Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

Consistent with the policies of the Securities and Exchange Commission regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent auditors. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent auditors.

Prior to engagement of the independent auditors for the following year’s audit, management will submit an aggregate of services expected to be rendered during that year for each of four categories of services to the Audit Committee for approval.

Audit services are services rendered by the independent auditors for the audit of financial statements and review of financial statements included in the Company’s Form 10-Q or services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements. In addition, the independent auditors engage in a review of the effectiveness of the Company’s internal controls over financial reporting.

Audit-related services are for assurance and related services performed by the independent auditors that are reasonably related to the performance of the audit or review of the financial statements, including the audit of the annual financial statements for the Company’s Retirement Savings Plan.

Tax services include all services performed by the independent auditors for tax compliance, tax planning, and tax advice, including professional services rendered for preparation and review of the federal and state corporate income tax returns, preparation of the Puerto Rico corporate income tax return and miscellaneous tax advice and tax planning related to federal and state income tax issues.

Prior to engagement, the Audit Committee pre-approves these services by category of service. The fees are budgeted and the Audit Committee requires the independent auditors and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent auditors for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before engaging the independent auditors.

VOTING SECURITIES AND PRINCIPAL HOLDERS

The following table sets forth information regarding the beneficial ownership of the Company’s Class A Common Stock for (i) each person known to the Company to have beneficial ownership of more than 5% of the Company’s Class A Common Stock; (ii) each of the Company’s directors; (iii) each person who served as Chief Executive Officer during fiscal year 2004,2005, including the Company’s former interim Chief Executive Officer, and former Chief Executive Officer, the threetwo other most highly compensated executive officers serving as executive officers at the end of the last fiscal year and one former officer who would have been among the four most highly compensated executive officers but for the fact that such individual was not serving as an executive officer as of the end of the last fiscal year (collectively, the “Named“Named Executive Officers”Officers”); and (iv) all directors of the Company and the Named Executive Officers as a group. Except for information based upon Schedule 13D or Schedule 13G, as indicated in the footnotes, beneficial ownership is stated as of June 3, 2005.

April 19, 2006.

As of June 3, 2005,April 19, 2006, there were 44,630,14174,571,412 shares of Class A Common Stock issued and outstanding and no shares of Class B Common Stock were issued and outstanding. While the Company has 24,6009,441 shares of Series C Convertible Preferred Convertible Stock issued and outstanding, holders of the Series C Convertible Preferred Stock are not entitled to vote on the matters to be presented at the Annual Meeting.

Name and Address of Stockholder		Beneficial Ownership of Shares of Class A Common Stock		Percent of Beneficial Ownership of Shares of Class A Common Stock
Peter D. Whitford (9)		500,000		1.1	%
Joseph Deckop (10)		57,750		*
Douglas C. Felderman (11)		33,335		*
Jennifer Pritchard (12)		62,200		*
Gary White (13)		225,000		*
Allan Haims		42,750		*
Kenneth M. Reiss (14)		300,000		*
Sidney M. Horn (14)		300,000		*
Harold D. Kahn (14)		300,000		*
Alan Siegel (15)		365,751		*
Joel N. Waller (16)		2,400,000		5.4	%
Henry D. Winterstern (17)		1,000,000		2.2	%
All directors and officers as a group (10) individuals) (18)		5,586,786		12.3	%

Name and Address of Stockholder		Beneficial Ownership of Shares of Class A Common Stock		Percent of Beneficial Ownership of Shares of Class A Common Stock
Sidney M. Horn (8)		300,000		*
Harold D. Kahn (8)		270,000		*
Jennifer Pritchard (9)		181,200		*
Kenneth M. Reiss (8)		300,000		*
Alan Siegel (8)(10)		347,417		*
Joel N. Waller (11)		2,066,667		*
Gary White (12)		131,400		*
Henry D. Winterstern (13)		1,005,000		*
Michael Zimmerman (1)		7,934,263		9.99	%(2)
All directors and officers as a group (12 individuals) (14)		12,646,448		16.76	%

Associates’ investments in the Company. Prentice Capital Management has, except in limited circumstances, investmentthe power to vote or to direct the vote and voting control overto dispose or to direct the securitiesdisposition of the company held byCompany’s Class A Common Stock that SAC Capital Associates. In limited circumstances,Associates may be deemed to beneficially own. As a result, SAC Capital Advisors, SAC Capital Management, SAC Capital Associates and Mr. Cohen may be deemed to constitute a “group” within the meaning of the provisions of Rule 13d-3 of the Securities Exchange Act of 1934, as amended, with Prentice Capital Management and its affiliates with respect to their investments in accordance withthe Company. Each of SAC Capital Advisors, SAC Capital Management, SAC Capital Associates and Mr. Cohen disclaims beneficial ownership of any securities owned by Prentice Capital Management or its affiliates. SAC Capital Advisors, SAC Capital Management, and Mr. Cohen own directly no shares of the Company’s Class A Common Stock. Pursuant to investment agreements, each of S.A.C.SAC Capital

Advisors a Delaware limited liability company and S.A.C.SAC Capital Management a Delaware limited liability company would haveshare all investment and voting power with respect to the securities held by SAC Capital Associates. As stated above, Prentice Capital Management manages various investments of SAC Capital Associates, including the SAC Capital Associates’ investments in the Company and has, except in limited circumstances, the power to vote or to direct the vote and to dispose or to direct the disposition of the company held by S.A.C.shares of the Company’s Class A Common Stock that SAC Capital Associates LLC.may be deemed to beneficially own as of the date hereof. Mr. Steven A. Cohen controls both SAC Capital Advisors and SAC Capital Management. Each of SAC Capital Associates, SAC Capital Advisors, SAC Capital Management and Mr. Cohen disclaim beneficial ownership of any of these securities.

(4)

As reported in a Schedule 13G dated January 14, 2005Form 3/A filed on April 24, 2006 and based on information provided by the Company, this amount includes (i) 1,750,000 performance shares which are generally subject to vesting in accordance with a selling securityholder questionnaire provided in connection withschedule based on the company’s filingweighted average closing price of a registration statement on Form S-3, each of Highbridge International LLC, Highbridge Capital Corporation, Highbridge Capital Management, LLC, Glenn Dubin and Henry Swieca may be deemed to be the beneficial owner of 4,911,793 shares of Class A Common Stock. Subject to the ownership limitation described in Note 2, each Reporting Person may be deemed the beneficial owner of (i) 1,889,242 shares of Class A Common Stock issuable to Smithfield Fiduciary LLC upon the exercise of certain warrants, (ii) 3,947,415 shares of Class A Common Stock issuable to Smithfield Fiduciary upon the conversion of certain secured convertible notes, (iii) 867,000 shares of Class A Common Stock issuable to Smithfield Fiduciary upon the conversion of preferred stock and (iv) 355,267 shares of Class A Common Stock issued to Smithfield Fiduciary upon the conversion of warrants. Highbridge Capital Management, LLC (“Highbridge”), is the trading manager of Smithfield Fiduciary LLC (“Smithfield”) and consequently has voting control and investment discretion over the shares of Class A common stock during the period from January 1, 2007 to January 1, 2008 and (ii) 100,000 shares held by Smithfield. Glenn Dubin and Henry Swieca control Highbridge. Each of Highbridge and Messrs. Dubin and Swieca disclaims beneficial ownership of the shares of Class A common stock heldYM Inc. (Investments), an entity owned 100% by Smithfield.YM Inc. (Sales), which is an entity owned 100% by Mr. Gold.

(5)

As reported in a Schedule 13D dated January 14, 2005 and in a selling securityholder questionnaireBased on information provided in connection with the company’s filing of a registration statement on Form S-3, each ofby GMM Capital LLC, GMM Capital LLC, a Delaware limited liability company and GMM Trust, a trust formed under the law of the State of New Jersey, may be deemed to be the beneficial owner of 4,900,1698,220,159 shares of Class A Common Stock. This amount includes (i) 4,440,169 shares ofthe Company’s Class A Common Stock, issuable to GMM Capital LLC upon the conversion of certain secured convertible notes and preferred stockSeries C Convertible Preferred Stock and the exercise of certain warrants, (ii) 420,000 shares of Class A Common Stock issued to GMM Capital LLC upon the exercise of certain warrants and (iii) 40,000 shares of Class A Common Stock held by GMM Capital.warrants. GMM Trust is the sole member of GMM Capital.

