) are comparable store sales, increasegross margins, and our ability to control operating costs. For a discussion of 8.2%. This increase in comparable store sales marked the first monthly comparable store sales increase in over two years. Subsequently, we reported a comparable store sales increase for the 4-week period ending February 26, 2005 and the 5-week period ending April 2, 2005 of 16.4% and 36.3%, respectively. The improving trend in comparable store sales performance has been driven by an increasechanges in the numbercomponents comprising operating income (loss), see “Results of transactions, particularlyOperations” in this section.

Cash flow and liquidity (working capital)—We evaluate cash flow from operations, liquidity and working capital to determine our Wet Seal division. This sales growth has occurred while having less than optimal levels of inventory. The improvement in sales has contributed to the improvement inshort-term operational financing needs. We expect that our cash positionon hand and liquidity profile.

April 2005 Private Placement

To further enhance our financial position, and providecash flows from operations will be sufficient capital to finance operations without borrowing under our efforts of improving the performance of the Company oversenior credit facility for at least the next twelve months, we announced on April 29, 2005, the signing of a Securities Purchase Agreement with several investors that participated in the Company’s January 2005 financing. We will receive approximately $18.0 million in net proceeds (after transaction expenses and retirement of the Bridge Loan Facility) from this transaction. Pursuant to the Securities Purchase Agreement, the investors have agreed to exercise all of their outstanding Series A Warrants and a pro rata portion of the outstanding Series B Warrants that were issued in the January 2005 Private Placement. Approximately 3.4 million shares of our Class A common stock will be issued in the warrant exercise at an aggregate exercise price of approximately $6.4 million.

At the closing, we will issue to the investors 24,600 shares of our Series C Convertible Preferred Stock for an aggregate purchase price of $24.6 million. The Preferred Stock will be convertible into 8.2 million shares of the Class A common stock, reflecting an initial $3.00 per share conversion price. The Preferred Stock will not be entitled to any special dividend payments or mandatory redemption or voting rights. The Preferred Stock will have customary weighted-average anti-dilution protection for future stock issuances below the applicable per share conversion price.

Our company has also agreed to issue new warrants to purchase up to 7.5 million shares of Class A Common Stock. The new warrants will be exercisable beginning six months following the closing and will expire on the fifth anniversary of the date upon which they became initially exercisable. The new warrants will have an initial exercise price of $3.68, reflecting the closing bid price of the Common Stock on the business day immediately before the signing of the Securities Purchase Agreement. The new warrants will have anti-dilution protection for stock splits, stock dividends, distributions and similar transactions.

Our company will use approximately $12.0 million of the proceeds from the financing to retire our outstanding Bridge Loan Facility which was provided by certain participants of the January 2005 Private

27months.

Placement. The remainder of the proceeds, approximately $18.0 million, will be used for general working capital purposes. The financing with the Investors will close no later than May 3, 2005.

The purpose of the series of financings the Company has arranged, or is arranging, the entering into an arrangement with Michael Gold and any other management additions which may occur, is to implement our strategy to return our company to profitability. We believe that the financings will provide us with the capital needed to effect the store closures, reach the appropriate inventory levels at stores we intend to keep open, absorb operating losses that may be incurred while we implement our plans and improve our credit standing with suppliers and factors. We are encouraged by the early comparable store sales trends and they provide early validation of our merchandising strategy. We believe the Company is suitably capitalized to execute our strategies and procure adequate levels of merchandise under more favorable credit terms than experienced in recent periods.

Code of Conduct

We recently introduced a Code of Conduct for Vendors and Suppliers for all of our vendors and suppliers which provides guidelines for their employment practices such as wage and benefits, health and safety, working age, environmental conditions and related employment matters.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted accounting principlesin the United States 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 consolidated 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. Our significant accounting policies are more fully described in Note 1 of the consolidated financial statementsNotes to Consolidated Financial Statements included herein andelsewhere in the Management’s Discussion and Analysis of Financial Condition and Results of Operations below.this Annual Report on Form 10-K. The policies and estimates discussed below involve the selection or application of alternative accounting policies andthat are material to our consolidated financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our boardBoard of directors.Directors.

