UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K10-K/A

(Amendment No. 1)

(Mark One)

For the fiscal year ended January 28, 2006

OR

Commission file number 0-18632

THE WET SEAL, INC.

(Exact name of registrant as specified in its charter)

(949) 699-3900

(Registrant’s telephone number, including area code)

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

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  þx

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  þx

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 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  þx    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-K10-K/A or any amendment to this Form 10-K.10-K/A.  þx

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:  þx            Non-accelerated filer:  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þx

The aggregate market value of voting stock held by the registrant’s non-affiliates as of July 30, 2005, was approximately $313,076,000 based on the closing sale price of $6.20 per share as reported on the NASDAQ National Market on July 29, 2005.

The number of shares of the registrant’s Class A Common Stock, par value $0.10 per share, outstanding at April 10, 2006, was 69,071,412. There were no shares of the registrant’s Class B Common Stock, par value $0.10 per share, outstanding at April 10, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

PART III of this Annual Report incorporates information by reference from the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to bethat was filed with the SEC within 120 days of January 28,on May 3, 2006.

THE WET SEAL, INC.

Annual Report on Form 10-K10-K/A

For the Fiscal Year Ended January 28, 2006

TABLE OF CONTENTS

EXPLANATORY NOTE

The Wet Seal, Inc. (the “Company”) is filing this Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year ended January 28, 2006 (the “2005 10-K”), originally filed on April 13, 2006, to restate its consolidated balance sheets as of January 28, 2006, and January 29, 2005, its consolidated statements of operations, statements of cash flows and statements of stockholders’ equity for the fiscal years ended January 28, 2006, January 29, 2005, and January 31, 2004, and the related disclosures. Please refer to Note 20 to the accompanying consolidated financial statements for additional information.

Since the summer of 2006, several United States public companies have issued press releases announcing the restatement of their financial statements due to errors in their accounting for grants of stock options to employees, members of their boards of directors, and other service providers. Many other companies also announced they were looking into their past practices related to the granting of stock options. On September 19, 2006, the Office of the Chief Accountant of the Securities and Exchange Commission (the “Office”) issued a letter to industry describing the Office’s views on historical stock option accounting issues. In light of these events, the audit committee of the Company’s board of directors initiated a review of the Company’s historical stock option granting practices from 1990, the year in which the Company became a public registrant, through August 2006. The review was conducted with the assistance of outside accounting consultants and reviewed by legal counsel. The review was concluded on December 7, 2006.

During the course of this review, the Company identified six instances in which the Company had established measurement dates for accounting purposes for “mass” stock option grants to a broad base of executives, non-executive employees and non-employee directors prior to the completion of all granting actions required for the individual recipients and number of shares granted to be considered fixed and unchangeable for accounting purposes (the “measurement date”). The Company determined that the accounting needs to be adjusted for four of these mass grants, exercisable into a total of 3,367,375 shares of Class A common stock, due to increases in the Company’s common stock price from the originally determined measurement dates to the correct measurement dates. The pre-tax impact of these accounting adjustments on the consolidated statements of operations is approximately $4.2 million, which should have been recorded within general and administrative expenses over the period from fiscal 2001 through fiscal 2006.

Similarly, the Company also identified errors with respect to the measurement dates used for accounting purposes for stock option grants to 20 individual executives, non-executive employees and non-employee directors, exercisable into a total of 590,750 shares of Class A common stock, due to delayed completion of granting actions or existence of documentation supporting a different measurement date, and for which the Company’s common stock price increased from the originally used measurement dates to the corrected measurement dates. Accordingly, the Company determined that the accounting also needs to be adjusted for these grants. The pre-tax impact of these accounting adjustments on the consolidated statements of operations is approximately $0.2 million, which should have been recorded within general and administrative expenses over the period from fiscal 1998 through fiscal 2006.

No current executive officers or current members of the board of directors of the Company realized income from any of the option grants requiring adjustment. The audit committee believes that the errors discovered during the review were not the result of a pattern of anyone attempting to receive an improper benefit or to improve the reported financial results of the Company.

During the second quarter of fiscal 2006, the Company also identified a fiscal 1999 purchase accounting misallocation between goodwill and deferred income tax assets, which resulted in an overstatement of goodwill amortization of approximately $0.4 million and an understatement of provisions for deferred income taxes of approximately $2.9 million, which should have been recorded in selling, general and administrative expenses and provision for income taxes, respectively, over the period from fiscal 1999 through fiscal 2004. The Company previously concluded these misstatements were quantitatively and qualitatively immaterial; however, the Company has corrected such misstatements as part of this restatement. Lastly, the Company also included in this restatement the correction of certain other previously unrecorded quantitatively and qualitatively immaterial accounting adjustments that had the effect of increasing the Company’s loss from continuing operations by a total of $0.4 million over the period from fiscal 2002 through fiscal 2005.

This Amendment No. 1 does not result in a change in the Company’s previously reported revenues, cash flow from operations or total cash and cash equivalents shown in its consolidated financial statements. Furthermore, except as discussed above, the Company has not modified or updated disclosures presented in the 2005 10-K in this Form 10-K/A, except as required to reflect the effects of the items discussed above. Accordingly, this Form 10-K/A does not reflect events occurring after the filing of the 2005 10-K or modify or update those disclosures affected by subsequent events or discoveries. Information not affected by these restatements is unchanged and reflects the disclosures made at the time of the

original filing of the 2005 10-K on April 13, 2006. Events occurring after the filing of the 2005 10-K or other disclosures necessary to reflect subsequent events are addressed in the Company’s Quarterly Reports on Form 10-Q/A for the quarterly periods ended April 29, 2006, and July 29, 2006, and the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 28, 2006, which have been filed concurrently with the filing of this Form 10-K/A, and any reports filed with the Securities and Exchange Commission subsequent to the date of this filing.