(6)

As reported in Amendment No. 1 to a Schedule 13G dated January 14,December 31, 2005, and in a selling securityholder questionnaire provided in connection with the company’s filing of a registration statement on Form S-3, each of Millenco, LP,L.P., a Delaware limited partnership (“Millenco”), Millennium Holding Group, L.P., a Delaware limited partnership (“Holding”), Millennium Management, L.L.C., a Delaware limited liability company (“Millennium Management”) and Israel A. Englander may be deemed to be the beneficial owner of 4,809,1595,402,811 shares of Class A Common Stock. Subject to the ownership limitation described in Note 2, each Reporting Personof Millenco, Holding, Millennium Management and Mr. Englander may be deemed to be the beneficial owner of (i) 1,488,9863,111,112 shares of Class A Common Stock issuable to Riverview Group, LLC, a Delaware limited liability company (“Riverview”) upon the exerciseconversion of certain warrants,secured convertible notes, (ii) 3,111,111537,000 shares of Class A Common Stock issuable to Riverview upon the conversion of certain secured convertible notes,preferred stock and (iii) 683,3331,754,700 shares of Class A Common Stock issuable to Riverview upon the conversion of preferred stock; (iv) 280,000 shares of Class A Common Stock issued upon the conversionexercise of certain warrants and (v) 1,150,300 shares of Class A Common Stock held outright by Millenco, LP, a Delaware limited partnership (“Millenco”).warrants. The managing member of Riverview is Millennium Holding Group, L.P., a Delaware limited partnership (“Millennium Holdings”).Holding. Millennium Management L.L.C., a Delaware limited liability company (“Millennium Management”), is the general partner of Millennium HoldingsHolding and Millenco and consequently may be deemed to have voting control and investment discretion over securities owned by Millennium HoldingsHolding, Riverview and by Riverview. Israel A.Millenco. Mr. Englander (“Mr. Englander”) is the managing member of Millennium Management. As a result, Mr. Englander may be deemed to be considered the beneficial owner of any shares deemed to be beneficially owned by Millennium Management. The foregoing should not be construed in and of itself as an admission by any of Millennium Holdings,Holding, Millennium Management or Mr. Englander as to beneficial ownership of the shares owned by Riverview.Riverview or Millenco. Millennium Partners, L.P., a Cayman Islands exempted limited partnership (“Millennium Partners”), is a limited partner of Millennium Holdings.Holding and of Millenco. As a limited partner, Millennium Partners has no investment or voting control over Millennium HoldingsHolding or itsMillenco or their securities positions.

(7)

As reported in Amendment No. 1 to a Schedule 13G dated February 14, 2006, Fidelity Management & Research Company (“Fidelity”), a wholly-owned subsidiary of FMR Corp. (“FMR”) and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940 (the “1940 Act”), is the beneficial owner of 7,002,400 shares of the Class A Common Stock as a result of acting as investment adviser to various investment companies registered under Section 8 of the 1940 Act. The ownership of one

(7)

As reported in a Schedule 13D dated March 7, 2005, each of Remy W. Trafelet and Trafelet & Company, LLC may be deemed investment company, Fidelity Contrafund, amounted to be the beneficial owner of 2,781,5004,074,000 shares of Class A Common Stock. Remy W. Trafelet isEdward C. Johnson 3d, Chairman of FMR, and FMR, through its control of Fidelity and the Managing Memberfunds, each has sole power to dispose of Trafelet & Company, LLC.the 7,002,400 shares owned by the funds. Members of the family of Mr. Johnson are the predominant owners, directly or through trusts, of Series B shares of common stock of FMR, representing 49% of the voting power of FMR. The Johnson family group and all other Series B shareholders have entered into a shareholders’ voting agreement under which all Series B shares will be voted in accordance with the majority vote of Series B shares. Accordingly, through their ownership of voting common stock and the execution of the shareholders’ voting agreement, members of the Johnson family may be deemed, under the 1940 Act, to form a controlling group with respect to FMR. Neither FMR nor Mr. Johnson has the sole power to vote or direct the voting of the shares owned directly by the Fidelity funds, which power resides with the funds’ Boards of Trustees. Fidelity carries out the voting of the shares under written guidelines established by the funds’ Boards of Trustees.

(8)

As reported in a Schedule 13G dated February 2, 2005, each of PAR Investment Partners, L.P., PAR Group, L.P. and PAR Capital Management, Inc. may be deemed to be the beneficial owner of 2,575,913 shares of Class A Common Stock. PAR Group, L.P. is the general partner of PAR Investment Partners, L.P. and PAR Capital Management, Inc. is the general partner of PAR Group, L.P.

(9)	Consists of 500,000 shares of Class A Common Stock issuable upon the exercise of options pursuant to the Company’s 1996 Long Term Incentive Plan within 60 days of June 3, 2005.

(10)	Consists of (i) 42,750 shares of Class A Common Stock and (ii) 15,000 shares of Class A Common Stock issuable upon the exercise of options pursuant to the Company’s 1996 Long Term Incentive Plan within 60 days of June 3, 2005.

(11)	Includes 23,334 shares of Class A Common Stock issuable upon the exercise of options pursuant to the Company’s 1996 Long Term Incentive Plan within 60 days of June 3, 2005.

(12)	Includes 54,200 shares of Class A Common Stock issuable upon the exercise of options pursuant to the Company’s 1996 Long Term Incentive Plan within 60 days of June 3, 2005.

(13)	Includes 10,000 shares of Class A Common Stock issuable upon the exercise of options pursuant to the Company’s 2000 Stock Incentive Plan within 60 days of June 3, 2005.

(14)	Consists of 300,000200,000 restricted shares of Class A Common Stock which are subject to vesting restrictions but have voting rights.

(15)(9)

Consists of (i) 65,751Includes 89,200 shares of Class A Common Stock issuable upon the exercise of options pursuant to the Company’s 1996 Long Term Incentive Plan within 60 days of June 3, 2005April 19, 2006.

(10)	Includes 77,417 shares of Class A Common Stock issuable upon the exercise of options within 60 days of April 19, 2006. Does not include 30,000 shares of Class A Common Stock which are held in the John R. Siegel 2006 Trust and of which Mr. Siegel disclaims beneficial ownership.

(11)	Includes (i) 166,667 shares of Class A Common Stock issuable upon the exercise of options within 60 days of April 19, 2006 and (ii) 300,0001,200,000 performance shares of Class A Common Stock which are subject to vesting restrictions but have voting rights.

(12)	Includes (i) 30,000 shares of Class A Common Stock issuable upon the exercise of options within 60 days of April 19, 2006 and (ii) 100,000 performance shares of Class A Common Stock which are subject to vesting restrictions but have voting rights.

(13)	Includes (i) 5,000 shares of Class A Common Stock issuable upon the exercise of options within 60 days of April 19, 2006 and (ii) 500,000 restricted shares of Class A Common Stock which are subject to vesting restrictions but have voting rights.

(16)	Consists of 2,400,000 performance shares of Class A Common Stock which are subject to vesting restrictions but have voting rights.

(17)	Includes 750,000 restricted shares of Class A Common Stock which are subject to vesting restrictions but have voting rights.

(18)(14)

Includes (i) 636,628368,284 shares of Class A Common Stock issuable upon the exercise of options within 60 days of June 3, 2005,April 19, 2006, (ii) 2,400,0001,300,000 performance shares of Class A Common Stock which are subject to vesting restrictions but have voting rights and (iii) 1,950,0001,300,000 restricted shares of Class A Common Stock which are subject to vesting restrictions but have voting rights.

EXECUTIVE COMPENSATION AND OTHER INFORMATION

Summary Compensation Table

The following table sets forth the compensation (cash and non cash), for fiscal years 2005, 2004 2003 and 20022003 of the Named Executive Officers.

is required to exercise his options on or before June 13, 2005 pursuant to the terms of his option agreement or these options will expire. $4,645.

(9)

Mr. Whitford joinedAmount represents the Company as Chief Executive Officer on June 30, 2003. Mr. Whitford resigned effective on November 4, 2004. Mr. Whitford failed to exercise options to purchase 100,000 sharesfollowing payments: (i) payment of Class A Common Stock within ninety (90) days after the termination of his employment. As a result, these options have expired pursuant to the terms of his option agreement. In$2,539 in connection with his severance agreement, Mr. Whitford was granted options to purchasethe provision of an aggregateautomobile and (ii) housing allowance payment of 500,000 shares of Class A Common Stock, which will expire on June 1, 2006.$28,071.

(10)

Mr. Haims resigned as PresidentWhite was promoted to the position of Chief Operating Officer of the Wet Seal divisionCompany on November 23, 2004. Mr. Haims failed to exercise options to purchase 15,000 shares of Class A Common Stock within ninety (90) days afterApril 2, 2006, as is more fully described under the termination of his employment. As a result, these options have expired pursuant to the terms of his option agreement.heading “Employment Agreements with Current Executive Officers”.

Option Grants in 20042005

The following table sets forth information regarding options granted in fiscal year 20042005 to each of the Named Executive Officers. All such options were granted pursuant to the Company’s 1996 Long-Term Incentive Plan, with the exception of Gary White’s options which were granted pursuant toas amended, the Company’s 2000 Stock Incentive Plan.

Plan or the Company’s 2005 Stock Incentive Plan, as amended.

OPTION GRANTS IN THE LAST FISCAL YEAROption Grants In The Last Fiscal Year

termination of their employment have expired due to a failure to exercise such options within ninety (90) days of termination of employment.

(4)	These options were granted in connection with Mr. Whitford’s severance agreement and each grant expires on June 1, 2006.

(5)	The potential realizable values at assumed annual rates of stock price appreciation are no longer applicable due to the expiration of the options pursuant to the executive officer’s failure to exercise such options within ninety (90) days after the termination of his employment.