We have certain accounting policies that require more significant management judgment and estimates than others. These include our accounting policies with respect to revenue recognition, merchandise inventories, long-lived assets, impairment of goodwill, stock-based compensation, recovery of deferred income taxes, and insurance reserves.

Revenue Recognition

Sales are recognized upon purchase by customers at our company’s retail store locations. For online sales, revenue is recognized at the estimated time goods are received by customers. Additionally, shipping and handling fees billed to customers are classified as revenue. CustomersOnline concept customers typically receive goods within 5-7five to seven days of being shipped. We have recorded reserves to estimate sales returns by customers based on historical sales return results. A customer may return regular or promotionally priced merchandise within 30 days of the original purchase date. Actual return rates have historically been within management’s expectationsestimates and the reserves established. Shipping and handling fees billed to customers are included in net sales and approximated $0.3 million, $0.2 million and $0.3 millionAs the reserve for merchandise returns is based on estimates, the years ended January 29, 2005, January 31, 2004 and February 1, 2003, respectively.actual returns could differ from the reserve, which could impact sales.

Our company recognizesWe recognize the sales from gift cards and gift certificates and the issuance of store credits as they are redeemed.

Our company, throughThrough our Wet Seal division, hasconcept, we have a Frequent Buyer Card program that entitles the customer to receive a 10% to 20% discount on all purchases made during the twelve-month program period. The revenue

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from the annual membership fee of $20.00 is non-refundable. RevenueMembership fee revenue is recognized on a straight-line basis over the twelve-month membership period, base upon historicalwhich approximates the spending patternspattern under the program. Discounts received by customers on purchases using the Frequent Buyer program are recognized at the time of such purchases. The unearned revenue for Wet Seal customers.this program is recorded in accrued liabilities on the consolidated balance sheets and was $7.0 million and $3.3 million at January 28, 2006, and January 29, 2005, respectively.

We introduced a customer loyalty program in our Arden B. concept in August 2004. Under the program, customers accumulate points based on purchase activity. Once a loyalty member achieves a certain point level, the member earns awards that may be redeemed at any time for merchandise. Merchandise redemptions are accrued as unearned revenue and recorded as a reduction of sales as points are accumulated by the customer. The program has been in effect for only eighteen months, resulting in our having limited history for assessing redemption patterns. However, we have anticipated partial non-redemption of awards based on the program’s redemption history to date. The unearned revenue for this customer loyalty program is recorded in accrued liabilities on the consolidated balance sheets and was $6.2 million and $3.5 million at January 28, 2006, and January 29, 2005, respectively. If actual redemptions ultimately differ from accrued redemption levels, or if we modify the terms of the program in a way that affects expected redemption value and levels, we could record adjustments to the unearned revenue accrual, which would affect sales.

Inventory ValuationMerchandise Inventories

Merchandise inventories are stated at the lower of cost (first in, first out) or market. Market is determined based on the estimated net realizable value, which generally is the merchandise selling price. Cost is calculated using the retail inventory method. Under the retail inventory method, inventory is stated at its current retail selling value. Inventory retail values arevalue, then is converted to a cost basis by applying a specifican average cost factor that represents the average cost-to-retail ratio based on beginning inventory and the fiscal year purchase activity. The retail inventory method inherently requires management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.

Markdowns for clearance activities are recorded when the utilitysales value of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, and age of the merchandise and fashion trends. When a decision is made to permanently mark down merchandise, the resulting gross profitmargin reduction is recognized in the period the markdown is recorded. For the years ended January 29, 2005, January 31, 2004 and February 1, 2003 theTotal markdowns on a cost basis as a percentagein fiscal 2005, 2004 and 2003 were $60.6 million, $88.6 million and $92.4 million, respectively, and represented 12.1%, 20.3%, and 17.9% of sales, were 20.5%, 25.3%,respectively. We accrued on a cost basis for planned but unexecuted markdowns as of January 28, 2006, and 13.5%,January 29, 2005, of $3.2 million and $2.6 million, respectively.