This Form 10-K/A should be read in conjunction with the Company’s filings made with the Securities and Exchange Commission subsequent to the filing of the 2005 10-K. The following items have been amended as a result of the restatements described above:

Part II – Item 6 – Selected Financial Data

Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Part II – Item 8 – Financial Statements and Supplementary Data

Part II – Item 9A – Controls and Procedures

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 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.

All references to “we,” “our,” “us,” and “our company” in this Annual Report mean The Wet Seal, Inc. and its wholly owned subsidiaries. All references in this Annual Report to “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,10-K/A, Quarterly Reports on Form 10-Q, Current 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 (www.wetsealinc.com,www.wetseal.com, andwww.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 25 years old. Wet Seal stores average approximately 4,000 square feet in size. As of April 10, 2006, we operated 308 Wet Seal stores.

Arden B. In fiscal 1998, we opened our first Arden B. store. Arden B. delivers a feminine, contemporary, sophisticated wardrobe of branded fashion separates and accessories for every facet of the customer’s lifestyle, from everyday to special occasion, 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 10, 2006, we operated 92 Arden B. stores.

Internet Operations. In 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 concept in August of 2002 with the launch ofwww.ardenb.com, offering Arden B. apparel and accessories comparable to those carried in the 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 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 plans to open new stores in an effort to limit capital expenditures and concentrate our efforts on expanding our core business. We opened three new Arden B. stores during fiscal 2005, and also renovated seven Arden B. stores.

We operated a chain, Zutopia, which was not successful in generating profits. We decided to discontinue this chain of 31 stores at the end of fiscal 2003. Fiscal 2004 and fiscal 2003 included losses from discontinued operations, net of income taxes, of $7.0 million and $8.3 million, respectively, for the Zutopia chain.

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

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 2006, we intend to open 20 to 25 new Wet Seal and/or Arden B. stores and to remodel or relocate 10 to 15 Wet Seal and/or Arden B. stores. In addition, we have approximately 45 existing store leases scheduled to expire in fiscal 2006. We expect to negotiate new leases that will allow us to remain in a substantial majority of 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.

We report our results of operations as one reportable segment representing the aggregation of our two retail brands due to the similarities of the economic and operating characteristics of the operations represented by our two store concepts.

Design, Buying and Product Development

Our design and buying teams are responsible for identifying evolving fashion trends and 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 assessing customer responses to current trends, shopping the European market and the appropriate domestic vendor base and fashion services and gathering references from industry publications. After selecting fashion themes, the design and buying teams work closely with vendors to use colors, materials and designs that create images consistent with the themes for our product offerings.

Since fiscal 2004, we have decreased our dependency on internally-designed merchandise in our Wet Seal concept. This allows 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 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.

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

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 we send e-mails to cardholders to notify them of special in-store promotions, such as preferred customer sales during which cardholders receive additional incentives. As discussed further in Note 1 of Notes to Consolidated Financial Statements contained elsewhere within this Annual Report, our Arden B. concept also offers a loyalty program, “B Rewarded,” designed for the same purposes as those of our Wet Seal concept.

Sourcing and Vendor Relationships

We purchase our merchandise from both domestic and foreign vendors. Approximately 14% of our retail receipts are directly imported from foreign vendors. Although in fiscal 2005 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 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 store operations management and merchandise buyers, our team of planners and allocators manages inventory levels and coordinates 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 center, where items are inspected 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-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 our online concept is performed at our Foothill Ranch distribution center.

Information and Control Systems

Our merchandise, financial and store computer systems are 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 a leading retail enterprise resource planning, or “ERP,” software 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. This system features bar-coded ticket scanning, automatic price look-ups and centralized credit authorizations. All stores are networked to the corporate office via a centrally managed virtual private network. We 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 enables more efficient communications with the corporate office. In fiscal 2005, the majority of our information technology efforts centered around maintaining and enhancing existing systems. In fiscal 2006, we anticipate implementing a new 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 more than 30% of our annual 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 service 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. FLAUNT IT.^®, HUG ME^™, LIMBO LOUNGE^®, SEAL GLAMOUR^™, SEAL STASH^®, SEAL TV^™, STYLIZER^®, URBAN VIBE^®, and ZUTOPIA^®. In general, the registrations for these trademarks and service marks are renewable indefinitely, as long as we continue to use the marks as required by applicable trademark 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. Our 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

Our 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 28, 2006, our operations had 5,312 employees, consisting of 1,735 full-time employees and 3,577 part-time employees. Full-time personnel consisted of 562 salaried employees and 1,173 hourly employees. All part-time personnel are hourly employees. Of all employees, 4,992 were sales personnel and 320 were administrative and distribution center personnel. Personnel at all levels of store operations are provided various 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 industry standards. We believe that our relationship with our employees is good.

Statement Regarding Forward Looking Disclosure and Risk Factors

Certain sections of this Annual Report on Form 10-K,10-K/A, 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, 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 concept 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 to differ materially from any forward-looking statements include, but are not limited to, those discussed in “Risk Factors” below and discussed elsewhere in this Annual Report.

Item 1A. Risk Factors

Risks Related to our Business

Our improvements in comparable store sales and operating results in fiscal 2005 may not be indicative of our future performance trends, and we cannot assure you that we will be able to sustain such rate of improvement and achieve profitability.

During fiscal 2003 and 2004, the comparable store sales of our Wet Seal concept declined significantly, which resulted in a loss from continuing operations in 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 maintain the success of our Wet Seal and Arden B. concepts depends in large part on a number of factors, some of which are outside of our control, including 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 effective pricing strategies, selecting effective marketing techniques, optimizing store performance, negotiating acceptable renewals of expiring leases and general economic conditions. As a result, we cannot assure you that we will be able to sustain the recent rate of improvement in results of operations in the future.