(6)	In each case the stock options were granted at a price that was at a premium to the then current market price and due to the limited duration of the option term, their potential realizable value would not exceed their exercise price.

Option Exercise and Fiscal Year-End Values

The following table sets forth information regarding the exercise of options by each of the Named Executive Officers during fiscal year 2004.2005. The table also shows the number and value of unexercised options held by each of the Named Executive Officers as of January 29, 2005.28, 2006. The value of unexercised options is based on a fair market value as determined by the closing sale price of $2.23$5.50 per share of Class A Common Stock as of January 28, 2005.

27, 2006.

AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEARAggregated Option/Sar Exercises In The Last Fiscal Year

AND OPTION/SAR VALUES AT JANUARY 29, 2005And Option/Sar Values At January 28, 2006

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of January 29, 200528, 2006 about the Company’s Class A Common Stock that may be issued upon the exercise of options, warrants and rights granted to employees, consultants or members of the Board of Directors under all of the Company’s existing equity compensation plans, including the Company’s 1996 Long-Term Incentive Plan, as amended, the 2000 Stock Incentive Plan and the 2005 Stock Incentive Plan.Plan, as amended.

Changes in our Board Composition and Management

The composition of our Board of Directors and executive management has changed since the Company’s last annual meeting. On August 3, 2004, Peter D. Whitford31, 2005, Douglas C. Felderman resigned as Executive Vice President and Chief Financial Officer. On December 12, 2005, John J. Luttrell was appointed as a DirectorExecutive Vice President and Chairman of the Board of Directors. Chief Financial Officer.

On this same date, Irving Teitelbaum was replaced by Mr. Whitford as Chairman of the Board of Directors but remained as a Director of the Company. On August 18, 2004, Howard Gross was appointed as lead directorMarch 6, 2006, Michael Zimmerman and Mr. Winterstern and Anne K. ZehrenJonathan Duskin were appointed to the Board of Directors. On the same day, George H. Benter and Barry J. Entous retired from the Board of Directors.

On November 4, 2004, Mr. WhitfordMarch 1, 2006, Jennifer Pritchard resigned from his position as Chief Executive Officer and Chairman of the Board of Directors. In connection with Mr. Whitford’s resignation, the Board of Directors appointed Joseph Deckop as interim Chief Executive Officer effective November 8, 2004. Also on November 8, 2004, the Board of Directors accepted the resignation of Ms. Zehren and appointed Mr. Winterstern as Chairman of the Board of Directors. On November 23, 2004, the Company announced the resignation of Allan Haims as President of the Company’s Arden B. division. On March 12, 2006, Gregory S. Gemette was appointed the President of Merchandise of the Company’s Arden B. division. On April 2, 2006, Gary White was appointed as the Company’s Chief Operating Officer. On May 2, 2006, Dyan M. Jozwick became the Chief Merchandise Officer of the Company’s Wet Seal division.

On December 28, 2004, Mr. Irving Teitelbaum and Stephen Gross retired from the Board of Directors of the Company. Effective as of December 30, 2004, the Company’s Board of Directors appointed Joel N. Waller as a Director.

Effective as of January 27, 2005, Walter Loeb and Wilfred Posluns retired from the Board of Directors and Howard Gross resigned as a director of the Company. On the same day, Sidney M. Horn, Harold D. Kahn and Kenneth M. Reiss were appointed to serve on the Board of Directors. Effective as of February 1, 2005, Mr. Waller was appointed President and Chief Executive Officer. On March 15, 2005, Joseph Deckop resigned from his position as Executive Vice President.

Employment Agreements with Current Executives

Joel N. Waller

On December 16, 2004, the Company and Joel N. Waller entered into an Employment Agreement setting forth the terms of Mr. Waller’s employment with the Company as its President and Chief Executive Officer (the “Agreement”“Waller Agreement”), effective on February 1, 2005 (the “Effective Date”“Effective Date”).

TheUnder the Waller Agreement, sets forth the terms of Mr. Waller’s employment, including:Waller shall be entitled to: (i) a base salary of $650,000, (ii) an annual performance bonus to be paid in accordance with the Company’s incentive plan, with a target

award up to 100% of Mr. Waller’s base salary and a maximum incentive opportunity of up to 200% of his base salary, and (iii) 2,400,000 performance shares of the Company’s Class A Common Stock which were granted on February 1, 2005 under the terms of the Company’s 2005 stock incentive planStock Incentive Plan (the “Plan”“Plan”) and, as amended, which are not inconsistent with the relatedterms of the performance shares award agreement entered into on February 1, 2005 by the Company and Mr. Waller (the “Award Agreement”“Award Agreement”).

The Award Agreement provides that the shares will be granted in two tranches of 1,200,000 shares each (“Tranche 1”1” and “Tranche 2”“Tranche 2” respectively), subject to certain restrictions. In particular, prior to vesting of the shares, Mr. Waller may not transfer the shares, except to his immediate family members for no consideration or as provided in the Plan or the Award Agreement.

Tranche 1 of Mr. Waller’s shares will vest as follows: (i) 600,000 of the Tranchevested on March 1, Shares will vest if, at any time following the first anniversary of the Effective Date and before the third anniversary of the Effective Date (the “Tranche 1 Vesting Period”), the weighted average closing price of the Company’s stock for any trailing 20 trading days (the “20-Day Average”) during the Tranche 1 Vesting Period equals or exceeds $3.50 per share; an additional 200,000 of the Tranche 1 Shares will vest (until the entire Tranche 1 is 100% vested) each time the 20-Day Average price of the Company’s stock during the Tranche 1 Vesting Period equals or exceeds $4.00, $4.50 and $5.00 per share; and, for the avoidance of doubt, if the 20-Day Average equals or exceeds $5.00 per share at any time during the Tranche 1 Vesting Period, 100% of Tranche 1 shall vest; and (ii) 200,0002006. Two hundred thousand of the Tranche 2 Shares will vest if, at any time following the second anniversary of the Effective Date and before the third anniversary of the Effective Date (the “Tranche“Tranche 2 Vesting Period”Period”), the weighted average closing price of the Company’s Class A Common Stock for any trailing 20 trading days (the “20-Day Average”) during the Tranche 2 Vesting Period equals or exceeds $5.50 per share; an additional 200,000 of the Tranche 2 Shares will vest (until the entire Tranche 2 is 100% vested) each time the 20-Day Average price of the Company’s stock during the Tranche 2 Vesting Period equals or exceeds $6.00, $6.50, $7.00, $7.50 and $8.00 per share; and, for the avoidance of doubt, if the 20-Day Average equals or exceeds $8.00 per share at any time during the Tranche 2 Vesting Period, 100% of Tranche 2 shall vest. If any of the Shares are still outstanding as of the third anniversary of the Effective Date and have not otherwise vested after giving effect to the vesting provisions of clauses (i) and (ii)described above, the unvested Shares shall automatically be forfeited without the payment of any consideration to Mr. Waller.

Peter D. WhitfordGregory S. Gemette

On March 4, 2006, the Company and Mr. Gregory S. Gemette entered into an Employment Agreement (the “Gemette Agreement”) setting forth the terms of Mr. Gemette’s employment with the Company as President of Merchandise for the Company’s Arden B. division, effective as of March 13, 2006.

Peter D. Whitford served asUnder the Chief Executive OfficerGemette Agreement, Mr. Gemette shall be entitled to: (i) a base salary of $400,000 (subject to annual review by the Board of Directors), (ii) an annual performance bonus to be paid in accordance with the Company’s incentive plan, with a target award up to 50% of Mr. Gemette’s base salary, (iii) a relocation allowance and (iv) the right to receive options to acquire up to 50,000 shares of Class A Common Stock of the Company from June 30, 2003 through November 4, 2004. During his employment,Company. The options will vest in equal tranches over a three year period beginning on the first anniversary date of employment. In addition, Mr. Whitford wasGemette will be entitled to receive an120,000 restricted shares of the Company’s Class A Common Stock. The restricted shares shall be granted in three equal annual base salaryinstallments of $750,000, adjustable annually,40,000. The initial installment will be granted on the first anniversary of Mr. Gemette’s commencement of employment. The options and was eligiblerestricted stock granted to receive a performance bonus. AtMr. Gemette shall be subject to the timeterms and conditions of the Company’s 2005 Stock Incentive Plan, as amended, and the related award agreement.

In the event Mr. Gemette is terminated without “cause” (as defined in the Gemette Agreement) or his employment with the Company is terminated hisby Mr. Gemette for “good reason” (as defined in the Gemette Agreement), he shall be entitled to receive severance pay equivalent to six months base salary.

Dyan M. Jozwick

On May 2, 2006, the Company and Ms. Dyan M. Jozwick entered into an Employment Agreement (the “Jozwick Agreement”) setting forth the terms of Ms. Jozwick’s employment with the Company as Chief Merchandise Officer of the Wet Seal division.

