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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JANUARY 31, 1998

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-18632
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THE WET SEAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE 33-0415940
(State of incorporation) (I.R.S. Employer Identification No.)

26972 BURBANK, FOOTHILL RANCH, CA 92610
(Address of principal executive (Zip Code)
offices)

(714) 583-9029

(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

CLASS A COMMON STOCK PREFERRED STOCK PURCHASE RIGHTS
(Title of Class) (Title of Class)

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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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to the Form 10-K.

The aggregate market value of voting stock held by non-affiliates as of
April 6, 1998 was $395,666,853.

The number of shares outstanding of the registrant's Class A Common Stock
and Class B Common Stock, par value $.10 per share, at April 6, 1998 was
10,669,578 and 2,912,665, respectively. There were no shares of Preferred Stock,
par value $.01 per share, outstanding at April 6, 1998.

DOCUMENTS INCORPORATED BY REFERENCE:

PART III incorporates information by reference from the Registrant's
definitive Proxy Statement for its Annual Meeting of Stockholders' to be filed
with the Commission within 120 days of January 31, 1998.
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PART I

ITEM 1. BUSINESS

GENERAL

The Wet Seal, Inc., a Delaware corporation ("Wet Seal" or the "Company"),
founded in 1962, is a specialty retailer of moderately priced, fashionable,
casual apparel and accessory items designed for consumers with a young, active
lifestyle. On July 1, 1995, the Company acquired the business, assets and
properties of Contempo Casuals, Inc. ("Contempo Casuals"), a 237-store retail
junior women's chain. This acquisition substantially increased the size of the
Company. As of April 6, 1998, the Company operated 401 retail stores in 40
states and Puerto Rico, including 119 in California, 52 in Florida, and 31 in
Texas. Of the 401 stores, 236 operate under the "CONTEMPO CASUALS" trademark,
159 operate under the "WET SEAL" trademark, five stores operate under the "LIMBO
LOUNGE" trademark and one of the stores operates under the "NEXT" trademark. All
of the stores, with the exception of the stores located in malls where the
Company operates both a Wet Seal and a Contempo Casuals store ("duplicate
locations"), offer substantially the same merchandise and utilize the same
visual merchandising strategies. At the duplicate locations, the Company employs
different visual merchandising displays as well as in-store image posters and
will on occasion differentiate a portion of the merchandise mix. The Limbo
Lounge is a recent concept which the Company introduced in fiscal 1996 and
intends to expand to up to seven additional stores in fiscal 1998. The Limbo
Lounge offers both junior's and young men's clothing and accessories in a unique
store environment.

The Company introduced the "Wet Seal Catalog" in late January 1998. The
catalog is focused on the junior customer and features both private label and
branded apparel, shoes and accessories. The Company plans to have approximately
six catalog mailings throughout fiscal 1998. Due to the timing of the initial
catalog mailing at the end of fiscal 1997, there is no material impact on the
financial statements for fiscal 1997, other than the costs related to catalog
book production and printing, which are reported as prepaid assets as of January
31, 1998.

PRODUCTS AND MERCHANDISING

Both Wet Seal and Contempo Casuals stores target the same fashion-conscious
junior customer. The Company merchandises both stores similarly. In duplicate
locations, the Company differentiates the locations by displaying the
merchandise differently in each of the stores, and will occasionally
differentiate the merchandise mix. The Company provides a balance of
moderately-priced, fashionable brand name and Company-developed apparel and
accessories that appeal to consumers with young, active lifestyles. The Company
believes that Company-developed apparel differentiates it from its competitors.
The Company frequently updates its product offerings, which include sportswear,
dresses, lingerie, outerwear, shoes, cosmetics and accessories, to provide a
regular flow of fresh, new fashionable merchandise. Additionally, management
carefully monitors pricing and markdowns to expedite sales of slower-moving
inventory, facilitate the introduction of new merchandise and maintain an
updated fashion image.

Generally, the Company's stores display merchandise within a current fashion
statement by color and trend groupings. Rather than displaying garments together
by type (blouses with blouses, for example), the Company combines items of
apparel and accessories which the customer might buy as an ensemble. Store
displays are designed to enable customers to create ensembles within a current
fashion statement or trend group. Management believes that the trend grouping
concept strengthens the fashion image of the merchandise offered in the stores
and enables the customer to locate combinations of blouses, skirts, pants and
accessories in a manner which enhances the Company's opportunity to make
multiple unit sales. The general layout of merchandise in the stores is planned
by the Company's management, but may be varied and adapted by each store's
management. The Company makes use of in-store image posters to help focus
customers on particular fashion themes. The Company changes the visual display
of the merchandise in its stores approximately every six weeks to reflect the
changing tastes of the Company's target customer.

In the last quarter of fiscal 1996, the Company introduced a stand alone
store concept called Limbo Lounge. The product offerings include both junior's
and young men's apparel and accessories. The Company currently operates five
Limbo Lounges and plans to open up to seven additional stores in fiscal 1998.

DESIGN, BUYING AND PRODUCT DEVELOPMENT

The Company's experienced design and buying teams are responsible for
identifying evolving fashion trends and then developing themes to guide the
Company's merchandising strategy. These teams monitor emerging fashion trends by
attending domestic and international fashion shows, engaging the services of
international fashion consultants, following industry publications and
conducting regular market research, including monitoring cutting-edge,
alternative stores, visiting Company stores to interact with customers and
employees and visiting competitors' stores. Additionally, the Company holds
"open to buy" days once a week to allow vendors to meet with buyers. Management
believes that these open sessions provide buyers with the opportunity to
purchase fresh and innovative products that help to further differentiate the
Company's merchandise mix.

The Company's commitment to Company-developed apparel is an important
element in differentiating its merchandise from that of its competitors. After
selecting a fashion theme to promote, the design and buying teams work closely
with vendors to modify colors, materials and designs and create an image
consistent with the theme for the Company's product offerings. Additionally, the
Company has increased its focus on developing exclusive designs and brands to
reinforce the fashion statements of its merchandise offerings as well as to
increase the perception of Wet Seal, Contempo Casuals and Limbo Lounge as
destination stores for the customer. The Company focused on the Blue Asphalt,
Evolution Not Revolution and Arden B. brands in particular in fiscal 1997 and
given the success of these brands, plans to continue this focus.

SOURCING AND VENDOR RELATIONSHIPS

The Company purchases its merchandise from numerous domestic vendors and an
increasing number of foreign vendors. Although in fiscal 1997 no single vendor
accounted for more than 10% of the Company's merchandise and only two vendors
accounted for more than 5%, management believes the Company is the largest
customer of many of its smaller vendors. Management believes the Company's
importance to these vendors allows it to provide significant input into their
design, manufacturing and distribution processes, and has enabled the Company to
negotiate favorable terms with such vendors. Quality control is monitored
carefully at the distribution points of its largest vendors and manufacturers,
and all merchandise is inspected upon arrival at the Company's Foothill Ranch,
California distribution center. The Company does not have any long term or
exclusive contracts with any particular manufacturer or supplier for either
brand name or Company-developed apparel.

ALLOCATION AND DISTRIBUTION

The Company's merchandising effort primarily focuses on maintaining a
regular flow of fresh, fashionable merchandise into its stores. Successful
execution depends in large part on the Company's integrated planning, allocation
and distribution functions. Planning and allocation are managed by a team headed
by the Company's Vice President of Planning and Allocation. By working closely
with District and Regional Directors and merchandise buyers, this team manages
inventory levels and coordinates the allocation of merchandise to each of the
Company's stores based on sales volume, climate and other factors that may
influence individual stores' product mix.

In December 1997, the Company moved its distribution function into a new
facility in Foothill Ranch, California. All merchandise is received from vendors
at this facility, where items are inspected for quality and prepared for
shipping to the Company's stores. The Company ships merchandise to stores within
a

100-mile radius of the distribution center by its fleet of Company-owned trucks.
The remainder of the Company's stores are shipped merchandise by common carrier.
Consistent with the Company's goal of maintaining the freshness of its product
offerings, the Company ships new merchandise to each store daily.

In keeping with the Company's policy of introducing new merchandise,
markdowns are taken regularly to effect a rapid sale of slow-moving inventory.
Merchandise which remains unsold is periodically shipped to the Company's
clearance stores where further markdowns are taken as needed in order to move
the merchandise. Sales of merchandise at these stores aggregated $3.6 million
for the fiscal year ended January 31, 1998. These stores operate under both the
Wet Seal and the Contempo Casuals names.

MARKETING, ADVERTISING AND PROMOTION

The Company believes that the highly-visible locations of its stores within
regional shopping malls, broad selection of fashionable merchandise and dynamic,
entertaining in-store environments have contributed significantly to the
Company's reputation as a destination store addressing the lifestyle of fashion-
conscious young consumers. Consequently, the Company has historically relied
more heavily on these factors and "word-of-mouth" advertising than more
traditional forms of advertising such as print, radio and television.