We have incurred significant operating losses and negative cash flows in recent years.

We incurred significant operating losses and negative cash flows during each of fiscal 2003 and 2004 which caused liquidity problems and resulted in very tight vendor payment terms. In 2005, we raised additional capital, generated a smaller operating loss and had positive cash flow from operations, which improved our liquidity substantially. If, in the future, we were to experience operating losses and negative cash flows, resulting in renewed concern about our ability to pay vendors, we might need additional financing. Such financing would likely be very costly, and would potentially be unavailable, on reasonable terms.

The closing of certain Wet Seal stores may not significantly improve our future financial condition or results of operations.

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 also re-opened eight previously closed Wet Seal stores during fiscal 2005. Although the stores closed in 2005 had 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 on our operating results or that we will not have to close additional stores in the future.

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 unable 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 a class action and the subject of an investigation by the Securities and Exchange Commission.

As previously reported, our company and certain of our former directors and former officers have been named as defendants in several 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 the 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 will 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 not 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 own (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 impact on our 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 and the indenture governing our secured 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.

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. Our 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. We face a variety of competitive challenges, including:

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 allow the introduction of new products or new competitors at a fast 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, competition for prime locations and lease terms within shopping malls, in particular, 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.

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, 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.

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, 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 center, and any significant disruption in the operation of this center 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 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 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 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.

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 adversely affect our business and results of operations.

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

We compete with Internet concepts 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:

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 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 lawsuits 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 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.

Although certain conversion and exercise restrictions are placed upon the holders of the securities issued in the January 2005 private placement and the 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’ investments would be further diluted. Such dilution could cause the market price of 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.

In 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 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 Class A common stock from time to time. Moreover, a significant percentage of the convertible securities issued in our 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.

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 our notes prohibit us from paying dividends to our stockholders. 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 authorizes 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 Class 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 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 Class A common stock and limiting the price that investors might in the future be willing to pay for shares of Class A common stock.

Item 1B. Unresolved Staff Comments

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 space in the distribution facility and 86,216 square feet of office space. This lease expires on December 4, 2007. The lease grants our company one five-year renewal option.

We lease all of our stores. Lease terms for our stores typically are 10 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/or non-renewal of a lease, we closed 108 Wet Seal stores and 5 Arden B. stores during the year ended January 28, 2006. Of these closures, 6 were due to lease expirations and 102 were related to our previously announced plans to close 150 Wet Seal stores or to identification of additional Wet Seal stores to close due to their poor performance. At the end of fiscal 2005, we had 1,498,638 square feet of leased space for continuing operations, not including our principal executive offices.

The following table sets forth information with respect to store openings and closings since fiscal 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, or the Court, on behalf of persons who purchased our common stock between January 7, 2003, and August 19, 2004. We and certain of our former directors and

executives were named as defendants. The complaints allege violations of Sections 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 us or disregarded by 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 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 our prospects to stem ongoing losses in our Wet Seal concept and return that business to profitability. The consolidated complaint also alleges that our 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. We 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.

On February 8, 2005, we announced that the Commission had commenced an informal, non-public inquiry regarding our company. We indicated that the Commission’s inquiry generally related to the events and announcements regarding our 2004 second quarter earnings and the sale of our stock by La Senza Corporation and its affiliates during 2004. The Commission 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. Consistent with the previous announcements, we intend to cooperate fully with the Commission’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 such outcome will 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.

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. We 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 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 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.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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 10, 2006, there were 351 stockholders of record of our Class A common stock. The closing price of our Class A common stock on April 10, 2006, was $6.30 per share. As of April 10, 2006, there were no shares of our Class B common 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. Our senior credit facility and the indenture associated with our notes do not allow us to declare or pay any dividends on 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 28, 2006, about our 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 existing equity compensation plans, including our 1996 Long-Term Incentive Plan, as amended, the 2000 Stock Incentive Plan and the 2005 Stock Incentive 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 year ended January 28, 2006.

Unregistered Sales of Equity Securities

On May 3, 2005, we issued 24,600 shares of preferred stock for an aggregate purchase price of $24.6 million, and warrants to acquire initially up to 7.5 million shares of our Class A common stock. 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 (subject to anti-dilution adjustments). As of April 10, 2006, 15,159 shares of preferred stock have been converted into common stock. The warrants are exercisable from November 3, 2005, to November 3, 2010, and have an initial exercise price equal to $3.68 (subject to anti-dilution adjustments). In connection with the issuance of the preferred stock and the warrants, 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 their outstanding Series B warrants. Approximately 3.4 million shares of our Class A common stock were issued as a result of the warrant exercise at an aggregate exercise price of approximately $6.4 million.

We registered the shares of the Class A common stock issuable upon conversion and exercise of the preferred stock and the warrants, as the case may be, pursuant to the terms of a Registration Rights Agreement among our company and the investors in the May 2005 Private Placement. The shares of Class A common stock issuable upon exercise of the Series A warrants and the Series B warrants were included in such registration statement.The securities were issued pursuant to the Commission’s rules and regulations under the Securities Act.

Item 6.

Selected Financial Data

The following table sets forth selected consolidated financial and other data as of and for

Item 6. Selected Financial Data

See the 2001 through 2005 fiscal years. The following selected financial data has been derived from“Explanatory Note” to this Amendment No. 1 to our consolidated financial statements. The data set forth below should be read in conjunction with the consolidated financial statements and notes thereto, which are included elsewhere in this Annual Report on Form 10-K.10-K/A and Note 20 to our consolidated financial statements for more detailed information regarding the restatement of our consolidated financial statements as of January 28, 2006, January 29, 2005, and January 31, 2004, and for each of the three fiscal years ended January 28, 2006, January 29, 2005, and January 31, 2004. We have also revised the selected financial data provided for the fiscal years ended February 1, 2003, and February 2, 2002, to reflect the correction of the errors described in those sections of this report.