To the extent that management’s estimates differ from actual results, additional markdowns may be required that could reduce our company’s gross margin, operating income and the carrying value of inventories. Our company’s success is largely dependent upon our ability to anticipate the changing fashion tastes of our customers and to respond to those changing tastes in a timely manner. If our company failswe 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.

Long-livedLong-Lived Assets and Impairment

Our company evaluatesIn accordance with Statements of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we evaluate the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors that are considered important that could trigger an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that demonstrates continuing losses or insufficient income associated with the use of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on undiscounted estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If the undiscounted estimated future cash flows are less than the carrying value, an impairment loss is recognized, measured by the difference between the carrying value and the estimated fair value of the assets, with such estimated fair values determined using the best information available, generally based on the discounted estimated future cash flows of the assets uponusing a rate that approximates our weightedweighted-average cost of capital. Our estimateQuarterly, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of future cash flows islong-lived assets may not be recoverable.

During fiscal 2005, we determined such events or changes in circumstances had occurred with respect to certain of our retail stores, and that operating losses would likely continue. As such, we recorded non-cash charges of a combined total of $1.0 million in our consolidated statement of operations for fiscal 2005 to write-down the carrying value of these stores’ long-lived assets to their estimated fair value.

As of July 31, 2004, based upon our experience and knowledge, as well as third party advisors. However, these estimates can be affected by factors such as future store profitability, real estate demand and economic conditions that might be difficult to predict. In light ofon disappointing sales results during the fiscal 2004 back-to-school period, the then expectation forof continued operating losses through the end of fiscal 2004 and our company’s historical operating performance, our companywe concluded that an indication of impairment existed at July 31, 2004, with respect to a large number of our retail stores. Accordingly, we conducted an impairment evaluation as of July 31, 2004. Accordingly, our company conducted an impairment evaluation in accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS”) as of July 31, 2004. This analysis included reviewing the stores’ historical cash flows, estimating future cash flows over remaining lease terms and determining the recoverability of each store’s carrying value. Based on the results of this analysis, our company wrote down the carrying value of these impaired long-lived assets as of July 31, 2004 by $40.4 million.

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Additionally, as the operating losses continued through the end of the fiscal year and the holiday season, managementwe determined that a triggering event occurred during the fiscal 2004 fourth quarter and accordingly updated the impairment analysis. Based on the results of this updated analysis, our companythese analyses, we wrote down the carrying value of certain impaired long-lived assets asduring fiscal 2004 by $41.4 million, including impairment of January 29, 2005 by $0.7 million.goodwill (see below). The impairment charges were a non-cash charge to theour consolidated statementstatements of operations.

Our company announced on December 28, 2004The estimation of future cash flows from operating activities requires significant estimates of factors that include future sales growth and gross margin performance. If our sales growth, gross margin performance or other estimated operating results are not achieved at or above our forecasted level, or cost inflation exceeds our forecast and we would close approximately 150 stores as part of our turn-around strategy. In light of this event, our company wrote down the carrying values of the 153 identified stores for closure in January 2005. As a result, our company recognized a non-cash charge of $4.4 million and included the amount in “Store closure costs” (see Note 5are unable to the Notes to Consolidated Financial Statements).

Our company also wrote downrecover such costs through price increases, the carrying value of goodwill at January 29, 2004 by $0.3 million, a non-cash charge to the consolidated statement of operations. The write-off was the resultcertain of our annualretail stores may prove to be unrecoverable and we may incur additional impairment evaluationcharges in the future.

Impairment of Goodwill

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”.