The Company utilizes a variety of advertising and promotional programs that
allow the Company to gain exposure in a cost-effective manner. By introducing
frequent shopper cards in its stores, the Company has developed a marketing
database that helps to track customers. The cards, which are sold for $20 each,
entitle customers to a standard 10% discount on purchases made within a one-year
period. As part of these programs, sales representatives call selected
cardholders personally to notify customers of special in-store promotions, such
as preferred customer sales during which cardholders receive additional
incentives. Management believes these promotions foster customer loyalty and
encourage frequent visits and multiple item purchases. The Company also sponsors
special events such as snowboarding competitions and beach festivals that focus
on the interests and active lifestyles of its target customers. Further, the
Company utilizes its Company-owned trucks as "rolling billboards" in California,
painting them to promote the Company as well as certain of its Company-developed
labels such as Blue Asphalt and Evolution Not Revolution.

STORE OPERATIONS

The Company's stores are divided into six geographic regions. Each region is
managed by a Regional Director who reports to the Company's Vice President of
Store Operations. Each region is further divided into districts consisting of
between 9 to 16 stores and managed by a District Director. The Company delegates
substantial authority to regional, district and store-level employees, while
taking advantage of economies of scale by centralizing functions such as
finance, data processing, merchandise purchasing and allocation, human resources
and real estate at the corporate level.

The Company encourages communication between and among its Regional and
District Directors and senior management. Each of the Company's 38 District
Directors provides weekly reports to senior management concerning overall
business conditions and specific aspects of their stores' operations. These
reports are used to identify competitive trends and store level concerns in a
timely manner. Store performance is also evaluated by senior management through
the use of a "secret shopper" service that shops each store twice a month.

Stores are typically staffed with one full-time manager, one or two
full-time co-managers, one full-time customer service leader and 9 to 16
customer service representatives and cashiers, most of whom are part-time.
During peak seasons, stores may increase staffing levels to accommodate the
additional in-store traffic. The Company seeks to hire store-level employees who
are energetic, fashionable and friendly and who can identify with its targeted
customers. The Company's policy is to promote store managers from within while
also hiring from outside. Highly-regarded store managers are often given
opportunities to

move to higher-volume stores. The Company sets weekly sales goals for each store
and devises incentives to reward stores that meet or exceed their sales targets.
In addition, from time to time the Company runs sales contests to encourage its
store level employees to maximize sales volume.

Most of the Company's stores are, and the Company expects that most of its
new stores will be, located in regional, high-traffic shopping malls which
contain at least one "anchor" department store. The Company places great
emphasis on its location within a mall and attempts to locate stores in the
higher-traffic areas of a mall and to obtain the greatest amount of frontage
possible. The Company's average store size is approximately 4,200 square feet.
Store hours are determined by the mall in which the store is located.

INFORMATION AND CONTROL SYSTEMS

In fiscal 1996, the register hardware at both the Wet Seal and Contempo
Casuals stores was upgraded to a common system in order to increase efficiency.
Additionally, the Company plans to upgrade the register software in fiscal 1998.
As a result of these two upgrades, the Company expects to decrease communication
and maintenance costs, further improve customer service and become more
innovative in the area of in-store marketing.

While the Company believes its information systems are adequate to support
its current needs, in order to accommodate future growth the Company plans to
convert and upgrade its merchandising and other support systems in fiscal 1998
and fiscal 1999.

EXPANSION STRATEGY

The Company currently plans to open up to 75 new stores in fiscal 1998 and
plans to continue to grow in the following year. The Company may, in limited
instances and to the extent it deems advisable, seek to acquire additional
businesses which complement or enhance the Company's operations. The Company
currently has no commitments or understandings with respect to such business
opportunities.

The following table sets forth the number of stores in each state as of
April 6, 1998:

# OF # OF # OF
STATE STORES STATE STORES STATE STORES
- ---------------------------- --------- ---------------------------- --------- ---------------------------- ---------

Alabama..................... 1 Louisiana................... 5 Ohio........................ 7
Arizona..................... 11 Maine....................... 1 Oklahoma.................... 2
Arkansas.................... 1 Maryland.................... 6 Oregon...................... 1
California.................. 119 Massachusetts............... 10 Pennsylvania................ 10
Colorado.................... 8 Michigan.................... 12 Rhode Island................ 1
Connecticut................. 8 Minnesota................... 7 South Carolina.............. 1
Delaware.................... 1 Missouri.................... 2 Tennessee................... 2
Florida..................... 52 Nebraska.................... 1 Texas....................... 31
Georgia..................... 5 Nevada...................... 6 Utah........................ 3
Hawaii...................... 7 New Hampshire............... 1 Virginia.................... 4
Illinois.................... 18 New Jersey.................. 16 Washington.................. 4
Iowa........................ 1 New Mexico.................. 3 Wisconsin................... 5
Indiana..................... 3 New York.................... 19 Puerto Rico................. 2
Kentucky.................... 1 North Carolina.............. 3

Management does not believe there are significant geographic constraints on
the locations of future stores. The Company's strategy is to enter a particular
geographic region with a base of two or three solid stores, and then continue
expansion in such geographic regions while simultaneously entering new markets
in a similar manner, thereby increasing the recognition of the Company's name.
When deciding whether to open a new store, the Company typically targets
regional malls as well as prime street locations in select

markets. In making its selection, the Company evaluates, among other factors,
market area, demographics, "anchor stores," store location, the volume of
consumer traffic, rent payments and other costs associated with opening a new
store. The average store size the Company intends to consider is between 3,600
and 4,500 square feet. However, in making its decision, management reviews all
leases in order to match closely the store size to the sales potential of the
store.

The Company's ability to expand in the future will depend, in part, on
general business conditions, the demand for the Company's merchandise, the
ability to find suitable malls or other locations with acceptable sites on
satisfactory terms, and the continuance of satisfactory cash flows from existing
operations.

TRADEMARKS

The Company's primary trademarks and service marks are "WET SEAL," "CONTEMPO
CASUALS," "LIMBO LOUNGE" and "NEXT," which are registered in the U.S. Trademark
Office. The Company also uses and has registered, or has a pending registration,
on a number of marks, including "ACCOMPLICE," "BLUE ASPHALT," "CEMENT," "URBAN
VIBE," "EVOLUTION NOT REVOLUTION," "ARDEN B.," "MEOW GENES," "UNCIVILIZED" and
"URBAN LIFE." In general, the registrations for these trademarks and service
marks are renewable indefinitely as long as the Company continues to use the
marks as required by applicable trademark law. The Company is the owner of an
allowed and currently pending service mark application for the mark "SEAL PUPS."
The Company is not aware of any adverse claim or other infringement relating to
its trademarks or service marks.

COMPETITION

The young women's retail apparel industry is highly competitive, with
fashion, quality, price, location, in-store environment and service being the
principal competitive factors. The Company competes with specialty apparel
retailers, department stores and certain other apparel retailers, including The
Limited and The GAP, and on a regional basis, with such retailers as Charlotte
Russe, Gadzooks and Pacific Sunwear. Many competitors are large national chains
which have substantially greater financial, marketing and other resources than
the Company. While the Company believes it competes effectively for favorable
site locations and lease terms, competition for prime locations within a mall is
intense.

EMPLOYEES

As of January 31, 1998, the Company had 5,822 employees, consisting of 1,688
full-time employees and 4,134 part-time employees. Full-time personnel consisted
of 1,083 salaried and 605 hourly employees. All part-time personnel are hourly
employees. Of the total employees, 5,537 were sales personnel and 285 were
administrative and distribution center personnel. Personnel at all levels of
store operations are provided with cash incentives based upon various individual
store sales targets.

All of the Company's employees are non-union and, in management's opinion,
are paid competitively with current standards in the industry. The Company
considers its relationship with its employees to be satisfactory.

ITEM 2. PROPERTIES

The Company's corporate headquarters is located at 26972 Burbank, Foothill
Ranch, California, consisting of 283,200 square feet of leased office and
distribution facility space (including 74,500 square feet of merchandise
handling and storage mezzanine space in the distribution facility and 20,500
square feet of second floor office space). This lease expires on December 4,
2007. The Company's former distribution facility located in Los Angeles,
California was subleased beginning in fiscal 1998 for the remainder of the lease
term. The Los Angeles lease was acquired with the acquisition of Contempo
Casuals and expires on July 31, 2002.

The Company leases all of its stores. Lease terms for the Company's stores
are typically 10 years in length and generally do not contain renewal options.
The leases generally provide for a fixed minimum rental and a rental based on a
percent of sales once a minimum sales level has been reached. As a lease
expires, the Company generally renews such lease at current market terms.
However, each renewal is based upon an analysis of the individual store's
profitability and sales potential.

The following table sets forth information with respect to store openings
and closings since fiscal 1993:

FISCAL YEARS
--------------------------------------------------
1997 1996 1995 1994
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Stores open at beginning of year..................................... 364 364 133 129
Stores acquired during period(1)..................................... 0 0 237 0
Stores opened during period.......................................... 34 10 3 6
Stores closed during period.......................................... 9 10 9 2
--- --- --- ---
Stores open at end of period......................................... 389 364 364 133
--- --- --- ---
--- --- --- ---

1993
-----

Stores open at beginning of year..................................... 125
Stores acquired during period(1)..................................... 0
Stores opened during period.......................................... 10
Stores closed during period.......................................... 6
---
Stores open at end of period......................................... 129
---
---

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(1) Contempo Casuals was acquired on July 1, 1995.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Management
believes that, in the event of a settlement or an adverse judgment of any
pending litigation, the Company is adequately covered by insurance. As of April
6, 1998, the Company was not engaged in any legal proceedings which are
expected, individually or in the aggregate, to have a material adverse effect on
the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through solicitations of
proxies or otherwise.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Class A Common Stock ("Common Stock") is listed on The Nasdaq
National Market ("Nasdaq") under the symbol "WTSLA." As of April 6, 1998, there
were 286 shareholders of record of the Company's Class A Common Stock.
Additionally, the number of beneficial owners of the Company's Common Stock was
estimated to be in excess of 4,500. The closing price of the Common Stock on
April 6, 1998 was $37 1/8.

