The holiday catalog that is now in-home is performing better than we had most recently anticipated, although the results continue to fail to meet our initial expectations and therefore we continue to assess our catalog plans for next year. In addition to reviewing the profitability of our "direct to customer" business, we continue to review our expense structure. Within certain departments we have recently reduced staffing levels and do not plan on increasing either the staffing at our home office next year or the salaries of those employees for the balance of this year.

        Interest income will likely be lower for the fourth quarter than it was last year, a result of lower cash and investment balances and the reduction in the market interest rates earned on our cash and cash equivalents and short and long-term investments.

        We anticipate opening approximately 12 new stores and closing approximately 16 stores in the fourth quarter of fiscal 2002. We have been successful in leveraging our occupancy costs by opening appropriately sized stores with better than average sales per square foot, and by closing under-performing stores. In a press release dated February 28, 2002, we stated that the average new store will be approximately 3,300 square feet and each will require an investment of approximately $300,000. Although there can be no assurance, we believe we can achieve average sales of $300 per square foot in these stores.

        During fiscal 2003 we anticipate opening approximately 75 new locations, consisting of 15 to 20 Arden B. locations, 3 to 10 Zutopia locations with the remainder of the openings being Wet Seal locations. We expect about 35% of the new locations to open in the spring season and the remainder to open before Thanksgiving. Total capital expenditures anticipated for Fiscal 2003 will be approximately $45 million. This capital expenditure estimate includes the anticipated costs of renovating 55 stores whose leases have expired but that we expect to renew.

Inventory Valuation

Merchandise inventories are stated at the lower of cost (first in, first out) or market. Cost is calculated using the retail inventory method. The retail inventory method is used to estimate the ending inventory at cost by employing a cost to retail (selling price) ratio. The ending inventory is first determined at selling price and then converted to cost. Purchases, sales, net markdowns (less mark-

ups), charity, discounts and estimated shrink are considered in arriving at the cost to retail ratio. Inventories include items that have been marked down to management'smanagement’s best estimate of their fair market value. Management'sManagement’s decision to mark down merchandise is based on maintaining the freshness of our product offering. Markdowns are taken regularly to affecteffect the rapid sale of slow moving inventory and to make room for new merchandise arriving daily atto the stores.

To the extent that management’s estimates differ from actual sales results, are lower than management's estimates, additional markdowns may be required whichthat could reduce bothour gross margin, operating income and operating income.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.

We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimates are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 to the consolidated financial statements and in Management’s Discussion and Analysis, respectively, included in our Annual Report for the fiscal year ended February 1, 2003.

Current Trends and Outlook

Results for the first quarter of fiscal 2003 reflected a continuation of negative comparable store sales. Despite this, we were encouraged by the month-to-month improvement in our comparable store sales trend during the quarter and by a good Easter holiday week in the third month of the quarter. However, we have been disappointed by lower sales in late April and May than our progress through the first half of April had led us to anticipate.

We continue to work through many challenges following a difficult year, and believe we have made significant progress in our efforts to reposition our merchandise. We have researched our core customers and received valuable feedback from focus groups. Based upon our analysis of this information, our team has been working diligently to develop merchandise with an exciting new fashion direction that will focus on our core customers’ needs. Although our sales have not rebounded as quickly or as strongly as we had initially expected, we are looking forward to the back-to-school season when we believe our new product offerings will reconnect us with our “core” customer. In addition, we believe that strides have been made to ensure merchandise is received on a more consistent and timely basis.

We will continue our efforts to reduce costs, given the disappointing sales and bottom line results of the first quarter. We currently are making operating changes that should result in substantial savings, such as switching product shipments from air freight to ground freight. Other cost saving strategies are being developed and implemented to reduce selling, general and administrative expenses and buying costs.

During fiscal 2003, we anticipate opening a total of 35 new locations. We opened 20 new stores in the first quarter, and expect to open 15 more stores, divided between Wet Seal and Arden B. locations. In addition to the 5 stores closed during the first quarter, we expect to close another 9 stores during the remainder of the year. Total capital expenditures are expected to be less than $17.5 million for the fiscal year, well below the level spent in the prior two years.