OnAssets,” we test goodwill for impairment annually as of January 6, 2004,28, 2006, and also on an interim basis if an event or circumstance indicates that it is more likely than not impairment may have occurred. The impairment, if any, is measured based on the Board of Directors authorized our company to proceed with our strategic decision to close all 31 Zutopia stores by the end of the first quarter or early in the second quarter of fiscal 2004, due to their poor financial results and perceived limited ability to become profitable in the future. Our company determined that there was no estimated fair value to the Zutopia’s divisions fixed assets. Therefore, the financial losses generated by this chain and the write down of its fixed assets to their estimated fair value of zero,a reporting unit. Fair value can be determined based on discounted cash flows, comparable sales or valuations of other retail businesses. Impairment occurs when the carrying amount of the goodwill exceeds its estimated fair value.

The most significant assumptions we use in this analysis are those made in estimating future cash flows. In estimating future cash flows, we use assumptions for items such as comparable store sales, store count growth rates, the rate of inflation and the discount rate we consider to represent our weighted average cost of capital and/or the market discount rate for acquisitions of retail businesses.

If our assumptions used in performing the impairment test prove inaccurate, the fair value of our goodwill may ultimately prove to be significantly lower, thereby causing the carrying value to exceed the fair value and indicating impairment has occurred. As of January 28, 2006, goodwill was $6.0 million, of which the entire amount is directly associated with the Arden B. concept. Based on the January 28, 2006, analysis, we determined that no impairment of the Company’s goodwill had occurred. However, based on the results of the January 29, 2005, analysis, we wrote down the carrying value of goodwill as of January 29, 2005, by $0.3 million, which was recorded within asset impairments in the consolidated statements of operations.

Stock-Based Compensation

We have been identified as discontinued operations. (Seevarious stock-based compensation arrangements that provide options, warrants, restricted stock grants and performance shares to certain employees, non-employee directors, consultants, lenders and landlords. Through fiscal 2005, we have elected to account for stock-based compensation to employees in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” which utilizes the intrinsic value method of accounting for stock-based compensation. For certain of our stock-based compensation arrangements, we also apply other accounting guidance, including EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services,” and EITF Issue No. 00-18, “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees.” As discussed in Note 6 to the1 of Notes to Consolidated Financial Statements)Statements included elsewhere within this Annual Report on Form 10-K, during the first quarter of fiscal 2006, we will begin to account for stock-based compensation in accordance with SFAS No. 123(R), “Share-Based Payment.” We estimate that the adoption of SFAS No. 123(R) will result in our incurring approximately $2.8 million in stock-based compensation expense in fiscal 2006 that would not have been incurred under APB No. 25. This estimate is based upon various assumptions, including an estimate of the number of share-based awards that will be granted, cancelled or expired during fiscal 2006, as

well as future stock prices. These assumptions are highly subjective and changes in these assumptions would materially affect our estimates. In addition, our net income will continue to be reduced by compensation expense for share-based awards to non-employees.

The application of these accounting standards may require initial valuations and periodic re-valuations of the equity instruments we have issued as stock-based compensation. These initial valuations and re-valuations may require consideration of our then common stock price and estimates that include future common stock price volatility, risk-free interest rates and anticipated annual dividends. In fiscal 2005, 2004 and 2003, we recognized stock-based compensation expenses of $24.3 million, $1.5 million and $0.9 million, respectively. If our Class A common stock price fluctuates or the assumptions we use to value such equity instruments change, we may record charges or credits, which may be significant, to increase or decrease the amount of expense recognized for stock-based compensation.

Recovery of Deferred Income Taxes

Our company accountsWe account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,Taxes.” (“SFAS 109”) which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax asset will not be realized. As a result of disappointing sales results during the 2004 back-to-school season and our company’s historical operating performance, our companymanagement concluded that it iswas more likely than not that our company willwe would not realize itsour net deferred tax assets. As a result of this conclusion, we reduced to zero our company reduced ournet deferred tax assets by establishing a tax valuation allowance of $40.4$97.5 million as of July 31,in fiscal 2004. In addition, our company haswe have discontinued recognizing income tax benefits in the consolidated statements of operations until it is determined that it is more likely than not that our companywe will generate sufficient taxable income to realize theour deferred income tax assets.