Under the Jozwick Agreement, Ms. Jozwick shall be entitled to: (i) a base salary of $400,000 (subject to annual review by the Board of Directors), (ii) an annual performance bonus equal to a maximum of 100% of Ms. Jozwick’s base salary, was $775,000.(iii) a signing bonus of $50,000, that shall be earned over the course of her first year of employment, (iv) a relocation allowance and (v) the right to receive options to acquire up to 90,000 shares of Class A Common Stock of the Company. The options will vest in equal tranches over a three year period beginning on May 2, 2007. In addition, Ms. Jozwick will be entitled to receive 30,000 restricted shares of the Company’s Class A Common Stock. The restricted shares shall vest in three equal annual installments beginning on May 2, 2007. The options and restricted stock granted to Ms. Jozwick shall be subject to the terms and conditions of the Company’s 2005 Stock Incentive Plan, as amended, and the related award agreement.

In the event Ms. Jozwick is terminated without “cause” or there is a “change of control” (each as defined in the Jozwick Agreement), she shall be entitled to receive severance pay equivalent to six months base salary.

John J. Luttrell

On November 4, 2004,December 5, 2005, the Company and Mr. WhitfordJohn J. Luttrell entered into an Employment Agreement and General Release to terminate(the “Luttrell Agreement”) setting forth the terms of Mr. Whitford’sLuttrell’s employment with the Company. PursuantCompany as its Executive Vice President and Chief Financial Officer, effective as of December 12, 2005.

Under the Luttrell Agreement, Mr. Luttrell shall be entitled to: (i) a starting base salary of $375,000, (ii) an annual performance bonus to thisbe paid in accordance with the Company’s incentive plan, with a target award up to 50% of Mr. Luttrell’s base salary, (iii) a signing bonus of $50,000, payable in installments and subject to forfeiture and (iv) a temporary housing allowance. Mr. Luttrell will also be entitled to receive options to acquire up to 100,000 shares of Class A Common Stock of the Company which will be priced at the greater of (x) the closing price on the date of the commencement of employment and (y) the average 30 day market price of the Company’s Class A Common Stock ending on and including the date of the commencement of employment. The options will vest in equal tranches over a three year period beginning on December 12, 2006. In addition, Mr. Luttrell will be entitled to receive 210,000 restricted shares of the Company’s Class A Common Stock. The restricted shares shall be granted in three equal annual installments of 70,000. The initial installment will be granted on December 12, 2007. The options and restricted stock granted to Mr. Luttrell shall be subject to the terms and conditions of the Company’s 2005 Stock Incentive Plan, as amended, and the related award agreement.

In the event Mr. Luttrell is terminated without “cause” (as defined in the Luttrell Agreement) within the first three years of the date of his employment, he shall be entitled to receive severance pay equivalent to one year’s base salary. In the event that Mr. Luttrell’s employment is terminated with “cause” (as defined in the Luttrell Agreement) within three years of his employment, or with or without cause on or after the third anniversary of his employment, Mr. Luttrell will not be entitled to severance pay.

Gary White

On April 2, 2006, Mr. Gary White was appointed as the Company’s Chief Operating Officer. Mr. White had previously served as President, Store Operations, Wet Seal division. On April 10, 2006, the Company and Mr. White entered into a new employment agreement (the “White Agreement”) setting forth the terms of Mr. Whitford resigned from his positionsWhite’s employment with the Company as its Chief ExecutiveOperating Officer, Director and Chairmaneffective as of April 2, 2006.

Under the White Agreement, Mr. White shall be entitled to: (i) a base salary of $450,000 (subject to annual review by the Board of Directors effective as of November 4, 2004.

In addition, the Agreement and General Release provided that Mr. Whitford would receive certain payments and grants of optionsan increase from the Company, including: (i) bi-weekly payments of $29,807 which were paid from November 5, 2004 until January 14, 2005 (the “Payment Date”)$375,000), (ii) 300,000annual bonus compensation equal to a maximum of 100% of Mr. White’s base salary and (iii) stock options at anto purchase 150,000 shares of the Company’s Class A Common Stock, which shall vest in three equal installments on the first, second and third anniversaries of the grant. The exercise price of $1.75 per sharesuch options shall be set in accordance with the terms of the plan under which such options are granted and 200,000 options at an exercise priceshall be subject to a written option agreement in a form acceptable to the Company.

In the event Mr. White is terminated without “cause” or upon a “change of $2.00 per share, exercisable until June 1, 2006, issued on December 8, 2004, (iii)control” resulting in either a paymentdiminution of $1,585,000 (lessduties or termination (each as defined in the total amount of bi-weekly payments) which was paid on the Payment Date, representing two years of compensation, (iv) a payment of $509,400 which was paid on the Payment Date, representing the cost of three annual contributionsWhite Agreement), Mr. White shall be entitled to Mr. Whitford’s supplemental executive retirement plan, (v) a payment ofreceive severance pay in an amount equal to one year’s base salary.

Mr. White was also granted equity compensation under the costterms of his March 28, 2005 employment agreement with the Company, which included: (i) 60,000 Company stock options which vest equally in three installments beginning on March 28, 2006 and (ii) 200,000 shares of performance shares of the Company’s Class A Common Stock, granted in two tranches, of 100,000 shares each, pursuant to the Company’s 2005 Stock Incentive Plan, as amended, which vest upon the achievement of certain trading prices of the Company’s Class A Common Stock. Tranche 1 of Mr. Whitford’s continued healthcare coverage for eighteen months following November 4, 2004, which was paidWhite’s shares vested on or before the Payment Date, and (vi) $50,000 representing the cost of providing outplacement services which was paid on the Payment Date.March 28, 2006.

Furthermore, each of the CompanyEmployment Agreements and Mr. Whitford released the other party from any claims it had against such other party up to November 4, 2004.

Severance Agreements with Former Executives

Joseph Deckop

On October 27, 2004, the Company entered into a retention agreement with Joseph Deckop, in his capacity as Executive Vice President of the Company. Mr. Deckop also served as the Company’s interim Chief Executive Officer following the departure of Mr. Whitford on November 14, 2004 until February 1, 2005, the date upon which Mr. Waller assumed his duties as President and Chief Executive Officer.

Under the retention agreement, Mr. Deckop received a one-time retention cash bonus of $100,000 on December 1, 2004, which was required to be returned to On March 18, 2005, the Company ifentered into a Separation Agreement and General Release with Mr. Deckop were to voluntarily terminate his employment with the Company within 12 months. In addition, Mr. Deckop received a grant of 155,000 shares of our restricted stock as well as certain severance protections upon an involuntary termination of employment by the Company. The Company did not modify Mr. Deckop’s retention agreement in connection with his appointment as interim Chief Executive Officerresignation from the position of the Company.

On March 15, 2005, Mr. Deckop resigned from his position as Executive Vice President. In connection with his separation fromPresident, pursuant to the Company,terms of which Mr. Deckop was entitled to: (i) a severance payment of $354,462, (ii) the accelerated vesting of 38,750 shares of restricted stock previously granted to him by the Company and (iii) the right to exercise previously granted, but unexercised, options to purchase 15,000 shares of the Company’s Class A Common Stock until June 13, 2005. Mr. Deckop did not required to return his $100,000 retention bonus.

exercise any of these options before they expired.

Douglas C. Felderman

On October 28, 2004, the Company entered into a retention agreement with Douglas C. Felderman, ourthe former Executive Vice President and Chief Financial Officer. Under the retentionOfficer, which agreement set forth Mr. Felderman received a one-time retention cash bonus of $100,000, which is required to be returned to the Company if Mr. Felderman were to voluntarily terminate his employment with the Company within 12 months.

In addition, Mr. Felderman received a grant of 155,000 shares of our restricted stockFelderman’s base salary and other compensation as well as certain severance protections upon an involuntary termination of employment by the Company.

On August 31, 2005, the Company entered into a Separation Agreement and General Release with Mr. Felderman in connection with his resignation from the position of Executive Vice President and Chief Financial Officer of the Company, pursuant to the terms of which Mr. Felderman was entitled to: (i) a severance payment of $365,500, (ii) the accelerated vesting of 53,750 shares of restricted stock previously granted to him by the Company, (iii) the right to exercise previously granted, but unexercised, options to purchase 23,334 shares of the Company’s Class A Common Stock until November 29, 2005 and (iv) a payment for unused vacation in the amount of $24,978. Mr. Felderman did not exercise any of these options before they expired.

Jennifer Pritchard

On September 27, 2004, the Company entered into a retention agreement with Jennifer Pritchard, the former President of the Company’s Arden B. division.division, which agreement set forth Ms. Pritchard’s base salary was increased by $25,000 to an annual rate of $410,000, her bonus opportunity was increased from 50% of her salary to 75% of her salary and her previous maximum bonus was increased from 100% to 150% of her salary. In addition, Ms. Pritchard was given a retention cash bonus of $200,000, which is required to be returned to the Company if she were to leave voluntarily within 12 months. Ms. Pritchard has the right to exchange the retention cash bonus for an award of 200,000 shares of our Class A Common Stock.

In addition, Ms. Pritchard received a grant of 200,000 shares of our restricted Class A Common Stockother compensation as well as certain severance protections upon an involuntary termination of employment by the Company.