Five-Year Financial Summary

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

(2)	Net (loss) income per share and the weighted-average shares outstanding have been adjusted to account for the three-for-two stock split on July 24, 2001, and subsequent three-for-two stock split on May 9, 2002.

(3)	Long-term debt is presented net of unamortized discount of $35.6 million and $44.3 million for fiscal 2005 and fiscal 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. Stores are deemed comparable stores on the first day of the month following the one-year anniversary of their opening or expansion/relocation.

(5)	See Note 20 of the Notes to Consolidated Financial Statements for a discussion of the restatement.

(6)

The consolidated financial statements as of and for fiscal 2002 and fiscal 2001 have been restated. The restated amounts for these years are unaudited. The selected financial data for fiscal 2002 and fiscal 2001, and the unaudited results for fiscal 2000, 1999 and 1998, have been restated to reflect adjustments related to the restatement described in Note 20 of the Notes to Consolidated Financial Statements included in this Form 10-K/A. The restatement adjustments correct errors related to (i) stock-based compensation expense not previously recorded for certain stock option grants and the related income tax effects in fiscal 1998 through fiscal 2002, (ii) an incorrect purchase price allocation between goodwill and deferred income taxes for a fiscal 1999 acquisition, which resulted in overstatements of amortization of goodwill within selling, general and administrative expenses in fiscal 1999 through fiscal 2001 and understatements of provisions for deferred income taxes in fiscal 1999 through fiscal 2002, (iii) a previously unadjusted insignificant accrual for interest payable in fiscal 2002 and (iv) prior year typographical errors in presentation of cost of sales, gross margin and income before provision for income taxes in the selected financial data for fiscal 2001. The restatement adjustments resulted in a decrease in income from continuing operations from amounts previously reported of $1.5 million and $0.4 million for fiscal years 2002 and 2001, respectively. The cumulative effect of the restatement adjustments for fiscal 2000 and prior was an increase in income from continuing operations from amount previously reported of $26,000. The cumulative adjustments through fiscal 2002 are reflected as adjustments to the beginning balances of paid-in capital, deferred stock compensation and accumulated deficit in the consolidated statement of stockholders’ equity for fiscal 2003. The following table summarizes the corrections described above for the fiscal 2002 and fiscal 2001 selected financial data (in thousands except per share amounts and ratios):

Restated Pro Forma Disclosures of Stock-Based Compensation Prior to Fiscal 2003

The financial information set forth below reflects our restated pro forma disclosures made in accordance with Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation,” for fiscal 2002 and fiscal 2001 related to the stock compensation expense restatements discussed in Note 20 of the Notes to Consolidated Financial Statements included in this Form 10-K/A:

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

The discussion and analysis set forth below in this Item 7 has been amended to reflect the restatement as described in the Explanatory Note to this amended Annual Report on Form 10-K/A and in Note 20 of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report. For this reason, the data set forth in this section may not be comparable to discussions and data in our previously filed Annual Reports.

The following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto included elsewhere in this Form 10-K.10-K/A. The following discussion and analysis 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“Statements Regarding Forward Looking DisclosureDisclosures and Risk Factors” included elsewhere in this Form 10-K.10-K/A.

Executive Overview

We are a national specialty retailer operating stores selling fashionable and contemporary apparel and accessory items designed for female customers. We operate two nationwide, primarily mall-based, chains of retail stores under the names “Wet Seal” and “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 be key performance indicators in evaluating our performance:

Comparable 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 administrative 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 results negatively affect operating leverage. Comparable store sales results also have a direct impact on our total net sales, cash, and working capital.

Transaction counts—We consider the trend in the number of sales transactions occurring in our stores to be a key performance metric. To the extent 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—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 percentage of net sales. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns or an inability to generate sufficient sales leverage on other components of cost of sales could have an adverse impact on our gross margin results and results of operations.

Operating income (loss)—We view operating income (loss) as a key indicator of our success. The key drivers of operating income (loss) are comparable store sales, gross margins, and our ability to control operating costs. For a discussion of the changes in the components comprising operating income (loss), see “Results of Operations” in this section.

Cash flow and liquidity (working capital)—We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs. We expect that our cash on hand and cash flows from operations will be sufficient to finance operations without borrowing under our senior credit facility for at least the next twelve12 months.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in 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 accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.10-K/A. The policies and estimates discussed below involve the selection or application of alternative accounting policies that 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 Board of 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 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. Online concept customers typically receive goods within five 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 merchandise within 30 days of the original purchase date. Actual return rates have historically been within management’s estimates and the reserves established. As the reserve for merchandise returns is based on estimates, the actual returns could differ from the reserve, which could impact sales.

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

Through our Wet Seal concept, we have a Frequent Buyer program that entitles the customer to receive a 10% to 20% discount on all purchases made during the twelve-month12-month program period. The revenue from the annual membership fee of $20.00 is non-refundable. Membership fee revenue is recognized on a straight-line basis over the twelve-month12-month membership period, which approximates the spending pattern 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 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 eighteen18 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.

Merchandise Inventories

Merchandise inventories are stated at the lower of cost 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, then is converted to a cost basis by applying an 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 are recorded when the sales value of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to permanently mark down merchandise, the resulting gross margin reduction is recognized in the period the markdown is recorded. Total markdowns on a cost basis in 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, respectively. We accrued on a cost basis for planned but unexecuted markdowns as of January 28, 2006, and 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 gross margin, operating income and the carrying value of inventories. Our 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 we fail to anticipate, identify or react appropriately to changing styles, trends or brand preferences of our customers, we may experience lower sales, excess inventories and more frequent and extensive markdowns, which would adversely affect our operating results.