The following table reflects the high and low sales prices of the Company's
Common Stock as reported by Nasdaq for the last two fiscal years.

FISCAL 1997 FISCAL 1996

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QUARTER HIGH LOW HIGH LOW
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First Quarter..................................... $27 1/4 $18 $16 $ 7 1/16
Second Quarter.................................... 31 5/8 22 1/2 27 1/4 11 1/2
Third Quarter..................................... 27 1/4 17 3/8 41 7/8 23 7/8
Fourth Quarter.................................... 31 1/2 22 3/4 31 13 1/4

The Company has reinvested earnings in the business and has never paid any
cash dividends to holders of the Company's Common Stock. The declaration and
payment of future dividends, which are subject to the terms and covenants
contained in the Company's bank line of credit, are at the sole discretion of
the Board of Directors and will depend upon the Company's profitability,
financial condition, cash requirements, future prospects and other factors
deemed relevant by the Board of Directors.

ITEM 6. SELECTED FINANCIAL DATA

The following table of certain selected data regarding the Company should be
read in conjunction with the financial statements and notes thereto and with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The data for the fiscal years ended January 28, 1995 and January
29, 1994 are derived from the Company's financial statements for such years
which are not included herein.

FIVE YEAR FINANCIAL SUMMARY

FISCAL YEAR 1997 1996 1995 1994 1993
- ------------------------------- -------------- -------------- -------------- -------------- --------------

JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29,
FISCAL YEAR ENDED 1998 1997 1996(1) 1995 1994
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OPERATING RESULTS
Sales.......................... $ 412,463,000 $ 374,942,000 $ 266,695,000 $ 132,997,000 $ 140,129,000
Income (loss) before provision
(benefit) for income taxes... 36,325,000 26,217,000 9,948,000 (1,366,000) (3,966,000)
Net income (loss).............. $ 21,250,000 $ 15,252,000 $ 5,815,000 $ (1,013,000) $ (2,378,000)

PER SHARE DATA
Net income (loss), basic....... $ 1.57 $ 1.15 $ 0.47 $ (0.08) $ (0.19)
Net income (loss), diluted..... $ 1.53 $ 1.13 $ 0.47 $ (0.08) $ (0.19)
Weighted average shares
outstanding, basic........... 13,552,502 13,219,284 12,387,140 12,234,502 12,227,781
Weighted average shares
outstanding, diluted......... 13,899,877 13,459,810 12,500,564 12,234,502 12,227,781

OTHER FINANCIAL INFORMATION
Net income (loss) as a percent
of sales..................... 5.2% 4.1% 2.2% (0.8)% (1.7)%
Return on average stockholders'
equity....................... 20.8% 20.5% 10.7% (2.0)% (4.5)%
Cash and marketable
securities................... $ 95,873,000 $ 89,183,000 $ 57,153,000 $ 25,369,000 $ 18,331,000
Working capital................ $ 66,452,000 $ 59,791,000 $ 26,051,000 $ 22,473,000 $ 18,874,000
Ratio of current assets to
current liabilities.......... 2.1 2.1 1.5 2.8 2.7
Total assets................... $ 184,223,000 $ 154,752,000 $ 117,564,000 $ 67,298,000 $ 66,434,000
Long-term debt................. 1,264,000 3,264,000 5,264,000 -- --
Total stockholders' equity..... $ 112,994,000 $ 91,120,000 $ 57,735,000 $ 50,724,000 $ 51,729,000
Number of stores open at year
end.......................... 389 364 364 133 129
Number of stores acquired
during the year.............. -- -- 237 -- --
Number of stores opened during
the year..................... 34 10 3 6 10
Number of stores closed during
the year..................... 9 10 9 2 6
Square footage of leased store
space at year end............ 1,637,347 1,539,777 1,530,891 596,685 583,462
Percent of increase in leased
square footage............... 6.3% 0.6% 156.6% 2.3% 7.1%
Avg. sales per square foot of
leased space(2).............. $ 263 $ 244 $ 229 $ 226 $ 247
Average sales per store(2)..... $ 1,112,000 $ 1,030,000 $ 976,000 $ 1,008,000 $ 1,092,000
Comparable store sales increase
(decrease)(3)................ 5.8% 8.8% (4.1)% (9.2)% (14.2)%

- --------------------------

(1) The Company's fiscal 1995 data include the results of operations of Contempo
Casuals since July 1, 1995. Fiscal 1995 consisted of 53 weeks.

(2) In fiscal 1995, the 53rd week of sales was excluded from "Sales" for
purposes of calculating "Average sales per square foot" and "Average sales
per store" in order to make fiscal 1995 comparable to prior years.

(3) In fiscal 1996, "Comparable store sales" were calculated by excluding sales
during the first week of fiscal 1995 in order to make fiscal 1995 comparable
to fiscal 1996. In fiscal 1995, "Comparable store sales" were calculated by
adding the first week of fiscal 1995 to fiscal 1994 sales in order to make
fiscal 1994 comparable to fiscal 1995. Comparable store sales are defined as
sales in stores that were open throughout the full fiscal year and
throughout the full prior fiscal year.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The Company is one of the largest national mall-based specialty retailers
focusing primarily on young women's apparel, and currently operates 401 retail
stores in 40 states and Puerto Rico under the names "Wet Seal", "Contempo
Casuals", "Limbo Lounge" and "Next". The Company sells moderately priced,
fashionable, casual apparel and accessory items designed for consumers with a
young, active lifestyle.

On July 1, 1995, the Company acquired Contempo Casuals. The purchase price
consisted of a $100,000 cash payment and the issuance of 254,676 shares of Class
A Common Stock, which had a market value of $1,178,000 as of the acquisition
date. In addition, the Company assumed approximately $27,700,000 of current
liabilities of Contempo Casuals. The transaction was accounted for under the
purchase method and resulted in negative goodwill. The acquisition substantially
increased the number of stores the Company operates and reduced the percentage
of total stores the Company operates in California from more than 50% to
approximately 35%.

In connection with the acquisition of Contempo Casuals, the Company
established an accrual for combination costs which consisted of management's
estimates for the costs of closing and/or combining certain Contempo Casuals
facilities and operations into Wet Seal's, as well as the costs of integrating
management information and security systems. At February 1, 1997, the accrual
totaled $5,569,000. As of January 31, 1998, the Company has substantially
completed the combination of facilities and the acquisition of necessary
management information systems to fully integrate Contempo Casuals' operations
into Wet Seal's. Management estimates that the accrued combination costs
remaining at January 31, 1998 totaling $1,645,000 will be fully utilized by
mid-1998, at which time the Company's in-store security systems will be
integrated.

The Company's return to profitability in fiscal 1995 as well as its improved
profitability in fiscal 1996 and fiscal 1997 was directly related to the
acquisition of Contempo Casuals. Acquiring Contempo Casuals enabled the Company
to significantly reduce fixed expenses as a percentage of sales through the
consolidation and integration of the two companies' management teams, corporate
offices and distribution centers. This process was substantially completed at
the time of the acquisition. At the same time, the acquisition allowed the
Company to reduce the average depreciation per store due to the favorable
acquisition price. As a result of the acquisition of Contempo Casuals and the
Company's strong balance sheet, the Company believes it is well-positioned to
capitalize on the growth in the teenage population and the expected continuing
changes in the competitive environment of the retailing industry.

Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Financial Statements
and the Notes thereto.

RESULTS OF OPERATIONS

The following discussion and analysis of results of operations includes a
comparison of the results of operations for fiscal 1996, which contained the
full year results for both Wet Seal stores and Contempo Casuals stores, to
fiscal 1995, which contained the full year results of the Wet Seal stores and
the seven month results of the Contempo Casuals stores which were acquired on
July 1, 1995. Therefore, the results of operations for fiscal 1995 are not
directly comparable to those of fiscal 1996.

Comparable store sales are defined as sales in stores that were open
throughout the full fiscal year and throughout the full prior fiscal year. In
the last seven months of fiscal 1995, comparable store sales included sales
results of Contempo Casuals stores as compared to sales results of Contempo
Casuals stores in the corresponding period in the prior year during which time
Contempo Casuals was under different ownership.