As of January 29,28, 2006, we had federal net operating loss carryforwards of $179.9 million, which begin to expire in 2023. Section 382 of the Internal Revenue Code, or Section 382, contains provisions that may limit the availability of net operating loss carryforwards to be used to offset taxable income in any given year upon the occurrence of certain events, including significant changes in ownership interests. Under Section 382, an ownership change that triggers potential limitations on net operating loss carryforwards occurs when there has been a greater than 50% change in ownership interest by shareholders owning 5% or more of a company over a period of three years or less. Based on our analysis, we had an ownership change on April 1, 2005, which results in Section 382 limitations applying to federal net operating loss carryforwards generated prior to that date, which we estimate to be approximately $155.9 million. However, we estimate we will have approximately $103.5 million of “pre-ownership change” federal net operating loss carryforward available within five years after the ownership change, at a rate of approximately $20.7 million annually, with the residual approximate $52.4 million becoming available prior to expiration between 2023 and 2025. However, if future taxable income were to exceed the sum of (i) the applicable annual loss limitation, (ii) carryforwards of prior years’ unutilized losses, if any, and (iii) carryforwards of post-ownership change losses, if any, in any given fiscal year, then we would be required to pay federal and state income taxes on the excess amount in such fiscal year.

We estimate we will have approximately $61.8 million of federal net operating loss carryforwards available to offset taxable income in fiscal 2006. However, we may also generate income in future periods on a federal alternative minimum tax basis, which would result in alternative minimum taxes payable, of which only 90% may be offset by alternative minimum tax net operating loss carryforwards. In addition, we may determine that varying state laws with respect to net operating loss carryforward utilization may result in lower limits, or an inability to utilize loss carryforwards in some states altogether, which could result in our company’s tax valuation allowance was $97.5 million.

incurring additional state income taxes.

Insurance CoverageReserves

Our company isWe are partially self-insured for our worker’s compensation and group health plans. Under the workers’ compensation insurance program, our company iswe are liable for a deductible of $250,000$0.25 million for each individual claim and an

aggregate annual liability of $1.6$5.0 million. Under our company’s group health plan, our company iswe are liable for a deductible of $100,000$0.15 million for each claim and an aggregate monthly liability of $500,000.$0.5 million. The monthly aggregate liability is subject to the number of participants in the plan each month. For both of the insurance plans, our company recordswe record a liability for the costs associated with reported claims and a projected estimate for unreported claims due toconsidering historical experience and industry standards. Our companyWe will continue to adjust the estimates as the actual experience dictates. A significant change in the number or dollar amount of claims could cause our companyus to revise our estimate of potential losses and affect itsour reported results.

Current Trends and Outlook

In January 2005, we initiated the primary component of our turn-around strategy for our Wet Seal stores. This approach, among other things, consisted of lower retail prices, a broader assortment of fashion-right merchandise and more frequent delivery of fresh merchandise. With the introduction of this new strategy, we experienced consolidated comparable store sales growth of 44.7% in fiscal 2005. This comparable store sales trend has resulted primarily from increased transaction counts, partially offset by a decrease in average dollar sale. As a result of our improving sales trend and the completion of our Wet Seal concept store closure plan, we experienced a significant reduction in our loss from continuing operations in fiscal 2005 versus a year ago. Gross margin expanded to 32.2% of sales in fiscal 2005 versus 13.3% for the prior year, driven by the improving sales in existing stores, lower merchandise markdowns and the benefits of closing low volume stores. Our current operating performance trend and financing transactions completed in fiscal 2004 and 2005 have resulted in increased liquidity and, in turn, improved our current credit standing with suppliers, which may further improve our liquidity. However, we cannot assure you that we will not experience future declines in comparable store sales. If our comparable store sales drop significantly, this could impact our operating cash flow and we may be forced to seek alternatives to address cash constraints, including seeking additional debt and/or equity financing.