Long-Lived Assets

In accordance with StatementsStatement 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 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 the discounted estimated future cash flows of the assets using a rate that approximates our weighted-average cost of capital. Quarterly, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-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 on disappointing sales results during the fiscal 2004 back-to-school period, the then expectation of continued operating losses through the end of fiscal 2004 and our historical operating performance, we 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.

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

The 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 are unable to recover such costs through price increases, the carrying value of certain of our retail stores may prove to be unrecoverable and we may incur additional impairment charges in the future.

Impairment of Goodwill

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we test goodwill for impairment annually as of January 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 estimated fair value of 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 averageweighted-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$3.5 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 various 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 1 of Notes to Consolidated Financial Statements included elsewhere within this Annual Report on Form 10-K,10-K/A, 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$24.6 million, $1.5$1.7 million and $0.9$2.0 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

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 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 historical operating performance, management concluded that it was more likely than not that we would not realize our net deferred tax assets. As a result of this conclusion, we reduced to zero our net deferred tax assets by establishing a tax valuation allowance of $97.5$100.4 million in fiscal 2004. In addition, we have discontinued recognizing income tax benefits in the consolidated statements of operations until it is determined that it is more likely than not that we will generate sufficient taxable income to realize our deferred tax assets.

As of January 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 incurring additional state income taxes.

Insurance Reserves

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

aggregate annual liability of $5.0 million. Under our group health plan, we are liable for a deductible of $0.15 million for each claim and an aggregate monthly liability of $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, we record a liability for the costs associated with reported claims and a projected estimate for unreported claims considering historical experience and industry standards. We will continue to adjust the estimates as the actual experience dictates. A significant change in the number or dollar amount of claims could cause us to revise our estimate of potential losses and affect our 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.

Store 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 twelve12 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,10-K/A, 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 withWith Michael Gold

Since late 2004, Michael Gold has been assisting our company with 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 the 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 sharesPerformance 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 variable basis, whereby quarterly charges through the remainder of the consulting agreement period will be based upon the then fair value of the Performance Shares, which could have a significant impact on 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 concept, which was closed by May 2004.

The following table sets forth selected statements 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 2005 compared to Fiscal 2004

Net Sales

		2005			Change From Prior Fiscal Year						2004
		(in millions)
Net sales		$	500.8		$	65.2		15.0	%		$	435.6
Comparable store sales								44.7	%

Net sales in fiscal 2005 increased as a result of significant 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 during fiscal 2005 versus fiscal 2004 was also affected by closure of 25 stores primarily from February through September of fiscal 2004 and closure of an additional 14 stores from late March 2005 through the end of fiscal 2005. The lower average number of stores in operation 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.

Cost of Sales

Cost of sales includes the cost of merchandise, markdowns, inventory shortages, inventory valuation adjustments, inbound freight, payroll expenses associated with design, buying, planning and allocation, inspection costs, processing, receiving and other warehouse costs, and rent and depreciation and amortization expense associated with our stores and distribution center.

Cost of sales, in dollars and as a percent to sales, decreased due to:

Selling, General and Administrative 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.

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 effect 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$21.3 million over last year to $58.3$58.1 million. As a percentage of sales, general and administrative expenses were 11.6%, or 3.2%3.1%, as a percentage of sales, higher than a year ago. The following contributed to the current year increase in general and administrative expenses:

Offset by the following decreases:

Store Closure Costs

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 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-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.

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.

During fiscal 2004, we recorded impairment charges of $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 2004 and recent historical results.

Interest (Expense) Income, Net

We incurred net interest expense of $13.0$12.9 million in fiscal 2005 comprised of:

In fiscal 2004, we incurred net interest expense of $2.1 million, comprised of $0.7 million associated with the Facility and the term loan thereunder, $0.6 million of interest expense on our $10.0 million bridge loan, $0.3 million of interest on our notes issued shortly before that fiscal year-end and $1.0 million of deferred financing cost amortization, partially offset by $0.5 million of interest income on investments.

Provision (Benefit) for Income Taxes

As discussed further below, we ceased recognizing tax benefits related to our net operating losses and other deferred tax assets beginning with our second quarter of fiscal 2004. We also did not recognize income tax benefits related to net operating losses generated in fiscal 2005. During fiscal 2005, we incurred a provision for income taxes of $0.3 million primarily to write off certain state tax receivables we no longer believe to be realizable.

In fiscal 2004, we incurred a benefit for current income taxes of $2.0$1.9 million and a provision for deferred income taxes of $29.5$32.6 million. The provision for deferred income taxes was comprised of the establishment of a tax valuation allowance of $40.4$43.5 million against all of our deferred tax assets, partially offset by a benefit to income taxes of $10.9 million recognized prior to our decision last year to cease recognizing such benefits. The tax valuation allowance was deemed necessary in light of disappointing sales results, our expectations at that time for weak future operating results and our historical operating performance. We established this tax valuation allowance in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires deferred tax assets to be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized in the foreseeable future. Also, see Note 2 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report for discussion of limitations on our ability to utilized net operating loss carryforwards.

Accretion of Non-Cash Dividends on Convertible Preferred Stock

As discussed further in Note 7 of Notes to Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K,10-K/A, during fiscal year 2005 we issued 24,600 shares of the Preferred Stock, with a stated value of $24.6 million. We initially recorded the Preferred Stock at a discount of $23.3 million. We immediately accreted this discount in its entirety in the form of a non-cash dividend on Preferred Stock since the Preferred Stock is immediately convertible and has no stated redemption date.