Results of Operations

The quarter ended November 2, 2002 asMay 3, 2003 compared to the quarter ended November 3, 2001.May 4, 2002.

Sales for the quarter ended November 2, 2002May 3, 2003 were $144.5$123.6 million, compared to sales for the prior year first quarter ended November 3, 2001 of $146.9$156.6 million, a decrease of $2.4$33.0 million or 1.6%21.0%. The decrease in

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sales was due primarily to thea comparable store sales decline of 9.6%25.5% for the quarter ended November 2, 2002.May 3, 2003, offset partially by an increase in the number of stores. In the same quarter ended November 3, 2001a year ago comparable store sales had increased 4.4%8.2%. ComparableThe sales pace during the first quarter of this year reflects a continuation of the challenges faced through year-end in needing to more closely correlate our inventory and fashions with our customers’ tastes. Many changes are underway with the merchandise assortment and marketing strategies, which we expect will be completed before the upcoming back to school season. We believe some improvement has already occurred, as evidenced by the month-to-month comparable store sales are defined asimprovement during the quarter. We also believe a portion of the April sales improvement reflects some benefit from a later Easter holiday this year, in stores that were open throughout the preceding 14 month period.addition to our merchants’ ongoing efforts to improve assortments.

Cost of sales (including buying, merchandise planning, distribution and occupancy costs) was $104.8$98.9 million for the quarter ended November 2, 2002May 3, 2003 compared to $99.6$104.1 million for the same quarter last year ended November 3, 2001, an increaseMay 4, 2002, a decrease of $5.2 million or 5.2%4.9%. As a percentagepercent of sales, cost of sales was 72.5%80.0% for the first quarter ended November 2, 2002May 3, 2003 compared to 67.8%66.5% for the same quarter ended November 3, 2001,last year, an increase of 4.7%13.5%. The increase inmost significant impact on the cost of sales as a percentagepercent of sales was primarily due toin the first quarter this year stems from the sales-driven loss of leverage onfor occupancy, expense and warehouse and buying costs dueand

merchandise planning costs compared to the decrease in sales. A portionprior year first quarter. In addition, cost of the change was alsosales as a percent of sales rose this year due to an increase in markdowns, a slight decrease in initial markup, and an increase in the quarter ended November 2, 2002shrink reserve. The increased markdowns resulted from lower than anticipated sales. We have also repositioned our pricing on selected items, which contributed to a slightly lower initial markup, with the intent to reduce the need for later markdowns on those items. Buying costs also increased in orderdollar terms over last year, reflecting the addition of key merchants to assuretheir respective staffs at both the Wet Seal and Zutopia divisions. Distribution center costs dropped in dollar terms and remained flat as a clean conversionpercentage of inventorysales, reflecting gains in preparation forefficiency over the holiday season.prior year.

Selling, general and administrative (SG&A) expenses were $44.4$38.2 million for the quarter ended November 2, 2002May 3, 2003, compared to $37.7$39.6 million for the same quarter last year, a decrease of $1.4 million. The $1.4 million decrease reflects less advertising expenditures, lower merchandise delivery costs, and reductions of store payroll costs. These reductions were partially offset by the investments made since the first quarter of last year to upgrade the level of field support. The savings over last year also reflect the CEO vacancy and the elimination of a number of other executive-level administrative positions. As a percentage of sales, SG&A expenses were 30.9% for the quarter ended May 3, 2003, compared to 25.3% for the quarter ended May 4, 2002, an increase of 5.6%. This increase in SG&A expenses as a percent of sales reflects the loss of leverage due to the comparable store sales decline.