The following table sets forth selected income statement data of the Company
expressed as a percent of sales for the years indicated:

AS A PERCENTAGE OF SALES
FISCAL YEAR ENDED
-------------------------------------------

JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
------------- ------------- -------------
Sales (including frequent buyer sales income).............................. 100.0% 100.0% 100.0%
Cost of sales (including buying, distribution and occupancy costs)......... 71.0 72.6 75.2
----- ----- -----
Gross margin............................................................... 29.0 27.4 24.8
Selling, general and administrative expenses............................... 21.1 21.1 21.6
----- ----- -----
Operating income........................................................... 7.9 6.3 3.2
Interest income, net....................................................... (0.9) (0.7) (0.5)
----- ----- -----
Income before provision for income taxes................................... 8.8 7.0 3.7
Provision for income taxes................................................. 3.6 2.9 1.5
----- ----- -----
Net income................................................................. 5.2% 4.1% 2.2%
----- ----- -----
----- ----- -----

FISCAL 1997 COMPARED TO FISCAL 1996

Sales in fiscal 1997 (52 weeks) were $412,463,000 compared to sales in
fiscal 1996 (52 weeks) of $374,942,000, an increase of $37,521,000 or 10%. The
dollar increase in sales in fiscal 1997 compared to fiscal 1996 was primarily
due to the increase in the comparable store sales and the increase in frequent
buyer sales income in fiscal 1997 compared to fiscal 1996. The Company
attributes the increase in comparable store sales of 5.8% to the continued
resurgence of fashion that began in fiscal 1996. The increase in sales was also
due to a slightly lesser extent to the impact of the 34 new store openings in
fiscal 1997 and the full year impact in 1997 of the 10 new store openings in
fiscal 1996. These increases were somewhat offset by the closing of nine stores
in fiscal 1997.

Cost of sales, including buying, distribution and occupancy costs, was
$292,644,000 in fiscal 1997 compared to $272,189,000 in fiscal 1996, an increase
of $20,455,000 or 7.5%. As a percentage of sales, cost of sales decreased to
71.0% in fiscal 1997, from 72.6% in fiscal 1996, a decrease of 1.6%. The dollar
increase in cost of sales in fiscal 1997 compared to fiscal 1996 was due
primarily to the increase in sales. Of the 1.6% decrease in cost of sales as a
percentage of sales, 1.0% related to a decrease in occupancy costs, 0.4% related
to a decrease in the cost of merchandise and 0.3% related to a decrease in
distribution costs, offset by a 0.1% increase in buying costs. The decrease in
occupancy costs was associated primarily with a decrease in store rental
expenses as a percent of sales as a result of the expense leverage related to
the increase in comparable store sales. The decrease of 0.4% in merchandise cost
was due to an increase in the initial markup rates related to a decrease in the
cost of merchandise. The 0.3% decrease in distribution costs was related to a
decrease in depreciation due to the impact of fully depreciated assets in the
current year and to cost efficiencies related to processing the merchandise.
These decreases were offset by a 0.1% increase in buying costs which was
associated with payroll and personnel increases during the year to support the
larger operations.

Selling, general and administrative expenses were $86,999,000 in fiscal 1997
compared to $79,238,000 in fiscal 1996, an increase of $7,761,000 or 9.8%. As a
percentage of sales, selling, general and administrative expenses remained the
same at 21.1% in fiscal 1997 as compared to fiscal 1996. The dollar increase in
selling, general and administrative expenses in fiscal 1997 compared to fiscal
1996 was primarily due to the increase in sales and an increase in management
expenses related to bonuses and retirement plans, offset by a decrease in office
depreciation related to the impact of fully-depreciated assets, proceeds related
to an insurance reimbursement and a decrease in non-payroll related selling
expenses as a result of the economies of scale associated with the increase in
comparable store sales.

Interest income, net, was $3,505,000 in fiscal 1997 compared to $2,702,000
in fiscal 1996, an increase of $803,000. This increase was due primarily to an
increase in the average cash balance invested.

Income tax expense was $15,075,000 in fiscal 1997 compared to $10,965,000 in
fiscal 1996. The effective income tax rate in fiscal 1997 was 41.5% compared to
a rate of 41.8% in fiscal 1996.

Based on the factors noted above, net income was $21,250,000 in fiscal 1997
compared to $15,252,000 in fiscal 1996, an increase of $5,998,000 or 39.3%. As a
percentage of sales, net income was 5.2% in fiscal 1997 compared to 4.1% in
fiscal 1996.

FISCAL 1996 COMPARED TO FISCAL 1995

Sales in fiscal 1996 (52 weeks) were $374,942,000 compared to sales in
fiscal 1995 (53 weeks) of $266,695,000, an increase of $108,247,000 or 40.6%.
The dollar increase in sales in fiscal 1996 compared to fiscal 1995 was
primarily due to the acquisition of Contempo Casuals and, to a lesser extent, to
the increase in the comparable store sales in fiscal 1996 compared to fiscal
1995. The Company attributes the increase in comparable store sales of 8.8% to
the resurgence of fashion at the beginning of fiscal 1996. Further contributing
to the sales increases were the opening of 10 new stores in fiscal 1996 offset
to some extent by the closing of 10 stores as well as the fact that fiscal 1996
had one less week of sales than fiscal 1995.

Cost of sales, including buying, distribution and occupancy costs, was
$272,189,000 in fiscal 1996 compared to $200,626,000 in fiscal 1995, an increase
of $71,563,000 or 35.7%. As a percentage of sales, cost of sales decreased from
75.2% in fiscal 1995 to 72.6% in fiscal 1996, a decrease of 2.6%. The dollar
increase in cost of sales in fiscal 1996 compared to fiscal 1995 was due
primarily to the increase in the number of stores as a result of the acquisition
of Contempo Casuals. Of the 2.6% decrease in cost of sales as a percentage of
sales, 1.8% related to a decrease in occupancy and buying costs and 0.8% related
to a decrease in the cost of merchandise. The decrease in occupancy costs was
associated primarily with a decrease in depreciation resulting from the lower
net book value per store of the depreciable assets of Contempo Casuals, as
compared to Wet Seal. The decrease of 0.8% in merchandise cost was due to an
increase in the initial markup rates.

Selling, general and administrative expenses were $79,238,000 in fiscal 1996
compared to $57,531,000 in fiscal 1995, an increase of $21,707,000 or 37.7%. As
a percentage of sales, selling, general and administrative expenses decreased
from 21.6% in fiscal 1995 to 21.1% in fiscal 1996, a decrease of .5%. The dollar
increase in selling, general and administrative expenses in fiscal 1996 compared
to fiscal 1995 was primarily due to the increase in the number of stores as a
result of the acquisition of Contempo Casuals. The decrease as a percentage of
sales was related to the economies of scale the Company achieved primarily as a
result of the increase in comparable store sales in fiscal 1996.

Interest income, net, was $2,702,000 in fiscal 1996 compared to $1,410,000
in fiscal 1995, an increase of $1,292,000. This increase was due primarily to an
increase in the average cash balance invested.

Income tax expense was $10,965,000 in fiscal 1996 compared to $4,133,000 in
fiscal 1995. The effective income tax rate in fiscal 1996 was 41.8% compared to
a rate of 41.5% in fiscal 1995.

Based on the factors noted above, net income was $15,252,000 in fiscal 1996
compared to $5,815,000 in fiscal 1995, an increase of 162%. As a percentage of
sales, net income was 4.1% in fiscal 1996 compared to 2.2% in fiscal 1995.

LIQUIDITY AND CAPITAL RESOURCES

Working capital at the end of fiscal 1997, 1996 and 1995 was $66,452,000,
$59,791,000 and $26,051,000, respectively. Net cash provided by operating
activities in fiscal 1997, 1996 and 1995 was $31,948,000, $28,187,000 and
$25,308,000, respectively. The increase in cash provided by operating activities
in fiscal 1997 was due to the increase in earnings. Further contributing to the
increase was the increase in accounts

payable and accrued liabilities offset to some extent by the increase in
inventory. The increase in accounts payable was attributable to the increase in
payables associated with capital expenditures as well as to the timing of
inventory receipts. The increase in inventory over the prior year was related to
the increase in the number of stores as well as to inventory held for the new
catalog operations at the end of fiscal 1997. The increase in cash provided by
operating activities in fiscal 1996 was due primarily to the increase in net
earnings. Further contributing to the increase was the increase in accounts
payable offset to some extent by the related increase in inventory as well as
the increase in deferred taxes. The increase in accounts payable was related to
the timing of inventory receipts. The increase in inventory was planned in order
to bring the inventories to an appropriate level to support planned sales. The
increase in deferred taxes was related primarily to the difference between book
and tax depreciation.

Additions to property and equipment are the Company's most significant
investment activities. In fiscal 1997, 1996 and 1995 the Company invested
$22,973,000, $8,620,000 and $2,585,000, respectively, in property and equipment
and leasehold improvements. These expenditures related primarily to new store
openings and remodelings. In fiscal 1997, the Company constructed a new office
and distribution facility. Primarily as a result of the Company's expanded
operations, capital expenditures for fiscal 1998 are currently estimated to be
$35,000,000.

On May 24, 1996 the Company sold 765,000 shares of Class A Common Stock as
part of a public offering pursuant to a registration statement on Form S-3. The
net proceeds to the Company from the sale of shares were $14,459,000.

The Company has an unsecured revolving line of credit arrangement with Bank
of America National Trust and Savings Association ("Bank of America") in an
aggregate principal amount of $30,000,000 and a five year amortizing term loan
with Bank of America in the amount of $10,000,000, maturing on July 1, 2000. At
January 31, 1998, there were no outstanding borrowings under the credit
arrangement, and the Company believes it was in compliance with all terms and
covenants of the credit arrangement and the term loan. The Company invests its
excess funds primarily in a short-term investment grade money market fund,
investment grade commercial paper and U.S. Treasury and Agency obligations.
Management believes the Company's working capital and cash flows from operating
activities will be sufficient to meet the Company's operating and capital
requirements in the foreseeable future.