Fiscal 2004 compared to Fiscal 2003

Net Sales

		2004			Change From Prior Fiscal Year							2003
		(in millions)
Net sales		$	435.6		$	(82.3	)		(15.9	)%		$	517.9
Comparable store sales									(13.0	)%

Our net sales decreased primarily as a result of lower comparable store sales and fewer stores in operation in fiscal 2004 versus fiscal 2003.

Cost of Sales

Cost of sales include the cost of merchandise, markdowns, inventory shortages, valuation adjustments, inbound freight, payroll expenses associated with design, buying, planning and allocation, inspection costs, processing, receiving and other warehouse costs, rent and depreciation and amortization expense associated with our stores and distribution center. In fiscal 2004, our cost of sales declined $42.8 million and increased as a percent to sales by 5.5%.

Selling, General and Administrative Expenses (SG&A)

In fiscal 2004, SG&A spending was moderately higher than in the prior year. However, reductions in store level operating expenses, due to store closures and lower comparable store sales, were offset by higher levels of spending in general and administrative expenses. The lower sales volume accounted for 3.6% of the 6.4%6.3% increase in the SG&A percentage of sales. The following items contributed to the increase in SG&A percentage of sales:

Store Closure Costs

We ceased use of property at 103 Wet Seal stores on or about January 29, 2005, in connection with our strategy to close low-volume, unprofitable stores. We 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 down of the carrying value of the store assets (primarily leasehold improvements) to realizable value. We also recognized a benefit of approximately $1.2 million related to the write-off of deferred rent associated with these stores.

Asset Impairment

We recorded impairment charges of $41.4 million, including $0.3 million for impairment of goodwill, on certain long-lived assets, primarily as a result of disappointing sales results for the fiscal 2004 “Back-To-School” period, our expectations at that time for operating results for the balance of fiscal 2004 and recent historical results.

Interest (Expense) Income, Net

We incurred interest expense of $2.1$2.2 million as a result of:

Provision (Benefit) for Income Taxes

For the year ended January 29, 2005, we incurred a benefit for current income taxes of $2.0$1.9 million and a provision for deferred income taxes of $29.5$32.6 million. The provision for deferred income taxes was comprised of the establishment of a tax valuation allowance of $40.4$43.5 million against all of our deferred tax assets, partially offset by a benefit to income taxes of $10.9 million recognized prior to our decision to cease recognizing such benefits.

We established this tax valuation allowance in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires deferred tax assets to be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized in the foreseeable future. The ability to utilize net operating loss carryforwards is limited under various provisions of the Internal Revenue Code. (See Note 2 in “NotesNotes to Consolidated Financial Statements).

Loss from Discontinued Operations, Net of Income Taxes

Our company closed 31 Zutopia stores during the first two quarters of fiscal 2004. The loss of $7.0 million reflects the operating losses during the year ended January 29, 2005, including lease termination costs.

Liquidity and Capital Resources

Net cash provided by operating activities was $11.0 million for fiscal 2005, compared to net cash used in operating activities of $77.4 million for the same period last year. For fiscal 2005, operating cash flows were directly impacted by net non-cash charges (primarily stock compensation, depreciation and amortization, amortization of debt discount and deferred financing costs and payment-in-kind interest expense) of $52.0$52.3 million, andpartially offset by cash generated fromused in changes in other operating assets and liabilities of $8.0$11.9 million, partially offset by our net loss of $29.5 million,including an increase in merchandise inventories, net of merchandise accounts payable, of $4.0$3.6 million, and payment of $15.5 million in store closure costs associated with our closure of 153 Wet Seal stores in late fiscal 2004 and early fiscal 2005.2005, partially offset by our net loss of $29.4 million,. At January 28, 2006, the net owned inventory ratio was 1.881.83 compared to the ratio of 1.76 on January 29, 2005. The slight increase in the inventory ratio was due to shorter vendor credit terms. While we believe we could now obtain longer credit terms with several vendors as a result of our improved financial performance, we continue to maintain shorter credit terms in order to take advantage of favorable purchase discounts.

For fiscal 2005, net cash used in investing activities of $5.3 million was comprised of capital expenditures of $5.4 million, partially offset by proceeds from sales of furniture, fixtures and equipment of $0.1 million. Capital expenditures for the period were primarily for new store development and store relocations for our Arden B. concept.

We estimate that, in fiscal 2006, capital expenditures will be approximately $15.0 million to $17.0 million, primarily for the construction of 20 to 25 new stores and remodeling of existing stores.

For fiscal 2005, net cash provided by financing activities was $19.4 million, comprised primarily of $24.6 million in proceeds from our issuance of Preferred Stock on May 3, 2005, and $7.4 million in proceeds from investor exercises of common stock warrants, of which $6.4 million occurred concurrently with the Preferred Stock issuance and $1.0 million of proceeds from exercise of stock options, partially offset by payment of $1.6 million for the Preferred Stock and other equity financing transaction costs, payment of $11.9 million of principal and interest to retire our $10.0 million bridge loan and payment of $0.1 million of deferred financing costs.

Total cash and cash equivalents at January 28, 2006, was $96.8 million, compared to $71.7 million at January 29, 2005. Our working capital at January 28, 2006, increased to $68.9$69.2 million from $27.0$26.9 million at January 29, 2005, due primarily to our increase in cash and cash equivalents and repayment of our bridge loan during fiscal 2005.

As of January 28, 2006, we had a $58.0 million secured revolving credit facility. The Facility consists of a $50.0 million senior secured revolving line-of-credit with a $50.0 million sub-limitsublimit for letters of credit, and an $8.0 million junior secured term loan. Additional information regarding the Facility is contained in Note 6, “Bridge Loan Payable, Long-Term Debt and Secured Convertible Notes,” of the Notes to Consolidated Financial Statements.