Interest income, net, was $0.4 million for the quarter ended NovemberMay 3, 2001, an increase of $6.7 million. As a percentage of sales, selling, general and administrative expenses was 30.7% for the quarter ended November 2, 20022003, compared to 25.7% for the quarter ended November 3, 2001, an increase of 5.0%. The increase as a percentage of sales was related to the loss of leverage, caused by the comparable store sales decline, for store wages and general and administrative costs, combined with a recent investment in field management to improve the customers' experience in our stores. The increase was also due to the implementation of a "Back to School' catalog this year which was not in place in the prior year. In addition, advertising costs increased in the quarter ended November 2, 2002 due to both the catalog as well as for general media coverage compared to the quarter ended November 3, 2001.

        Interest income, net, was $0.7$1.0 million for the quarter ended November 2,May 4, 2002, compared to $1.2 million for the quarter ended November 3, 2001, a decrease of $0.5$0.6 million. This decrease was due primarily to a reduction in market interest rates on the invested balance. In addition, the total balance available for investment dropped $17 millionbalances, as well as to a drop in the last month ofinvested balances compared to the quarter ended November 2, 2002, resulting from $8.2 million paid for share repurchases and an increasesame period in net owned inventory.the prior year.

The income tax provision reflected a $1.5$4.6 million benefit for the quarter ended November 2, 2002 comparedMay 3, 2003, with an effective tax rate of 35.0%. This compares to a $3.9$5.2 million charge for the quarter ended November 3, 2001. The effective income tax rate for the quarter ended November 2,May 4, 2002, was 37.5% compared to 36.6% for the quarter ended November 3, 2001. The lowerwith an effective rate of 37.5%. The year-over-year drop in the quarter ended November 3, 2001 reflected a drop from previous quarters, leading to an effective tax rate for allreflects an expectation that tax exempt interest income and charitable deductions of fiscal 2001inventory will be a higher proportion of 37.5%.full year net income than similar expectations at the end of the first quarter last year.

Based on the factors noted above, we had athe net loss of $2.5 million for the quarter ended November 2, 2002May 3, 2003 was $8.5 million, or $0.29 per diluted share, compared to net income of $6.8$8.7 million or $0.28 per diluted share for the quarter ended November 3, 2001,May 4, 2002, a decrease of $9.3$17.2 million. This equates to a net loss of 1.7% of sales for the quarter ended November 2, 2002 compared to net income of 4.6% of sales for the quarter ended November 3, 2001.

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Results of Operations

The nine months ended November 2, 2002 as compared to the nine months ended November 3, 2001.

        Sales in the first nine months of fiscal 2002 were $447.3 million compared to sales for the nine months ended November 3, 2001 of $420.4 million, an increase of $26.9 million or 6.4%. The dollar increase in sales was due to the net increase of 42 stores; 610 stores were open and operating at the end of the first nine months of fiscal 2001 compared to 568 stores at the end of the first nine months of fiscal 2002. Comparable store sales decreased 0.2% for the first nine months of fiscal 2002. This compares to a comparable store sales increase of 3.8% for the first nine months of fiscal 2001.

        Cost of sales, including buying, distribution and occupancy costs, were $310.2 million in the first nine months of fiscal 2002 compared to $291.4 million in the first nine months of fiscal 2001, an increase of $18.8 million or 6.5%. This increase reflects the sales increase of 6.4% over the same period. Cost of sales was 69.3% of sales in the first nine months of fiscal 2002, identical to the 69.3% of sales in the first nine months of fiscal 2001.

        Selling, general and administrative expenses were $123.9 million in the first nine months of fiscal 2002 compared to $107.6 million in the first nine months of fiscal 2001, an increase of $16.3 million or 15.1%. The dollar increase in selling, general and administrative expenses was primarily due to the increase in the number of stores and in total sales, driving store payroll and volume-related costs. Selling, general and administrative expenses were 27.7% of sales in the first nine months of fiscal 2002, 2.1% above the 25.6% of sales for the first nine months of fiscal 2001. This percentage increase was primarily caused by investments made this year in store staffing and general and administrative staff, as well as higher advertising costs and investment in the catalog program.