Gary White

On March 28, 2005,1, 2006, the Company and Gary White entered into an “at-will” employment agreement. Undera Separation Agreement and General Release with Mr. Pritchard in connection with her resignation from the employment agreement, Mr. White isposition of President of the Company’s Arden B. division, pursuant to the terms of which Ms. Pritchard was entitled to and has been granted:to: (i) a base salary increase to an annual rateseverance payment of $375,000,$675,000, (ii) 60,000 Company stock options which vest equally in three installments beginning on the first anniversaryaccelerated vesting of the signing of the employment agreement, (iii) 200,00050,000 shares of restricted stock previously granted in two tranches, pursuant to her by the Plan, which vest uponCompany and (iii) the achievement of certain trading pricesright to exercise previously granted, but unexercised, options to purchase 89,200 shares of the Company’s Class A common stock,Common Stock until May 30, 2006. As of the date of this Proxy Statement, Ms. Pritchard has not exercised any of these options.

Consulting Agreement with Michael Gold

The Company entered into an agreement with Michael Gold on July 7, 2005 (the “Gold Agreement”) to compensate him for his part in the sales turnaround of the Company and (iv)to provide incentives for his future assistance in achieving the Company’s return to profitability. Mr. Gold has been acting as a discretionary annual bonusconsultant to the Company and has been instrumental in both the design and execution of up to 50% of his base salary.the Company’s new merchandise strategy. The Gold Agreement term ends on January 31, 2007.

Mr. Gold was paid $2.8 million for the fiscal year ending January 28, 2006 and will be paid $1.2 million for the fiscal year ending February 3, 2007.

In addition, Mr. White is entitled to receive a severance payment equal to one year’s base salary if he is terminated by the Company without cause within one yearGold was awarded 2.0 million shares of restricted stock which vested on January 28, 2006 and two tranches of performance shares of 1,750,000 each (the “Shares”). Tranche 1 of the signingShares vested as follows: 1,050,000 on February 1, 2006; 350,000 on February 15, 2006; and 350,000 on March 29, 2006. Tranche 2 of the employment agreement. The severance paymentShares is conditioned upon Mr. White entering into a separation agreementto vest as follows: 350,000 shares will vest if, at any time after January 1, 2007 and general releasebefore January 1, 2008, the weighted average closing price of the Company’s Class A Common Stock for any claims againsttrailing 20 trading days (the “20-Day Average”) equals or exceeds $6.00 per share; an additional 350,000 shares will vest (until tranche 2 is 100% vested) each time the Company upon his termination.

20-Day Average price of the Company’s Class A Common Stock during the vesting period equals or exceeds $6.50, $7.00, $7.50 and $8.00 per share, respectively. In addition, the Tranche 2 Shares to be otherwise earned in calendar year 2007 can vest earlier if sales per square foot of the Company’s Wet Seal division average $350 per square foot for any trailing 12 month period and an agreed merchandise margin is maintained.

The Company did not modifyfiled a registration statement on Form S-8 covering the Shares issued to Mr. White’s employment agreement in connection with his appointment as Executive Vice President of the Company.

Gold.

Director Compensation

All directors, other than Messrs. Waller, Winterstern, Zimmerman and Winterstern,Duskin receive an annual fee of $75,000 that is payable quarterly. Mr. Winterstern receives an annual fee of $250,000 that is payable quarterly. In addition, each director, other than Messrs. Waller, Winterstern, Zimmerman and WintersternDuskin, received 300,000 shares of restricted stock, 100,000 shares of which vested on January 27, 2006, and the remaining shares which shall vest in threetwo equal installments on the first, second and third anniversaries of the date of grant which was January 27, 2005. Mr. Winterstern received 750,000 shares of restricted stock which vest underare subject to the same vesting terms.

The terms of the compensation arrangements with Messrs. Zimmerman and Duskin have not yet been determined.

The awarding of stock options and/or restricted stock by the Company to directors, in their capacity as such, is at the discretion of the Compensation/Option Committee. The directors do not receive any additional compensation in connection with their attendance of board and committee meetings. All directors are reimbursed for expenses incurred in connection with attendance at the meetings of the Board of Directors.

Mr. Waller is not entitled to any additional compensation in his capacity as a director. Please see the summary of Mr. Waller’s employment agreement set forth in this Proxy Statement for additional compensation information.

a description of his compensation.

Special Committee Compensation

On August 18, 2004, the Company formed a special committee of the Board of Directors to analyze various business alternatives in light of its financial condition. The Special Committee was composed of Mr. Winterstern (Chairman), Howard Gross and Alan Siegel. Upon the recommendation of Pearl Meyer & Partners, a leading compensation consulting firm, Henry D. Winterstern received a fee of $35,000 per month for the first two months of service on the Special Committee, while Messrs. Gross and Siegel received $25,000 per month for the same period. Each member of the Special Committee received one-half of his respective monthly fee for the third month of service on the Special Committee. The Special Committee was disbanded on November 9, 2004, which was the date of execution of the Securities Purchase Agreement governing the private placement of the Company’s convertible notes and warrants (the “Private Placement”).

Additional Compensation for Mr. Winterstern

On February 24, 2005, Mr. Winterstern received 250,000 shares of unregistered Class A Common Stock in consideration for his extensive involvement in the structuring, negotiation and successful conclusion of the Private Placement.

Indemnification Agreements

The Company has entered into indemnification agreements with each of our current directors and certain of our officers. These agreements requires us to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to the Company, and to adverse expenses incurred as a result of any proceeding against them as to which they can be indemnified. We expect to enter into indemnification agreements with our future directors and certain of our officers.

Compensation/Option Committee Report

The following Report of the Compensation/Option Committee does not constitute soliciting materials and shall not be deemed filed or incorporated by reference into any other filing byof the Company with the SEC, except to the extent specifically incorporated by reference.Board of Directors on Executive Compensation

The primary duties ofFor fiscal year 2005, the Compensation/Option Committee include: (i) reviewingconsisted of four outside directors, each of whom the Board of Directors had affirmatively determined was “independent” in accordance with Nasdaq National Market listing standards. The Compensation/Option Committee is responsible for discharging the Board of Directors’ responsibility with respect to all forms of compensation levels of the Company’s primary executive officers, and certain other members of senior management, (ii)administering the Company’s equity incentive plans for employees, consulting with and making recommendations to the Company’s Board of Directors regarding the Company’s overall policy of granting options and restricted stock awards under the Company’s long-term incentive plans, (iii) monitoring the performance of senior management (iv) granting restricted stock, performance shares and stock options to executive officers andperforming such other key employees, and (v) related matters. Thefunctions as the Board of Directors has affirmatively determined that each membermay from time to time assign to the Compensation/Option Committee.

The following report summarizes the philosophies and methods the Board of Directors and the Compensation/Option Committee is independentuses in accordance with Nasdaq National Market listing standards. The members of the Compensation/Option Committee who have delivered this report were appointed byestablishing and administering the Company’s Boardexecutive compensation and incentive programs, including the development of Directors on January 27, 2005.

compensation programs designed to provide key executive officers with ownership interests in the Company and motivation to build shareholder value.

Compensation Philosophy

The Company’s executive compensation programs are based upon the recognition that The Wet Seal, Inc.the Company competes in a creative industry in which it is critical to stay current with rapidly changing trends and styles. Competition is intense for talented executives who can successfully guide a company in this type of competitive environment. Therefore, the Company’s compensation programs are designed to provide total compensation packages that will both attract talented individuals to the Company as well as provide rewards based upon the Company’s long-term success.

With these principles in mind, the Compensation/Option Committee has set forth the following guidelines:

1. Provide base salaries that are competitive in the retail apparel industry to attract and retain talented individuals;

2. Provide annual bonuses that are tied to the Company’s short-term performance to align the interests of the Company’s executives with those of its stockholders; and

3. Provide long-term incentive benefits that will reward long-term commitment to the Company.

In fiscal 2005, the Company entered into employment agreements with John J. Luttrell, the Executive Vice President and Chief Financial Officer of the Company, and Gary White, who served in the roles of Executive Vice President of the Company and Senior Vice President, Store Operations, Wet Seal division, during fiscal year 2005. Mr. White has since been promoted to the position of Chief Operating Officer of the Company. The employment agreement of Mr. Luttrell is more fully described under the heading “Employment Agreements with Current Executive Officers”, as are the terms of Mr. White’s employment agreements with the Company. The Board of Directors enters into employment agreements with certain of its executive officers to incentivize them to remain with the Company and to further align their interests with those of the Company’s stockholders.

Compensation of Executive Officers

Base salaries for executive officers are established with a view to the responsibilities of the position and the experience of the individual. Salary levels are also fixed with reference to comparable companies in retail and related trades. The salaries of key executive officers and the incentive plans in which they participate are reviewed annually by the Compensation/Option Committee in light of the Committee’s assessment of individual performance, contribution to the Company and level of responsibility.

Executive officers are eligible to receive annual cash bonuses with a percentage based on the profitability of the Company and another percentage based on individual performance.Company. The Compensation/Option Committee believes that tying annual cash bonuses to the Company’s profitability aligns the interests of management with stockholders and encourages intensive efforts to attain and increase profitability.