Operating LeasesStore Closures

In December 2004, we announced that we would close approximately 150 Wet Seal stores as part of our turn-around strategy. We completed our inventory liquidation sales and the closing of 153 Wet Seal stores in March 2005. During fiscal 2005, we also closed an additional nine Wet Seal stores, of which one was due to lease expiration, and closed five Arden B. stores, which were all due to lease expirations. We believe future closures for at least the next twelve months will primarily be the result of lease expirations where we decide not to extend, or are unable to extend, a store lease. During fiscal 2005, we took net charges of $4.5 million related to the estimated lease termination costs for the store closures that occurred in our fiscal quarter ended April 30, 2005, and related liquidation fees and expenses, partially offset by a benefit related to the write-off of deferred rent associated with these stores.

Issuance of Convertible Preferred Stock and Common Stock Warrants

To further enhance our financial position and provide sufficient capital to finance our efforts of improving our performance, we announced on April 29, 2005, the signing of a Securities Purchase Agreement with several investors that participated in our January 2005 private placement financing. On May 3, 2005, we completed this financing and received approximately $19.1 million in net proceeds (including the proceeds from the exercise of the Series A and Series B warrants discussed below) and after the retirement of our $10.0 million bridge loan and related accrued interest and before transaction costs. Pursuant to the Securities Purchase Agreement, the investors agreed to exercise all of their outstanding Series A Warrants and a pro rata portion of the outstanding Series B warrants that were issued in the January 2005 financing (see Note 6 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report). We issued approximately 3.4 million shares of our Class A common stock related to the exercise of these warrants at an aggregate exercise price of approximately $6.4 million.

At the closing, we issued to the investors 24,600 shares of our Series C Convertible Preferred Stock, or the Preferred Stock, for an aggregate purchase price of $24.6 million. The Preferred Stock is convertible into

8.2 million shares of our Class A common stock, reflecting an initial $3.00 per share conversion price. The Preferred Stock is not entitled to any special dividend payments, mandatory redemption or voting rights. The Preferred Stock has customary weighted-average anti-dilution protection for future stock issuances below the applicable per share conversion price.

We also issued Series E warrants to purchase up to 7.5 million shares of our Class A common stock. The Series E warrants became exercisable on November 3, 2005, and expire on November 3, 2010. The Series E warrants have an initial exercise price of $3.68, reflecting the closing bid price of our Class A common stock on the business day immediately before the signing of the Securities Purchase Agreement. The Series E warrants have anti-dilution protection for stock splits, stock dividends, distributions and similar transactions.

We used approximately $11.9 million of the proceeds from the financing to retire our outstanding bridge loan, which was provided by certain participants of the January 2005 financing. The remainder of the proceeds, approximately $19.1 million, is being used for general working capital purposes and costs of the transaction.

As described more fully in Note 7 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K, based on valuations of the Series E warrants, the Registration Rights Agreement associated with the Preferred Stock and the beneficial conversion feature of the Preferred Stock, we recorded the Preferred Stock at a discount of approximately $23.3 million, with such discount also recorded as an increase to paid-in capital. Because the Preferred Stock is immediately convertible and has no stated redemption date, we recognized the $23.3 million discount on the Preferred Stock as a non-cash deemed dividend in its entirety on May 3, 2005. The non-cash dividend is recognized in our consolidated statements of operations as a reduction to arrive at net loss attributable to common stockholders.

For the year ended January 28, 2006, investors in the Preferred Stock converted 14,940 shares of Preferred Stock into 4,980,000 shares of Class A common stock, resulting in 9,660 shares of Preferred Stock remaining outstanding as of January 28, 2006.

Credit Extensions

Due to our financial results through fiscal 2004, we experienced a tight credit environment. Credit extended to us by vendors, factors, and others for merchandise and services was extremely limited. This credit tightening required us to issue letters of credit outside of the ordinary course of business, or, in many instances, shorten vendor credit terms. The lack of credit created a considerable need for working capital. Our improving sales trend, the completion of the May 2005 private placement and our improved operating results in fiscal 2005 have significantly improved our cash position and liquidity profile. As a result, we believe, but cannot provide assurance, that we could now obtain longer credit terms with several vendors. However, we continue to maintain shorter credit terms in order to take advantage of favorable purchase discounts.