        Interest income, net, was $2.6 million in the first nine months of fiscal 2002 compared to $4.0 million in the first nine months of fiscal 2001, a decrease of $1.4 million. As with the quarter ended November 2, 2002, this year-to-date decrease was due primarily to a reduction in market interest rates.

        The income tax provision was $5.9 million in the first nine months of fiscal 2002 compared to $9.6 million in the first nine months of fiscal 2001. The effective tax rate for the first nine months of fiscal 2002 was 37.5% compared to 38.0% in the first nine months of fiscal 2001. The decrease in the effective tax rate largely reflects an increase in income generated from states with lower effective tax rates.

        Based on the factors noted above, net income was $9.9 million in the first nine months of fiscal 2002 compared to $15.8 million in the first nine months of fiscal 2001, a decrease of $5.9 million or 37.3%. As a percentage of sales, the net loss was 6.9% in the quarter ended May 3, 2003, compared to net income was 2.2% inas a percentage of sales of 5.6% for the first nine months of fiscal 2002 compared to 3.7% in the first nine months of fiscal 2001.quarter ended May 4, 2002.

Liquidity and Capital Resources

Working capital at May 3, 2003, was $55.3 million compared to $64.5 at February 1, 2003, a decrease of $9.2 million. This decrease in working capital was primarily due to an increase in merchandise payables and a reduction in income tax receivable, offset by an increase in merchandise inventories and prepaid expenses.

Net cash provided by operating activities for the first nine months of fiscal 2002quarter ended May 3, 2003, was $1.9$8.3 million, compared to $29.6$7.4 million in the first nine months of fiscal 2001.quarter ended May 4, 2002. This is a $0.9 million increase despite a $17.2 million decrease in net cash provided by operating activities is dueearnings compared to the amount of owned inventory (inventory net of payables) being $9 million higher at November 2, 2002 than at November 3, 2001. Additionally, the first nine months of fiscal 2002 operating cash flows have also been negatively impacted by an increase in prepaid catalog, insurance, and holiday gift bags and boxes.

        Working capital at November 2, 2002 was $52.7 million compared to $77.2 million at February 2, 2002, a decrease of $24.5 million. This decrease in working capital was due to a number of factors, including a shift of $10.5 million out of short-term investments into long-term investments. In addition, capital improvements were $2.8 million higher in the first nine months of fiscal 2002 compared to the

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same periodquarter of the prior year and there were $8.2ended May 4, 2002. An increase in merchandise payables conserved nearly $10 million of treasury stock purchases in cash compared to the first nine monthsquarter ended May 4, 2002. This increase was due to the timing of fiscal 2002.

        Duringprocessing merchandise checks. We also received nearly $8 million in income tax refunds during the quarter ended May 3, 2003 versus income tax payables totaling $7.5 million during the first nine months of fiscal 2002 the Company invested $36.2 million in equipment and leasehold improvements, compared to $33.5 million in the same periodquarter of the prior year.

The $36.2cash and investment balance of $93.2 million investedon May 3, 2003 was $1.6 million less than it was at February 1, 2003. The decline in the first nine months of fiscal 2002 was for 58 new stores already opened,cash and includes approximately $4.5 million for construction in progress for another 12 new stores scheduled to open ininvestment balance reflects the fourth quarter and upgrades and renovations in progress. In the same period of the prior year, there was $33.5 million in capital expenditures for 32 new store openings and the acquisition of 18 Zutopia stores. We currently estimate that the capital expenditures for the remainder of fiscal 2002 will be approximately $9 million. These planned expenditures relate primarily to completing the new store and remodel construction already underway or expected to start in Januaryloss for the first wavequarter of next year'sthis year, expenditures of $8.8 million for capital improvements, and $0.9 million to repurchase the company’s stock. These outflows of cash were offset by the income tax refund received during the quarter and the increase in merchandise payables.

During the quarter ended May 3, 2003, capital improvements totaled $8.8 million, compared to $20.7 million during the quarter ended May 4, 2002. The investment of $8.8 million reflects costs for the 20 new stores.stores and 13 store remodels completed, as well as remodels and new stores under construction for second quarter openings.