At January 28, 2006, the amount outstanding under the Facility consisted of an $8.0 million junior secured term loan, $7.3 million in open documentary letters of credit related to merchandise purchases and $11.9 million in standby letters of credit, which included $10.0 million for inventory purchases. At January 28, 2006, we had $30.8 million available for cash advances and/or for the issuance of additional letters of credit under the Facility. Our ability to borrow and request the issuance of letters of credit is also subject to the requirement that we maintain an excess of our borrowing base over the outstanding credit extensions of not less than the lesser of 15% of such borrowing base or $5.0 million. At January 28, 2006, we were in compliance with all covenant requirements related to the Facility. Subsequent to January 28, 2006, we repaid and retired the $8.0 million junior secured term loan and reduced the standby letter of credit for inventory purchases to $5.0 million.

As a result of our operating losses over the past three years, primarily those in fiscal 2004 and fiscal 2003, we experienced a tightening of credit extended to us by vendors, factors, and others for merchandise and services. The impact of 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. All of these factors led us to seek additional financing for the purpose of executing our turn-around strategy, funding future negative cash flows from operations, satisfying working capital needs, funding capital expenditures in fiscal 2005 and improving our credit worthiness.creditworthiness. During fiscal 2004, we raised approximately $92.7 million in net proceeds through a series of financings to meet our cash needs. In addition, on May 3, 2005, we completed a private placement of convertible preferred stock and common stock warrants and received the net proceeds outlined in the above discussion about net cash provided by financing activities. See Note 7, “Convertible Preferred Stock and Common Stock Warrants,” in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K10-K/A for additional information regarding this transaction.

For fiscal 2005, we experienced a comparable store sales increase of 44.7%. This comparable store sales increase was the first in over two years, and resulted primarily from our new merchandise approach in our Wet Seal stores, a key component of our turn-around strategy that we initiated in January 2005. In light of our improvement in comparable store sales and our cash position of $96.8 million at January 28, 2006, we believe, if current sales trends continue, we will have sufficient cash to meet our operating and capital requirements for the next twelve12 months. However, we cannot assure you that we will not experience future declines in comparable store sales.

In addition, in the future we may consider opportunities to acquire retail businesses that we believe complement our existing business concepts and/or repurchase portions of our common stock, secured convertible notes or Preferred Stock if we believe such opportunities represent an appropriate use of our cash.

Seasonality and Inflation

Our business is seasonal in 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 our sales volume. For the past three fiscal years, the Christmas and back-to-school seasons together accounted for an average of slightly more than 30% of our annual sales. We do not believe that inflation has had a material effect on our results of operations during the past three years. However, we cannot be certain that our business will not be affected by inflation in the future.

Commitments and Contingencies

At January 28, 2006, our contractual obligations consist of:

(3)

The projected interest component of our company’s contractual obligations was estimated based on the prevailing or contractual interest rates for the respective obligations over the period of the agreements (see Note 6 of Notes to Consolidated Financial Statements). The projected interest due in less than one year and in one to three years pertains to our $8.0 million junior secured term loan, which we repaid and retired on March 23, 2006. The projected interest due in more than five years pertains to the 3.76% interest, compounded annually, on our convertible notes. Upon investor conversions of our convertible notes, we become no longer obligated to pay a ratable portion of such interest.

Our principal commercial commitments consist of letters of credit, primarily for the procurement of merchandise inventories, secured by our revolving line-of-credit arrangement. We do not maintain any long-term or exclusive commitments or arrangements to purchase merchandise from any single supplier. At January 28, 2006, our contractual commercial commitments under the letters of credit arrangements were as follows:

New Accounting Pronouncements

In October 2005, the FASB issued FASB Staff Position No. 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP No. 13-1”), which requires rental costs associated with ground or building operating leases that are incurred during a construction period to be recognized as rental expense. FSP No. 13-1 is effective for periods beginning after December 15, 2005. We will be adopting this pronouncement beginning with our fiscal 2006. The adoption of FSP No. 13-1 is not expected to have a material impact on our consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. SFAS No. 154 also addresses the reporting of a correction of an error by restating previously issued financial statements. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005. We will be adopting this pronouncement beginning with our fiscal 2006.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), an interpretation of SFAS 143, “Accounting for Conditional Asset Retirement Obligations.” This interpretation clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This statement is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN 47 did not have a material impact on our consolidated financial position or results of operations.

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, which provides guidance on the implementation of SFAS No. 123(R). In particular, SAB No. 107 provides key guidance related to valuation methods (including assumptions such as expected volatility and expected term), the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123(R), the modification of employee share options prior to the adoption of SFAS No. 123(R), the classification of compensation expense, capitalization of compensation cost related to share-based payment arrangements, first-time adoption of SFAS No. 123(R) in an interim period, and disclosures in Management’s Discussion and Analysis subsequent to the adoption of SFAS No. 123(R). SAB No. 107 became effective on March 29, 2005. We will apply the principles of SAB No. 107 in conjunction with our adoption of SFAS No. 123(R).

In December 2004, the FASB issued SFAS No. 123(R). SFAS No. 123(R) requires an entity to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. For any unvested portion of previously issued and outstanding awards, compensation expense is required to be recorded based on the previously disclosed SFAS No. 123 methodology and amounts. Prior periods presented do

not require restatement. This statement is effective for the first fiscal year beginning after June 15, 2005. We will be adopting this pronouncement during the first quarter of our fiscal 2006, at which time we will begin to record stockstock-based compensation expense, based on the fair values of awards on their respective measurement dates, over the remaining vesting period for prior stock option grants and certain other stock awards to employees that are not fully vested as of the end of fiscal 2005. The adoption of SFAS No. 123(R) could also have a significant adverse effect on our results of operations and earnings per share to the extent we

continue to make share-based payments. We estimate that the adoption of SFAS No. 123(R) will result in our incurring approximately $2.8 million in stock compensation expense in fiscal 2006 that we would not have incurred under the applicable accounting standards in effect through the end of fiscal 2005. 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 2006, as well as our 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 and performance share and restricted stock grants to employees.