Arrangements with Michael Gold

Since late 2004, Michael Gold has been assisting our company recognizes rentwith merchandising initiatives for our Wet Seal concept. On July 6, 2005, we entered into a consulting agreement and an associated stock award agreement with Mr. Gold to compensate him for his part in our sales turn-around and to provide incentives for his future assistance in achieving our return to profitability. Mr. Gold’s consulting agreement extends through January 31, 2007.

Under the terms of the consulting agreement, we paid Mr. Gold $2.1 million upon execution and will pay him $0.1 million per month from July 2005 through January 2007. We recorded $2.8 million of consulting expense within general and administrative expenses in our consolidated statements of operations for operating leasesthe year ended January 28, 2006, to recognize Mr. Gold’s cash compensation earned to date.

Under the terms of the stock award agreement, we awarded Mr. Gold 2.0 million shares of non-forfeitable restricted stock, which vested on January 28, 2006, and two tranches of performance shares, the Performance Shares, of 1.75 million shares each. The Performance Shares vest upon our achievement of certain common stock

market price levels as specified in the stock award agreement. The second tranche of performance shares may also vest upon our achievement of certain sales and gross margin levels, also as specified in the stock award agreement. Subsequent to January 28, 2006, the entire first tranche of the Performance Shares had vested due to our achievement of the specified common stock market price levels pertaining thereto.

As more fully described in Note 8 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report, we recorded $13.3 million of non-cash consulting expense within general and administrative expenses in fiscal 2005 for the value of the 2.0 million shares of non-forfeitable restricted stock as of the grant date, and we recorded $8.9 million of non-cash consulting expense within general and administrative expenses in fiscal 2005 based on the service period elapsed and the fair value of the Performance Shares, which included consideration of vesting probability as of January 28, 2006. Prospectively, the Performance Shares will be accounted for on a straight-linevariable basis, (includingwhereby quarterly charges through the effectremainder of reduced or free rent and rent escalations) over the initial lease term. The difference betweenconsulting agreement period will be based upon the cash paid tothen fair value of the

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landlord and the amount recognized as rent expense Performance Shares, which could have a significant impact on a straight-line basis is included in deferred rent. Cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives are recorded as deferred rent. Deferred rent related to landlord incentives is amortized using the straight-line method over the initial lease term as an offset to rent expense.

our results of operations.

Results of Operations

Except as otherwise noted, the following discussion of our financial position and results of operations excludes our discontinued Zutopia division,concept, which was closed by May 2004.

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

Fiscal 20042005 compared to Fiscal 20032004

Net Sales

Net sales

Our net sales decreased primarily in fiscal 2005 increased as a result of lower comparativesignificant growth in comparable store sales. Comparable store sales increased 44.7% as a result of an 85.3% increase in transaction count per store, partially offset by a 13.0% decrease in average dollar sale driven substantially all by a decrease in our average unit retail, which resulted from our change in merchandising strategy in our Wet Seal stores.

The sales growth from increased comparable store sales was partially offset by having a lower average number of stores in operation during fiscal 2005 than in fiscal 2004. This decrease primarily resulted from closing 103 Wet Seal stores during the period from December 2004 through January 2005 and 50 Wet Seal Stores from February 2005 through early March 2005 pursuant to the Wet Seal turn-around strategy. The fewer stores in operation this yearduring fiscal 2005 versus last year.

was partially offset by openings of 8 stores during fiscal 2004 followed by openings of 11 stores during fiscal 2005, which included re-openings of 8 previously closed Wet Seal stores.

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Cost of salesSales

Cost of sales includeincludes the cost of merchandise, markdowns, inventory shortages, inventory valuation adjustments, inbound freight, payroll expenses associated with design, buying, planning and sourcing,allocation, inspection costs, processing, receiving and other warehouse costs, and rent and depreciation and amortization expense associated with our stores and distribution center. For the fiscal year ended January 29, 2005 our cost

Cost of sales, declined $42.8 millionin dollars and increased as a percent to sales, by 550 basis points.decreased due to:

Selling, generalGeneral and administrative expensesAdministrative Expenses (SG&A)

Our 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 expense component includes the cost of corporate functions such as executives, legal, finance and accounting, information systems, human resources, real estate and construction, loss prevention, and other centralized services.