 On October 1, 2002,

In September 1998, the Company'sCompany’s Board of Directors authorized the repurchase of up to 5.4 million20% of the outstanding shares of our Class A common stock. From this authorized plan, 3,077,100 shares (split adjusted) were repurchased at a cost of $20.3 million. These repurchased shares were reflected as Treasury Stock in our consolidated balance sheets, until they were retired on December 2,

2002, as authorized by the Company'sBoard of Directors. On October 1, 2002, our Board of Directors authorized the repurchase of up to 5,400,000 shares of our outstanding Class A common stock. This amount includesincluded the remaining shares previously authorized for repurchase by the Company's Board of Directors. As of November 2, 2002, 3,077,100 shares (split adjusted) that were repurchased under the previous plan at a cost of $20.3 million were reflected as Treasury Stock in the Company's consolidated condensed balance sheets. During Octoberfiscal 2002, the Company repurchased 947,400 shares under the new repurchase plan for $8.2 million. Thesemillion and immediately retired these shares. An additional 124,500 shares were repurchased shares underfor $0.9 million in the new planfirst quarter of fiscal 2003 and these shares were immediately retired as authorized by the Company's Boardretired. As of Directors. There are approximately 4.5 millionMay 3, 2003, there were 4,328,100 shares remaining that are authorized for future repurchases under the October 1, 2002 authorization. As of the date of this report, all treasury shares have been retired.repurchase.

We have a revolving line-of-credit arrangement with Bank of America, N.A. in an aggregate principal amount of $50 million, maturing on JanuaryJuly 1, 2004. At November 2, 2002,May 3, 2003, there were no outstanding borrowings under the credit arrangement and therearrangement. There were $14.7$12.0 million in open letters of credit related to imported inventory orders.orders as well as standby letters of credit totaling $0.9 million. As of November 2, 2002,May 3, 2003, we were in compliance with all financial covenants of the credit arrangement.

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

We believe that our working capital and cash flows from operating activities will be sufficient to meet our operating and capital requirements in the foreseeable future.

 Our principal contractual obligations consist of minimum annual rental commitments under non-cancelable leases, including our corporate office and warehouse facility lease. At November 2, 2002, our contractual obligations under these leases were as follows (in thousands):

        Our principal commercial commitments consist of open letters of credit, related to imported inventory orders, against our revolving line-of-credit arrangement. At November 2, 2002, our contractual commercial commitments under these letters of credit arrangements were as follows (in thousands):

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Seasonality and Quarterly Operating ResultsInflation

Our business is seasonal byin nature with the Christmas season, (beginningbeginning the week of Thanksgiving and ending the first Saturday after Christmas)Christmas, and the back-to-school season, (beginningbeginning the last week of July and ending the first week of September)September, historically accounting for the largesta large percentage of sales volume. In ourFor the past three fiscal years, ended February 2, 2002, the Christmas and back-to-school seasons together accounted for an average of approximately 30% of our annual sales, after adjusting for sales increases related to new stores. We do not believe that inflation has had a material effect on the results of operations during the past three years. However, there can be no assurancewe cannot assure you that our business will not be affected by inflation in the future.

Commitments and Contingencies

Our principal contractual obligations consist of minimum annual rental commitments under non-cancelable leases for our stores, our corporate office, warehouse facility, automobiles, computer equipment and copiers. At May 3, 2003, our contractual obligations under these leases were as follows (in thousands):

Our principal commercial commitments consist of open letters of credit, related primarily to imported inventory orders, secured by our revolving line-of-credit arrangement. At May 3, 2003, our contractual commercial commitments under these letters of credit arrangements were as follows (in thousands):

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

Statement Regarding Forward-Looking Disclosure

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

Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, which include words such as "believes," "plans," "anticipates," "estimates," "expects"“believes,” “plans,” “anticipates,” “estimates,” “expects” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements. Forward-looking statements are based on current expectations and

projections about future events and are subject to risks, uncertainties, and assumptions about our company, economic and market factors and the industry in which we do business, among other things. These statements are not guaranties of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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