The Company maintains an employee stock bonus plan in which the top executives and other key employees of the Company are eligible to participate. Awards under this plan are calculated by multiplying the Company’s fiscal year-end pretax profit (if any) as a percentage of sales by the employee’s base salary and dividing such amount by the price of the Company’s Class A Common Stock as of the end of the fiscal year. Grants under the stock bonus plan vest over a period of three years.

Restricted stock, performance shares and stock options are granted to executive officers and other key employees whose contributions are considered important to the long-term success of the Company pursuant to the Company’s long-term incentive plans. Restricted stock, performance shares and stock options have historically been granted by the Compensation/Option Committee on a case-by-case basis based upon management’s recommendations and the Committee’s evaluation of an individual’s past contributions and potential future contributions to the Company. In granting restricted stock, performance shares and stock options, the Compensation/Option Committee takes into consideration the anticipated long-term contributions of an individual to the potential growth and success of the Company, as well as the number of options, restricted stock and/or performance shares previously granted to the individual.

Compensation of the Chief Executive Officer

On June 30, 2003, Peter D. Whitford was appointedMr. Joel N. Waller has served as President and Chief Executive Officer byof the Board of Directors. For fiscal year 2004,Company since February 1, 2005. Mr. Whitford was compensated in accordance with hisWaller’s employment agreement which is described elsewhere in this Proxy Statement.Statement under the heading “Employment Agreements with Current Executive Officers”. Mr. Whitford resigned as Chief Executive Officer effective as of November 4, 2004.

Effective November 8, 2004, the Board of Directors appointed Joseph Deckop served as interim Chief Executive Officer. For fiscal yearOfficer from November 9, 2004 Mr. Deckop was compensated in accordance with his employment agreement, which is described elsewhere in this Proxy Statement. Mr. Deckop’s position as Interim Chief Executive Officer was terminated effective as ofto February 1, 2005, when Mr. Waller was appointedreplaced Mr. Deckop as President and Chief Executive Officer of the Company.

Pursuant to Mr. Waller’s employment agreement for fiscal year 2005, Mr. Waller received a base salary of $650,000. He was awarded an annual performance bonus of $796,250 in fiscal year 2005. None of Mr. Waller’s performance shares vested during the fiscal year 2005. In addition, during fiscal year 2005 the Compensation/Option Committee authorized the grant to Mr. Waller of options to purchase 500,000 shares of the Company’s Class A Common Stock, which options vest in equal installments over a period of three years.

On December 16, 2004,In order to encourage Mr. Waller to perform at the highest level, the Committee believes that Mr. Waller’s compensation should be heavily comprised of incentive compensation tied to the annual and long-term financial performance of the Company and Joel N. Waller entered into an Employment Agreement setting forth the terms oflong-term return realized by stockholders. Therefore, Mr. Waller’s employment as Presidentbase compensation has been and Chief Executive Officer. Mr. Waller’s Employment Agreement is described elsewhere in this Proxy Statement. Mr. Waller assumed his role as Presidentlower than market salaries and Chief Executive Officer effective February 1, 2005.

is comprised mostly of performance shares tied to the stock price performance of the Company’s Class A Common Stock.

Limitations on Deductibility of Executive Compensation

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”“Code”), enacted as part of the Revenue Reconciliation Act of 1993, limits the deductibility of compensation paid to certain executive officers of the Company beginning with the Company’s taxable year 1994. To qualify for deductibility under Section 162(m), compensation in excess of $1 million per year paid to the Chief Executive Officer and the four other most highly compensated executive officers at the end of such fiscal year generally must be either (1) paid pursuant to a written binding contract in effect on February 17, 1993 or (2) “performance-based” compensation as determined under Section 162(m). In order to be considered “performance-based” for this purpose, compensation must be paid solely on account of the attainment of one or more pre-established performance goals established by a committee of two or more “outside directors,” pursuant to an arrangement that has been disclosed to and approved by stockholders. Also, in order for an arrangement to give rise to fully deductible “performance-based” compensation, the terms of the arrangement must preclude the exercise of any discretion in the administration of the plan that would have the effect of increasing compensation paid thereunder. In the future, the Compensation/Option Committee will continue to evaluate the advisability of qualifying its executive compensation for deductibility under Section 162(m).

Policy with Respect to Qualifying Compensation Deductibility

The Company’s policy with respect to the deductibility limit of Section 162(m) of the Code generally is to preserve the federal income tax deductibility of compensation paid when it is appropriate and is in the best interest of the Company and its stockholders. However, the Company reserves the right to authorize the payment of non-deductible compensation if it deems that it is appropriate.

Compensation/Option Committee:

Sidney M. Horn

Harold D. Kahn

Kenneth M. Reiss

Henry D. Winterstern

The foregoing Report of the Compensation/Option Committee does not constitute soliciting materials and shall not be deemed filed or incorporated by reference into any other filing by the Company with the SEC, except to the extent specifically incorporated by reference.

Stock Price Performance Graph

The following graph compares the cumulative stockholder return on the Company’s Class A Common Stock with the return on the Total Return Index for the NASDAQ Stock Market (US) and the NASDAQ Retail Trade Stocks. The graph assumes $100 invested on January 28, 2000February 2, 2001 in the stock of The Wet Seal, Inc., the NASDAQ Stock Market (US) and the NASDAQ Retail Trade Stocks. It also assumes that all dividends are reinvested.

Performance Graph for the Class A Common Stock of Wet Seal, Inc.

The historical stock performance shown on the graph is not necessarily indicative of future price performance.

Certain Relationships and Related Party Transactions

On May 3, 2005, the Company 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 the Company’s Class A Common Stock in a private placement transaction (the “May Private Placement”) with investors, certain of whom had previously received securities convertible into the Company’s Class A Common Stock in connection with private placement transactions that occurred in June 2004 and January 2005. Messrs. Zimmerman and Duskin serve as Chief Executive Officer and Managing Director and Partner, respectively, of Prentice Capital Management, LP, (“Prentice”), which was one of the investors in the May Private Placement. Prentice paid a purchase price equal to $6,040,000 to the Company in exchange for receiving 6,040 shares of preferred stock and warrants to acquire initially up to 1,473,214 shares of the Company’s Class A Common Stock.

Mr. Siegel is a senior partner with the law firm of Akin Gump Strauss Hauer and Feld LLP (“Akin Gump”). In fiscal year 2005, the Company paid $1,600,000 for legal services received from Akin Gump.

In fiscal 2005, the Company purchased $600,000 of merchandise inventories from YM, Inc., a Canadian retail company owned by Mr. Gold. Also, in his role as merchandising consultant to the Company, Mr. Gold is significantly involved in purchasing decisions and terms negotiated with merchandise vendors for the Wet Seal concept. A substantial majority of these vendors also provide merchandise inventories to Mr. Gold’s Canadian retail businesses.

Section 16(a) Beneficial Ownership Reporting Compliance

The federal securities laws require the filing of certain reports by officers, directors and beneficial owners of more than 10%ten percent (10%) of the Company’s securities with the Securities and Exchange Commission. Specific due dates have been established and the Company is required to disclose in this Proxy Statement any failure to file by these dates.

Based solely on a review of copies of the filings furnished to the Company, the Company believes that during fiscal year 2004,2005, all such filing requirements were satisfied by the Company’s officers, directors and ten percent (10%) stockholders, except that two Formsother than one Form 4 for Jennifer Pritchard werefiled by Mr. Joel N. Waller with regard to Mr. Waller’s disposition of Class A Common Stock of the Company in one transaction, which was not filed on a timely basis due to report a grant sharesdelays in the execution of Class A Common Stock and restricted shares of Class A Common Stock, respectively, and athe agreement governing the transaction reflected in this Form 4 for each of Anne Zehren, Howard Gross and Henry D. Winterstern were not filed on a timely basis to report individual grants of shares of Class A Common Stock.

4.

OTHER MATTERS TO COME BEFORE THE 2006 ANNUAL MEETING

The Board of Directors knows of no other business to come before the Annual Meeting. However, if any other matters are properly brought before the Annual Meeting, the persons named in the accompanying form of proxy or their substitutes will vote in their discretion on such matters.

SOLICITATIONS

The cost of this solicitation or proxies will be borne by the Company. Arrangements may be made with brokerage houses, custodians, nominees and fiduciaries to send proxies and materials to their principals and, upon request, the Company will reimburse them for their expenses in so doing. The company has engaged MacKenzie Partners, Inc., as proxy solicitor, in connection with this Proxy Statement for which it will be paid a fee of $6,500, plus reimbursement of certain expenses.

STOCKHOLDER PROPOSALS FOR PRESENTATION AT 2006THE 2007 ANNUAL MEETING

If a stockholder of the Company wishes to present a proposal for consideration at the next annual meeting of stockholders, the proposal must be received at the principal executive offices of the Company no later than December 15, 2005,2006, to be considered for inclusion in the Company’s proxy statement and form of proxy for that annual meeting. A stockholder proposal will be considered untimely for consideration at the next annual meeting if it is not received by the Company at least 45 days prior to the date of the meeting.

EXHIBITExhibit A

Proposed Amendment to the

Restated Certificate Of Incorporation, as Amended, of

The Wet Seal, Inc.

Set forth below is the text of Article IV, Section 4.1 of the Restated Certificate of Incorporation of The Wet Seal, Inc., as proposed to be amended if Proposal 1 is approved by our stockholders:

“Section 4.1.Number of Shares. The total number of shares which the corporation shall have authority to issue is THREE HUNDRED TWELVE MILLION (312,000,000), consisting of “Common Stock” and “Preferred Stock” as follows:

(a)Preferred Stock. The total number of shares of Preferred Stock shall be TWO MILLION (2,000,000), having a par value of one cent ($0.01) per share, which may be issued from time to time in one or more series. The board of directors is hereby authorized to fix, by resolution or resolutions providing for the issue of any such series, the voting powers, if any, and the designation, preferences and rights of the shares in such series, and the qualifications, limitations or restrictions thereof, including, but not limited to, the following:

(1) the number of shares constituting that series and the distinctive designation thereof;

(2) the dividend rate on the shares of that series, whether dividends shall be cumulative and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series;

(3) the voting rights, if any, of shares of that series in addition to the voting rights provided by law, and the terms of such voting rights;

(4) the terms and conditions of the conversion privileges, if any, of shares of that series, including provision for adjustment of the conversion rate in such events as the board of directors shall determine;

(5) the terms and conditions of redemption, if shares of that series shall be redeemable, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;

(6) the terms and amount of any sinking fund for the redemption or purchase of shares of that series, if any;

(7) the rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights or priority, if any, of payment of shares of that series; and

(8) any other relative rights, preferences and limitations of that series.

Dividends on outstanding Preferred Stock shall be declared and paid, or set apart for payment, before any dividend shall be declared and paid, or set apart for payment, on the Common Stock with respect to the same dividend period.

(b)Common Stock. The total number of shares of Common Stock shall be THREE HUNDRED TEN MILLION (310,000,000), divided into two classes designated as Class A Common Stock and Class B Common Stock, as follows: the total number of authorized shares of Class A Common Stock shall be THREE HUNDRED MILLION (300,000,000), and each share of Class A Common Stock shall have a par value of ten cents ($0.10); and the total number of authorized shares of Class B Common Stock shall be TEN MILLION (10,000,000), and each share of Class B Common Stock shall have a par value of ten cents ($0.10).”

EXHIBIT BTHE WET SEAL, INC.

Proposed Amendment to

The Wet Seal, Inc. 2005 Stock Incentive Plan

The Wet Seal, Inc. 2005 Stock Incentive Plan is hereby amended by adding new Section 3.3 to read as follows:

3.3Subject to adjustments in accordance with Section 12, in addition to the shares of Stock available for grant pursuant to Section 3.1 of the Plan, an additional 2,500,000 shares of Stock shall be available for the grant of Awards under the Plan;providedthat, for purposes of this limitation, any Stock subject to an Option or Award which is canceled, forfeited or expires prior to exercise or realization shall again become available for issuance under the Plan (the “Special Reserve”).

EXHIBIT C

Charter of the Compensation Committee

of the Board of Directors of

The Wet Seal, Inc.

As ratified by the Board of Directors

May 12, 2005AUDIT COMMITTEE CHARTER

The CompensationAudit Committee (the “Committee”) ofis established by and amongst the Board of Directors of The Wet Seal, Inc. (the “Company”(“the Company”) is appointedfor the primary purpose of assisting the board with:

Consistent with this function, the Audit Committee should encourage continuous improvement of, and should foster adherence to, the Company’s policies, procedures and practices at all levels. The Audit Committee should also provide an open avenue of communication among the independent auditors, financial and senior management, the internal auditing function, and the Board of Directors.

The Audit Committee has the authority to obtain advice and assistance from the Company’s outside legal, accounting, or other advisors as deemed appropriate to perform its duties and responsibilities and may retain independent counsel, experts or advisors that the Committee believes to be necessary or appropriate.

The Company shall provide appropriate funding, as determined by the Audit Committee, for compensation to the independent auditor and to any advisers that the audit committee chooses to engage.

The Audit Committee will primarily fulfill its responsibilities by carrying out the activities enumerated in Section III of this Charter. The Audit Committee will report regularly to the Board of Directors regarding the execution of its duties and responsibilities. The powers and responsibilities delegated by the Board of Directors (the “Board”) to discharge the Board’sAudit Committee in this Charter or otherwise exercised and carried out by the Audit Committee as it deems appropriate without requirement of approval of the Board of Directors, and any decision made by the Audit Committee (including any decision to exercise or refrain from exercising any of the powers delegated hereunder) shall be at the Audit Committee’s sole discretion. While acting within the scope of the powers and responsibilities with respectdelegated to it, the Audit Committee shall have and may exercise all formsthe powers and authority of compensationthe Board of Directors. To the fullest extent permitted by law, the Audit Committee shall have the power to determine which matters are within the scope of the powers and responsibilities delegated to it.

Notwithstanding the foregoing, the Audit Committee’s responsibilities are limited to oversight. Management of the Company is responsible for the preparation and integrity of the Company’s executive officers, to administerfinancial statements as well as the Company’s equity incentive plansfinancial reporting process, accounting policies, internal audit function, internal accounting controls and disclosure controls and procedures. The independent auditor is responsible for employees, to produceperforming an annual report on executive compensation for use inaudit of the Company’s annual proxy statement and to perform such other functionsfinancial statements, expressing an opinion as the Board may from time to time assign to the Committee. This Charter sets forthconformity of such annual financial statements with generally accepted accounting principles and reviewing the authority andCompany’s quarterly financial statements. It is not the responsibility of the Audit Committee for approvingto plan or conduct audits or to determine that the Company’s financial statements and evaluating executive officer compensation arrangements, plans, policiesdisclosure are complete and programsaccurate and in accordance with generally accepted accounting principles and applicable laws, rules and regulations. Each member of the Audit Committee shall be entitled to rely on the integrity of those persons within the Company and for administeringof the professionals and experts (including the Company’s equity incentive plansinternal auditor (or others responsible for employees whether adopted priorthe internal audit

function, including contracted non-employees or audit or accounting firms engaged to provide internal audit services) and the Company’s independent auditor) from which the Audit Committee receives information and, absent actual knowledge to the contrary, the accuracy of the financial and other information provided to the Audit Committee by such persons, professionals or afterexperts.

Furthermore, auditing literature, particularly Statement of Accounting Standards No. 71, defines the dateterm “review” to include a particular set of adoptionrequired procedures to be undertaken by independent auditors. The members of the Audit Committee are not independent auditors, and the term “review” as used in this Charter (the “Stock Plans”).is not intended to have that meaning and should not be interpreted to suggest that the Audit Committee members can or should follow the procedures required of auditors performing reviews of financial statements.

The Audit Committee will consistshall be comprised of three or more members, with the exact number beingdirectors as determined by the Board. EachBoard, each of whom shall be independent directors (as defined by all applicable rules and regulations of the members of the Committee will be (i) an “independent director” as defined under the NASDAQ Listing Standards, as they may be amended from time to time (the “Nasdaq Rules”), except as may otherwise be permitted by such rulesStock Market and (ii) a “Non-Employee Director,” as defined in Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Ifamended), and free from any such person does not qualify as an “outside director” withinrelationship (including disallowed compensatory arrangements) that, in the meaningopinion of Treasury Regulation 1.162-27(e)(3) at the time that the Committee is granting “qualified performance-based compensation” within the meaning of Treasury Regulation 1.162-27(e)(2), such person shall recuse himself or herself from considering any compensation arrangement for which the Company will seek to so qualify. In such event, the Board, shall appoint onewould interfere with the exercise of his or more “outside directors” to the Committee suchher independent judgment as that it is comprised solely of two or more “outside directors” in order to satisfy the requirements of Section 162(m)a member of the Internal Revenue Code of 1986, as amended.Committee. All members of the Committee willshall be appointedable to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement. At least one member of the Committee shall be an “audit committee financial expert” in compliance with the criteria established by the SEC and shall serve athave past employment experience in finance or accounting, requisite professional certification in accounting or any other comparable experience or background which results in the discretionindividual’s financial sophistication, including being, or having been, a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. The existence of such member(s) shall be disclosed in periodic filings as required by the Board.

SEC. Committee members may enhance their familiarity with finance and accounting by participating in educational programs conducted by the Company or an outside consultant.

The Board will select members of the Committee who willshall be approvedelected by a majority votethe Board on the recommendation of the membersNominating and Corporate Governance Committee at the annual organizational meeting of the Board.Board to serve until the next annual organizational meeting of the Board or until their successors shall be duly elected and qualified. Committee members will serve during their respective term as a director, subject to earlier removalmay be removed from the Committee, with or without cause, by a majority vote of the Board. Unless a chairChair is elected by the full Board, the members of the Committee may designate a chairChair by majority vote of the full Committee membership.

The Chair, or in his or her absence, a member designated by the Chair, shall preside at each meeting of the Audit Committee and set the agendas for the Audit Committee meetings. The Audit Committee shall have the authority to delegate responsibilities listed herein to subcommitteesestablish its own rules and procedures for notice and conduct of its meetings so long as they are not inconsistent with any provisions of the Company ifCompany’s bylaws that are applicable to the Committee.

The Committee shall meet at least once during each fiscal quarter, or more frequently as circumstances dictate. Each regularly scheduled meeting shall conclude with an executive session of the Committee determinesabsent members of management and on such delegation would be interms and conditions as the best interestCommittee may elect. As part of its job to foster open communication, the Committee should meet periodically with management, the director of the Company.internal auditing function and the independent auditors in separate executive sessions to discuss any matters that the Committee or each of these groups believe should be discussed privately. In addition, the Committee shall meet quarterly with the independent auditors and management to discuss the annual audited financial statements and quarterly financial statements, including the Company’s disclosure under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

III.	RESPONSIBILITIES AND DUTIES

To fulfill its responsibilities and duties the Audit Committee shall:

Documents/Reports/Accounting Information Review

The principal processes of the Committee in carrying out its oversight responsibilities are set forth below. These processes are set forth as a guide with the understanding that the Committee may supplement them as appropriate and may establish policies and procedures from time to time that it deems necessary or advisable in fulfilling its responsibilities.

(b)

The CEO will have the authority to hire, retain, promote or terminateBoard of Directors any employee whose salary is $250,000 or less in base annual pay regardless of Section 16(b) status under the Exchange Act.necessary amendments as conditions dictate.

Independent Auditors

10.	At least annually, obtain and review a report by the independent auditor describing:

Financial Reporting Processes and Accounting Policies

Internal Audit

Other Compliance Functions

(i)

The Committee will exercise the powers of the Directors and perform such duties and responsibilities as may be assigned to a “committee”, this Committee or the Board under the terms of any incentive-compensation, equity-based, deferred compensation, or other plan inrisk management. Such review should include the Company’s executive benefit program.major financial and accounting risk exposures and the steps management has undertaken to control them.

Other Responsibilities

Meetings

Exhibit B

BUSINESS ETHICS

POLICY

AND

CODE OF CONDUCT

a charter for ethical conduct

The Wet Seal, Inc.

Table of the Committee will be held from time to time, but at least twice each year, in response to the needsContents

Wet Seal, Inc. Code of the Board or as otherwise determined by the Chairman of such Committee, and the Committee shall provide reports to the Board. The Chairperson of the Committee shall be responsible for leadership of the Committee, including preparing the agenda, presiding over Committee meetings, making Committee assignments and reporting the Committee’s actions to the Board from time to time (but at least once each year) as requested by the Board.

The Committee may request that any directors, officers or employees of the Company, or other persons whose advice and counsel are sought by the Committee, attend any meeting of the Committee to provide such pertinent information as the Committee requests.Conduct

Note: This Code and related policies are current as of May 1, 2006. In adopting and publishing these guidelines, you should note that (1) in some respects our policies may exceed minimum legal requirements or industry practice, (2) nothing contained in this Code should be construed as a binding definition or interpretation of a legal requirement or industry practice, and (3) any action by our employees or agents in violation of the law or this Code is beyond the scope of such person’s authority or duty and is not an act by us or on our behalf.

To obtain additional copies of this Code, you may contactyour supervisor or the Corporate Compliance Officer at 1-888-679-3964 ext. 4796.

Exhibit B

Introduction

The Wet Seal, Inc.Business Ethics Policy and Code of Conduct (“the Code” or “the Policy”) is our charter for ethical conduct. The Wet Seal, Inc. (“the Company”) is in compliance with Federal laws and has established this Code to describe the Company’s expectations for business conduct. The Code applies to all actions of every trustee and every employee, from those who perform entry level functions to senior officers. All officers and managers are responsible for ensuring that employees under their supervision are familiar with the Code and the Policy and are consistently applying it in all business conduct.

In response to recently enacted laws, the Company has established means by which you can confidentially communicate any observations of code violations—in particular accounting and financial reporting controls, auditing practices, or conflicts of interest and other concerns listed herein—without fear of retaliation by the Company or its employees. Retaliation will not be tolerated. To report a concern, you may contact your supervisor or your supervisor’s manager.

If you are aware of or observed improper accounting or financial reporting, you may call our Ethics Hotline at 1-800-435-1445 to speak with a live representative, 24 hours a day from a third party, Global Compliance. These calls are reported back to the Company’s Corporate Compliance Officer, Ms. Pam O’Connor, Senior Vice President of Human Resources. Any investigation of such complaints will be treated as confidentially as possible.

If you have concerns related to other matters covered by the Code, such as conflicts of interest and business ethics, you may call and leave an anonymous voicemail message at 1-888-679-3964 ext. 4796.

Additionally, in either case, you may also speak with our Corporate Compliance Officer, who is authorized to assist you in your report and discuss such issues with you. Please contact Ms. Pam O’Connor, at 949-699-4079.

As far as your personal actions, when you are faced with a situation and you are not clear as to what action you should take, ask yourself the following questions:

Accurate and Complete Accounting

Our accounting and financial reporting policies must follow Generally Accepted Accounting Principles (GAAP) and other laws and regulations such as those of the Internal Revenue Service and the Securities and Exchange Commission. Laws and regulations require that the Company have and maintain internal controls to ensure the integrity of its financial statements. You are required to adhere to the following policies:

Suspected breaches of improper treatment of an accounting transaction must be reported and investigated. We will not retaliate against any employee for filing a good faith complaint or for cooperating in an investigation of an alleged violation, and will not tolerate or permit retaliation by management, employees or co-workers.

Record Retention

We will retain all books, records and statements in accordance with our record retention policies and all applicable laws and regulations. It is a crime to alter, destroy, modify or conceal documentation or other objects that are relevant to litigation or a government investigation, including not only formal reports but all less formal data such as e-mails, expense reports and internal memos. If you are informed that information in your possession is the subject of litigation or a government investigation, or if you have other reason to believe that such information may be involved in a judicial proceeding, no matter whether you think it is relevant or not, you are prohibited from making any effort to alter, destroy, modify or conceal that information.

Fair Dealing

We are committed to maintaining the highest levels of integrity and fairness within our company. You should not take unfair advantage of anyone (customers, contractors and even competitors) through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair-dealing practice. If you are unclear regarding what constitutes an unfair-dealing practice, please ask your direct manager or the senior manager of your division.

Legal Compliance

The CommitteeCompany behaves in an ethical manner and complies with all laws, rules and government regulations that are applicable to our business. The Company expects the same from its employees.

This discussion is not comprehensive and you are expected to familiarize yourself with all laws and regulations relevant to your position with us, as well as all our related written policies on these laws and regulations. Supervisors are responsible for ensuring that employees under their supervision have access to and are familiar with these laws and regulations.

Conflicts of Interest

All of us must be able to perform our duties and exercise judgment on behalf of the Company without influence or impairment, or the appearance of influence or impairment, due to a non-company activity, interest or relationship.

Conflicts of interest arise:

Gifts and Entertainment

Commercial bribery is illegal. The following actions may be deemed, or suggest the appearance of commercial bribery when:

As a general rule, and subject to the discussion below, our employees may not accept favors, gifts, free services, discounts, entertainment, or special considerations of any kind in connection with a Company business activity. You should not accept loans from any persons or entities having or seeking our business.

If you are offered a gift or benefit, you must report it to your supervisor (who will maintain written minutesreport this to the Corporate Compliance Officer). Gifts, services, discounts or entertainment with low value may be allowed on a case by case basis but will in no event be allowed if they are for the sole benefit of the employee or if they are over a value of $250. To the extent practical, disallowed but received gifts, services, discounts, etc., will be shared within the Company or donated to charity. A gift of cash or its meetings,equivalent, for any value, is not allowed.

Entertainment or favors to the Company’s customers, prospective customers, and will filepublic officials and others who are affiliated with such minutes withindividuals should be avoided unless pre-approved by your supervisor.All funds expended for business entertainment and gifts must be fully and accurately documented and reflected in the books and records of the Company.

A Committee member (includingEmployees working or traveling in foreign countries should obtain the Chairperson) may be removed at any time, withprior specific approval of our legal counsel before paying for certain privileges, services or without cause, by the Board. No person may be made a member of the Committee if his or her service on the Committeeactions that would violate any restriction on service imposed by any rule or regulation ofcost nothing in the United States Securitiesor Canada. If circumstances make such prior approval impossible, the payment should be disclosed to your supervisor as soon afterward as feasible.

None of our funds or assets may be contributed to any political candidate or political party, unless such contribution is expressly permitted by law. Employees must not be reimbursed by the Company in any way, directly or indirectly, for personal political contributions.

Interests in Competitors, Suppliers and Exchange CommissionThird Parties

You should not have any direct or indirect interest in any transaction to which the Nasdaq Stock Market.Company will be a party if your interest or relationship could influence, or appear to influence, your actions with regard to your Company duties. You should not have any financial or other interest in any competitor, vendor, supplier (i.e., someone who provides products or services to the Company) or third party with whom you could influence or appear to influence the Company’s decision to do business (or proposing to do business).