Additional information regarding new accounting pronouncements is contained in Note 1 of Notes to Consolidated Financial Statements herein.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

To the extent that we borrow under the Facility, we are exposed to market risk related to changes in interest rates. At January 28, 2006, no borrowings were outstanding under the Facility; however we did have $8.0 million outstanding under our junior secured term loan. The junior secured term loan bears interest at the prime rate plus 7.0%. The balance of this note was repaid on March 23, 2006. Based on the outstanding balance of the junior secured term loan at January 28, 2006, a one percent increase in the applicable interest rate would decrease our annual cash flow by $0.1 million. Conversely, a one percent decrease in the applicable interest rate would increase our annual cash flow by $0.1 million. As of January 28, 2006, we are not a party to any derivative financial instruments, except as discussed in “Market Risk – Change in Value of our Common Stock” immediately below.

Market Risk—Change in Value of our Common Stock

Our notes (see Note 6 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K)10-K/A) contain an embedded derivative, which upon the occurrence of a change of control, as defined, allows each note holder the option to require us to redeem all or a portion of the notes at a price equal to the greater of (i) the product of (x) the conversion amount being redeemed and (y) the quotient determined by dividing (A) the closing sale price of our Class A common stock on the business day on which the first public announcement of such proposed change of control is made by (B) the conversion price and (ii) 125% of the conversion amount being redeemed. We account for this derivative at fair value on the consolidated balance sheets within other long-term liabilities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” We determine the fair value of the derivative instrument each period using both the Black-Scholes model and the Monte-Carlo simulation model. Such models are complex and require significant judgments in the estimation of fair values in the absence of quoted market prices. Changes in the fair market value of the derivative liability are recognized in earnings.

In applying the Black-Scholes and Monte-Carlo simulation models, changes and volatility in our common stock price and risk-free interest rates could significantly affect the fair value of this derivative instrument, which could then result in significant charges or credits to interest expense in our consolidated statements of operations. During the year ended January 28, 2006, there was a $0.1 million decrease in the fair value of this derivative, which we recognized as a decrease to the carrying value of the derivative liability and a reduction of interest expense in the consolidated statements of operations.

Item 8. Financial Statements and Supplementary Data

Information with respect to this item is set forth under Item 15.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the restatement of our financial statements resulting from our errors in historical stock option accounting practices, as described in Note 20 of the Notes to Consolidated Financial Statements, and the filing of this Form 10-K/A, our management, with the participation of our Chief Executive Officer and Chief Financial officer, re-evaluated the effectiveness of our disclosure controls and procedures. In conducting their re-evaluation, our Chief Executive Officer and Chief Financial Officer considered the nature and timing of our successful remediation of material weaknesses in internal control over financial reporting during the fiscal year ended January 28, 2006, as discussed below inChanges in Internal Control Over Financial Reporting, relative to the findings from our management’s current review of our historical stock option accounting practices and the resulting restatement. In doing so, our Chief Executive Officer and Chief Financial Officer concluded that the remediation efforts completed during the fiscal year ended January 28, 2006, in particular our finance and accounting staff additions to improve our technical accounting expertise and implementation of improved stock option granting procedures, not only addressed other material weaknesses in internal control over financial reporting that had existed as of January 29, 2005, the end of the prior fiscal year, but also effectively remediated the material weakness in internal control that gave rise to the historical stock option accounting errors. Based upon their re-evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the fiscal quarter ended January 28, 2006, no significant changes occurred with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting, except as noted below:

These changes effectively remediated our material weaknesses in internal control over financial reporting that existed as of January 29, 2005, and had continued to exist through October 29, 2005.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 28, 2006, based on the framework inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our management’s evaluation under the framework inInternal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of January 28, 2006.

Our independent registered public accounting firm has issued an attestation report on management’s assessment of our internal control over financial reporting. This report appears below.

Independent Registered Public Accounting Firm Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

The Wet Seal, Inc.

Foothill Ranch, California:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that The Wet Seal, Inc. (“the Company”) maintained effective internal control over financial reporting as of January 28, 2006, based on the criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and is effected by the company’s Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes these policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorization of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of the changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of January 28, 2006 is fairly stated, in all material respects, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 28, 2006 of the Company, and our report dated April 13, 2006 (December 12, 2006, as to the effects of the restatement discussed in Note 20), expressed an unqualified opinion on those financial statements.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California

April 13, 2006

Item 9B. Other Information

None.

PART III

Item

Itemss 10 through 14 are incorporated by reference to our definitive proxy statement to bethat was filed with the Commission no later than 120 days after the end of the year covered by this Form 10-K or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A, not later than the end of such 120-day period.on May 3, 2006.

PART IV

Item 15. Exhibits and Financial Statement Schedules

SIGNATURES

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

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

THE WET SEAL, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

The Wet Seal, Inc.

We have audited the accompanying consolidated balance sheets of The Wet Seal, Inc. and subsidiaries (the “Company”) as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended January 28, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 28, 2006 and January 29, 2005, and the results of its operations and its cash flows for each of the three years in the period ended January 28, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 20, the accompanying consolidated financial statements as of January 28, 2006 and January 29, 2005, and for each of the three years in the period ended January 28, 2006, have been restated.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 28, 2006, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 13, 2006, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California

April 13, 2006 (December 12, 2006, as to the effects of the restatement discussed in Note 20)

THE WET SEAL, INC.

CONSOLIDATED BALANCE SHEETS