New Accounting Pronouncements

 In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets," which, among other things, establishes new standards for goodwill acquired in a business combination, eliminates the amortization of goodwill and requires the carrying value of goodwill and identifiable intangibles to be evaluated for impairment on, at least, an annual basis. Identifiable intangible assets with a determinable useful life will continue to be amortized over that period. The Company adopted SFAS No. 142 on February 3, 2002. Net income for the quarter and year-to-date ended November 3, 2001 would have been increased by $62,000 and $183,000 respectively had goodwill amortization been discontinued effective February 4, 2001. Net income per common share for the quarter and year-to-date ended November 3, 2001, after adjusting for the impact of discontinued goodwill amortization, would not have changed. Upon completion of the first step of the impairment test, the Company determined that there was no impairment of goodwill at that time.

In November 2001, the FASB issued SFAS No. 143 "Accounting“Accounting for Asset Retirement Obligations,"” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 is effective for fiscal years

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beginning after June 15, 2002. We do not believe theThe adoption of SFAS No. 143 will have a material impact on our consolidated results of operations, financial position or cash flows.

        In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of either by sale or other than by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material impact on our consolidated results of operations, financial position or cash flows.

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

In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” an interpretation of FASB Statements No. 5, 57 and 107, and rescission of FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at

the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of such interpretation did not have a material impact on our results of operations or financial position.

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

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

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset

in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe that the adoption of SFAS No. 150 will have a significant impact on its results of operations, financial position or cash flows.

Item 3—Quantitative and Qualitative Disclosures About Market Risk

To the extent that we borrow under our credit facility, we would be exposed to market risk related to changes in interest rates. At November 2, 2002May 3, 2003, no borrowings were outstanding under our credit facility. We are not a party to any derivative financial instruments. Additionally,However, we are exposed to market risk related to changes in interest rate riskrates on the short-term investment of excess cash in short-termour investment grade interest-bearing securities. If there are changes in interest rates, those changes would affect the investment income we earn on those investments.

 We have certain investments that generate interest income. These investments have carrying values that are subject to interest rate changes that could impact our earnings to the extent that we did not hold the investments to maturity.

Item 4—Controls and Procedures

 As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within the 90 days prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design

Disclosure Controls and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Vice Chairman and Chief Executive Officer along with the Company's Senior Vice President and Chief Financial Officer. Based upon that evaluation, the Company's Vice Chairman and Chief Executive Officer along with the Company's Senior Vice President and Chief Financial Officer concluded that the Company'sInternal Controls

Our disclosure controls and procedures are effective. There have been no significant changes(as defined in the Company's internal controls, or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

Rule 13a-14(c) under Exchange Act) (“Disclosure controls and proceduresControls”) are controls and other procedures that are designed to ensurewith the objective of ensuring that information required to be disclosed in Companyour reports filed or submitted under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission'sSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and proceduresControls are also designed to ensurewith the objective of ensuring that this information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to our management, including the Company'sour interim Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls and procedures for financial reporting (“Internal Controls”) are designed with the objective of providing reasonable assurance that:

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

Limitations on the Effectiveness of Controls

Our management, including our interim Chief Executive Officer and our Chief Financial Officer, does not expect that our Disclosure Controls or Internal Controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. Moreover, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events.

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

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

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

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

PART II—OTHER INFORMATION

Item 1—Legal Proceedings.

We are not party to any material legal proceedings. We anticipate that we will be subject to litigation (and arbitration) in the ordinary course of business.

Item 2—Changes in Securities.Not Applicable

 Not Applicable

Item 3—Defaults Upon Senior Securities.Not Applicable

 Not Applicable

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

 Not Applicable

We held our most recent Annual Meeting on May 29, 2003. Following is a brief description of the proposal voted upon at the meeting and the tabulation of the voting therefore:

Proposal—Election of Directors.