For

Selling expenses decreased $11.3 million to 22.7% of sales, or 6.0% as a percentage of sales, from a year ago. The decrease in store operating expenses from last year, in dollars, was primarily due to having a lower average number of stores open in fiscal 2005 versus fiscal 2004 due mainly to the fiscaleffect of the Wet Seal turn-around strategy, which resulted in an $11.5 million decrease in store and field operations payroll and benefit costs, and a $4.1 million decrease in spending for advertising, which included the discontinuance of our Wet Seal in-store fashion and entertainment network, partially offset by increases of $1.5 million for merchandise delivery, $1.5 million for bags and boxes and $0.4 million for store supplies as a result of our significant transaction count increase, and an increase of $0.7 million in credit card fees due to our sales growth. The decrease in selling expenses as a percentage of sales was primarily due to efficiencies resulting from changes in our store staffing model and the leverage benefits on store labor from the comparable store sales increases in ongoing stores, partially offset by the increases in store supplies, bag and box and merchandise delivery costs, which exceeded our sales growth rate.

General and administrative expenses increased approximately $21.6 million over last year ended January 29, 2005, SG&A spending was moderatelyto $58.3 million. As a percentage of sales, general and administrative expenses were 11.6%, or 3.2%, as a percentage of sales, higher than a year ago. However, reductions in store level operating expenses, dueThe following contributed to store closures and lower comparable store sales, were offset by higher levels of spendingthe current year increase in general and administrative expenses. The lower sales volume accounted for 360 basis pointsexpenses:

Offset by the following decreases:

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Store Closure Costs

We closed a total of 153In December 2004, we announced that we would close approximately 150 Wet Seal stores related toas part of our turn-around strategy. We completed our inventory liquidation sales and closing of 153 Wet Seal stores by early March 2005. Subsequently, we closed eight additional Wet Seal stores due to their poor performance. We took

charges of $4.5 million related to the estimated lease termination costs for the store closures that occurred

through early March 2005 and related liquidation fees and expenses, partially offset by a benefit related to the write-off of deferred rent associated with these stores. We have substantially completed our previously announced store closure effort and related lease terminations.

With respect to fiscal 2004, of the 153 stores that were part of our Wet Seal turn-around strategy, we had ceased use of property at 103 Wet Seal stores on or about January 29, 2005, and took a charge of approximately $13.2 million for the estimated cost of lease buyouts and other related costs. In addition, for all the stores we identified for closure, we took a charge of approximately $4.4 million for the write downwrite-down of the carrying value of the store assets (primarily leasehold improvements) to realizable value. In addition, we recognized a benefit of approximately $1.2 million related to the write-off of deferred rent associated with these stores. We expect to take a charge of $6.1 million for the balance of Wet Seal store closures that will occur in our first quarter ending April 30, 2005.

Asset Impairment

Based on our quarterly assessments of the carrying value of long-lived assets conducted in accordance with SFAS No. 144, in fiscal 2005 we identified seven stores with carrying values of their assets, including leasehold improvements, furniture, fixtures and equipment, in excess of such stores’ respective forecasted undiscounted cash flows. Accordingly, we reduced their respective carrying values to their estimated fair market values. We incurred non-cash charges of $1.0 million to write down these stores to their respective fair values, as well as to write-down the value of certain capital additions made to previously impaired stores.

WeDuring fiscal 2004, we recorded an impairment chargecharges of $41.1$41.4 million, including impairment of goodwill, on certain long-lived assets, primarily as a result of disappointing sales results for the “Back-To-School”, period, our then expectations for operating results for the balance of fiscal year 2004 and recent historical results.

Interest (Expense) Income, Net

We incurred net interest expense of $13.0 million in fiscal 2005 comprised of: