Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

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

The number of shares outstanding of the registrant’s Class A common stock, par value $0.10 per share, at August ~~28, 2009,~~27, 2010, was ~~97,090,443.~~101,739,011. There were no shares outstanding of the registrant’s Class B common stock, par value $0.10 per share, at August ~~28, 2009.~~27, 2010.


	August 1, 2009			January 31, 2009			August 2, 2008			July 31, 2010		January 30, 2010			August 1, 2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	143,987		$	142,064		$	123,570		$	165,516	$	161,693		$	143,987
Income taxes receivable		—			—			167
Other receivables		795			1,784			1,833			1,381		479			795
Merchandise inventories		38,050			25,529			44,551			39,285		29,159			38,050
Prepaid expenses and other current assets		10,829			10,600			11,033			12,150		10,939			10,829
Deferred tax assets											19,600		19,600			—

Total current assets		193,661			179,977			181,154			237,932		221,870			193,661

EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements		106,281			102,062			104,483			112,058		108,958			106,281
Furniture, fixtures and equipment		68,570			65,378			66,202			74,969		66,708			68,570

		174,851			167,440			170,685			187,027		175,666			174,851
Less accumulated depreciation and amortization		(95,382	)		(92,571	)		(96,621	)		(99,998)		(97,603	)		(95,382)

Net equipment and leasehold improvements		79,469			74,869			74,064			87,029		78,063			79,469

OTHER ASSETS:
Deferred financing costs, net of accumulated amortization of $5,635, $5,586 and $5,537 at August 1, 2009, January 31, 2009, and August 2, 2008, respectively		124			173			223
Deferred tax assets											46,909		51,713			—
Other assets		2,123			1,640			1,628			2,560		2,584			2,247

Total other assets		2,247			1,813			1,851			49,469		54,297			2,247

TOTAL ASSETS	$	275,377		$	256,659		$	257,069		$	374,430	$	354,230		$	275,377

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable – merchandise	$	19,760		$	8,388		$	16,915		$	21,970	$	14,588		$	19,760
Accounts payable – other		12,434			9,188			12,165			15,665		9,480			12,434
Income taxes payable		103			228			125			—		47			103
Accrued liabilities		24,009			28,079			30,119			24,561		24,918			24,009
Current portion of deferred rent		3,468			3,378			4,056			2,876		2,735			3,468

Total current liabilities		59,774			49,261			63,380			65,072		51,768			59,774

LONG-TERM LIABILITIES:
Secured convertible notes, including accrued interest of $853, $752 and $653 at August 1, 2009, January 31, 2009, and August 2, 2008, respectively, and net of unamortized discount of $2,425, $2,712 and $2,954 at August 1, 2009, January 31, 2009, and August 2, 2008, respectively		3,095			2,707			2,366
Secured convertible notes, including accrued interest of $0, $956 and $853 at July 31, 2010, January 30, 2010, and August 1, 2009, respectively, and net of unamortized discount of $0, $2,083 and $2,425 at July 31, 2010, January 30, 2010, and August 1, 2009, respectively											—		3,540			3,095
Deferred rent		28,832			30,051			29,938			28,988		28,827			28,832
Other long-term liabilities		1,727			1,821			1,826			1,707		1,785			1,727

Total long-term liabilities		33,654			34,579			34,130			30,695		34,152			33,654

Total liabilities		93,428			83,840			97,510			95,767		85,920			93,428


	August 1, 2009			January 31, 2009			August 2, 2008			July 31, 2010			January 30, 2010			August 1, 2009
COMMITMENTS AND CONTINGENCIES (Note 6)
CONVERTIBLE PREFERRED STOCK, $0.01 par value, authorized 2,000,000 shares; 1,611 shares issued and outstanding at August 1, 2009, and January 31, 2009; 2,167 shares issued and outstanding at August 2, 2008		1,611			1,611			2,167
CONVERTIBLE PREFERRED STOCK, $0.01 par value, authorized 2,000,000 shares; no shares issued and outstanding at July 31, 2010, and 1,611 shares issued and outstanding at January 30, 2010, and August 1, 2009, respectively											—			1,611			1,611

STOCKHOLDERS’ EQUITY:
Common stock, Class A, $0.10 par value, authorized 300,000,000 shares; 103,773,868 shares issued and 97,090,443 outstanding at August 1, 2009; 103,319,360 shares issued and 96,635,935 shares outstanding at January 31, 2009; and 102,463,275 shares issued and 95,822,555 shares outstanding at August 2, 2008		10,377			10,332			10,246
Common stock, Class A, $0.10 par value, authorized 300,000,000 shares; 111,976,044 shares issued and 101,739,011 outstanding at July 31, 2010; 106,889,150 shares issued and 98,046,279 shares outstanding at January 30, 2010; and 103,773,868 shares issued and 97,090,443 shares outstanding at August 1, 2009											11,198			10,689			10,377
Common stock, Class B convertible, $0.10 par value, authorized 10,000,000 shares; no shares issued and outstanding		—			—			—			—			—			—
Paid-in capital		301,573			300,607			297,915
Accumulated deficit		(109,696	)		(117,828	)		(128,906	)
Treasury stock, 6,683,425 shares; 6,683,425 shares; and 6,640,720 shares at cost, at August 1, 2009, January 31, 2009, and August 2, 2008, respectively		(22,461	)		(22,461	)		(22,461	)
Paid-in capital (Note 3)											324,594			312,689			304,517
Accumulated deficit (Note 3)											(22,585	)		(27,342	)		(112,640)
Treasury stock, 10,237,033 shares; 8,842,871 shares; and 6,683,425 shares; at cost, at July 31, 2010, January 30, 2010, and August 1, 2009, respectively											(34,957	)		(29,758	)		(22,461)
Accumulated other comprehensive income		545			558			598			413			421			545

Total stockholders’ equity		180,338			171,208			157,392			278,663			266,699			180,338

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	275,377		$	256,659		$	257,069		$	374,430		$	354,230		$	275,377


	13 Weeks Ended						26 Weeks Ended						13 Weeks Ended						26 Weeks Ended
	August 1, 2009			August 2, 2008			August 1, 2009			August 2, 2008			July 31, 2010			August 1, 2009			July 31, 2010			August 1, 2009
Net sales	$	136,366		$	149,060		$	268,375		$	291,450		$	131,541		$	136,366		$	269,303		$	268,375
Cost of sales		97,196			97,034			190,024			192,724			93,159			97,196			185,798			190,024

Gross margin		39,170			52,026			78,351			98,726			38,382			39,170			83,505			78,351
Selling, general and administrative expenses		34,321			39,911			68,294			77,902
Selling, general, and administrative expenses														34,737			34,321			69,801			68,294
Asset impairment		1,552			303			1,552			303			1,041			1,552			1,131			1,552

Operating income		3,297			11,812			8,505			20,521			2,604			3,297			12,573			8,505

Interest income		132			599			316			1,297			85			132			159			316
Interest expense		(246	)		(2,086	)		(437	)		(2,392	)
Interest expense (Note 3)														(25	)		(246	)		(2,992	)		(437	)

Interest expense, net		(114	)		(1,487	)		(121	)		(1,095	)
Interest income (expense), net														60			(114	)		(2,833	)		(121	)

Income before provision for income taxes		3,183			10,325			8,384			19,426			2,664			3,183			9,740			8,384
Provision for income taxes		80			177			252			350
Provision for income taxes (Note 1)														1,049			80			4,983			252

Net income	$	3,103		$	10,148		$	8,132		$	19,076		$	1,615		$	3,103		$	4,757		$	8,132

Net income per share, basic	$	0.03		$	0.10		$	0.08		$	0.19		$	0.02		$	0.03		$	0.05		$	0.08

Net income per share, diluted	$	0.03		$	0.10		$	0.08		$	0.19		$	0.02		$	0.03		$	0.05		$	0.08

Weighted-average shares outstanding, basic		95,594,834			92,339,436			95,492,536			91,506,480			100,257,750			95,594,834			98,756,560			95,492,536

Weighted-average shares outstanding, diluted		96,159,261			95,245,049			95,988,664			92,972,515			100,556,634			96,159,261			99,414,245			95,988,664

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


	Common Stock						Paid-In Capital			Accumulated Deficit				Treasury Stock				Comprehensive Income				Accumulated Other Comprehensive Income			Total Stockholders’ Equity				Common Stock								Paid-In Capital				Accumulated Deficit			Treasury Stock			Comprehensive Income			Accumulated Other Comprehensive Income				Total Stockholders’ Equity
	Class A			Class B																	Class A							Class B
	Shares	Par Value		Shares	Par Value																Shares							Par Value			Shares		Par Value
Balance at January 31, 2009	103,319,360	$	10,332	—	$	—	$	300,607					$	(117,828	)		$	(22,461	)						$	558			$	171,208
Balance at January 30, 2010																													106,889,150		$	10,689		—	$	—	$	312,689			$	(27,342	)	$	(29,758	)				$	421			$	266,699
Net income	—		—	—		—		—						8,132				—			$			8,132			—				8,132			—		—	—			—			—			4,757			—			$	4,757			—	4,757
Stock issued pursuant to long-term incentive plans	267,602		27	—		—		(27	)		—				—				—				—			—			213,900			21		—		—		(21	)			—			—			—			—				—
Stock-based compensation - directors and employees (Note 2)	—		—	—		—		471			—				—				—				—			471			—			—		—		—		619				—			—			—			—				619
Amortization of stock payment in lieu of rent	—		—	—		—		48			—				—				—				—			48			—			—		—		—		49				—			—			—			—				49
Exercise of stock options	3,334		—	—		—		8			—				—				—				—			8			64,168			7		—		—		199				—			—			—			—				206
Exercise of common stock warrants	183,572		18	—		—		466			—				—				—				—			484			1,160,715			116		—		—		4,155				—			—			—			—				4,271
Conversions of secured convertible notes into common stock																													3,111,111			311		—		—		5,347				—			—			—			—				5,658
Conversions of convertible preferred stock into common stock																													537,000			54		—		—		1,557				—			—			—			—				1,611
Amortization of actuarial gain under Supplemental Employee Retirement Plan	—		—	—		—		—			—				—				(13	)			(13	)		(13	)		—			—		—		—		—				—			—			(8)			(8	)			(8	)

Comprehensive income																		$	8,119																												$	4,749

Balance at August 1, 2009	103,773,868	$	10,377	—	$	—	$	301,573		$	(109,696	)		$	(22,461	)						$	545		$	180,338
Repurchase of common stock																													—			—		—		—		—				—			(5,199)						—				(5,199)

Balance at July 31, 2010																													111,976,044		$	11,198		—	$	—	$	324,594			$	(22,585	)	$	(34,957	)				$	413			$	278,663

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


	Common Stock						Paid-In Capital				Accumulated Deficit			Treasury Stock				Comprehensive Income			Accumulated Other Comprehensive Income			Total Stockholders’ Equity			Common Stock									Paid-In				Accumulated				Treasury			Comprehensive		Accumulated Other Comprehensive Income			Total Stockholders’ Equity
	Class A			Class B													Class A									Class B										Paid-In				Accumulated				Treasury			Comprehensive
	Shares	Par Value		Shares	Par Value												Shares						Par Value				Shares		Par Value			Capital			Deficit				Stock				Income
Balance at February 2, 2008	98,377,559	$	9,838	—	$	—				$		287,848		$	(147,982	)				$	(22,461	)						$	596		$	127,839
Balance at January 31, 2009																											103,319,360		$	10,332		—	$	—		$	303,551			$	(120,772	)		$	(22,461	)			$	558		$	171,208
Net income	—		—	—		—						—			19,076				—			$	19,076			—			19,076		—		—		—			—			—				8,132			—		$	8,132		—		8,132
Stock issued pursuant to long-term incentive plans	259,192		26	—		—		(26	)			—			—				—			—			—		267,602			27		—		—			(27	)			—				—			—		—			—
Stock-based compensation-directors and employees	—		—	—		—		1,402				—			—				—			—			1,402
Stock-based compensation - directors and employees (Note 2)																											—			—		—		—			471				—				—			—		—			471
Amortization of stock payment in lieu of rent	—		—	—		—		90				—			—				—			—			90		—			—		—		—			48				—				—			—		—			48
Exercise of stock options	6,000		1	—		—		9				—			—				—			—			10		3,334			—		—		—			8				—				—			—		—			8
Exercise of common stock warrants	1,545,720		154	—		—		5,407				—			—				—			—			5,561		183,572			18		—		—			466				—				—			—		—			484
Conversions of secured convertible notes into common stock	2,274,804		227	—		—		3,185				—			—				—			—			3,412
Amortization of actuarial net loss under Supplemental Employee Retirement Plan	—		—	—		—		—				—			—				2			2			2
Amortization of actuarial gain under Supplemental Employee Retirement Plan																											—			—		—		—			—				—				—			(13)		(13	)		(13	)

Comprehensive income																		$	19,078																												$	8,119

Balance at August 2, 2008	102,463,275	$	10,246	—	$	—	$	297,915			$	(128,906	)	$	(22,461	)					$	598		$	157,392
Balance at August 1, 2009																											103,773,868		$	10,377		—	$	—		$	304,517			$	(112,640	)		$	(22,461	)			$	545		$	180,338


	26 Weeks Ended						26 Weeks Ended
	August 1, 2009			August 2, 2008			July 31, 2010		August 1, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8,132		$	19,076		$	4,757	$	8,132
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,270			7,191			7,988		7,270
Amortization of discount on secured convertible notes		287			2,503
Amortization/acceleration of discount on secured convertible notes								2,083		287
Amortization of deferred financing costs		49			235			145		49
Amortization of stock payment in lieu of rent		48			90			49		48
Adjustment of derivatives to fair value		(40	)		(80	)		(20)		(40)
Interest added to (extinguished from) principal of secured convertible notes		101			(309	)
Interest added to principal of secured convertible notes								35		101
Conversion inducement fee								700		—
Loss on disposal of equipment and leasehold improvements		127			283			537		127
Asset impairment		1,552			303			1,131		1,552
Deferred income taxes								4,804		—
Stock-based compensation (Note 2)		471			1,402			619		471
Changes in operating assets and liabilities:
Other receivables		989			3,882			(902)		989
Merchandise inventories		(12,521	)		(12,961	)		(10,126)		(12,521)
Prepaid expenses and other current assets		(229	)		(88	)		(1,356)		(229)
Other non-current assets		(483	)		74			24		(483)
Accounts payable and accrued liabilities		8,294			4,809			7,628		8,294
Income taxes payable		(125	)		125			(47)		(125)
Deferred rent		(1,129	)		(421	)		302		(1,129)
Other long-term liabilities		(67	)		(50	)		(66)		(67)

Net cash provided by operating activities		12,726			26,064			18,285		12,726

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements		(11,295	)		(8,683	)		(13,040)		(11,295)

Net cash used in investing activities		(11,295	)		(8,683	)		(13,040)		(11,295)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		8			10			206		8
Conversion inducement fee								(700)		—
Proceeds from exercise of common stock warrants		484			5,561			4,271		484
Repurchase of common stock								(5,199)		—

Net cash provided by financing activities		492			5,571
Net cash (used in) provided by financing activities								(1,422)		492

NET INCREASE IN CASH AND CASH EQUIVALENTS		1,923			22,952			3,823		1,923
CASH AND CASH EQUIVALENTS, beginning of period		142,064			100,618			161,693		142,064

CASH AND CASH EQUIVALENTS, end of period	$	143,987		$	123,570		$	165,516	$	143,987

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	33		$	37		$	34	$	33
Income taxes	$	378		$	225		$	597	$	378
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Conversion of secured convertible notes into 2,274,804 shares of Class A common stock	$	—		$	3,412
Conversion of secured convertible notes into 3,111,111 shares of Class A common stock							$	5,658	$	—
Conversion of convertible preferred stock into 537,000 shares of Class A common stock							$	1,611	$	—
Purchase of equipment and leasehold improvements unpaid at end of period	$	5,189		$	3,562		$	8,209	$	5,189
Amortization of actuarial (gain) loss under Supplemental Employee Retirement Plan	$	(13	)	$	2
Amortization of actuarial gain under Supplemental Employee Retirement Plan							$	(8)	$	(13)

NOTE 1 – Basis of Presentation, Significant Accounting Policies, ~~Recently Adopted Accounting Pronouncements~~ and New Accounting Pronouncements Not Yet Adopted

The information set forth in these condensed consolidated financial statements is unaudited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, all adjustments necessary for a fair presentation have been included. The results of operations for the 26 weeks ended ~~August 1, 2009,~~July 31, 2010, are not necessarily indicative of the results that may be expected for the fiscal year ending January ~~30, 2010.~~29, 2011. For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of The Wet Seal, Inc. (the “Company”)~~, and amendments thereto,~~ for the fiscal year ended January ~~31, 2009.~~30, 2010.

The Company recognizes the sales from gift cards, gift certificates, and store credits as they are redeemed for merchandise. Prior to redemption, the Company maintains an unearned revenue liability for gift cards, gift certificates, and store credits until the Company is released from such liability. The Company’s gift cards, gift certificates, and store credits do not have expiration dates; however, over time, a percentage of gift cards, gift certificates, and store credits are not redeemed or recovered (“breakage”). Based upon an analysis completed by the Company during the second fiscal quarter of 2009, historical redemption patterns determined that the likelihood of redemption of unredeemed gift cards, gift certificates, and store credits greater than two years after their issuance is remote. As a result, beginning in the second quarter of fiscal 2009, the Company adjusted its unearned revenue liability to recognize the change in timing of when breakage of gift cards, gift certificates and store credits is recorded from greater than three years after their issuance date to greater than two years after their issuance date. The Company’s net sales in the second quarter of fiscal 2009 included a benefit of $1.2 million due to this change in estimate to reduce the Company’s unearned revenue liability for estimated unredeemed amounts. The unearned revenue for gift cards, gift certificates, and store credits is recorded in accrued liabilities in the consolidated balance sheets and was $4.4 million, $6.5 million and $4.8 million at August 1, 2009, January 31, 2009, and August 2, 2008, respectively. If actual redemptions ultimately differ from the assumptions underlying the Company’s breakage adjustments, or the Company’s future experience indicates the likelihood of redemption of gift cards, gift certificates, and store credits becomes remote at a different point in time after issuance, the Company may recognize further significant adjustments to its accruals for such unearned revenue, which could have a significant effect on the Company’s net sales and results of operations.

The Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be ~~recoverable in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144”).~~recoverable. Factors that are considered important that could ~~trigger~~result in the necessity to perform an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that ~~demonstrates~~indicates continuing losses or insufficient income associated with the ~~use~~realization of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized, measured by the difference between the carrying value and the estimated fair value of the assets, based on discounted cash flows using the Company’s weighted average cost of capital, with such estimated fair values determined using the best information ~~available~~available. The Company has considered all relevant valuation techniques that could be obtained without undue cost and effort and has determined that the discounted cash flow approach continues to provide the most relevant and reliable means by which to determine fair value in ~~accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), as discussed further within Recently Adopted Accounting Pronouncements.~~

~~NOTE 1 – Basis of Presentation, Significant Accounting Policies, Recently Adopted Accounting Pronouncements and New Accounting Pronouncements Not Yet Adopted (Continued)~~this circumstance.

At least quarterly, the Company assesses whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. The Company’s evaluations during the 13 and 26 weeks ended July 31, 2010, and August 1, 2009, ~~and the 13 and 26 weeks ended August 2, 2008,~~ indicated that operating losses or insufficient operating income existed at certain retail stores, with a projection that the operating losses or insufficient operating income for those locations would continue. As such, the Company recorded non-cash charges of ~~$1.6~~$1.0 million, $1.1 million, $1.6 million ~~$0.3 million~~ and ~~$0.3~~$1.6 million during the 13 and 26 weeks ended July 31, 2010, and August 1, 2009, ~~and the 13 and 26 weeks ended August 2, 2008,~~ respectively, within asset impairment in the condensed consolidated statements of operations, to write down the carrying values of these stores’ long-lived assets to their estimated fair values.

~~In September 2006,~~The Company began fiscal 2010 with approximately $116.6 million of federal net operating loss carryforwards (NOLs) available to offset taxable income in fiscal 2010 and thereafter, subject to certain annual limitations based on the ~~Financial Accounting Standards Board~~provisions of Section 382 of the Internal Revenue Code (“~~FASB”~~Section 382”).

For the 13 weeks ended July 31, 2010, the Company’s effective income tax rate was approximately 39%, which is the rate the Company currently expects to incur for the remainder of the fiscal year. The Company incurred a higher effective income tax rate than it had in 2009 primarily as a result of the reversal of its deferred tax asset valuation allowance at the end of fiscal 2009.

The Company’s effective income tax rate for the 26 weeks ended July 31, 2010 was approximately 51%. This rate was higher due to $2.8 million in interest charges incurred in the first fiscal quarter upon the conversion of the Company’s remaining Secured Convertible Notes (the “Notes”) ~~issued SFAS No. 157. SFAS No. 157 provides a new single authoritative definition~~and Series C Convertible Preferred Stock (the “Preferred Stock”), which are not tax-deductible. The impact of ~~fair value and provides enhanced guidance for measuring~~these non-deductible charges on the ~~fair value of assets and liabilities and requires additional disclosures related to~~effective income tax rate in the ~~extent to which companies measure assets and liabilities at fair value, the information used to measure fair value,~~first fiscal quarter and the ~~effect of fair value measurements on earnings. Adoption of SFAS No. 157~~26 weeks ended July 31, 2010, was ~~required for companies with fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FSP Nos. 157-1~~approximately 16% and 157-2, which partially deferred the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. SFAS No. 157 does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The Company adopted SFAS No. 157 effective February 3, 2008, for all financial assets and financial liabilities, as required, and adopted the deferred portion of SFAS No. 157 effective February 1, 2009, for all nonfinancial assets and nonfinancial liabilities, as required. The adoption of SFAS No. 157, FSP No. 157-1 and FSP No. 157-2 did not impact the Company’s consolidated financial statements.

In October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP No. 157-3 provides guidance for the valuation of financial assets in an inactive market, the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. FSP No. 157-3 is effective for all periods presented in accordance with SFAS No. 157. The adoption of FSP No. 157-3 did not impact the Company’s consolidated financial statements.

~~In December 2007, the FASB issued SFAS No. 141 (revised 2007)~~12%, “Business Combinations” (“SFAS No. 141R”). The objective of SFAS No. 141R is to improve the relevance, representational faithfulness, and comparability of the information that a company provides in its financial reports about a business combination and its effects. Under SFAS No. 141R, a company is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration measured at their fair value at the acquisition date. It further requires that research and development assets acquired in a business combination that have no alternative future use be measured at their acquisition-date fair value and then immediately charged to expense, and that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. Among other changes, this statement also requires that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, and any deferred tax benefits resulting from a business combination are recognized in income from continuing operations in the period of the combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Effective February 1, 2009, the Company adopted SFAS No. 141R, which will affect how the Company accounts for business acquisitions occurring after its adoption date.respectively.

NOTE 1 – Basis of Presentation, Significant Accounting Policies, ~~Recently Adopted Accounting Pronouncements~~ and New Accounting Pronouncements Not Yet Adopted (Continued)

Due to its expected utilization of federal and state NOL carry forwards during fiscal 2010, the Company anticipates cash income taxes for the fiscal year will be approximately 2% of pre-tax income, representing the portion of federal and state alternative minimum taxes that cannot be offset by NOLs. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash provision for deferred incomes taxes.

The Company’s current expectations regarding the federal NOL carry forwards it may use annually are based on calculations made by management. Through these calculations, management determined that, in April 2005 and December ~~2007,~~2006, the ~~FASB issued SFAS No. 160, “Noncontrolling Interests~~Company incurred “ownership changes,” as defined in ~~Consolidated Financial Statements—~~Section 382 that require re-calculation of NOL annual utilization limits. Such ownership changes can result merely from an ~~amendment~~accumulation of ARB No. 51” (“SFAS No. 160”). The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a company provides in its consolidated financial statements. SFAS No. 160 requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the companynormal market trading activity in the ~~consolidated financial statements within~~Company’s common stock over time. The NOL annual utilization limits determined upon an ownership change depend on, among other things, the ~~equity section but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent~~Company’s market capitalization and ~~to the noncontrolling~~long-term federal interest ~~to be clearly identified and presented~~rates on the ~~face of~~ownership change date. If the ~~consolidated statements of operations; changes in~~Company were to determine it had incurred another ownership interest to be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary to be measuredchange at ~~fair value. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or~~some time after December ~~15, 2008. Effective February 1, 2009,~~2006, the Company ~~adopted SFAS No. 160. The adoption of this standard did not impact the Company’s consolidated financial statements.~~

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133” (“SFAS No. 161”). The objective of SFAS No. 161 is to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Effective February 1, 2009, the Company adopted SFAS No. 161. The adoption of this standard did not impact the Company’s consolidated financial statements.

In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”), which requires entities to apply the two-class method of computing basic and diluted earnings per share to participating securities with nonforfeitable dividend rights, irrespective of whether the entity declares and/or pays a dividend. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008, and all prior-period earnings per share data presented shallwould be adjusted retrospectively. Effective February 1, 2009, the Company adopted FSP No. EITF 03-6-1. The adoption of this standard did not significantly impact the Company’s consolidated financial statements. Refer to Note 5 of the Notes to Condensed Consolidated Financial Statements for further information.

In December 2008, the FASB issued FSP SFAS No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP SFAS No. 132(R)-1”). This new standard requires enhanced disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan. Companies are required to ~~disclose information about how investment allocation decisions are made, the fair value of each major category of plan assets, the basis used~~re-calculate its annual federal NOL utilization limit, which could result in a decrease to determine the overall expected long-term rate of return on assets assumption, a description of the inputs and valuation techniques used to develop fair value measurements of plan assets, and significant concentrations of credit risk. It is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Effective February 1, 2009, the Company adopted FSP SFAS No. 132(R)-1. The adoption of SFAS No. 132(R)-1 did not impact the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP SFAS No. 107-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP SFAS No. 107-1”), which amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, and APB Opinion No. 28, “Interim Financial Reporting”. FSP SFAS No. 107-1 requires disclosures about fair value of financial instruments in financial statements for interim reporting periods and in annual financial statements of publicly-traded companies. FSP SFAS No. 107-1 also requires entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim and annual basis and to highlight any changes from prior periods. FSP SFAS No. 107-1 is effective for interim and annual periods ending after June 15, 2009. The adoption of FSP SFAS No. 107-1 did not significantly impact the Company’s consolidated financial statements aside from the required disclosures. Refer to Note 4 of the Notes to Condensed Consolidated Financial Statements for further information.

~~NOTE 1 – Basis of Presentation, Significant Accounting Policies, Recently Adopted Accounting Pronouncements and New Accounting Pronouncements Not Yet Adopted (Continued)~~

In April 2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS No. 157-4”), which provides additional guidance for estimating fair value when the market activity for an asset or liability has declined significantly. FSP FAS No. 157-4 is effective for interim and annual periods ending after June 15, 2009. The adoption of FSP FAS No. 157-4 did not impact the Company’s consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the consolidated financial statements are issued or areNOL carry forwards available to ~~be issued. Among other items, SFAS No. 165 requires the disclosure of the date through which~~offset taxable income and an entity has evaluated subsequent events and the basis for that date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The Company has adopted SFAS No. 165 and has evaluated subsequent events through the date of issuance of these condensed consolidated financial statements, September 1, 2009. Adoption of SFAS No. 165 resultedincrease in ~~no impact on the Company’s consolidated financial statements.~~cash income tax payments in fiscal 2010 and/or thereafter.

In ~~June~~October 2009, the ~~FASB issued SFAS No. 168, “The FASB~~Financial Accounting Standards ~~Codification~~Board (“FASB”) issued guidance related to revenue arrangements with multiple deliverables. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162,” (“SFAS No. 168”). SFAS No. 168 establishes the FASB Accounting Standards Codification as the source of authoritative GAAP recognized by the FASBrelative selling price method. Such guidance is to be applied ~~by nongovernmental entities~~on a prospective basis for revenue arrangements entered into or materially modified in ~~the preparation of financial statements in conformity~~fiscal years beginning on or after June 15, 2010, with GAAP. SFAS No. 168 will be effective for financial statements issued for interim and annual periods ending after September 15, 2009. SFAS No. 168 does not change GAAP, but replaces the current GAAP hierarchy of four levels to two levels of literature, authoritative and non-authoritative.early adoption permitted. The ~~adoption of SFAS No. 168 will result in the change of disclosures to reflect the new codification references, but otherwise the~~ Company does not ~~expect it to~~believe adoption of this guidance will have any effect on its condensed consolidated financial statements.

In January 2010, the FASB issued guidance and clarifications for improving disclosures about fair value measurements. This guidance requires enhanced disclosures regarding transfers in and out of the levels within the fair value hierarchy. Separate disclosures are required for transfers in and out of Level 1 and 2 fair value measurements, and the reasons for the transfers must be disclosed. In the reconciliation for Level 3 fair value measurements, separate disclosures are required for purchases, sales, issuances, and settlements on a gross basis. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for interim and annual reporting periods beginning after December 15, 2010. Effective January 31, 2010, the Company adopted the new and updated disclosure guidance, aside from those deferred to periods after December 15, 2010, and it did not significantly impact the Company’s condensed consolidated financial statements. The Company does not believe adoption of the remaining guidance on disclosures will have any effect on its condensed consolidated financial statements.

The Company ~~had the following two stock incentive plans~~has a 2005 Stock Incentive Plan (the “2005 Plan”) under which shares were available for grant at ~~August 1, 2009: the 2005 Stock Incentive Plan (the “2005 Plan”) and the 2000 Stock Incentive Plan (the “2000 Plan”).~~July 31, 2010. The Company also previously granted share awards under its 1996 Long-Term Incentive Plan (the “1996 Plan”) and its 2000 Stock Incentive Plan (the “2000 Plan”) that remain unvested and/or unexercised as of ~~August 1, 2009;~~July 31, 2010; however, the 1996 Plan expired during fiscal 2006 and the 2000 Plan expired during fiscal 2009, and no further share awards may be granted under the 1996 Plan and 2000 Plan. The 2005 Plan, the 2000 Plan, and the 1996 Plan are collectively referred to as the “Plans.”

The 2005 Plan ~~and 2000 Plan permit~~permits the granting of options, restricted common stock, performance shares, or other equity-based awards to the Company’s employees, officers, directors, and consultants. The Company believes the granting of equity-based awards helps to align the interests of its employees, officers, directors, and consultants with those of its stockholders. The Company has a practice of issuing new shares to satisfy stock option exercises, as well as for restricted stock and performance share grants. The 2005 Plan was approved by the Company’s stockholders on January 10, 2005, as amended with stockholder approval on July 20, 2005, for the issuance of incentive awards covering 12,500,000 shares of Class A common stock. Additionally, an amended and restated 2005 Plan was approved by the Company’s stockholders on May 19, 2010, which increased the incentive awards capacity under the 2005 Plan to 17,500,000 shares of the Company’s Class A common stock. An aggregate of ~~19,896,703~~26,281,061 shares of the Company’s Class A common stock have been issued or may be issued pursuant to the Plans. As of ~~August 1, 2009, 2,261,005~~July 31, 2010, 6,582,188 shares were available for future grants.

The Plans provide that the per-share exercise price of a stock option may not be less than the fair market value of the Company’s Class A common stock on the date the option is granted. Under the Plans, outstanding options generally vest over periods ranging from three to five years from the grant date and generally expire from five to ten years after the grant date. Certain stock option and other equity-based awards provide for accelerated vesting if there is a change in control (as defined in the Plans). The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The Company uses historical data, the implied volatility of market-traded options and other factors to estimate the expected price volatility, option lives, and forfeiture rates.

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant ~~for~~and the estimated life of the option. The following weighted-average assumptions were used to estimate the fair value of options granted during the periods indicated using the Black-Scholes option-pricing model:


	13 Weeks Ended				26 Weeks Ended				13 Weeks Ended				26 Weeks Ended
	August 1, 2009		August 2, 2008		August 1, 2009		August 2, 2008		July 31, 2010		August 1, 2009		July 31, 2010		August 1, 2009
Dividend Yield	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%
Expected Volatility	56.00	%	53.00	%	56.00	%	53.00	%	59.00	%	56.00	%	59.00	%	56.00	%
Risk-Free Interest Rate	1.60	%	3.43	%	1.58	%	2.10	%	1.29	%	1.60	%	1.56	%	1.58	%
Expected Life of Options (in Years)	3.3		3.3		3.3		3.3		3.3		3.3		3.3		3.3

The Company recorded compensation expense of ~~$0.2~~less than $0.1 million, ~~a compensation benefit of $0.2~~$0.1 million, ~~compensation expense of~~ $0.2 million, and a compensation benefit of ~~less than $0.1~~$0.2 million, in each case less than $0.01 per basic and diluted share, related to stock options outstanding during the 13 and 26 weeks ended July 31, 2010 and August 1, 2009, ~~and the 13 and 26 weeks August 2, 2008,~~ respectively. Refer to “Change in Estimated Forfeiture Rate” later within this Note 2 for additional information.

At ~~August 1, 2009,~~July 31, 2010, there was ~~$0.8~~$0.6 million of total unrecognized compensation expense related to nonvested stock options under the Company’s share-based payment plans, which will be recognized over an average period of ~~1.9~~1.7 years, ~~over the course of~~representing the remaining vesting periods of such options through fiscal ~~2012.~~2013.

The following table summarizes the Company’s stock option activities with respect to its Plans for the 26 weeks ended ~~August 1, 2009,~~July 31, 2010, as follows (aggregate intrinsic value in thousands):


Options	Number of Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value		Number of Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at January 31, 2009	2,367,202		$	7.17
Outstanding at January 30, 2010								2,234,752		$	6.77
Granted	90,000		$	3.39				32,000		$	4.54
Exercised	(3,334	)	$	2.40				(64,168	)	$	3.21
Canceled	(167,416	)	$	6.07				(443,144	)	$	4.81

Outstanding at August 1, 2009	2,286,452		$	7.11	2.75	$	131
Vested and expected to vest in the future at August 1, 2009	2,149,192		$	7.31	2.65	$	112
Exercisable at August 1, 2009	1,720,382		$	8.12	2.25	$	45
Outstanding at July 31, 2010								1,759,440		$	6.94	2.68	$	148
Vested and expected to vest in the future at July 31, 2010								1,685,572		$	7.09	2.62	$	140
Exercisable at July 31, 2010								1,231,457		$	8.40	2.17	$	84

Options vested and expected to vest in the future is comprised of all options outstanding at ~~August 1, 2009,~~July 31, 2010, net of estimated forfeitures. Additional information regarding stock options outstanding as of ~~August 1, 2009,~~July 31, 2010, is as follows:

The weighted-average grant-date fair value of options granted during the 13 and 26 weeks ended July 31, 2010, and August 1, 2009, was $1.65, $1.91, $1.36 and ~~the 13 and 26 weeks ended August 2, 2008, was $1.36,~~ $1.37, ~~$1.99 and $1.13,~~ respectively. The total intrinsic value for options exercised during ~~each of~~ the 13 and 26 weeks ended July 31, 2010, and August 1, 2009, ~~and the 13 and 26 weeks ended August 2, 2008,~~ was less than $0.1 ~~million.~~million, $0.1 million, less than $0.1 million and less than $0.1 million, respectively.

Cash received from option exercises under all Plans for ~~each of~~ the 26 weeks ended July 31, 2010, and August 1, 2009, was $0.2 million and ~~August 2, 2008, was~~ less than $0.1 ~~million.~~million, respectively. The Company did not ~~record~~realize tax benefits for the tax deductions from option exercises as it ~~has been determined that it is currently more likely than not that~~must first utilize its regular NOL prior to realizing the ~~Company will not generate sufficient taxable income to realize its deferred income~~excess tax ~~assets.~~benefits.

Under the 2005 ~~Plan and 2000~~ Plan, the Company grants directors, certain executives, and other key employees restricted common stock with vesting ~~generally~~ contingent upon completion of specified service ~~periods.~~periods ranging from one to three years. The Company also grants certain executives and other key ~~employees~~employee’s performance share awards with vesting ~~generally~~ contingent upon a combination of specified service periods and the Company’s achievement of specified common stock price levels.

During the 26 weeks ended July 31, 2010, and August 1, 2009, ~~and the 26 weeks ended August 2, 2008,~~ the Company granted ~~263,436~~213,900 and ~~249,025~~263,436 shares, respectively, of restricted common stock to certain ~~employees and~~ directors under the Plans. ~~Restricted common stock awards generally vest over periods ranging from one to three years.~~ The weighted-average grant-date fair value of the restricted common stock granted during the 26 weeks ended July 31, 2010, and August 1, 2009, was $3.35 and ~~the 26 weeks ended August 2, 2008, was~~ $2.71 ~~and $3.10~~ per share, respectively. The Company recorded approximately $0.3 million, ~~$0.5~~$0.6 million, ~~$0.5~~$0.3 million and ~~$0.7~~$0.5 million of compensation expense related to outstanding shares of restricted common stock held by employees and directors during the 13 and 26 weeks ended July 31, 2010, and August 1, 2009, ~~and the 13 and 26 weeks ended August 2, 2008,~~ respectively. ~~Refer to “Change in Estimated Forfeiture Rate” later within this Note 2 for additional information.~~

During the 26 weeks ended July 31, 2010, and August 1, 2009, ~~and the 26 weeks ended August 2, 2008,~~ the Company granted no performance shares under the 2005 Plan. The Company recorded a compensation benefit of $0.2 million and $0.1 million, and compensation expense of $0.2 million ~~$0.4~~and $0.2 million ~~and $0.7 million of compensation expense~~ during the 13 and 26 weeks ended July 31, 2010, and August 1, 2009, ~~and~~respectively, related to performance shares previously granted to officers. The benefit recorded in the 13 and 26 weeks ended ~~August 2, 2008, respectively,~~July 31, 2010 was related to ~~performance shares granted to officers.~~higher forfeiture adjustment in such periods. Refer to “Change in Estimated Forfeiture Rate” later within this Note 2 for additional information.

The fair value of nonvested restricted common stock awards is determined based on the closing trading price of the Company’s common stock on the grant date. The fair value of nonvested performance shares granted to officers is determined based on a number of factors, including the closing trading price of the Company’s common stock and the estimated probability of achieving the Company’s stock price performance conditions as of the grant date. The following table summarizes activity with respect to the Company’s nonvested restricted common stock and performance shares for the 26 weeks ended ~~August 1, 2009:~~July 31, 2010:


Nonvested Restricted Common Stock and Performance Shares	Number of Shares		Weighted- Average Grant- Date Fair Value		Number of Shares		Weighted- Average Grant- Date Fair Value
Nonvested at January 31, 2009	1,820,260		$	2.55
Nonvested at January 30, 2010					1,596,318		$	2.37
Granted	263,436		$	2.71	213,900		$	3.35
Vested	(240,986	)	$	3.43	(254,038	)	$	2.81
Forfeited	—		$	—	(30,000	)	$	3.09

Nonvested at August 1, 2009	1,842,710		$	2.46
Nonvested at July 31, 2010					1,526,180		$	2.42

The fair value of restricted common stock and performance shares that vested during the 26 weeks ended ~~August 1, 2009,~~July 31, 2010, was ~~$0.6~~$0.9 million.

At ~~August 1, 2009,~~July 31, 2010, there was ~~$1.3~~$0.5 million of total unrecognized compensation expense related to nonvested restricted common stock and performance shares under the Company’s share-based payment plans, of which ~~$1.0~~$0.4 million relates to restricted common stock and ~~$0.3~~$0.1 million relates to performance shares. That cost is expected to be recognized over a weighted-average period of ~~0.8~~0.4 years. These estimates utilize subjective assumptions about expected forfeiture rates, which could change over time. Therefore, the amount of unrecognized compensation expense noted above does not necessarily represent the expense that will ultimately be recognized by the Company in its condensed consolidated statements of operations.

The following table summarizes stock-based compensation recorded in the condensed consolidated statements of ~~operations:~~operations (in thousands):


	13 Weeks Ended				26 Weeks Ended					13 Weeks Ended					26 Weeks Ended
(in thousands)	August 1, 2009		August 2, 2008		August 1, 2009			August 2, 2008
										July 31, 2010			August 1, 2009		July 31, 2010			August 1, 2009
Cost of sales	$	113	$	217	$	(180	)	$	87	$	(156	)	$	113	$	(130	)	$	(180	)
Selling, general, and administrative expenses		539		916		651			1,315		259			539		749			651

Stock-based compensation	$	652	$	1,133	$	471		$	1,402	$	103		$	652	$	619		$	471

In the first ~~quarters~~quarter of fiscal 2009, ~~and fiscal 2008,~~ based on historical experience, the Company modified the estimated annual forfeiture rate used in recognizing stock-based compensation expense, from a 10% forfeiture rate to a 15% forfeiture ~~rate during the 26 weeks ending August 1, 2009 and, for its executives, from a 5% forfeiture rate to a 10% forfeiture rate during the 26 weeks ended August 2, 2008.~~rate. During ~~these~~this same ~~periods,~~period, the Company also realized benefits from actual forfeiture experience that was higher than previously estimated for unvested stock options and restricted common stock, resulting primarily from executive and other employee departures from the Company. The impact of these events were benefits during the 26 weeks ended August 1, 2009, ~~and the 26 weeks ended August 2, 2008,~~ of approximately $0.9 million, ~~and $0.9 million, respectively,~~ of which $0.4 million ~~and $0.3 million, respectively,~~ was included in cost of sales and $0.5 million ~~and $0.6 million, respectively,~~ was included in selling, general, and administrative expenses in the condensed consolidated statements of ~~operations for~~operations. During the 26 weeks ended ~~August 1, 2009, and~~July 31, 2010, the ~~26 weeks ended August 2, 2008.~~estimated annual forfeiture rate has remained at 15%.

NOTE 3 – Senior Revolving Credit Facility, Secured Convertible Notes, Convertible Preferred Stock, and Common Stock Warrants

The Company maintains a $35.0 million senior revolving credit facility (the “Facility”), which can be increased up to $50.0 million in the absence of any default and upon the satisfaction of certain conditions precedent specified in the Facility. The Facility expires in May ~~2011.~~2011 and the Company intends to either replace or renew the Facility. Under the Facility, the Company is subject to borrowing base limitations on the amount that can be borrowed and certain customary covenants, including covenants limiting the ability to incur additional indebtedness, make investments and acquisitions, grant liens, pay dividends, close stores, and dispose of assets, subject to certain exceptions, without the lender’s consent. The ability of the Company and its subsidiaries to borrow and request the issuance of letters of credit is subject to the requirement that the Company ~~maintains~~maintain an excess of the borrowing base over the outstanding credit extensions of not less than $5.0 million. The interest rate on the revolving line of credit under the Facility is the prime rate or, if the Company elects, the London ~~Interbank~~InterBank Offered Rate ~~(“LIBOR”)~~(LIBOR) plus a margin ranging from 1.0% to 1.5%. The applicable LIBOR margin is based on the level of average ~~Excess Availability,~~excess availability, as defined under the Facility, at the time of election, as adjusted quarterly. The applicable LIBOR margin was 1.0% as of ~~August 1, 2009.~~July 31, 2010. The Company also incurs fees on outstanding letters of credit under the Facility at a rate equal to the applicable LIBOR margin for standby letters of credit and 33.3% of the applicable LIBOR margin for commercial letters of credit.

~~The Facility ranks senior in right of payment to the Company’s Secured Convertible Notes (the “Notes”).~~ Borrowings under the Facility are secured by all presently owned and hereafter acquired assets of the Company and two of its ~~wholly-owned~~wholly owned subsidiaries, The Wet Seal Retail, Inc. and Wet Seal Catalog, Inc., each of which may be a borrower under the Facility. The obligations of the Company and the subsidiary borrowers under the Facility are guaranteed by another ~~wholly-owned~~wholly owned subsidiary of the Company, Wet Seal GC, ~~SMLLC.~~LLC.

At ~~August 1, 2009,~~July 31, 2010, the amount outstanding under the Facility consisted of ~~$5.9~~$3.8 million in open ~~commercial~~documentary letters of credit related to merchandise purchases and ~~$1.8~~$1.5 million in outstanding standby letters of credit, and the Company had ~~$27.3~~$29.7 million available under the Facility for cash advances and/or the issuance of additional letters of credit.

At July 31, 2010, the Company was in compliance with all covenant requirements related to the Facility.

During the 26 weeks ended ~~August 2, 2008,~~July 31, 2010, investors in the Company’s Notes converted ~~$3.4~~$4.7 million of the Notes into ~~2,274,804~~3,111,111 shares of the Company’s Class A common stock. As a result of these conversions, the Company recorded ~~net~~ non-cash interest charges of ~~$1.9~~$2.1 million during the 26 weeks ended ~~August 2, 2008,~~July 31, 2010, to write-off a ratable portion of unamortized debt discount and deferred financing costs ~~and accrued interest~~ associated with the Notes. Additionally, a ratable portion of accrued interest of $1.0 million was forfeited by the holder when the Notes were converted and it was written off to paid-in capital. Finally, the Company provided the holder with a $0.7 million conversion inducement, which was recorded as an interest charge during the 26 weeks ended July 31, 2010. The Company also repurchased an insignificant remaining Note balance from another holder. As a result of these transactions, there are no longer any remaining Notes outstanding as of July 31, 2010 and there was a satisfaction and discharge of our obligations under the Indenture governing the Notes. No Notes were converted during the 26 weeks ended August 1, 2009.

Prior to the first quarter of fiscal 2010, the Company recognized the ratable portion of accrued interest forfeited by Note holders upon conversions as a reduction of interest expense. The Company has determined that the correct treatment of accrued interest forfeited is a credit to paid-in capital rather than a reduction of interest expense. In the condensed consolidated balance sheets as of January 30, 2010, and August 1, 2009, the Company has retrospectively reclassified $2.9 million from accumulated deficit to paid-in capital to reflect the correct treatment of accrued interest forfeited in periods prior to fiscal 2010. This reclassification has no effect on the previously reported total stockholders’ equity or cash flows and is not material to all periods presented.

During the 26 weeks ended July 31, 2010, and August 1, 2009, ~~and August 2, 2008,~~ certain investors exercised portions of outstanding common stock warrants, resulting in the issuance of ~~183,572~~1,160,715 and ~~1,545,720~~183,572 shares, respectively, of the Company’s Class A common stock in exchange for ~~$0.5~~$4.3 million and ~~$5.6~~$0.5 million, respectively, of proceeds to the Company.

AtDuring the 26 weeks ended July 31, 2010, investors in the Company’s Preferred Stock converted $1.6 million of Preferred Stock into 537,000 shares of the Company’s Class A common stock. As a result of this transaction, there is no longer any Preferred Stock outstanding as of July 31, 2010. No Preferred Stock was converted during the 26 weeks ended August 1, ~~2009,~~2009.

For the ~~Company was in compliance with all covenant requirements related to the Facility~~26 weeks ended July 31, 2010, and ~~the Notes.~~August 1, 2009

~~SFAS No. 157 defines fair~~Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

~~SFAS No. 157 establishes~~Inputs used in measuring fair value are prioritized into a three-level hierarchy ~~of fair value measurements~~ based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The fair-value hierarchy requires the use of observable market data when available and consists of the following levels:

The following ~~table presents~~tables present information on the Company’s financial instruments (in thousands):


	Carrying Amount August 1, 2009			Fair Value Measurements at Reporting Date Using								Carrying Amount at July 31, 2010			Fair Value Measurements at Reporting Date Using
			Level 1			Level 2			Level 3			Carrying Amount at July 31, 2010		Level 1			Level 2			Level 3
Financial assets:	Carrying Amount August 1, 2009
Cash and cash equivalents	$	143,987		$	143,987		$	—		$	—	$	165,516		$	21,095		$	144,421		$	—
Other receivables		795			795			—			—
Long-term tenant allowance receivables													762			—			—			762

												Carrying Amount January 30, 2010			Fair Value Measurements at Reporting Date Using
												Carrying Amount January 30, 2010			Level 1			Level 2			Level 3
Financial assets:
Cash and cash equivalents												$	161,693		$	17,306		$	144,387		$	—
Long-term tenant allowance receivables		348			—			—			348		728			—			—			728
Financial liabilities:
Accounts payable		32,194			32,194			—			—
Embedded derivative instrument		20			—			20			—		20			—			20			—
Secured convertible notes		3,095			10,267			—			—
Convertible preferred stock		1,611			1,772			—			—
Notes													3,540			10,422			—			—
Preferred Stock													1,611			1,799			—			—

												Carrying Amount at August 1, 2009			Fair Value Measurements at Reporting Date Using
												Carrying Amount at August 1, 2009			Level 1			Level 2			Level 3
Financial assets:
Cash and cash equivalents												$	143,987		$	4,685		$	139,302		$	—
Financial liabilities:
Embedded derivative instrument													20			—			20			—
Notes													3,095			10,267			—			—
Preferred Stock													1,611			1,772			—			—

Cash and cash equivalents are carried at either cost or amortized cost, which approximates fair value, due to their short term maturities. Money market funds are valued through the use of quoted market prices, or $1, which is generally the net asset value of these funds. The Company believes the carrying amounts of ~~cash and cash equivalents,~~ other ~~receivables, long-term tenant allowance~~ receivables and accounts payable approximate fair value. The fair value of the long-term tenant allowance receivables was determined by discounting them to present value, and they are included in other assets within the condensed consolidated balance sheet. The Company ~~determines~~determined the fair value of its embedded derivative instrument using a combination of the Black-Scholes model and Monte-Carlo simulation. The estimated fair values for the ~~secured convertible notes~~Notes and ~~convertible preferred stock~~Preferred Stock were determined to be the market value of the Company’s Class A common stock as of January 30, 2010, and August 1, 2009, ~~as applicable,~~ multiplied by the number of shares of common stock into which such securities could be converted. There are no longer any embedded derivatives, Notes or Preferred Stock outstanding as of July 31, 2010, as a result of the conversions discussed in Note 3.

The table below segregates all non-financial assets and liabilities as of July 31, 2010, January 30, 2010, and August 1, 2009, that are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date:


	Carrying Amount August 1, 2009			Fair Value Measurements at Reporting Date Using									Total Gains (Losses)				Carrying Amount at July 31, 2010			Fair Value Measurements at Reporting Date Using									Total Gains (Losses)
			Level 1			Level 2			Level 3				Total Gains (Losses)				Carrying Amount at July 31, 2010		Level 1			Level 2			Level 3				Total Gains (Losses)
Long-lived assets held and used	Carrying Amount August 1, 2009	$	79,469		$	—		$	—		$	79,469		$	(1,552	)		$	87,029		$	—		$	—		$	87,029		$	(1,131	)

Total assets	$	79,469		$	—		$	—		$	79,469		$	(1,552	)		$	87,029		$	—		$	—		$	87,029		$	(1,131	)


																	Carrying Amount January 30, 2010			Fair Value Measurements at Reporting Date Using									Total Gains (Losses)
																			Level 1			Level 2			Level 3				Total Gains (Losses)
Long-lived assets held and used																	Carrying Amount January 30, 2010	$	78,063		$	—		$	—		$	78,063		$	(2,341	)

Total assets																	$	78,063		$	—		$	—		$	78,063		$	(2,341	)



																	Carrying Amount at August 1, 2009			Fair Value Measurements at Reporting Date Using									Total Gains (Losses)
																			Level 1			Level 2			Level 3				Total Gains (Losses)
Long-lived assets held and used																	Carrying Amount at August 1, 2009	$	79,469		$	—		$	—		$	79,469		$	(1,552	)

Total assets																	$	79,469		$	—		$	—		$	79,469		$	(1,552	)

The Company performs impairment tests whenever there are indicators of impairment. Refer to Note 1 for further information.

Long-lived assets held and used with a carrying value of $87.0 million and $79.5 million, respectively, represent their fair values, after the impairment charges of $1.0 million, $1.1 million, $1.6 million and $1.6 million, respectively, during the 13 and 26 weeks ended July 31, 2010, and August 1, 2009.

The Company performs impairment tests under the guidance of SFAS No. 144, whenever there are indicators of impairment. These tests typically consider which assets are impaired at a store level. The Company recognizes an impairment loss only if the carrying value of a long-lived asset or group of assets is not recoverable from undiscounted cash flows, and measures an impairment loss as the difference between the carrying value and fair value of the assets based on discounted cash flows which applied the Company’s weighted average cost of capital. Upon the adoption of SFAS No. 157, the Company considered all relevant valuation techniques that could be obtained without undue cost and effort, which included the discounted cash flow approach, and determined that the discounted cash flow approach continued to provide the most relevant and reliable means by which to determine fair value in this circumstance.

As of August 1, 2009, long-lived assets held and used with a carrying value of $81.0 million were written down to their fair value, resulting in impairment charges of $1.6 million and $1.6 million during the 13 and 26 weeks ended August 1, 2009.

In accordance with SFAS No. 128, “Earnings Per Share,” and additional guidance from the Emerging Issues Task Force (“EITF”) Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128,” and FSP EITF 03-6-1, “Determining When Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”), netNet income per share, basic, is computed based on the weighted-average number of common shares outstanding for the period, including consideration of the two-class method with respect to certain of the Company’s other equity securities (see below). Net income per share, diluted, is computed based on the weighted-average number of common and potentially dilutive common equivalent shares outstanding for the period, also with consideration given to the two-class method.

The dilutive effect of stock warrants is determined using the “treasury stock” method, whereby exercise is assumed at the beginning of the reporting period and proceeds from such exercise are assumed to be used to purchase the Company’s Class A common stock at the average market price during the period. The dilutive effect of stock options is also determined using the “treasury stock” method, whereby ~~exercise is assumed at the beginning of the reporting period and~~ proceeds from such exercise, unamortized compensation on share-based awards, and excess tax benefits arising in connection with share-based compensation are assumed to be used to purchase the common stock at the average market price during the period.

The Notes and Preferred Stock ~~are~~were convertible into shares of Class A common stock. Both of these securities ~~include~~included rights whereby, upon payment of dividends or other distributions to Class A common stockholders, the Notes and Preferred Stock would participate ratably in such distributions based on the number of common shares into which such securities were convertible at that time. Because of these rights, ~~under the provisions of EITF Issue No. 03-6,~~ the Notes and Preferred Stock ~~are~~were considered to be participating securities requiring the use of the two-class method for the computation of earnings per share. For the dilutive computation, under the two-class method, determination of whether the Notes and Preferred Stock ~~are~~were dilutive iswas based on the application of the “if-converted” method. AtAlthough the Notes and Preferred Stock were fully converted and represented Class A common shares outstanding as of July 31, 2010, they were included in the computation of diluted earnings for the 26 weeks ended July 31, 2010 with respect to the period they were outstanding prior to conversion. For the 26 weeks ended July 31, 2010 and the 13 and 26 weeks ended August 1, 2009, ~~and August 2, 2008,~~ the effect of the Notes and Preferred Stock was ~~anti-dilutive~~not dilutive to the computation of diluted earnings per share.

Effective February 1, 2009, the Company adopted FSP EITF 03-6-1, which states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. While the Company historically has paid no cash dividends, participants in the Company’s equity compensation plans who were granted restricted stock and performance shares are allowed to retain cash dividends paid on unvested restricted stock and unvested performance shares. ~~Therefore,~~The Company’s unvested restricted stock and unvested performance shares also qualify as participating securities ~~under FSP EITF 03-6-1,~~ and are included in the computation of earnings per share ~~must be calculated using~~pursuant to the two-class method. ~~The provisions of FSP EITF 03-6-1 are retrospective. Therefore, all prior-period earnings per share data presented must be adjusted retrospectively.~~ For the dilutive computation, under the two-class method, determination of whether the unvested share-based payment awards are dilutive is based on the application of the “treasury stock” ~~method. At~~method and whether the performance criteria has been met. For the 13 and 26 weeks ended July 31, 2010, and August 1, 2009, ~~and August 2, 2008,~~ the effect of the unvested share-based payment awards was anti-dilutive to the computation of diluted earnings per share.

The two-class method requires allocation of undistributed earnings per share among the ~~Class A~~ common stock, Notes, Preferred Stock and unvested share-based payment awards based on the dividend and other distribution participation rights under each of these securities. The following table summarizes the allocation of undistributed earnings among ~~Class A~~ common stock and other participating securities using the two-class method and reconciles the weighted average common shares used in the computation of basic and diluted earnings per share (in thousands, except share data):


	13 Weeks Ended												13 Weeks Ended
	August 1, 2009						August 2, 2008						July 31, 2010						August 1, 2009
	Net Income			Shares	Per Share Amount		Net Income			Shares	Per Share Amount		Net Income			Shares	Per Share Amount		Net Income			Shares	Per Share Amount
Basic earnings per share:
Net income	$	3,103					$	10,148					$	1,615					$	3,103
Less: Undistributed earnings allocable to participating securities		(159	)					(647	)					(23	)					(159	)

Basic earnings per share	$	2,944		95,594,834	$	0.03	$	9,501		92,339,436	$	0.10	$	1,592		100,257,750	$	0.02	$	2,944		95,594,834	$	0.03

Diluted earnings per share:
Net income	$	3,103					$	10,148					$	1,615					$	3,103
Less: Undistributed earnings allocable to participating securities		(158	)					(628	)					(23	)					(158	)
Effect of dilutive securities				564,427						2,905,613						298,884						564,427

Diluted earnings per share	$	2,945		96,159,261	$	0.03	$	9,520		95,245,049	$	0.10	$	1,592		100,556,634	$	0.02	$	2,945		96,159,261	$	0.03


	26 Weeks Ended
	August 1, 2009						August 2, 2008
	Net Income			Shares	Per Share Amount		Net Income			Shares	Per Share Amount
Basic earnings per share:
Net income	$	8,132					$	19,076
Less: Undistributed earnings allocable to participating securities		(418	)					(1,345	)

Basic earnings per share	$	7,714		95,492,536	$	0.08	$	17,731		91,506,480	$	0.19

Diluted earnings per share:
Net income	$	8,132					$	19,076
Less: Undistributed earnings allocable to participating securities		(416	)					(1,325	)
Effect of dilutive securities				496,128						1,466,035

Diluted earnings per share	$	7,716		95,988,664	$	0.08	$	17,751		92,972,515	$	0.19

The computations of diluted earnings per share excluded the following potentially dilutive securities exercisable or convertible into Class A common stock for the periods indicated because their effect would not have been ~~anti-dilutive.~~dilutive.


	13-Week Period Ended		26-Week Period Ended		13-Week Period Ended		26-Week Period Ended
	August 1, 2009	August 2, 2008	August 1, 2009	August 2, 2008	July 31, 2010	August 1, 2009	July 31, 2010	August 1, 2009
Stock options outstanding	2,082,286	2,090,167	2,080,692	2,143,897	1,558,143	2,082,286	1,502,585	2,080,692
Performance shares and nonvested restricted stock awards	1,508,872	1,379,167	1,525,165	1,435,368	1,481,180	1,508,872	1,538,774	1,525,165
Stock issuable upon conversion of secured convertible notes	3,111,113	4,186,021	3,111,113	4,785,969	—	3,111,113	991,453	3,111,113
Stock issuable upon conversion of preferred stock	537,000	722,333	537,000	722,333	—	537,000	168,181	537,000
Stock issuable upon exercise of warrants:
June 2004 warrants	1,723,705	2,071,142	1,723,705	2,090,208	—	1,723,705	—	1,723,705
Series E warrants	6,092,116	—	6,092,116	—	—	6,092,116	—	6,092,116

Total	15,055,092	10,448,830	15,069,791	11,177,775	3,039,323	15,055,092	4,200,993	15,069,791

Based upon the respective exercise prices and number of outstanding warrants, exercise of all outstanding warrants via cash payment by the warrant holders as of ~~August 1, 2009, and August 2, 2008,~~July 31, 2010 would have resulted in proceeds to the Company of ~~$39.1 million and $40.3 million, respectively.~~$18.1 million.

On July 19, 2006, a complaint was filed in the Superior Court of the State of California for the County of Los Angeles ~~or the Superior Court,~~ on behalf of certain of the Company’s current and former employees that were employed and paid by the Company on an hourly basis during the four-year period from July 19, 2002 through July 19, 2006. The Company was named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and orders issued by the Industrial Welfare Commission. On November 30, 2006, the Company reached an agreement to pay approximately $0.3 million to settle this matter, subject to Superior Court approval. On May 18, 2007, the Superior Court entered an order granting preliminary approval of the class action settlement. On February 29, 2008, the court issued its order granting final approval of the class action settlement, subject to appeal. On April 28, 2008, a notice of appeal of the judgment was filed. On May 6, 2009, the Court reversed and remanded the case ~~for~~to the Superior Court to re-evaluate the fairness of the settlement, ~~which is expected to~~and a final hearing will take place ~~before December 2009.~~in September 2010. As of ~~August 1, 2009,~~July 31, 2010, the Company ~~had~~has accrued ~~in accrued liabilities on its consolidated balance sheet~~ an amount equal to the settlement ~~amount.~~amount in accrued liabilities in its condensed consolidated balance sheet.

On May 22, 2007, a complaint was filed in the Superior Court of the State of California for the County of Orange on behalf of certain of the Company’s current and former employees ~~that~~who were employed and paid by the Company ~~during the four-year period~~ from May 22, 2003 through ~~May 22, 2007.~~the present. The Company was named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and orders issued by the Industrial Welfare Commission. ~~The Court has set a deadline of November 6, 2009 for the plaintiffs to file a~~Discovery is ongoing and Plaintiffs filed their motion for class certification ~~which~~in July 2010. The Company’s opposition to Plaintiffs’ motion is due on September 24, 2010, and the ~~Company will oppose.~~hearing is scheduled for October 8, 2010. The Company is vigorously defending this litigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on ~~the Company’s~~its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of ~~August 1, 2009.~~

On September 29, 2008, a complaint was filed in the Superior Court of the State of California for the County of San Francisco on behalf of certain of the Company’s current and former employees ~~that~~who were employed and paid by the Company ~~during the four-year period~~ from September 29, 2004 through ~~September 29, 2008.~~the present. The Company was named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. ~~The Company’s responsive plea~~Plaintiffs recently filed an amended complaint, and the Company filed a motion to strike allegations of the third amended complaint on or about February 16, 2010 which was ~~filed on November 14, 2008.~~held in abeyance. The case has been transferred to the complex panel of the San Francisco Superior Court for case management purposes. No class certification motion filing deadline has been set by the court, and discovery is ongoing. The Company is vigorously defending this litigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on ~~the Company’s~~its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of ~~August 1, 2009.~~July 31, 2010.

On March 18, 2009, a complaint was filed in the Superior Court of the State of California for the County of Orange on behalf of certain of the Company’s current and former employees that were employed and paid by the Company ~~since~~from March 18, ~~2005.~~2005 through March 18, 2009. The Company was named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and orders issued by the Industrial Welfare Commission. On October 23, 2009, the Company reached an agreement to pay approximately $0.2 million to settle this matter, subject to Superior Court approval. The Court has preliminarily approved the settlement and set a final approval hearing for September 2, 2010. The Company ~~is vigorously defending this litigation and is unable to predict~~paid the likely outcome and whether such outcome may have a material adverse effect on the Company’s results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as ofpreliminary settlement amount in August ~~1, 2009.~~2010.

On April 24, 2009 the Pennsylvania Equal Employment Opportunity ~~Council~~Commission requested information and records relevant to several charges of ~~discrimination.~~discrimination by the Company against employees of the Company. In the course of this investigation, the EEOC served the Company with a subpoena seeking information related to current and former employees throughout the United States. In April 2010, the Company filed an action for declaratory and injunctive relief in the U.S. District Court for the Central District of California seeking relief from the subpoena, which action it has since voluntarily dismissed. Later that same month, the EEOC filed an application to enforce the subpoena in the U.S. District Court for the Eastern District of Pennsylvania, and is in the process of a nationwide investigation. The Company is ~~vigorously defending this~~awaiting the results of the EEOC’s investigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on ~~the Company’s~~its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of ~~August 1, 2009.~~July 31, 2010.

From time to time, the Company is involved in other litigation matters relating to claims arising out of its operations in the normal course of business. ~~Management~~The Company believes that, in the event of a settlement or an adverse judgment on certain of these claims arising out of the ~~pending litigation,~~normal course of business, the Company has insurance coverage to cover a portion of such losses; however, certain other matters may exist or arise for which the Company does not have insurance coverage. As of ~~August 1, 2009,~~July 31, 2010, the Company was not engaged in any other legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on its results of operations or financial condition.

The Company operates exclusively in the retail apparel industry in which it sells fashionable and contemporary apparel and accessories items, primarily through mall-based chains of retail stores, to female consumers with a young, active lifestyle. The Company has identified two operating segments (“Wet Seal” and “Arden B”) ~~as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”~~. Internet operations for Wet Seal and Arden B are included in their respective operating segments.

Information for the 13 and 26 weeks ended July 31, 2010, and August 1, 2009, ~~and the 13 and 26 weeks ended August 2, 2008,~~ for the two reportable segments is set forth below (in thousands, except percentages):


13 Weeks Ended July 31, 2010													Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales													$	108,875		$	22,666		$	—		$	131,541
Percentage of consolidated net sales														83	%		17	%		—			100	%
Operating income (loss)													$	6,219		$	2,676		$	(6,291	)	$	2,604
Depreciation and amortization expense													$	3,398		$	370		$	226		$	3,994
Interest income													$	—		$	—		$	85		$	85
Interest expense													$	—		$	—		$	25		$	25
Income (loss) before provision for income taxes													$	6,219		$	2,676		$	(6,231	)	$	2,664

13 Weeks Ended August 1, 2009	Wet Seal			Arden B			Corporate and Unallocated			Total			Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales	$	111,517		$	24,849		$	—		$	136,366		$	111,517		$	24,849		$	—		$	136,366
Percentage of consolidated net sales		82	%		18	%		—			100	%		82	%		18	%		—			100	%
Operating income (loss)	$	6,043		$	3,253		$	(5,999	)	$	3,297		$	6,043		$	3,253		$	(5,999	)	$	3,297
Depreciation and amortization expense	$	2,996		$	407		$	228		$	3,631		$	2,996		$	407		$	228		$	3,631
Interest income	$	—		$	—		$	132		$	132		$	—		$	—		$	132		$	132
Interest expense	$	—		$	—		$	246		$	246		$	—		$	—		$	246		$	246
Income (loss) before provision for income taxes	$	6,043		$	3,253		$	(6,113	)	$	3,183		$	6,043		$	3,253		$	(6,113	)	$	3,183

26 Weeks Ended July 31, 2010													Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales													$	222,786		$	46,517		$	—		$	269,303
Percentage of consolidated net sales														83	%		17	%		—			100	%
Operating income (loss)													$	20,548		$	5,913		$	(13,888	)	$	12,573
Depreciation and amortization expense													$	6,764		$	743		$	481		$	7,988
Interest income													$	—		$	—		$	159		$	159
Interest expense													$	—		$	—		$	2,992		$	2,992
Income (loss) before provision for income taxes													$	20,548		$	5,913		$	(16,721	)	$	9,740

26 Weeks Ended August 1, 2009													Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales													$	219,882		$	48,493		$	—		$	268,375
Percentage of consolidated net sales														82	%		18	%		—			100	%
Operating income (loss)													$	15,937		$	5,776		$	(13,208	)	$	8,505
Depreciation and amortization expense													$	5,982		$	833		$	455		$	7,270
Interest income													$	—		$	—		$	316		$	316
Interest expense													$	—		$	—		$	437		$	437
Income (loss) before provision for income taxes													$	15,937		$	5,776		$	(13,329	)	$	8,384

~~In the tables above, Wet Seal and Arden B reportable segments include net sales generated from their respective stores and Internet operations.~~ The “Corporate and Unallocated” column is presented solely to allow for reconciliation of segment contribution to consolidated operating income, interest income, interest expense and income before provision for income taxes. Wet Seal and Arden B segment results include net sales, cost of sales, asset impairment and other direct store and field management expenses, with no allocation of corporate overhead or interest income and expense.

Wet Seal operating segment results during the 13 and 26 weeks ended July 31, 2010, and August 1, 2009 include $1.0 million, $1.1 million, $1.6 million and $1.6 million, respectively, of asset impairment charges.

Corporate expenses during the 26 weeks ended July 31, 2010, include non-cash interest expense of $2.1 million as a result of accelerated write-off of remaining unamortized debt discount and deferred financing costs upon conversion of Notes and $0.7 million of interest expense for a conversion inducement associated with conversions of Notes and Preferred Stock.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto. The following discussion and analysis contains forward-looking statements. Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, and/or which include words such as “believes,” “plans,” “anticipates,” “estimates,” “expects” or similar expressions. In addition, any statements concerning future financial performance, ongoing concept strategies or prospects, and possible future actions 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 guarantees of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. Factors that could cause our actual performance, future results and actions to differ materially from any forward-looking statements include, but are not limited to, those discussed in “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended January ~~31, 2009,~~30, 2010, and elsewhere in this Quarterly Report onof Form 10-Q.

We are a national specialty retailer operating stores selling fashionable and contemporary apparel and accessory items designed for female customers aged 13 to 35 years old. As of ~~August 1, 2009,~~July 31, 2010, we operated ~~496~~508 retail stores in 47 states, Puerto Rico and ~~Washington D.C.~~District of Columbia. Our products can also be purchased online.

We consider the following to be key performance indicators in evaluating our performance:

Comparable store sales—For purposes of measuring comparable store sales, sales include merchandise sales as well as membership fee revenues recognized under our Wet Seal division’s frequent buyer program during the applicable period. Stores are deemed comparable stores on the first day of the month following the one-year anniversary of their opening or significant remodel/relocation, which we define to be a square footage increase or decrease of at least 20%. Stores that are remodeled or relocated with a resulting square footage change of less than 20% are maintained in the comparable store base with no interruption. However, stores that are closed for four or more days in a fiscal month, due to remodel, relocation or other reasons, are removed from the comparable store base for that fiscal month as well as for the comparable fiscal month in the following fiscal year. Comparable store sales results are important in achieving operating leverage on certain expenses such as store payroll, occupancy, depreciation and amortization, general and administrative expenses, and other costs that are at least partially fixed. Positive comparable store sales results generate greater operating leverage on expenses while negative comparable store sales results negatively affect operating leverage. Comparable store sales results also have a direct impact on our total net sales, cash, and working capital.

Average transaction counts—We consider the trend in the average number of sales transactions occurring in our stores to be a key performance metric. To the extent we are able to increase transaction counts in our stores that more than offset the decrease, if any, in the average dollar sale per transaction, we will generate increases in our comparable store sales.

Gross margins—We analyze the components of gross margin, specifically cumulative mark-on, markups, markdowns, shrink, buying costs, distribution costs, and store occupancy costs. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns or in inventory shrink, or an inability to generate sufficient sales leverage on other components of cost of sales could have an adverse impact on our gross margin results and results of operations.

Operating income—We view operating income as a key indicator of our financial success. The key drivers of operating income are comparable store sales, gross margins, and the changes we experience in operating costs.

Cash flow and liquidity (working capital)—We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs.

We operate two nationwide, primarily mall-based, chains of retail stores under the names “Wet Seal” and “Arden B”. Although the two operating segments ~~are similar~~have many similarities in their products, production processes, distribution methods, and regulatory environment, ~~they~~there are differences in most of these areas and distinct differences in their economic characteristics. As a result, we consider these segments asto be two distinct reportable segments.

Wet Seal. Wet Seal is a junior apparel brand for teenage girls ~~that~~who seek trend-focused and value-competitive clothing, with a target customer age of 13 to 19 years old. Wet Seal seeks to provide its customer base with a balance of affordably priced, fashionable and basic apparel and accessories. Wet Seal stores average approximately 3,900 square feet in size. As of ~~August 1, 2009,~~July 31, 2010, we operated ~~415~~432 Wet Seal stores.

Arden B. Arden B is a fashion brand at value price points for the feminine contemporary ~~woman with sex appeal.~~woman. Arden B targets customers aged 25 to 35 years old and seeks to deliver contemporary collections of fashion and basic separates and accessories for various aspects of the customers’ lifestyles. Arden B stores average approximately 3,100 square feet in size. As of ~~August 1, 2009,~~July 31, 2010, we operated 8176 Arden B stores.

We maintain a Web-based store located atwww.wetseal.com ~~that offers~~offering Wet Seal merchandise, comparable to that carried in our stores, to customers over the ~~Internet.~~internet. We also maintain a Web-based store located atwww.ardenb.com ~~that offers~~offering Arden B ~~apparel and accessories~~merchandise, comparable to ~~those~~that carried in our stores, to customers over the ~~Internet.~~internet. Our online stores are designed to serve as an extension of the in-store experience and offer a wide selection of merchandise, which helps expand in-store sales. Internet operations for both Wet Seal and Arden B are included in their respective operating segments. In fiscal 2009, 2008, and 2007, we experienced rapid growth in both visitor traffic and our online sales, and we will continue to develop our Wet Seal and Arden B websites to increase their effectiveness in marketing our brands.

See Note 7 of the ~~Notes~~notes to ~~Condensed Consolidated Financial Statements and Segment Information elsewhere within this Management’s Discussion and Analysis of Financial Condition and Results of Operations~~condensed consolidated financial statements for financial information regarding segment ~~reporting.~~reporting, which information is incorporated herein by reference.

We currently operate in a challenging retail environment driven by several factors, including disruptions in the U.S. housing and financial markets ~~increasing~~and high unemployment rates across all regions of the U.S. ~~and significant declines~~Beginning in ~~consumer confidence and spending. During the first and second calendar quarters of 2009 and~~ the fourth calendar quarter of 2008 and continuing through the second calendar quarter of 2009, U.S. gross domestic product decreased ~~1.0%, 6.4% and 6.3%, respectively,~~ on a year-over-year basis. Although U.S. gross domestic product has shown improvement since the third calendar quarter of 2009, the increases have been modest and we continue to experience a volatile, and generally weak, retail environment. Our operating performance is susceptible to ~~the recent changes in the~~these general economic conditions, which have impacted consumer confidence and discretionary consumer spending in the ~~United States. These trends have led to a highly promotional retail environment negatively impacting our margins. If the conditions remain uncertain or continue to be volatile,~~U.S. Although our operating performance ~~may be~~improved for the 26 weeks ended July 31, 2010, it declined during the 13 weeks ended July 31, 2010, and these uncertain and volatile conditions could adversely ~~affected.~~affect our ability to sustain or further improve our operating performance.

Our comparable store sales decreased ~~10.6%~~4.3% for the 13 weeks ended ~~August 1, 2009,~~July 31, 2010, driven by ~~an 11.9%~~a 4.3% comparable store sales ~~decline~~decrease in our Wet Seal division and a ~~4.1%~~4.5% comparable store sales ~~decline~~decrease in our Arden B division. The Wet Seal division comparable store sales ~~decline~~decrease was primarily driven by ~~average unit retail prices and~~a decrease in transaction volume, ~~declines. These declines were~~ partially offset by an increase in average dollar sales. Directionally, the shifts in transaction volume and average unit retail metrics were in line with our expectations and resulted from our planned merchandise content shift at Wet ~~Seal’s units purchased per customer.~~Seal more towards apparel and away from lower-priced accessories relative to the prior year quarter. The Arden B division comparable store sales ~~decline~~decrease was primarily driven by ~~a decline~~declines in ~~comparable store~~its average ~~dollar sales due to our strategic decision to lower~~unit selling price ~~points approximately 20% to 25% across all product categories in January 2009,~~and transaction volume, partially offset by ~~a significant~~an increase in ~~transaction volumes as a result of merchandise mix changes and the change in pricing strategy.~~units purchased per customer.

We ~~continue to make~~made progress on several key initiatives ~~at both divisions, in addition~~since the end of fiscal 2009. Although we experienced negative comparable store sales declines during the second quarter of fiscal 2010, primarily related to ~~the hiring of a new chief merchandise officer~~weak denim business at Wet Seal, we achieved merchandise margin improvement in the Wet Seal division due to the improved merchandise mix in tops, activewear and ~~engagement~~jewelry and the use of ~~a consultant to oversee~~our markdown optimization system. Arden B ~~merchandising, infrastructure down-sizing~~continued to generate stable and ~~other organizational changes~~strong merchandise margins in ~~2008,~~the second quarter of fiscal 2010 due to strong performance in denim, accessories, related separates and knit tops. In addition, we hired two new divisional merchandise managers at Wet Seal in 2009. We have also improved inventory management, better aligned management incentive goals and increased operating efficiencies at both divisions during 2008 and 2009. While we have made this progress, we will continue to ~~focus on increasing store level efficiencies and lowering operating costs. We will continue to take aggressive steps to revitalize Arden B, including further investment in~~maintain slightly higher inventory levels ~~in an effort~~at Arden B to ~~facilitate consistent~~support continued comparable store sales growth under our new low-price model. We continued with our Wet Seal store expansion by opening 11 new Wet Seal stores in the second fiscal quarter of 2010 and ~~continuing~~are on track to ~~phase~~open a net 25 stores for the year. We also plan to open 60 Wet Seal stores in fiscal 2011 with a ~~better merchandise assortment and modifying pricing and promotional strategies across all product categories to enhance sales without sacrificing margin performance. We will also continue to~~ focus on ~~improving~~off-mall power centers in select markets throughout the ~~merchandise mix at~~country and on malls in which we previously had highly productive Wet Seal with specific focus on building ready-to-wear, including fall dresses and outerwear, and accessories such as jewelry. At the same time, we will remain focused on continuing productivity and cost savings initiatives, as well as on several initiativesstores. We expect to ~~improve sales productivity at both divisions.~~

~~Our strategy is to return to positive comparable store sales growth, revive the~~open a net 3 Arden B ~~business, expand our existing retail store base and expand our online businesses.~~stores in fiscal 2010. We are also ~~taking several steps~~working on plans for continued moderate growth of Arden B stores in fiscal 2011. Lastly, we plan to

immediately increase our investment in our e-commerce inventories, marketing and team infrastructure to drive ~~higher~~more aggressive sales productivity in our retail stores, including improved store layout and visual displays, and have embarked on several initiatives to improve gross margins, including efforts to optimize sourcing of merchandise, enhance our inventory planning and allocation functions, better align merchandise mix with target customer wants and improve supply chain efficiency through better coordination among and within our vendor, internal distribution and store operations organizations.growth online.

Our operating performance since fiscal 2005 has resulted in increased liquidity and improved credit standing with suppliers. However, we may ~~experience continued declines~~not generate increases in comparable store sales or may be unsuccessful in executing some or all of our business strategy. If our comparable store sales drop significantly for an extended period of time, or we falter in execution of our business strategy, we may not achieve our financial performance goals, which could impact our results of operations and operating cash ~~flow, and we may be forced to seek alternatives to address potential cash constraints, including seeking debt and/or equity financing.~~flow.

During the 26 weeks ended ~~August 1, 2009,~~July 31, 2010, we opened ~~seven~~12 and closed ~~one~~four Wet Seal ~~store~~stores and we ~~opened one and~~ closed ~~seven~~four Arden B ~~stores. We believe future closures for at least the next 12 months will primarily result from lease expirations where we decide not~~stores, supporting our plan to extend, or are unable to extend, a store lease. Depending on future performance, we may consider modifying plans for Arden B store closures upon lease expirations and, instead, may renew leases where we see storesexit locations that are ~~showing improvement~~not productive and in ~~sales and profitability and can obtain favorable lease terms.~~which we do not see strong potential for improvement.

We expect to open ~~approximately 17 new~~a net of 25 Wet Seal stores and ~~anticipate closing a similar number of combined Wet Seal and~~three Arden B stores, ~~when their leases expire, so we estimate nominal store count change, if any, in~~contingent upon lease negotiations, during fiscal ~~2009.~~2010.

Our condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

The preparation of financial statements in conformity with GAAP requires the appropriate application of certain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our condensed consolidated financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differ from our estimates.

We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimates are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January ~~31, 2009.~~30, 2010.

The policies and estimates discussed below involve the selection or application of alternative accounting policies that are material to our condensed consolidated financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

We have certain accounting policies that require more significant management judgment and estimates than others. These include our accounting policies with respect to revenue recognition, merchandise inventories, long-lived assets, stock-based compensation, accounting for income taxes and insurance reserves. There have been no significant additions to or modifications of the application of the critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009. However, we have made a change in estimated breakage for unredeemed gift cards, gift certificates and store credits and a change in forfeiture rate estimates for executives and other employees affecting stock based compensation, and we continue to evaluate available evidence supporting our 100% valuation allowance against our net deferred income tax assets.30, 2010. The following updates the Form 10-K discussions of our critical accounting policies for ~~revenue recognition~~long lived assets and ~~stock-based compensation.~~accounting for income taxes.

~~Change~~We evaluate the carrying value of long-lived assets for impairment whenever events or changes in ~~Estimated Breakage~~

Incircumstances indicate that the ~~second quarter~~carrying value of ~~fiscal 2009,~~such assets may not be recoverable. Factors that are considered important that could result in the necessity to perform an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that indicates continuing losses or insufficient income associated with the realization of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on ~~historical redemption patterns, we modified~~estimated undiscounted future cash flows from operating activities compared with the timing of when we record breakage of gift cards, gift certificates and store credits from greater than three years after their issuance date to greater than two years after their issuance date. See Note 1carrying value of the ~~Notes to Condensed Consolidated Financial Statements for further information.~~

Inrelated assets. If the ~~first quarter of fiscal 2009, based on historical analysis, we modified~~undiscounted future cash flows are less than the ~~estimated annual forfeiture rate used in recognizing stock-based compensation expense for our executives and other employees, from a 10% forfeiture rate to a 15% forfeiture rate. See Note 2 of~~carrying value, an impairment loss is recognized, measured by the ~~Notes to Condensed Consolidated Financial Statements for further information.~~

~~In September 2006,~~difference between the ~~Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 provides a new single authoritative definition of fair~~carrying value and ~~provides enhanced guidance for measuring~~ the estimated fair value of the assets, based on discounted cash flows using our weighted average cost of capital, with such estimated fair values determined using the best information available. We have considered all relevant valuation techniques that could be obtained without undue cost and ~~liabilities~~effort and ~~requires additional disclosures related~~have determined that the discounted cash flow approach continues to provide the ~~extent~~most relevant and reliable means by which to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. Adoption of SFAS No. 157 was required for companies with fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) Nos. 157-1 and 157-2, which partially deferred the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed atdetermine fair value in this circumstance.

At least quarterly, we assesses whether events or changes in circumstances have occurred that potentially indicate the ~~financial statements on a nonrecurring basis. SFAS No. 157 does~~carrying value of long-lived assets may not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. We adopted SFAS No. 157 effective February 3, 2008, for all financial assetsbe recoverable. Our evaluations during the 13 and ~~financial liabilities, as required,~~26 weeks ended July 31, 2010, and ~~adopted the deferred portion of SFAS No. 157 effective February~~August 1, 2009, indicated that operating losses or insufficient operating income existed at certain retail stores, with a projection that the operating losses or insufficient operating income for ~~all nonfinancial assets~~those locations would continue. As such, we recorded non-cash charges of $1.0 million, $1.1 million, $1.6 million and ~~nonfinancial liabilities, as required. The adoption of SFAS No. 157, FSP No. 157-1~~$1.6 million during the 13 and ~~FSP No.157-2 did not impact our consolidated financial statements.~~

In October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP No. 157-3”). FSP No. 157-3 provides guidance for the valuation of financial assets in an inactive market, the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active,26 weeks ended July 31, 2010, and the use of market quotes when assessing the relevance of observable and unobservable data. FSP No. 157-3 is effective for all periods presented in accordance with SFAS No. 157. The adoption of FSP No. 157-3 did not impact our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). The objective of SFAS No. 141R is to improve the relevance, representational faithfulness, and comparability of the information that a company provides in its financial reports about a business combination and its effects. Under SFAS No. 141R, a company is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration measured at their fair value at the acquisition date. It further requires that research and development assets acquired in a business combination that have no alternative future use be measured at their acquisition-date fair value and then immediately charged to expense, and that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. Among other changes, this statement also requires that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, and any deferred tax benefits resulting from a business combination are recognized in income from continuing operationsAugust 1, 2009, respectively, within asset impairment in the period of the combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Effective February 1, 2009, we adopted SFAS No. 141R, which will affect how we account for business acquisitions occurring after our adoption date.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a company provides in its consolidated financial statements. SFAS No. 160 requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of thecondensed consolidated statements of ~~operations; changes~~operations, to write down the carrying values of these stores’ long-lived assets to their estimated fair values.

We began fiscal 2010 with approximately $116.6 million of federal net operating loss carryforwards (NOLs) available to offset taxable income in ~~ownership~~fiscal 2010 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code (“Section 382”).

For the 13 weeks ended July 31, 2010, our effective income tax rate was approximately 39%, representing the rate that we currently expect to incur for the remainder of fiscal 2010. The effective rate of approximately 51% for the 26 weeks ended July 31, 2010 is higher than the expected rate for future periods due to $2.8 million in interest ~~to be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment~~charges incurred in the ~~former subsidiary~~first fiscal quarter upon the conversion of the our remaining Secured Convertible Notes (the “Notes”) and Series C Convertible Preferred Stock (the “Preferred Stock”), which are not tax-deductible. The impact of these non-deductible charges on the effective income tax rate in the first fiscal quarter and the ~~gain or loss on the deconsolidation~~26 weeks ended July 31, 2010, was approximately 16% and 12%, respectively.

Due to our expected utilization of ~~the subsidiary to be measured at fair value. SFAS No. 160 is effective for~~federal and state NOL carry forwards during fiscal ~~years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Effective February 1, 2009,~~2010, we ~~adopted SFAS No. 160. The adoption of this standard did not impact our consolidated financial statements.~~

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133” (“SFAS No. 161”). The objective of SFAS No. 161 is to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, andanticipate cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Effective February 1, 2009, we adopted SFAS No. 161. The adoption of this standard did not impact our consolidated financial statements.

declares and/or pays a dividend. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008, and all prior-period earnings per share data presented shall be adjusted retrospectively. Effective February 1, 2009, the Company adopted FSP No. EITF 03-6-1. The adoption of this standard did not significantly impact our consolidated financial statements. Refer to Note 5 of the Notes to Condensed Consolidated Financial Statements for further information.

In December 2008, the FASB issued FSP SFAS No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP SFAS No. 132(R)-1”). This new standard requires enhanced disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan. Companies are required to disclose information about how investment allocation decisions are made, the fair value of each major category of plan assets, the basis used to determine the overall expected long-term rate of return on assets assumption, a description of the inputs and valuation techniques used to develop fair value measurements of plan assets, and significant concentrations of credit risk. It is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Effective February 1, 2009, we adopted FSP SFAS No. 132(R)-1. The adoption of SFAS No. 132(R)-1 did not impact our consolidated financial statements.

In April 2009, the FASB issued FSP SFAS No. 107-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP SFAS No. 107-1”), which amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, and APB Opinion No. 28, “Interim Financial Reporting”. FSP SFAS No. 107-1 requires disclosures about fair value of financial instruments in financial statements for interim reporting periods and in annual financial statements of publicly-traded companies. FSP SFAS No. 107-1 also requires entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim and annual basis and to highlight any changes from prior periods. FSP SFAS No. 107-1 is effective for interim and annual periods ending after June 15, 2009. The adoption of FSP SFAS No. 107-1 did not significantly impact our consolidated financial statements aside from the required disclosures. Refer to Note 4 of the Notes to Condensed Consolidated Financial Statements for further information.

~~In April 2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity~~income taxes for the ~~Asset or Liability Have Significantly Decreased~~fiscal year will be approximately 2% of pre-tax income, representing the portion of federal and ~~Identifying Transactions That Are Not Orderly” (“FSP FAS No. 157-4”), which provides additional guidance for estimating fair value when~~state alternative minimum taxes that cannot be offset by NOLs. The difference between the ~~market activity for an asset or liability has declined significantly. FSP FAS No. 157-4 is~~ effective ~~for interim and annual periods ending after June 15, 2009. The adoption of FSP FAS No. 157-4 did not impact our consolidated financial statements.~~

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the consolidated financial statements are issued or are available to be issued. Among other items, SFAS No. 165 requires the disclosure of the date through which an entity has evaluated subsequent eventsincome tax rate and the ~~basis~~anticipated cash income taxes is recorded as a non-cash provision for that date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. We have adopted SFAS No. 165 and have evaluated subsequent events through the date of issuance of these condensed consolidated financial statements, September 1, 2009. Adoption of SFAS No. 165 resulted in no impact on our consolidated financial statements.deferred incomes taxes.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued guidance related to revenue arrangements with multiple deliverables. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. Such guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June ~~2009,~~15, 2010, with early adoption permitted. We do not believe adoption of this guidance will have any effect on our condensed consolidated financial statements.

In January 2010, the FASB issued ~~SFAS No. 168, “The FASB Accounting Standards Codification~~guidance and clarifications for improving disclosures about fair value measurements. This guidance requires enhanced disclosures regarding transfers in and out of the levels within the fair value hierarchy. Separate disclosures are required for transfers in and out of Level 1 and 2 fair value measurements, and the ~~Hierarchy~~reasons for the transfers must be disclosed. In the reconciliation for Level 3 fair value measurements, separate disclosures are required for purchases, sales, issuances, and settlements on a gross basis. The new disclosures and clarifications of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162,” (“SFAS No. 168”). SFAS No. 168 establishes the FASB Accounting Standards Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS No. 168 will beexisting disclosures are effective ~~for financial statements issued~~ for interim and annual reporting periods ~~ending~~beginning after ~~September~~December 15, ~~2009. SFAS No. 168 does~~2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for interim and annual reporting periods beginning after December 15, 2010. Effective January 31, 2010, we adopted the new and updated guidance for disclosures, aside from those deferred to periods after December 15, 2010, and it did not ~~change GAAP, but replaces the current GAAP hierarchy of four levels to two levels of literature, authoritative and non-authoritative. The~~significantly impact our condensed consolidated financial statements. We do not believe adoption of ~~SFAS No. 168~~the remaining disclosure guidance will ~~result in the change of disclosures to reflect the new codification references, but otherwise we do not expect it to~~ have any effect on our condensed consolidated financial statements.

The following table sets forth selected condensed consolidated statements of operations data as a percentage of net sales for the 13-week and 26-week periods indicated. The discussion that follows should be read in conjunction with the table below:


	As a Percentage of Net Sales 13 Weeks Ended				As a Percentage of Net Sales 26 Weeks Ended				As a Percentage of Net Sales 13 Weeks Ended		As a Percentage of Net Sales 26 Weeks Ended
	August 1, 2009		August 2, 2008		August 1, 2009		August 2, 2008		July 31, 2010	August 1, 2009	July 31, 2010	August 1, 2009
Net sales	100.0	%	100.0	%	100.0	%	100.0	%	100.0%	100.0%	100.0%	100.0%
Cost of sales	71.3		65.1		70.8		66.1		70.8	71.3	69.0	70.8

Gross margin	28.7		34.9		29.2		33.9		29.2	28.7	31.0	29.2
Selling, general, and administrative expenses	25.2		26.8		25.4		26.8		26.4	25.2	25.9	25.4
Asset impairment	1.1		0.2		0.6		0.1		0.8	1.1	0.4	0.6

Operating income	2.4		7.9		3.2		7.0		2.0	2.4	4.7	3.2
Interest (expense) income, net	(0.1	)	(1.0	)	(0.1	)	(0.4	)
Interest income (expense), net									0.0	(0.1)	(1.1)	(0.1)

Income before provision for income taxes	2.3		6.9		3.1		6.6		2.0	2.3	3.6	3.1
Provision for income taxes	0.0		0.1		0.1		0.1		0.8	0.0	1.8	0.1

Net income	2.3	%	6.8	%	3.0	%	6.5	%	1.2%	2.3%	1.8%	3.0%

Thirteen Weeks Ended ~~August 1, 2009,~~July 31, 2010, Compared to Thirteen Weeks Ended August ~~2, 2008~~1, 2009


	13 Weeks Ended August 1, 2009		Change From Prior Fiscal Period					13 Weeks Ended August 2, 2008		13 Weeks Ended July 31, 2010		Change From Prior Fiscal Period				13 Weeks Ended August 1, 2009
			($ in millions)									($ in millions)
Net sales	$	136.4	$	(12.7	)	(8.5	)%	$	149.1	$	131.5	$	(4.9)	(3.5)	%	$	136.4
Comparable store sales decrease						(10.6	)%							(4.3)	%

Net sales for the 13 weeks ended ~~August 1, 2009,~~July 31, 2010, decreased primarily as a result of the following:

A decrease of ~~10.6%~~4.3% in comparable store sales resulting from an ~~8.0% decline~~11.4% decrease in comparable store average transaction counts, partially offset by a 7.5% increase in comparable store average dollar sales ~~and a 2.2% decrease in comparable store average transaction counts.~~per transaction. Comparable store average dollar sales ~~decreased~~per transaction increased mainly due to ~~a 15.4% decline~~an 10.4% increase in our average unit retail prices, primarily driven by increased promotional activity and a shift in sales toward lower-priced basic merchandise at Wet Seal and our strategic decision to significantly lower price points at Arden B in January 2009, and a decline in Wet Seal frequent buyer program membership sales, partially offset by a ~~9.4% increase~~2.2% decrease in the number of units purchased per customer, primarily as a result of a merchandise content shift at Wet Seal towards apparel and away from lower-priced accessories, as compared to the prior ~~year, primarily at Wet Seal.~~year; and


	13 Weeks Ended August 1, 2009			Change From Prior Fiscal Period				13 Weeks Ended August 2, 2008			13 Weeks Ended July 31, 2010			Change From Prior Fiscal Period					13 Weeks Ended August 1, 2009
				($ in millions)										($ in millions)
Cost of sales	$	97.2		$	0.2	0.2	%	$	97.0		$	93.2		$	(4.0	)	(4.2	)%	$	97.2
Percentage of net sales		71.3	%			6.2	%		65.1	%		70.8	%				(0.5	)%		71.3	%

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

Cost ~~of sales, and cost~~ of sales as a percentage of net sales ~~increased~~decreased due primarily to ~~a decrease~~an increase in merchandise margin as a result of ~~lower~~higher initial markup ~~and~~rates in both divisions, partially offset by an increase in the markdown rate for ~~our Wet Seal division, partially offset by a lower markdown rate in our Arden B division,~~both divisions, as compared to the prior year. Additionally, cost of sales as a percentage of sales was favorably impacted due to a reduction in buying, planning and allocation costs as a result of our open Wet Seal division chief merchandise officer position and a reduction in incentive bonuses due to declining performance results. Cost of sales as a percentage of net sales and in absolute dollar amount was negatively impacted by an increase in occupancy ~~costs primarily~~cost due to ~~normal inflation of rents and common area maintenance charges for new stores and remodels/relocations and~~ the deleveraging effect ~~on occupancy cost~~ from our decrease in comparable stores sales, ~~decrease.~~as well as an increase in number of stores open, from 496 stores as of August 1, 2009, to 508 stores as of July 31, 2010. Cost of sales was ~~positively~~also negatively impacted by a decrease in buying, planning and allocation costs primarily due to eliminated positions upon restructuring of the Arden B buying and design organization, favorable impacts on stock-based compensation from forfeitures from previously employed executives and a change in stock compensation forfeiture rate from 10% to 15% based on historical analysis, a decrease in seasonal merchant incentive bonuses due to declining performance in the Wet Seal division, a reduction in recruiting as the prior year quarter included a recruiting retainer fee to search for a chief merchant officer in the Wet Seal division and a decreasean increase in distribution costs due to ~~operational efficiencies.~~a loss on disposal charge as a result of equipment replaced by our new merchandise sorter system and an increase in temporary labor as a result of an increase in units shipped and a variation in mix of merchandise.


	13 Weeks Ended August 1, 2009			Change From Prior Fiscal Period					13 Weeks Ended August 2, 2008			13 Weeks Ended July 31, 2010			Change From Prior Fiscal Period				13 Weeks Ended August 1, 2009
				($ in millions)											($ in millions)
Selling, general, and administrative expenses	$	34.3		$	(5.6	)	(14.0	)%	$	39.9		$	34.7		$	0.4	1.2	%	$	34.3
Percentage of net sales		25.2	%				(1.6	)%		26.8	%		26.4	%			1.2	%		25.2	%

Our SG&A expenses are comprised of two components. Selling expenses include store and field support costs, including personnel, advertising and merchandise delivery costs as well as ~~Internet~~internet processing costs. General and administrative expenses include the cost of corporate functions such as executives, legal, finance and accounting, information systems, human resources, real estate and construction, loss prevention and other centralized services.

~~In fiscal 2009, we continued to place major emphasis on reducing costs across all SG&A categories, resulting in a significant decline in SG&A in absolute dollars as well as a percentage of sales.~~

Selling expenses decreased ~~approximately $3.8~~less than $0.1 million from the prior year to $28.2 million. As a percentage of net sales, selling expense was ~~20.7%~~21.5% of net sales, or 80 basis points ~~lower,~~higher, as a percentage of net sales, than a year ago.

However, the decreases in selling expenses were partially offset by the following increases:

The increase in selling expenses, as a percentage of net ~~decrease~~sales, was primarily due to the unfavorable deleveraging effect on store and field payroll costs and increase in ~~other selling expenses.~~advertising and marketing expenditures, as noted above.

General and administrative expenses ~~decreased~~increased approximately ~~$1.8~~$0.4 million from the prior year to ~~$6.1~~$6.5 million. As a percentage of net sales, general and administrative expenses were ~~4.5%~~4.9%, or 8040 basis points ~~lower,~~higher, than a year ago.

The following contributed to the current year ~~decrease~~increase in general and administrative expenses:

~~However, the decreases in general and administrative expenses were partially offset by the following increases:~~

However, the increases in general and administrative expenses were partially offset by the following decreases:


	13 Weeks Ended August 1, 2009			Change From Prior Fiscal Period				13 Weeks Ended August 2, 2008			13 Weeks Ended July 31, 2010			Change From Prior Fiscal Period					13 Weeks Ended August 1, 2009
				($ in millions)							($ in millions)
Asset impairment	$	1.6		$	1.3	412.2	%	$	0.3		$	1.0		$	(0.6	)	(32.9	)%	$	1.6
Percentage of net sales		1.1	%			0.9	%		0.2	%		0.8	%				(0.3	)%		1.1%

Based on our quarterly ~~assessment~~assessments of the carrying value of long-lived assets, during the 13 weeks ended July 31, 2010, and August 1, 2009, ~~and the 13 weeks ended August 2, 2008,~~ we identified certain retail stores with carrying values of their assets, including leasehold improvements, furniture, fixtures and equipment, in excess of such stores’ respective forecasted undiscounted cash flows. Accordingly, we reduced their respective carrying values to their estimated fair market values, resulting in non-cash charges of ~~$1.6~~$1.0 million and ~~$0.3~~$1.6 million, respectively.


	13 Weeks Ended August 1, 2009			Change From Prior Fiscal Period					13 Weeks Ended August 2, 2008			13 Weeks Ended July 31, 2010			Change From Prior Fiscal Period				13 Weeks Ended August 1, 2009
				($ in millions)								($ in millions)
Interest expense, net	$	(0.1	)	$	(1.4	)	(92.3	)%	$	(1.5	)
Interest income (expense), net												$	0.1		$	0.2	152.6	%	$	(0.1)
Percentage of net sales		(0.1	)%				(0.9	)%		(1.0	)%		0.0	%			0.1	%		(0.1)	%

We generated interest income, net, of $0.1 million in the 13 weeks ended July 31, 2010, comprised of:

We incurred a nominal amount of interest expense, net, in the 13 weeks ended August 1, 2009, comprised of:

In the second quarter of fiscal 2010, our effective income tax rate was approximately 39%, which is the rate we currently expect to incur for the remainder of the fiscal year. We incurred a higher effective income tax rate than we had in 2009 primarily as a result of the reversal of our deferred tax asset valuation allowance at the end of fiscal 2009.

Due to our expected utilization of federal and state NOL carry forwards during fiscal 2010, we anticipate cash income taxes for the fiscal year will only be approximately 2% of pre-tax income, representing the portion of federal and state

alternative minimum taxes that cannot be offset by NOLs. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash provision for deferred incomes taxes.

The following is a discussion of the operating results of our business segments. We consider each of our operating divisions to be a segment. In the tables below, Wet Seal and Arden B reportable segments include data from their respective stores and internet operations. Operating segment results include net sales, cost of sales, asset impairment and other direct store and field management expenses, with no allocation of corporate overhead or interest income or expense.

Wet Seal comparable stores sales decreased 4.3% during the 13 weeks ended July 31, 2010, compared to a prior year quarter decrease of 11.9%. The decrease during the 13 weeks ended July 31, 2010, was due primarily to a 12.2% decrease in comparable store average transactions, partially offset by an increase of 8.4% in average dollar sales per transaction. The increase in comparable store average dollar sales per transaction resulted from an 11.5% increase in our average unit retail prices, partially offset by a 2.2% decrease in units purchased per customer, as a result of a merchandise content shift towards apparel and away from lower-priced accessories. The net sales decrease was attributable to the comparable store sales decline and the prior year quarter including $0.8 million of additional net sales resulting from a change in estimated breakage, partially offset by a $0.4 million increase in net sales in our internet business and the increase in the number of stores compared to the prior year.

Wet Seal’s operating income increased to 5.7% of net sales during the 13 weeks ended July 31, 2010, from 5.4% of net sales during the 13 weeks ended August 1, 2009. The increase in operating income, as a percentage of sales, was due primarily to an increase in merchandise margin as a result of higher initial markup rates and favorable spring physical inventory shrink results, a decrease in buying, planning and allocation costs primarily due to our open chief merchandise officer position and a reduction in stock compensation expense as a result of higher forfeiture adjustments. Additionally, during the 13 weeks ended July 31, 2010, and the 13 weeks ended August 1, 2009, operating income included asset impairment charges of $1.0 million and $1.6 million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations. The increase for the 13 weeks ended August 1, 2009 was partially offset by a $0.8 million of breakage benefit resulting from a change in estimated breakage for unredeemed gift cards, gift certificates and store credits remaining outstanding more than two years from their respective issuance dates.

Arden B comparable stores sales decreased 4.5% during the 13 weeks ended July 31, 2010, compared to a prior year quarter decrease of 4.1%. The decrease during the 13 weeks ended July 31, 2010, was due primarily to a 2.6% decrease in comparable store average transactions and a 1.9% decrease in comparable store average dollar sales per transaction. The decrease in the average dollar sale per transaction resulted from a 4.9% decline in our average unit retail prices, partially offset by a 2.8% increase in units purchased per customer. The net sales decrease was attributable to the comparable store sales decrease and a decrease in the number of stores compared to the prior year, partially offset by a $0.2 million increase in net sales in our internet business.

Arden B generated operating income of 11.8% of net sales during the 13 weeks ended July 31, 2010, compared to operating income of 13.1% of net sales during the 13 weeks ended August 1, 2009. The decrease in operating results was due primarily to an increase in occupancy costs as a percentage of net sales as the prior year included a rent benefit for early termination of store leases and the deleveraging effect from the decrease in comparable store sales, and an increase in internet production ordering costs as a result of increased net sales in our internet business compared to the prior year. Additionally, operating income for the 13 weeks ended August 1, 2009, included $0.4 million of breakage benefit resulting from a change in estimated breakage for unredeemed gift cards, gift certificates and store credits remaining outstanding more than two years from their respective issuance dates.

Twenty-Six Weeks Ended July 31, 2010, Compared to Twenty-Six Weeks Ended August 1, 2009

Net sales for the 26 weeks ended July 31, 2010, increased primarily as a result of the following:

Cost of sales as a percentage of net sales decreased due primarily to an increase in merchandise margin as a result of higher initial markup rates in both divisions and favorable spring physical inventory shrink results, as compared to the prior year, partially offset by an increase in markdown rates due to the promotional environment. Cost of sales as a percentage of sales and absolute dollar amount was negatively impacted due an increase in occupancy cost due to the deleveraging effect from our comparable stores sales decrease, as well as an increase in number of stores open, from 496 stores as of August 1, 2009, to 508 stores as of July 31, 2010.

Selling expenses increased approximately $0.3 million from the prior year to $55.5 million. As a percentage of net sales, selling expense was 20.6% of net sales, or 10 basis points higher as a percentage of net sales as compared to a year ago.

However, the increases in selling expenses were partially offset by the following decreases:

General and administrative expenses increased approximately $1.2 million from the prior year, to $14.3 million. As a percentage of net sales, general and administrative expenses were 5.3%, or 40 basis points higher, than a year ago.

The following contributed to the current year increase in general and administrative expenses:

However, the increases in general and administrative expenses were partially offset by the following decrease:

Based on our quarterly assessments of the carrying value of long-lived assets, during the 26 weeks ended July 31, 2010, and August 1, 2009, we identified certain retail stores with carrying values of their assets, including leasehold improvements, furniture, fixtures and equipment, in excess of such stores’ respective forecasted undiscounted cash flows. Accordingly, we reduced their respective carrying values to their estimated fair market values, resulting in non-cash charges of $1.1 million and $1.6 million, respectively.

We incurred interest expense, net, of $2.8 million in the 26 weeks ended July 31, 2010, comprised of:

We incurred interest expense, net, of ~~$1.5~~$0.1 million in the 1326 weeks ended August ~~2, 2008,~~1, 2009, comprised of:

We have ~~net operating loss carryforwards (NOLs)~~NOL carry forwards available, subject to certain limitation, to offset our regular taxable income. We recognized a provision for income taxes that resulted in an effective tax rate of ~~3.0%~~51% for federal and state income taxes. This rate was higher than that expected for future periods due to $2.8 million in interest charges incurred upon the Note conversions, which are not tax-deductible in the first fiscal quarter of 2010. Excluding the effect of these non-deductible charges, the effective income tax rate for the first half of fiscal 2010 would have been approximately 39%, which is ~~based on~~the rate we currently expect to incur for the remainder of the fiscal year.

Due to our expected utilization of federal and state NOL carry forwards during fiscal 2010, we anticipate cash income taxes for the fiscal year will be approximately 2% of pre-tax income, representing the portion of ~~our estimated~~federal and state alternative minimum ~~taxable income for fiscal 2009~~taxes that cannot be offset by NOLs. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash provision for deferred incomes taxes.

The following is a discussion of the operating results of our business segments. We consider each of our operating divisions to be a segment. In the tables below, Wet Seal and Arden B reportable segments include data from their respective stores and ~~Internet~~internet operations. Operating segment results include net sales, cost of sales and other direct store and field management expenses, with no allocation of corporate overhead or interest income or expense.


(In thousands, except sales per square foot and store count data)	13 Weeks Ended August 1, 2009			13 Weeks Ended August 2, 2008			26 Weeks Ended July 31, 2010		26 Weeks Ended August 1, 2009
Net sales	$	111,517		$	121,686		$	222,786	$	219,882
Percentage of consolidated net sales		82	%		82	%		83%		82%
Comparable store sales percentage decrease compared to the prior year fiscal quarter		(11.9	)%		(1.8	)%
Comparable store sales percentage decrease compared to the prior year period								(1.4)%		(10.0)%
Operating income	$	6,043		$	18,114		$	20,548	$	15,937
Sales per square foot	$	64		$	73		$	126	$	128
Number of stores as of quarter end		415			404
Square footage as of quarter end		1,636			1,589
Number of stores as of period end								432		415
Square footage as of period end								1,709		1,636

Wet Seal comparable stores sales decreased ~~11.9%~~1.4% during the 1326 weeks ended ~~August 1, 2009,~~July 31, 2010, compared to a prior year ~~quarter~~ decrease of ~~1.8%~~10.0%. The decrease during the 1326 weeks ended ~~August 1, 2009,~~July 31, 2010, was due primarily to a ~~7.1%~~9.4% decrease in comparable store average ~~dollar sale and~~transactions, partially offset by a ~~4.5% decrease in comparable store average transaction counts per store. The decrease~~9.0% increase in comparable store average dollar ~~sale~~sales per transaction. The increase in comparable store average dollar sales per transaction resulted from a ~~15.4% decrease~~12.1% increase in our average unit retail prices, ~~and a decline in frequent buyer program membership sales,~~ partially offset by a ~~10.8% increase~~2.9% decrease in units purchased per ~~customer.~~customer, as a result of a merchandise content shift towards apparel and away from lower-priced accessories. The net sales ~~decrease~~increase was attributable to the increase in the number of stores compared to the prior year and a $1.0 million increase in net sales in our internet business, partially offset by a comparable store sales decline ~~partially offset by~~and the prior year including a $0.8 million of additional net sales resulting from a change in estimated breakage for unredeemed gift cards, gift certificates and store credits remaining outstanding more than two years from their respective issuance dates and a $0.1 million increase in net sales in our internet business.

While we believe the challenging economic environment contributed to the Wet Seal performance decline, we also believe inventory mix weaknesses, primarily light positions in fashion tops, dresses and jewelry and excessive levels of basic tops and certain accessories, also negatively affected sales. We have improved many of these inventory mix issues and are better positioned for the important back-to-school season. However, we will continue to focus on building inventories in key ready-to-wear categories, primarily fall dresses and outerwear, and in jewelry and other accessories to support continued sales improvement.breakage.

Wet Seal’s operating income ~~decreased~~increased to ~~5.4%~~9.2% of net sales during the 1326 weeks ended July 31, 2010, from 7.2% during the 26 weeks ended August 1, ~~2009, from 14.9% during the 13 weeks ended August 2, 2008.~~2009. The ~~decrease~~increase in operating income, as a percentage of sales, was due primarily to ~~a decrease~~an increase in merchandise margin as a result of ~~higher markdown rates and a decrease~~an increase in initial markup rates and ~~the deleveraging effect of~~favorable spring physical inventory shrink results and a decrease in ~~comparable store sales on occupancy~~buying, planning and allocation costs ~~compared~~primarily due to ~~the prior year.~~our open chief merchandise officer position and a reduction in stock compensation expense as a result of higher forfeiture adjustments. Additionally, during the 1326 weeks ended July 31, 2010, and the 26 weeks ended August 1, 2009, ~~and the 13 weeks ended August 2, 2008,~~ operating income included asset impairment charges of ~~$1.6~~$1.1 million and ~~$0.3~~$1.6 million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations. ~~Operating income for the 13 weeks ended August 1, 2009, also included the $0.8 million breakage benefit noted above.~~

~~Arden B comparable stores sales decreased 4.1% during the 13 weeks ended August 1, 2009, compared to a prior year quarter decrease of 13.8%.~~ The decrease during the 13 weeks ended August 1, 2009, was due primarily to a 25.3% decrease in comparable store average dollar sale, which reflects our strategic decision to significantly lower price points across all categories in January 2009, largely offset by a 28.4% increase in comparable store average transaction counts per store. The decrease in the average dollar sale resulted from a 28.5% decline in our average unit retail prices, partially offset by a 4.8% increase in units purchased per customer. The net sales decrease was attributable to the comparable store sales decline and the decrease in the number of stores compared to prior year, partially offset by $0.4 million of additional net sales resulting from a change in estimated breakage for unredeemed gift cards, gift certificates and store credits remaining outstanding more than two years from their respective issuance dates and a $0.8 million increase in net sales in our internet business.

Arden B generated operating income of 13.1% of net sales during the 13 weeks ended August 1, 2009, compared to operating income of 3.6% of net sales during the 13 weeks ended August 2, 2008. The improvement in operating results was due primarily to an increase in merchandise margin resulting from a significant decrease in markdown rates, a decrease in buying costs upon restructuring the Arden B buying and design groups, partially offset by an increase in seasonal merchant incentive bonus due to improvement in divisional performance, a decrease in occupancy costs due to a decrease in depreciation expense as a result of a number of underperforming Arden B stores being impaired during fiscal 2008, and the decrease in store counts from 93 stores as of August 2, 2008, to 81 stores as of August 1, 2009, and a decrease in store payroll costs as a result of lower sales and improved efficiency in controlling labor hours compared to the prior year. Operating income for the 13 weeks ended August 1, 2009, also included the $0.4 million breakage benefit noted above.

~~Twenty-Six Weeks Ended August 1, 2009, Compared to Twenty-Six Weeks Ended August 2, 2008~~

~~Net sales~~ for the 26 weeks ended August 1, 2009 ~~decreased primarily as a result of the following:~~

A decrease of 9.0% in comparable store sales resulting from a 5.6% decline in comparable store average dollar sales and a 3.0% decrease in comparable store average transaction counts. Comparable store average dollar sales decreased mainly due to a 14.6% decline in our average unit retail prices, primarily driven by increased promotional activity and a shift in sales toward lower-priced basic merchandise at Wet Seal and our strategic decision to significantly lower price points at Arden B in January 2009, and a decline in Wet Seal frequent buyer program membership sales, partially offset by an 11.3% increase in the number of units purchased per customer, compared to the prior year, primarily at Wet Seal.

Cost of sales decreased in dollars primarily as a result of the decrease in net sales. Cost of sales increased as a percentage of net sales primarily due to a decrease in merchandise margin. Merchandise margin decreased as a result of an increase in markdown rates for our Wet Seal division,was partially offset by a lower markdown rate in our Arden B division, and a decrease in initial markup rates. Additionally, cost of sales was negatively impacted by an increase in occupancy costs primarily due to normal inflation of rents and common area maintenance charges for new stores and remodels/relocations and the deleveraging effect on occupancy cost from our comparable stores sales decrease. Cost of sales was positively impacted by a decrease in buying, planning and allocation costs primarily due to eliminated positions upon restructuring of the Arden B buying and design organization, favorable impacts on stock-based compensation from forfeitures from previously employed executives and a change in stock compensation forfeiture rate from 10% to 15% based on historical analysis, a decrease in seasonal merchant incentive bonuses due to declining performance in the Wet Seal division, a reduction in recruiting as the prior year period included a recruiting retainer fee to search for a chief merchant officer in the Wet Seal division, and a decrease in distribution costs due to operational efficiencies.

Selling expenses decreased approximately $6.8 million from the prior year to $55.2 million. As a percentage of net sales, selling expense was 20.5% of net sales, or 80 basis points lower, as a percentage of net sales, than a year ago.

General and administrative expenses decreased approximately $2.8 million from the prior year to $13.1 million. As a percentage of net sales, general and administrative expenses were 4.9%, or 60 basis points lower, than a year ago.

~~The following contributed to the current year decrease in general and administrative expenses:~~

~~However, the decreases in general and administrative expenses were partially offset by the following increases:~~

Based on our assessment of the carrying value of long-lived assets, during the 26 weeks ended August 1, 2009, and the 26 weeks ended August 2, 2008, we identified certain retail stores with carrying values of their assets, including leasehold improvements, furniture, fixtures and equipment, in excess of such stores’ respective forecasted undiscounted cash flows. Accordingly, we reduced their respective carrying values to their estimated fair market values, resulting in non-cash charges of $1.6 million and $0.3 million, respectively.

~~We incurred interest expense, net, of $0.1 million in the 26 weeks ended August 1, 2009, comprised of:~~

~~We incurred interest expense, net, of $1.1 million in the 26 weeks ended August 2, 2008, comprised of:~~

We have net operating loss carryforwards (NOLs) available, subject to certain limitation, to offset our regular taxable income. We recognized a provision for income taxes that resulted in an effective tax rate of 3.0% for federal and state income taxes. This effective rate is based on the portion of our estimated alternative minimum taxable income for fiscal 2009 that cannot be offset by NOLs.

Wet Seal comparable stores sales decreased 10.0% during the 26 weeks ended August 1, 2009, compared to a prior year decrease of 2.5%. The decrease during the 26 weeks ended August 2, 2008, was due primarily to a 4.2% decline in comparable store average dollar sale and a 5.4% decrease in comparable store average transaction counts per store. The decrease in comparable store average dollar sale resulted from a 14.3% decrease in our average unit retail prices and a decline in frequent buyer program membership sales, partially offset by a 13.1% increase in units purchased per customer. The net sales decrease was attributable to the comparable store sales decline and a $0.4 million decrease in net sales in our internet business, partially offset by $0.8 million of ~~additional net sales~~breakage benefit resulting from a change in estimated breakage for unredeemed gift cards, gift certificates and store credits remaining outstanding more than two years from their respective issuance dates.

Arden B comparable stores sales increased 0.1% during the 26 weeks ended August 1, 2009, from 14.8% during the 26 weeks ended August 2, 2008. The decrease in operating income, as a percentage of sales, was due primarily to a decrease in merchandise margin as a result of higher markdown rates and a decrease in initial markup rates and the deleveraging effect of a decrease in comparable store sales on occupancy costs, compared to the prior year. Additionally, during the 26 weeks ended August 1, 2009, and the 26 weeks ended August 2, 2008, operating income included asset impairment charges of $1.6 million and $0.3 million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations. Operating income for the 26 weeks ended August 1, 2009, also included the $0.8 million breakage benefit noted above.

~~Arden B comparable stores sales decreased 4.1% during the 26 weeks ended August 1, 2009,~~July 31, 2010, compared to a prior year decrease of ~~17.8%~~4.1%. The ~~decrease~~increase during the 26 weeks ended ~~August 1, 2009~~July 31, 2010, was due primarily to a ~~26.7%~~2.1% increase in comparable store average transactions, partially offset by a 1.6% decrease in comparable store average dollar ~~sale, which reflects our strategic decision to significantly lower price points across all categories in January 2009, largely offset by a 29.6% increase in comparable store average transaction counts~~sales per ~~store.~~transaction. The decrease in the average dollar ~~sale~~sales per transaction resulted from a ~~26.7%~~7.5% decline in our average unit retail prices, ~~slightly~~partially offset by a ~~0.6%~~6.4% increase in units purchased per customer. The net sales decrease was primarily attributable to ~~the comparable store sales decline and~~ the decrease in the number of stores compared to the prior year ~~partially offset by~~and the prior year including a $0.4 million of additional net sales resulting from a change in estimated breakage, partially offset by the comparable store sales increase and a $0.7 million increase in net sales in our internet business.

Arden B generated operating income of 12.7% of net sales during the 26 weeks ended July 31, 2010, compared to operating income of 11.9% of net sales during the 26 weeks ended August 1, 2009. The improvement in operating results was due primarily to a decrease in occupancy costs due to a reduction in minimum rent and common area maintenance charges as a result of favorable lease negotiations, the decrease in store counts from 81 stores as of August 1, 2009, to 76 stores as of July 31, 2010, and a decrease in store payroll costs as a result of improved efficiency on higher sales volume compared to the prior year. These increases were partially offset by operating income for the 26 weeks ended August 1, 2009, including a $0.4 million of breakage benefit resulting from a change in estimated breakage for unredeemed gift cards, gift certificates and store credits remaining outstanding more than two years from their respective issuance ~~dates and a $1.3 million increase in net sales in our internet business.~~

Arden B generated operating income of 11.9% of net sales during the 26 weeks ended August 1, 2009, compared to operating income of 0.3% of net sales during the 26 weeks ended August 2, 2008. The improvement in operating results was due primarily to an increase in merchandise margin resulting from a significant decrease in markdown rates, a decrease in buying costs upon restructuring the Arden B buying and design groups, partially offset by an increase in seasonal merchant incentive bonus due to improvement in divisional performance, a decrease in occupancy costs due to a decrease in depreciation expense as a result of a number of underperforming Arden B stores being impaired during fiscal 2008, and the decrease in store counts from 93 stores as of August 2, 2008, to 81 stores as of August 1, 2009, and a decrease in store payroll costs as a result of lower sales and improved efficiency in controlling labor hours compared to the prior year. Operating income for the 26 weeks ended August 1, 2009, also included the $0.4 million breakage benefit noted above.dates.

Net cash provided by operating activities was ~~$12.7~~$18.3 million for the 26 weeks ended ~~August 1, 2009,~~July 31, 2010, compared to ~~$26.1~~$12.7 million for the same period last year. For the 26 weeks ended ~~August 1, 2009,~~July 31, 2010, cash provided by operating ~~cash flows were due to~~activities was comprised of our net income of ~~$8.1~~$4.8 million, ~~and~~ net non-cash charges, ~~(primarily~~primarily depreciation and amortization, asset impairment, stock-based compensation, provision for deferred income taxes and non-cash interest ~~expense)~~expense, of ~~$9.9~~$17.4 million, and a $0.7 million add back for a conversion/exercise inducement fee, partially offset by an increase in merchandise inventories ~~net of an~~over the increase in merchandise ~~accounts payable,~~payables of ~~which $3.0 million is a result of improved terms with vendors, of $1.1~~$2.7 million and a net use of cash from changes in other operating assets and liabilities of ~~$4.2 million, including gift card, gift certificate and store credit breakage of $1.2~~$1.9 million. For the 26 weeks ~~ended August 1, 2009,~~ending July 31, 2010, net cash used in investing activities of ~~$11.3~~$13.0 million was comprised entirely of capital ~~expenditures. Capital~~ expenditures, ~~for the period were~~ primarily for remodeling of existing Wet Seal stores upon lease renewals and/or store relocations, the construction of new Wet Seal stores, and investment in the development of new ~~markdown optimization~~retail merchandising and point-of-sale operating ~~systems.~~systems and a distribution sorting system. Capital expenditures that remain unpaid as of ~~August 1, 2009,~~July 31, 2010, have increased ~~$2.3~~$5.6 million since the end of fiscal ~~2008.~~2009. We expect to pay nearly all of the total balance of such amounts payable, in the amount of ~~$5.2~~$8.2 million, during the third quarter of fiscal ~~2009.~~2010.

We estimate that, in fiscal ~~2009,~~2010, capital expenditures will be approximately between ~~$23~~$31 million and ~~$24~~$32 million, net of approximately $2$4 million in landlord tenant improvement allowances. Of the total net capital expenditures, approximately ~~$16~~$20 million to $21 million is expected to be for the remodeling of existing Wet Seal and Arden B stores upon lease renewals and/or store relocations orand the construction of new Wet Seal and Arden B stores.

For the 26 weeks ~~ended August 1, 2009,~~ending July 31, 2010, net cash ~~provided~~used by financing activities was ~~$0.5~~$1.4 million, comprised of $5.2 million used to repurchase 1,394,162 shares of our Class A common stock, which utilized all remaining capacity under a $12.5 million repurchase authorization granted by our Board of Directors in November 2009, and a $0.7 million conversion inducement fee to a Note holder, partially offset by $4.3 million of proceeds from investor exercises of common stock warrants, which resulted in the issuance of ~~183,572~~1,160,715 shares of our Class A common stock, and ~~nominal~~$0.2 million of proceeds from the exercise of stock options.

In March 2010, a holder of our Notes, preferred stock and Series E warrants converted $4.7 million in principal amount of our Notes into 3,111,111 shares of our Class A common stock and 1,611 shares of our Preferred Stock into 537,000 shares of our Class A common stock, and exercised Series E warrants into 625,000 shares of our Class A common stock for an exercise price of $2.3 million. As an inducement for the holder to undertake these conversions and/or exercises of the Notes, Preferred Stock and Series E warrants, we provided the holder with a $0.7 million inducement fee. We also repurchased an insignificant remaining Note balance from another holder. As a result of these transactions, there are no longer any remaining Notes and Preferred Stock outstanding and there was a satisfaction and discharge of our obligations under the Indenture governing the Notes.

Total cash and cash equivalents at ~~August 1, 2009,~~July 31, 2010, was ~~$144.0~~$165.5 million compared to ~~$142.1~~$161.7 million at January ~~31, 2009.~~30, 2010.

We maintain a $35.0 million revolving credit facility (the “Facility”), which can be increased up to $50.0 million in the absence of any default and upon the satisfaction of certain conditions precedent specified in the agreement. The ~~revolving credit facility~~Facility expires in May ~~2011.~~2011 and we intend to either replace or renew our Facility. Under our ~~revolving credit facility,~~Facility, we are subject to borrowing base limitations on the amount that can be borrowed and certain customary covenants, including covenants limiting our ability to incur additional indebtedness, make investments and acquisitions, grant liens, pay dividends, close stores and dispose of assets, subject to certain exceptions. Our ability to borrow and request the issuance of letters of credit is subject to

the requirement that we maintain an excess of the borrowing base over the outstanding credit extensions of not less than $5.0 million. The interest rate on our line of credit under the ~~revolving credit facility~~Facility is the prime rate or, if we elect, the London ~~Interbank~~InterBank Offered Rate (“LIBOR”) plus a margin ranging from 1.0% to 1.5%. The applicable LIBOR margin is based on the level of average excess availability, as defined under our ~~revolving credit facility,~~Facility, at the time of election, as adjusted quarterly. The applicable LIBOR margin was 1.0% as of ~~August 1, 2009.~~July 31, 2010. We also incur fees on outstanding letters of credit under the ~~revolving credit facility in effect~~Facility at a rate equal to the applicable LIBOR margin for standby letters of credit and 33.3% of the applicable LIBOR margin for commercial letters of credit.

~~The revolving credit facility ranks senior in right of payment to our secured convertible notes.~~ Borrowings under the ~~revolving credit facility~~Facility are secured by all of our presently owned and hereafter acquired assets. Our obligations thereunder are guaranteed by one of our wholly owned subsidiaries, Wet Seal GC, ~~SMLLC.~~LLC.

At ~~August 1, 2009,~~July 31, 2010, the amount outstanding under the ~~revolving credit facility~~Facility consisted of ~~$5.9~~$3.8 million in open ~~commercial~~documentary letters of credit related to merchandise purchases and ~~$1.8~~$1.5 million in outstanding standby letters of credit. At ~~August 1, 2009,~~July 31, 2010, we had ~~$27.3~~$29.7 million available for cash advances and/or for the issuance of additional letters of ~~credit. At August 1, 2009,~~credit and we were in compliance with all covenant requirements in the ~~revolving credit facility and the indenture governing our secured convertible notes.~~Facility.

We believe we will have sufficient cash and credit availability to meet our operating and capital requirements for at least the next 12 months. However, the significant deterioration in ~~fiscal 2008 and into fiscal 2009,~~ consumer confidence and ~~consumer~~ spending ~~deteriorated significantly, and~~experienced over the past few years could remain depressed for an extended period. As a result of this ~~current~~continuing economic crisis, we may experience continued declines in consolidated comparable store sales or experience other events that negatively affect our operating results. If our consolidated comparable store sales drop significantly for an extended period, or we falter in execution of our business strategy, ~~including, among other things, the ability of one or more of our vendors to deliver their merchandise in a timely manner or otherwise meet their obligations,~~ we may not achieve our financial performance goals, which could adversely impact our results of operations and operating cash flow. This could also cause a decrease in or elimination of excess availability under our ~~revolving credit facility,~~Facility, which could force us to seek alternatives to address potential cash constraints, including seeking additional debt and/or equity financing.

The financial performance of our business is susceptible to ~~the recent~~ declines in discretionary consumer spending, availability of consumer credit and low consumer confidence in the United States. Volatile fuel prices and increasing commodity costs may also cause a shift in consumer demand away from the retail clothing products that we offer. There are no guarantees that government or other initiatives will limit the duration or severity of the current economic recession or stabilize factors that affect our sales and profitability. Recent adverse economic trends could affect us more significantly than companies in other industries.

One of the factors that provides financing to a small portion of our merchandise vendor base, CIT Group Inc. (“CIT”), has recently faced fiscal challenges that threaten its financial viability and its ability to provide factoring services to its customers. If the financial condition of CIT were to deteriorate further and our vendors were unable to procure alternative factoring arrangements from competitors of CIT on the same or substantially similar terms, our ability to timely procure merchandise for our stores could be adversely affected. This could require the devotion of significant time and attention by our management to adequately resolve such matters. In turn, our results of operation and financial condition could suffer.

Our business is seasonal in nature, with the Christmas season, beginning the week of Thanksgiving and ending the first Saturday after Christmas, and the back-to-school season, beginning the last week of July and ending during September, historically accounting for a large percentage of our sales volume. For the past three fiscal years, the Christmas and back-to-school seasons together accounted for an average of slightly less than 30% of our annual sales. We do not believe that inflation has had a material effect on our results of operations during the past three years. However, we cannot be certain that our business will not be affected by inflation in the future.

To the extent that we borrow under our ~~revolving credit facility,~~Facility, we are exposed to market risk related to changes in interest rates. At ~~August 1, 2009,~~July 31, 2010, no borrowings were outstanding under our ~~revolving credit facility.~~Facility. As of ~~August 1, 2009,~~July 31, 2010, we are not a party to any ~~material~~ derivative financial instruments.

We contract for and settle all purchases in USU.S. dollars. We only purchase a modest amount of goods directly from international vendors. Thus, we consider the effect of currency rate changes to be indirect and we believe the effect of a major shift in currency exchange rates on short-term results would be minimal. Over a longer period, the impact of such changes could be significant, albeit indirectly, through increased charges in USU.S. dollars from our vendors that source their ~~product~~products internationally.

We conducted an evaluation, under the supervision and with the participation of our ~~Chief Executive Officer~~chief executive officer and ~~Chief Financial Officer, of the effectiveness of the design and operation~~chief financial officer, of our disclosure controls and procedures, ~~(as~~as such term is defined in ~~Rules~~Rule 13a-15(e) and 15d-15(e)

promulgated under the ~~Securities~~ Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, ourAct. These disclosure controls and procedures are ~~effective in recording, processing, summarizing and reporting, on a timely basis,~~designed to provide reasonable assurance that the information required to be disclosed by usthe Company in the reports that ~~we file~~it files or ~~submit~~submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms. Our disclosure controls and procedures are ~~effective in ensuring~~also designed to provide reasonable assurance that information required to be disclosed ~~by us~~ in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our ~~Chief Executive Officer~~chief executive officer and ~~Chief Financial Officer, as appropriate~~chief financial officer, in order to allow timely decisions regarding required ~~disclosure.~~disclosures. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of July 31, 2010.

During the fiscal quarter ended ~~August 1, 2009,~~July 31, 2010, no changes occurred with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

On July 19, 2006, a complaint was filed in the Superior Court of the State of California for the County of Los Angeles ~~or the Superior Court,~~ on behalf of certain of our current and former employees that were employed and paid by us on an hourly basis during the four-year period from July 19, 2002 through July 19, 2006. We were named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and orders issued by the Industrial Welfare Commission. On November 30, 2006, we reached an agreement to pay approximately $0.3 million to settle this matter, subject to Superior Court approval. On May 18, 2007, the Superior Court entered an order granting preliminary approval of the class action settlement. On February 29, 2008, the court issued its order granting final approval of the class action settlement, subject to appeal. On April 28, 2008, a notice of appeal of the judgment was filed. On May 6, 2009, the Court reversed and remanded the case ~~for~~to the Superior Court to re-evaluate the fairness of the settlement, ~~which is expected to~~and a final hearing will take place ~~before December 2009.~~in September 2010. As of ~~August 1, 2009,~~July 31, 2010, we have accrued ~~in accrued liabilities in our consolidated balance sheet~~ an amount equal to the settlement ~~amount.~~amount in accrued liabilities in our condensed consolidated balance sheet.

On May 22, 2007, a complaint was filed in the Superior Court of the State of California for the County of Orange on behalf of certain of our current and former employees who were employed and paid by us ~~during the four-year period~~ from May 22, 2003 through ~~May 22, 2007.~~the present. We were named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and orders issued by the Industrial Welfare Commission. ~~The Court has set a deadline of November 6, 2009 for the plaintiffs to file a~~Discovery is ongoing and Plaintiffs filed their motion for class certification ~~which we will oppose.~~in July 2010. Our opposition to Plaintiffs’ motion is due on September 24, 2010, and the hearing is scheduled for October 8, 2010. We are vigorously defending this litigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of ~~August 1, 2009.~~July 31, 2010.

On September 29, 2008, a complaint was filed in the Superior Court of the State of California for the County of San Francisco on behalf of certain of our current and former employees who were employed and paid by us ~~during the four-year period~~ from September 29, 2004 through ~~September 29, 2008.~~the present. We were named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. ~~Our responsive plea was~~Plaintiffs recently filed an amended complaint, and we filed a motion to strike allegations of the third amended complaint on ~~November 14, 2008.~~or about February 16, 2010. The case has been

transferred to the complex panel of the San Francisco Superior Court for case management purposes. No class certification motion filing deadline has been set by the court, and discovery is ongoing. We are vigorously defending this litigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of ~~August 1, 2009~~.July 31, 2010.

On March 18, 2009, a complaint was filed in the Superior Court of the State of California for the County of Orange on behalf of certain of our current and former employees that were employed and paid by us ~~since~~from March 18, ~~2005.~~2005 through March 18, 2009. We were named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and orders issued by the Industrial Welfare Commission. On October 23, 2009, we reached an agreement to pay approximately $0.2 million to settle this matter, subject to Superior Court approval. The Court has preliminarily approved the settlement and set a final approval hearing for September 2, 2010. We ~~are vigorously defending this litigation and are unable to predict~~paid the ~~likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of~~preliminary settlement amount in August ~~1, 2009.~~2010.

Central District of California seeking relief from the subpoena, which action it has since voluntarily dismissed. Later that same month, the EEOC filed an application to enforce the subpoena in the U.S. District Court for the Eastern District of Pennsylvania, and is in the process of a nationwide investigation. We are ~~vigorously defending this~~awaiting the results of the EEOC’s investigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of ~~August 1, 2009.~~July 31, 2010.

From time to time, we are involved in other litigation matters relating to claims arising out of our operations in the normal course of business. We believe that, in the event of a settlement or an adverse judgment on certain of these claims arising out of the ~~pending litigation,~~normal course of business, we have insurance coverage to cover a portion of such losses; however, certain other matters may exist or arise for which we do not have insurance coverage. As of ~~August 1, 2009,~~July 31, 2010, we were not engaged in any other legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our results of operations or financial condition.

The following risk factor represents an addition to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January ~~31, 2009.~~30, 2010.

~~Our ability~~We are in the process of identifying a successor to ~~procure merchandise could be adversely affected by changes in~~ our ~~vendors’ factoring arrangements with CIT Group, Inc.~~

~~CIT has recently faced financial challenges that threaten its financial viability~~president and its ability to provide factoring services to its customers. Although we do not have a direct relationship with CIT, a small portion of our vendors who supply our company with merchandise have direct factoring arrangements with CIT. Vendors who engage in factoring transactions with CIT typically sell their accounts receivable to CIT at a discount in exchange for cash payments which can be used to financechief executive officer and the ~~business and operations of the vendors.~~

If the financial condition of CIT were to deteriorate further and certain of our vendors were unable to procure alternative factoring arrangements from competitors of CIT on the same or substantially similar terms,resulting succession may impact our ability to execute our business strategy in the near term.

As previously announced, Mr. Edmond S. Thomas, our president, chief executive officer and a director, will resign from his positions with our company upon the expiration of his existing employment agreement on October 8, 2010. We have entered into a transition services agreement with Mr. Thomas for a period of four months following the end of his employment agreement. During this period, Mr. Thomas will serve as interim president and interim chief executive officer and will be compensated for such services rendered pursuant to the terms of the transition services agreement. However, there can be no assurance that Mr. Thomas will continue to serve in any capacity during the entire transition period or that we will find a suitable replacement for Mr. Thomas before the expiration of Mr. Thomas’ employment agreement or the conclusion of his transition period.

If we are not able to appoint a new president and chief executive officer in a timely ~~procure merchandise for~~manner, our ~~stores~~business, financial condition, and results of operations could be materially and adversely affected. ~~This could require the devotion of significant time~~In addition, we anticipate that we will experience a transition period before our new chief executive officer is fully integrated into his/her new roles. We cannot provide any assurance that there will not be any disruption that adversely impacts our customer relationships, employee morale and ~~attention by~~ our ~~management to adequately resolve such matters. In turn, our results of operation and financial condition could suffer.~~business.

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


Delaware		33-0415940
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

26972 Burbank, Foothill Ranch, CA		92610
(Address of principal executive offices)		(Zip Code)


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets (Unaudited) as of July 31, 2010, January 30, 2010, and August 1, 2009 ~~January 31, 2009, and August 2, 2008~~	2-3

	Condensed Consolidated Statements of Operations (Unaudited) for the 13 and 26 Weeks Ended July 31, 2010, and August 1, 2009 ~~and August 2, 2008~~	4

	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited) for the 26 Weeks Ended July 31, 2010, and August 1, 2009 ~~and August 2, 2008~~	5-6

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the 26 Weeks Ended July 31, 2010, and August 1, 2009 ~~and August 2, 2008~~	7

	Notes to Condensed Consolidated Financial Statements (Unaudited)	~~8-21~~8-20

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~22-36~~21-34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3734

Item 4.	Controls and Procedures	3734-35

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	~~37-38~~35-36

Item 1A.	Risk Factors	3836

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3836

Item 3.	Defaults Upon Senior Securities	3836

Item 4.	~~Submission of Matters to a Vote of Security Holders~~Removed and Reserved	3836

Item 5.	Other Information	3836

Item 6.	Exhibits	3937

~~SIGNATURE PAGE~~SIGNATURES		4038

EXHIBIT 31.1

EXHIBIT 31.2

EXHIBIT 32.1

EXHIBIT 32.2


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding as of August 1, 2009	Weighted- Average Remaining Contractual Life (in years)	Weighted- Average Exercise Price Per Share		Number Exercisable as of August 1, 2009	Weighted- Average Exercise Price Per Share
$ 1.81 - $ 4.09	527,666	4.32	$	3.41	134,902	$	3.05
4.26 - 5.84	568,312	2.25		5.39	450,979		5.60
5.92 - 6.72	482,474	1.68		6.48	426,501		6.49
6.81 - 11.76	561,250	2.77		9.76	561,250		9.76
11.79 - 23.02	146,750	2.45		18.92	146,750		18.92

$ 1.81 - $ 23.02	2,286,452	2.75	$	7.11	1,720,382	$	8.12


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding as of July 31, 2010	Weighted- Average Remaining Contractual Life (in years)	Weighted- Average Exercise Price Per Share		Number Exercisable as of July 31, 2010	Weighted- Average Exercise Price Per Share
$ 1.81 - $ 2.93	157,500	2.80	$	2.61	99,169	$	2.58
2.96 - 4.83	608,500	4.11		3.70	153,180		3.95
4.86 - 8.00	486,440	2.03		6.39	472,108		6.44
8.08 - 12.28	386,500	1.57		10.62	386,500		10.62
15.02 - 23.02	120,500	1.43		19.40	120,500		19.40

$ 1.81 - $23.02	1,759,440	2.68	$	6.94	1,231,457	$	8.40


13 Weeks Ended August 2, 2008	Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales	$	121,686		$	27,374		$	—		$	149,060
Percentage of consolidated net sales		82	%		18	%		—			100	%
Operating income (loss)	$	18,114		$	986		$	(7,288	)	$	11,812
Depreciation and amortization expense	$	2,579		$	798		$	247		$	3,624
Interest income	$	—		$	—		$	599		$	599
Interest expense	$	—		$	—		$	2,086		$	2,086
Income (loss) before provision for income taxes	$	18,114		$	986		$	(8,775	)	$	10,325

26 Weeks Ended August 1, 2009	Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales	$	219,882		$	48,493		$	—		$	268,375
Percentage of consolidated net sales		82	%		18	%		—			100	%
Operating income (loss)	$	15,937		$	5,776		$	(13,208	)	$	8,505
Depreciation and amortization expense	$	5,982		$	833		$	455		$	7,270
Interest income	$	—		$	—		$	316		$	316
Interest expense	$	—		$	—		$	437		$	437
Income (loss) before provision for income taxes	$	15,937		$	5,776		$	(13,329	)	$	8,384

26 Weeks Ended August 2, 2008	Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales	$	237,877		$	53,573		$	—		$	291,450
Percentage of consolidated net sales		82	%		18	%		—			100	%
Operating income (loss)	$	35,173		$	145		$	(14,797	)	$	20,521
Depreciation and amortization expense	$	5,073		$	1,580		$	538		$	7,191
Interest income	$	—		$	—		$	1,297		$	1,297
Interest expense	$	—		$	—		$	2,392		$	2,392
Income (loss) before provision for income taxes	$	35,173		$	145		$	(15,892	)	$	19,426


	26 Weeks Ended August 1, 2009		Change From Prior Fiscal Period					26 Weeks Ended August 2, 2008
			($ in millions)
Net sales	$	268.4	$	(23.1	)	(7.9	)%	$	291.5
Comparable store sales decrease						(9.0	)%


~~3.1~~4.4.4		~~Amended~~ Satisfaction and ~~Restated By-Laws~~Discharge of Indenture entered into between our ~~Company~~company the The Bank of New York Mellon, dated as of May 3, 2010 (incorporated by reference to Exhibit ~~3.1~~99.1 of our ~~Company’s~~company’s Current Report on Form 8-K filed on May ~~29, 2009)~~7, 2010)

10.5.2		Amendment to the 2005 Stock Incentive Plan (incorporated by reference in Exhibit B of our company’s Definitive Proxy Statement of Form DEF 14A, dated April 19, 2010)

31.1		Certification of the Chief Executive Officer filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	THE WET SEAL, INC. (REGISTRANT)

Date: ~~September 1, 2009~~	~~By:~~August 31, 2010	~~/s/~~By:	/s/ Edmond S. Thomas
		Edmond S. Thomas
		President and Chief Executive Officer

Date: ~~September 1, 2009~~	~~By:~~August 31, 2010	~~/s/~~By:	/s/ Steven H. Benrubi
		Steven H. Benrubi
		Executive Vice President and Chief Financial Officer

Large accelerated filer:¨

¨
Accelerated filer: x

~~Accelerated~~
Nonaccelerated filer:¨

x
Smaller reporting company: ¨

~~Nonaccelerated filer:~~

¨ ~~(Do~~
(Do not check if a smaller
reporting company)

~~Smaller reporting company:~~