SEASONALITY AND INFLATION

The Company's business is seasonal by nature with the Christmas season
(beginning the week of Thanksgiving and ending the first Saturday after
Christmas) and the back-to-school season (beginning the last week of July and
ending the first week of September) historically accounting for the largest
percentage of sales volume. In the Company's three fiscal years ended January
31, 1998, the Christmas and back-to-school seasons together accounted for an
average of approximately 33% of the Company's annual sales, after adjusting for
sales increases related to new stores. The Company does not believe that
inflation has had a material effect on the results of operations during the past
three years. However, there can be no assurance that the Company's business will
not be affected by inflation in the future.

STATEMENT REGARDING FORWARD LOOKING DISCLOSURE

The preceding "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections may contain various
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act, which represent the Company's expectations or beliefs
concerning future events. The Company cautions that these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including, without
limitation, the retention by the Company of suppliers for both brand name and
Company-developed merchandise, the ability of the Company to expand and to
continue to increase comparable store sales and

the sufficiency of the Company's working capital and cash flows from operating
activities. In addition, these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward looking statements, including, without limitation, a decline in demand
for the merchandise offered by the Company, the ability of the Company to locate
and obtain acceptable store sites and lease terms or renew existing leases, the
ability of the Company to obtain adequate merchandise supply, the ability of the
Company to hire and train employees, the ability of the Company to gauge the
fashion tastes of its customers and provide merchandise that satisfies customer
demand, management's ability to manage the Company's expansion, the effect of
economic conditions, the effect of severe weather or natural disasters and the
effect of competitive pressures from other retailers.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting
Comprehensive Income" which is effective for annual and interim periods
beginning after December 15, 1997. This statement requires that all items that
are to be recognized under accounting standards as comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.

In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which is effective for fiscal years
beginning after December 15, 1997. This statement standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures that are no longer as useful as they
were under previous statements.

YEAR 2000 COMPLIANCE

During fiscal 1998 and fiscal 1999, the Company plans to convert
substantially all of its computer systems and hardware. Prior to the purchase of
the new systems and hardware the Company obtained or is in the process of
obtaining assurance from the vendors that the products purchased are in fact
Year 2000 compliant. The Company will also complete an independent review of
such systems to further verify Year 2000 compliance. The Company has performed a
preliminary review of its existing computer systems and hardware to identify
processes which may be affected by Year 2000 problems. At this time, no
significant issues have been identified, however the Company will complete a
more thorough review of its existing systems by mid-1998 in order to ensure an
adequate plan exists for Year 2000 compliance in the event the conversions fall
behind schedule.

During fiscal 1998 and fiscal 1999, the Company will also complete a Year
2000 review of its relationships with suppliers and financial institutions and
obtain assurance, where necessary, that these entities are Year 2000 compliant.
Because the majority of the Company's computer systems and hardware have been
purchased or developed recently and were designed to be Year 2000 compliant, the
Company does not expect to incur significant costs in addressing the Year 2000
issue.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Filed under Item 14.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Inapplicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

All of the information called for by Part III (Items 10 through 13) is
incorporated by reference from the Company's definitive Proxy Statement in
connection with its Annual Meeting of Stockholders to be held June 9, 1998,
filed pursuant to Regulation 14A.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

1. Financial Statements See "Index to Financial Statements and Financial
Statement Schedules".

2. Financial Statement Schedules See "Index to Financial Statements and
Financial Statement Schedules".

3. Exhibits See "Exhibit Index".

(B) REPORTS ON FORM 8-K.

No reports on Form 8-K were filed during the last quarter of the fiscal year
ended January 31, 1998.

SIGNATURES

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

THE WET SEAL, INC. (REGISTRANT)

By: -----------------------------------------
Kathy Bronstein
VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER

By: -----------------------------------------
Edmond Thomas
PRESIDENT AND CHIEF OPERATING OFFICER

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

SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------

- ------------------------------ Director April 22, 1998
George H. Benter Jr.

- ------------------------------ Vice Chairman and Chief April 22, 1998
Kathy Bronstein Executive Officer and
Director (Principal
Executive Officer)

- ------------------------------ Secretary and Director April 22, 1998
Stephen Gross

- ------------------------------ Vice President of Finance April 22, 1998
Ann Cadier Kim and Chief Financial
Officer (Principal
Financial and Accounting
Officer)

- ------------------------------ Director April 22, 1998
Walter F. Loeb

SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------

- ------------------------------ Director April 22, 1998
Wilfred Posluns

- ------------------------------ Director April 22, 1998
Gerald Randolph

- ------------------------------ Director April 22, 1998
Alan Siegel

- ------------------------------ Chairman of the Board and April 22, 1998
Irving Teitelbaum Director

- ------------------------------ President and Chief April 22, 1998
Edmond Thomas Operating Officer and
Director

THE WET SEAL, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

PAGE
---------

INDEPENDENT AUDITORS' REPORT:
Report of Deloitte & Touche LLP............................................................................ 19

FINANCIAL STATEMENTS:
Balance sheets as of January 31, 1998 and February 1, 1997................................................. 20
Statements of operations for the years ended January 31, 1998, February 1, 1997 and February 3, 1996....... 21
Statements of stockholders' equity for the years ended January 31, 1998, February 1, 1997 and February 3,
1996..................................................................................................... 22
Statements of cash flows for the years ended January 31, 1998, February 1, 1997 and February 3, 1996....... 23
Notes to financial statements.............................................................................. 24

FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted as they are not required, or the required information is shown in the financial
statements or the notes thereto.

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
The Wet Seal, Inc.:

We have audited the accompanying balance sheets of The Wet Seal, Inc. as of
January 31, 1998 and February 1, 1997 and the related statements of operations,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended January 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Wet Seal, Inc. as of
January 31, 1998 and February 1, 1997 and the results of its operations and its
cash flows for each of the three fiscal years in the period ended January 31,
1998, in conformity with generally accepted accounting principles.

Deloitte & Touche LLP
March 13, 1998
Costa Mesa, California

THE WET SEAL, INC.

BALANCE SHEETS

ASSETS

JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents (Note 1).................................................... $76,056,000 $71,483,000
Short-term investments (Note 1)....................................................... 19,817,000 17,700,000
Other receivables..................................................................... 3,209,000 1,577,000
Merchandise inventories............................................................... 26,884,000 22,589,000
Prepaid expenses (Note 1)............................................................. 330,000 --
Deferred tax charges (Note 3)......................................................... 1,137,000 693,000
----------- -----------
Total current assets................................................................ 127,433,000 114,042,000
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements................................................................ 65,465,000 55,429,000
Furniture, fixtures and equipment..................................................... 24,965,000 21,742,000
Leasehold rights...................................................................... 3,692,000 3,342,000
Construction in progress.............................................................. 2,000 2,000
----------- -----------
94,124,000 80,515,000
Less accumulated depreciation......................................................... (49,171,000) (47,285,000)
----------- -----------
Net equipment and leasehold improvements............................................ 44,953,000 33,230,000
----------- -----------
LONG-TERM INVESTMENTS (Note 1)........................................................ 499,000 --
OTHER ASSETS:
Deferred tax charges and other assets (Notes 3 and 12)................................ 10,817,000 6,914,000
Goodwill, net of accumulated amortization of $611,000 and $566,000 as of January 31,
1998 and February 1, 1997, respectively............................................. 521,000 566,000
----------- -----------
Total other assets.................................................................. 11,338,000 7,480,000
----------- -----------
$184,223,000 $154,752,000
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................................... $35,858,000 $26,035,000
Accrued liabilities (Note 11)......................................................... 20,570,000 24,064,000
Income taxes payable (Note 3)......................................................... 2,553,000 2,152,000
Current portion of long-term debt (Note 8)............................................ 2,000,000 2,000,000
----------- -----------
Total current liabilities........................................................... 60,981,000 54,251,000
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt (Note 8)............................................................... 1,264,000 3,264,000
Deferred rent......................................................................... 6,254,000 6,117,000
Other long-term liabilities (Note 12)................................................. 2,730,000 --
----------- -----------
Total long-term liabilities......................................................... 10,248,000 9,381,000
----------- -----------
Total liabilities................................................................... 71,229,000 63,632,000
----------- -----------
COMMITMENTS (Note 6)
STOCKHOLDERS' EQUITY: (Notes 4 and 5)
Preferred Stock, $.01 par value, authorized, 2,000,000 shares; none issued and
outstanding......................................................................... -- --
Common Stock, Class A, $.10 par value, authorized 20,000,000 shares; 10,656,578 and
10,628,874 shares issued and outstanding at January 31, 1998 and February 1, 1997,
respectively........................................................................ 1,066,000 1,063,000
Common Stock, Class B Convertible, $.10 par value, authorized 10,000,000 shares;
2,912,665 shares issued and outstanding at January 31, 1998 and February 1, 1997.... 291,000 291,000
Paid-in capital....................................................................... 57,217,000 56,596,000
Retained earnings..................................................................... 54,420,000 33,170,000
----------- -----------
Total Stockholders' Equity.......................................................... 112,994,000 91,120,000
----------- -----------
$184,223,000 $154,752,000
----------- -----------
----------- -----------

See accompanying notes to financial statements.

THE WET SEAL, INC.

STATEMENTS OF OPERATIONS

JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
-------------- -------------- --------------

SALES........................................................... $ 412,463,000 $ 374,942,000 $ 266,695,000
COST OF SALES (including buying, distribution and occupancy
costs)........................................................ 292,644,000 272,189,000 200,626,000
-------------- -------------- --------------
GROSS MARGIN.................................................... 119,819,000 102,753,000 66,069,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 9)........... 86,999,000 79,238,000 57,531,000
-------------- -------------- --------------
OPERATING INCOME................................................ 32,820,000 23,515,000 8,538,000
INTEREST INCOME, NET (Note 8)................................... (3,505,000) (2,702,000) (1,410,000)
-------------- -------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAXES........................ 36,325,000 26,217,000 9,948,000
PROVISION FOR INCOME TAXES (Note 3)............................. 15,075,000 10,965,000 4,133,000
-------------- -------------- --------------
NET INCOME...................................................... $ 21,250,000 $ 15,252,000 $ 5,815,000
-------------- -------------- --------------
-------------- -------------- --------------
NET INCOME PER SHARE, BASIC (Note 13)........................... $ 1.57 $ 1.15 $ 0.47
NET INCOME PER SHARE, DILUTED (Note 13)......................... $ 1.53 $ 1.13 $ 0.47
-------------- -------------- --------------
-------------- -------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC (Note 1)............. 13,552,502 13,219,284 12,387,140
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED (Note 1)........... 13,899,877 13,459,810 12,500,564
-------------- -------------- --------------
-------------- -------------- --------------

See accompanying notes to financial statements.

THE WET SEAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY

COMMON STOCK
---------------------------------------------

CLASS A CLASS B
---------------------- ---------------------

TOTAL
PAID-IN RETAINED STOCKHOLDERS'
SHARES PAR VALUE SHARES PAR VALUE CAPITAL EARNINGS EQUITY
---------- ---------- ---------- --------- ----------- ----------- -------------

Balance at January 29, 1995................ 4,328,937 $ 433,000 7,907,665 $791,000 $37,397,000 $12,103,000 $ 50,724,000
Stock issued pursuant to long-term
incentive plan (Note 5).................. 1,453 -- -- -- 11,000 -- 11,000
Exercise of stock options.................. 2,000 -- -- -- 7,000 -- 7,000
Conversion of Class B Common Stock to Class
A Common Stock (Note 4).................. 1,100,000 110,000 (1,100,000) (110,000 ) -- -- --
Issuance of Class A Common Stock pursuant
to acquisition of Contempo Casuals (Notes
2 and 4)................................. 254,676 25,000 -- -- 1,153,000 -- 1,178,000
Net income................................. -- -- -- -- -- 5,815,000 5,815,000
---------- ---------- ---------- --------- ----------- ----------- -------------
Balance at February 3, 1996................ 5,687,066 568,000 6,807,665 681,000 38,568,000 17,918,000 57,735,000
Issuance of Class A Common Stock pursuant
to Public Offering
(Note 4)................................. 765,000 76,000 -- -- 14,383,000 -- 14,459,000
Stock issued pursuant to long-term
incentive plan (Note 5).................. 5,308 1,000 -- -- 106,000 -- 107,000
Exercise of stock options (Note 5)......... 276,500 28,000 -- -- 1,712,000 -- 1,740,000
Tax benefit related to exercise of stock
options (Note 5)......................... -- -- -- -- 1,827,000 -- 1,827,000
Conversion of Class B Common Stock to Class
A Common Stock (Note 4).................. 3,895,000 390,000 (3,895,000) (390,000 ) -- -- --
Net income................................. -- -- -- -- -- 15,252,000 15,252,000
---------- ---------- ---------- --------- ----------- ----------- -------------
Balance at February 1, 1997................ 10,628,874 1,063,000 2,912,665 291,000 56,596,000 33,170,000 91,120,000
Stock issued pursuant to long-term
incentive plan (Note 5) 8,704 1,000 -- -- 265,000 -- 266,000
Exercise of stock options (Note 5)......... 19,000 2,000 -- -- 212,000 -- 214,000
Tax benefit related to exercise of stock
options (Note 5)......................... -- -- -- -- 144,000 -- 144,000
Net income................................. -- -- -- -- -- 21,250,000 21,250,000
---------- ---------- ---------- --------- ----------- ----------- -------------
Balance at January 31, 1998................ 10,656,578 $1,066,000 2,912,665 $291,000 $57,217,000 $54,420,000 $112,994,000
---------- ---------- ---------- --------- ----------- ----------- -------------
---------- ---------- ---------- --------- ----------- ----------- -------------

See accompanying notes to financial statements.

THE WET SEAL, INC.
STATEMENTS OF CASH FLOWS

JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
----------- ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $21,250,000 $15,252,000 $5,815,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 11,295,000 11,848,000 10,384,000
Loss on disposal of equipment and leasehold improvements............... -- 153,000 14,000
Stock issued pursuant to long-term incentive plan...................... 266,000 107,000 11,000
Deferred tax, net...................................................... (2,189,000) (3,084,000) (2,155,000)
Changes in operating assets and liabilities, net of effect of
acquisition:
Other receivables.................................................... (1,632,000) (1,054,000) 41,000
Tax refund receivable................................................ -- -- 59,000
Merchandise inventories.............................................. (4,295,000) (6,348,000) 2,436,000
Prepaid expenses..................................................... (330,000) 428,000 1,093,000
Other assets......................................................... (118,000) 38,000 (69,000)
Accounts payable and accrued liabilities............................. 6,329,000 9,276,000 3,529,000
Income taxes payable................................................. 545,000 625,000 3,117,000
Deferred rent........................................................ 137,000 946,000 1,033,000
Other long-term liabilities.......................................... 690,000 -- --
----------- ------------ ------------
Net cash provided by operating activities.............................. 31,948,000 28,187,000 25,308,000
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements....................... (22,973,000) (8,620,000) (2,585,000)
Investment in marketable securities...................................... (42,320,000) (17,700,000) --
Cash paid for acquisition, less cash acquired............................ -- -- (20,000)
Proceeds from sale of equipment and leasehold improvements............... -- -- 74,000
Proceeds from sale of marketable securities.............................. 39,704,000 -- --
----------- ------------ ------------
Net cash (used in) investing activities.................................. (25,589,000) (26,320,000) (2,531,000)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................................. -- -- 10,000,000
Principal payments on long-term debt..................................... (2,000,000) (3,736,000) (1,000,000)
Proceeds from issuance of common stock................................... 214,000 16,199,000 7,000
----------- ------------ ------------
Net cash (used in) provided by financing activities...................... (1,786,000) 12,463,000 9,007,000
----------- ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 4,573,000 14,330,000 31,784,000
CASH AND CASH EQUIVALENTS, beginning of year............................. 71,483,000 57,153,000 25,369,000
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of year................................... $76,056,000 $71,483,000 $57,153,000
----------- ------------ ------------
----------- ------------ ------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................................... $ 337,000 $ 538,000 $ 498,000
Income taxes, net...................................................... 16,720,000 13,424,000 2,829,000
SCHEDULE OF NONCASH TRANSACTIONS:
The Company acquired the assets of Contempo Casuals during the year ended
February 3, 1996. In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired............................................ -- -- $29,592,000
Cash paid to seller and transaction costs................................ -- -- 750,000
Common stock issued...................................................... -- -- 1,178,000
------------
Liabilities assumed.................................................... -- -- $27,664,000

In connection with the acquisition, the Company recorded a net deferred tax
liability of $433,000.

During the fifty-two weeks ended January 31, 1998 and February 1, 1997, the
Company recorded an increase to paid-in capital of $144,000 and $1,827,000,
respectively, related to tax benefits associated with the exercise of
non-qualified stock options.

During the fifty-two weeks ended February 1, 1997, the Company reduced
certain estimated liabilities assumed in connection with the acquisition of
Contempo Casuals. As a result, a reduction in accounts payable of $1,481,000 was
recorded with a corresponding reduction in fixed assets. During the fifty-three
weeks ended February 3, 1996, the Company acquired the assets of Contempo
Casuals for common stock valued at $1,178,000.

See accompanying notes to financial statements.

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF THE BUSINESS

The Wet Seal, Inc. (the Company) is a nationwide specialty retailer of
moderately priced, fashionable, casual apparel and accessory items designed for
consumers with a young, active lifestyle. On July 1, 1995, the Company acquired
Contempo Casuals, Inc., a 237-store retail junior women's chain. This
acquisition substantially increased the Company's size. The Company's success is
largely dependent upon its ability to gauge the fashion tastes of its customers
and to provide merchandise that satisfies customer demand. The Company's failure
to anticipate, identify or to react to changes in fashion trends could adversely
affect the Company. Approximately 30% of the voting stock of the Company is held
by a group of companies directly or indirectly controlled by two directors of
the Company, one of which is the Chairman of the Board. Effective February 2,
1997, Contempo Casuals, Inc. was merged with and into The Wet Seal, Inc. forming
one legal entity.

The Company's fiscal year ends on the Saturday closest to the end of
January. In fiscal 1995, the reporting period included 53 weeks as compared to
52 weeks in each of fiscal years 1996 and 1997.

INVESTMENTS

Short-term investments consist of highly liquid interest bearing deposits
purchased with an initial maturity exceeding three months with a remaining
maturity at January 31, 1998 less than twelve months. Long-term investments
consist of highly liquid interest bearing securities which mature beyond twelve
months from the balance sheet date. It is management's intent to hold short-term
and long-term investments to maturity. Short-term and long-term investments are
carried at amortized cost plus accrued income, which approximates market at
January 31, 1998.

Investments are comprised of the following:

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DESCRIPTION MATURITY DATES COST GAINS LOSSES FAIR VALUE
- ------------------------------------- ------------------- ------------- ----------- ----------- -------------

JANUARY 31, 1998
Commercial paper..................... Within one year $ 14,905,000 $ -- $ -- $ 14,905,000
Corporate bonds...................... Within one year 1,372,000 1,000 -- 1,373,000
Municipal bonds...................... Within one year 3,540,000 -- 7,000 3,533,000
Corporate bonds...................... One to two years 499,000 1,000 -- 500,000
------------- ----------- ----------- -------------
$ 20,316,000 $ 2,000 $ 7,000 $ 20,311,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
FEBRUARY 1, 1997
Commercial paper..................... Within one year $ 17,700,000 $ -- $ -- $ 17,700,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------

MERCHANDISE INVENTORIES

Merchandise inventories are stated at the lower of cost (first-in,
first-out) or market. Cost is determined using the retail inventory method.

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements are stated at cost. Expenditures for
betterment or improvement are capitalized, while expenditures for repairs that
do not significantly increase the life of the asset are expensed as incurred.

Depreciation is provided using primarily the straight-line method over the
estimated useful lives of the assets. Furniture, fixtures and equipment are
typically depreciated over 3 to 5 years. Leasehold improvements and the cost of
acquiring leasehold rights are depreciated over the lesser of the term of the
lease or 10 years.

LONG-LIVED ASSETS

The Company accounts for the impairment and disposition of long-lived assets
in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS No. 121"). In accordance with SFAS No. 121, long-lived
assets to be held are reviewed for events or changes in circumstances which
indicate that their carrying value may not be recoverable. At January 31, 1998,
the Company believes there has been no impairment of the value of such assets.

INTANGIBLE ASSET

Excess of cost over net assets acquired (goodwill) is being amortized on the
straight-line method over 25 years. The goodwill was established in fiscal 1984.
The Company assesses the recoverability of goodwill at each balance sheet date
by determining whether the amortization of the balance over its remaining useful
life can be recovered through projected undiscounted future operating cash
flows.

RENTAL EXPENSE

Any defined rental escalations are averaged over the term of the related
lease in order to provide level recognition of rental expense.

STORE PRE-OPENING COSTS

Store opening and pre-opening costs are charged to expense as they are
incurred.

ADVERTISING COSTS

Costs for advertising related to retail operations are expensed as incurred.
Direct response advertising costs consisting primarily of catalog book
production and printing costs are capitalized and amortized over the expected
life of the catalog, not to exceed 6 months. Direct response advertising costs
reported as prepaid assets are $330,000 at January 31, 1998. Total advertising
expenses in fiscal 1997, 1996 and 1995 were $1,676,000, $1,728,000 and
$1,391,000, respectively.

INCOME TAX

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Deferred tax charges are provided

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on items, principally depreciation and rent, for which there are temporary
differences in recording such items for financial reporting purposes and for
income tax purposes.

NET INCOME PER SHARE

The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") beginning with the Company's fourth
quarter of fiscal 1997. All prior period earnings per common share data have
been restated to conform to the provisions of this statement. Net income per
share, basic, is computed based on the weighted average number of common shares
outstanding for the period. 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. (See Note 13.)

STATEMENTS OF CASH FLOWS

For purposes of the statements of cash flows, the Company considers all
highly liquid interest-earning deposits purchased with an initial maturity of
three months or less to be cash equivalents. At January 31, 1998 and February 1,
1997, cash equivalents totaled $72,212,000 and $69,611,000, respectively,
bearing interest at rates ranging from approximately 5.4% to 5.6% at January 31,
1998 and from approximately 5.1% to 5.4% at February 1, 1997.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130 "Reporting Comprehensive Income" which is effective for annual and
interim periods beginning after December 15, 1997. This statement requires that
all items that are to be recognized under accounting standards as comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Management believes the carrying amounts of cash and cash equivalents,
accounts receivable and accounts payable approximate fair value due to the short
maturity of these financial instruments. Long-

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
term debt bears a variable rate of interest; therefore, management believes the
carrying amount for the outstanding borrowings at January 31, 1998 and February
1, 1997 approximate fair value.

STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees." (See Note 5.)

NOTE 2: ACQUISITION

On July 1, 1995, the Company acquired the business, assets and properties of
Contempo Casuals, Inc., a 237-store retail junior women's chain with stores in
34 states and Puerto Rico. The purchase price consisted of (a) the issuance of
254,676 shares of the Company's Class A Common Stock which had a value of
$1,178,000 on the date of the acquisition, and (b) $100,000 in cash. The
transaction was accounted for under the purchase method. In connection with the
acquisition, the Company assumed certain liabilities which were estimated by the
seller. The total amount of these assumed liabilities may not, in fact, be paid
as the actual payments will be based on the future claims and losses which are
actually submitted and which are related to pre-acquisition events. (See Note
11.)

NOTE 3: PROVISION FOR INCOME TAXES

SFAS No. 109 requires the recognition of deferred tax assets and liabilities
for the future consequences of events that have been recognized in the Company's
financial statements or tax returns. The measurement of deferred items is based
on enacted tax laws. In the event that the future consequences of differences
between financial reporting bases and the tax bases of the Company's assets and
liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation
of the probability of being able to realize the future benefits indicated by
such asset. A valuation allowance related to a deferred tax asset is recorded
when it is more likely than not that some portion or all of the deferred tax
assets will not be realized.

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 3: PROVISION FOR INCOME TAXES (CONTINUED)
The components of the income tax provision are as follows:

JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
------------- ------------- -------------

CURRENT:
Federal............................................................. $ 12,886,000 $ 10,674,000 $ 5,170,000
State............................................................... 4,378,000 3,375,000 1,127,000
------------- ------------- -------------
17,264,000 14,049,000 6,297,000
------------- ------------- -------------
DEFERRED:
Federal............................................................. (1,535,000) (2,569,000) (1,926,000)
State............................................................... (654,000) (515,000) (238,000)
------------- ------------- -------------
(2,189,000) (3,084,000) (2,164,000)
------------- ------------- -------------
$ 15,075,000 $ 10,965,000 $ 4,133,000
------------- ------------- -------------
------------- ------------- -------------

A reconciliation of the income tax provision to the amount of the provision
that would result from applying the federal statutory rate (35%) to income
before taxes is as follows:

JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
------------- ------------- -------------

Provision for income taxes at federal statutory rate....................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit...................... 7.2 7.1 6.5
Tax exempt interest........................................................ (2.0) (0.5) --
Change in valuation allowance.............................................. -- -- (1.1)
Other...................................................................... 1.3 0.2 1.1
--- --- ---
Effective tax rate......................................................... 41.5% 41.8% 41.5%
--- --- ---
--- --- ---

As of January 31, 1998 and February 1, 1997, the Company's net deferred tax
asset was $9,585,000 and $7,396,000 respectively. The major components of the
Company's net deferred taxes at January 31, 1998 and February 1, 1997 are as
follows:

JANUARY 31, FEBRUARY 1,
1998 1997
------------ ------------

Deferred rent......................................................................... $ 2,782,000 $ 2,706,000
Acquisition related reserves.......................................................... 650,000 2,508,000
Inventory cost capitalization......................................................... 808,000 653,000
Difference between book and tax basis of fixed assets................................. 4,643,000 1,445,000
State income taxes.................................................................... (136,000) (63,000)
Other................................................................................. 838,000 147,000
------------ ------------
$ 9,585,000 $ 7,396,000
------------ ------------
------------ ------------

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 4: STOCKHOLDERS' EQUITY

The 2,912,665 shares of the Company's Class B Common Stock outstanding as of
February 1, 1997 are convertible on a share-for-share basis into shares of the
Company's Class A Common Stock at the option of the holder. The Class B Common
Stock has two votes per share while the Class A Common Stock has one vote per
share.

During the year ended February 1, 1997, major stockholders converted
3,895,000 shares of Class B Common Stock to Class A Common Stock. These shares
were sold to the public through registration statements on Form S-3. The Company
did not receive any proceeds from these transactions.

On May 24, 1996 the Company sold 765,000 shares of Class A Common Stock as a
part of a public offering pursuant to a registration statement on Form S-3. The
net proceeds to the Company from the sale of shares were $14,459,000.

During the year ended February 3, 1996, a major stockholder converted
1,100,000 shares of Class B Common Stock to Class A Common Stock. These shares
were then sold to the public through a registration statement on Form S-3. The
Company did not receive any proceeds from this transaction.

On July 1, 1995, 254,676 shares of the Company's Class A Common Stock were
issued pursuant to the acquisition of Contempo Casuals, Inc. (See Note 2.)

NOTE 5: LONG-TERM INCENTIVE PLAN

Under the Company's long-term incentive plans (the "plans"), the Company may
grant stock options which are either incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified stock options. The plans provide that the per share exercise price
of an incentive 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. Options become
exercisable over periods of up to five years and generally expire ten years from
the date of grant or 90 days after employment or services are terminated. The
plans also provide that the Company may grant restricted stock and other
stock-based awards. An aggregate of 1,475,000 shares of the Company's Class A
Common Stock may be issued pursuant to the plans. As of January 31, 1998,
148,539 shares were available for future grants.

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 5: LONG-TERM INCENTIVE PLAN (CONTINUED)
Stock option activity for each of the three years in the period ended
January 31, 1998 was as follows:

NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- -----------------

Outstanding at January 29, 1995................................. 615,000 $ 5.06
Granted....................................................... 30,000 6.08
Canceled...................................................... (8,000) 3.88
Exercised..................................................... (2,000) 3.88
-----------
Outstanding at February 3, 1996................................. 635,000 5.12
Granted....................................................... 60,000 20.86
Canceled...................................................... (6,000) 4.13
Exercised..................................................... (276,500) 6.29
-----------
Outstanding at February 1, 1997................................. 412,500 6.64
Granted....................................................... 595,000 20.00
Canceled...................................................... (21,000) 17.70
Exercised..................................................... (19,000) 11.24
-----------
Outstanding at January 31, 1998................................. 967,500 $ 14.53
-----------
-----------

At January 31, 1998, February 1, 1997 and February 3, 1996 there were
119,500, 19,500 and 185,000 outstanding options exercisable at a weighted
average exercise price of $4.65, $4.40 and $7.36, respectively.

Additional information regarding options outstanding as of January 31, 1998
is as follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------

NUMBER NUMBER
OUTSTANDING WEIGHTED WEIGHTED EXERCISABLE WEIGHTED
AS OF AVERAGE AVERAGE AS OF AVERAGE
RANGE OF JAN. 31, REMAINING EXERCISE JAN. 31, EXERCISE
EXERCISE PRICES 1998 CONTRACTUAL LIFE PRICE 1998 PRICE
- ----------------- ------------ ----------------------- ----------- ------------ -----------
$ 3.00 - $ 3.63 37,000 6.36 $ 3.49 15,000 $ 3.54
4.13 - 5.13 292,500 6.22 4.20 99,500 4.22
8.00 - 17.44 16,000 8.39 12.72 2,000 8.00
20.00 - 22.00 622,000 9.33 20.09 3,000 22.00
------------ ------------
$ 3.00 - $22.00 967,500 8.26 $ 14.53 119,500 $ 4.65

During the years ended January 31, 1998 and February 1, 1997, the Company
recognized tax benefits of $144,000 and $1,827,000, respectively, resulting from
the exercise of certain non-qualified stock options.

ADDITIONAL LONG-TERM INCENTIVE PLAN INFORMATION

As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee incentive stock options or non-qualifed stock options.

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 5: LONG-TERM INCENTIVE PLAN (CONTINUED)
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 48 months following
vesting; stock volatility, 72.23% in fiscal 1997, 65.95% in fiscal 1996 and
48.34% in fiscal 1995; risk free interest rates, 6.10% in fiscal 1997, 6.38% in
fiscal 1996 and 5.71% in fiscal 1995; and no dividends during the expected term.
The Company's calculations are based on a valuation approach and forfeitures are
recognized as they occur. If the computed fair values of the fiscal 1997, fiscal
1996 and fiscal 1995 awards had been amortized to expense over the vesting
period of the awards, net income and earnings per share would have been reduced
to the pro forma amounts indicated below:

FISCAL FISCAL FISCAL
1997 1996 1995
------------- ------------- -------------

Net Income.......................................... As reported $ 21,250,000 $ 15,252,000 $ 5,815,000
Pro forma $ 20,745,000 $ 15,192,000 $ 5,811,000
Net Income Per Share, Basic......................... As reported $ 1.57 $ 1.15 $ 0.47
Pro forma $ 1.53 $ 1.15 $ 0.47
Net Income Per Share, Diluted....................... As reported $ 1.53 $ 1.13 $ 0.47
Pro forma $ 1.49 $ 1.13 $ 0.47

The impact of outstanding non-vested stock options granted prior to 1995 has
been excluded from the pro forma calculation; accordingly, the above pro forma
adjustments are not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.

As of January 31, 1998, the Company has granted an aggregate of 61,461
shares of Class A Common Stock, net of forfeitures, to a group of its key
employees under the performance grant award plan which was instituted pursuant
to the Company's plans. Under the performance grant award plan, key employees of
the Company receive Class A Common Stock in proportion to their salary. These
bonus shares vest at the rate of 33.33% per year and non-vested shares are
subject to forfeiture if the participant terminates employment. Compensation
expense, equal to the market value of the shares as of the issue date, is being
charged to earnings over the period that the employees provide service. In each
of the years ended January 31, 1998, February 1, 1997 and February 3, 1996,
8,704, 5,308 and 1,453 shares, respectively, were fully vested and issued. In
connection with the issuance of these shares, the Company recorded compensation
expense of $267,000, $107,000 and $11,000 for the years ended January 31, 1998,
February 1, 1997 and February 3, 1996, respectively.

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 6: COMMITMENTS

LEASES

The Company leases retail stores, automobiles, computers and corporate
office and warehouse facilities under operating lease agreements expiring at
various times through 2009. Substantially all of the leases require the Company
to pay maintenance, insurance, property taxes and percentage rent ranging from
4% to 10%, based on sales volume over certain minimum sales levels. Effective
February 1998, the Company entered into a sublease agreement for its former
warehouse facility which expires in August 2002.

Minimum annual rental commitments under non-cancelable leases, including the
new corporate office and warehouse facility lease executed at the end of fiscal
1997, are as follows:

MINIMUM LEASE SUBLEASE NET LEASE
COMMITMENTS INCOME COMMITMENTS
--------------- ------------ --------------

FISCAL YEAR ENDING: 1999....................................... $ 44,209,000 $ 647,000 $ 43,562,000
2000....................................... 41,239,000 647,000 40,592,000
2001....................................... 38,178,000 647,000 37,531,000
2002....................................... 32,874,000 647,000 32,227,000
2003....................................... 26,077,000 377,000 25,700,000
Thereafter................................. 69,355,000 -- 69,355,000
--------------- ------------ --------------
$ 251,932,000 $ 2,965,000 $ 248,967,000
--------------- ------------ --------------
--------------- ------------ --------------

Rental expense, including common area maintenance, was $64,384,000,
$62,391,000 and $46,010,000, of which $377,000, $345,000 and $152,000 was paid
as percentage rent based on sales volume, for the years ended January 31, 1998,
February 1, 1997 and February 3, 1996, respectively.

EMPLOYMENT CONTRACTS

The Company has employment contracts with two officers, which provide for
minimum annual salaries, customary benefits and allowances, and incentive
bonuses if specified Company earnings levels are achieved. The agreements
provide these same officers with severance benefits which approximate three
years' salary if the agreements are terminated without cause before expiration
of their terms or if the individual's duties materially change following a
change in control of the Company.

LITIGATION

The Company is a defendant in various lawsuits arising in the ordinary
course of its business. While the ultimate liability, if any, arising from these
claims cannot be predicted with certainty, the Company is of the opinion that
their resolution will not likely have a material adverse effect on the Company's
financial statements.

LETTERS OF CREDIT

At January 31, 1998, the Company had outstanding letters of credit amounting
to approximately $3,293,000.

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 7: REVOLVING CREDIT ARRANGEMENT

Under an unsecured revolving line-of-credit arrangement with a bank, the
Company may borrow up to a maximum of $30 million on a revolving basis through
July 1, 1998. The cash borrowings under the arrangement bear interest at the
bank's prime rate or, at the Company's option, LIBOR plus 1.75%.

The credit arrangement imposes quarterly and annual financial covenants
requiring the Company to maintain certain financial ratios and achieve certain
levels of annual income. In addition, the credit arrangement requires that the
bank approve the payment of dividends and restrict the level of capital
expenditures. At January 31, 1998 and February 1, 1997, the Company was in
compliance with these covenants. The Company had no borrowings outstanding under
the credit arrangement at January 31, 1998 or February 1, 1997.

NOTE 8: LONG-TERM DEBT

In June 1995, the Company entered into an unsecured five-year, $10 million
term loan. The loan bears interest at the bank's prime rate plus .25% or, at the
Company's option, LIBOR plus 1.75% (7.3438% at fiscal year end). The estimated
annual principal payments on the loan are $2,000,000 payable in quarterly
installments of $500,000 beginning October 31, 1995.

The term loan imposes quarterly and annual financial covenants requiring the
Company to maintain certain financial ratios and achieve certain levels of
annual income. In addition, the term loan requires that the bank approve the
payment of dividends and restricts the level of capital expenditures. At January
31, 1998 and February 1, 1997, the Company was in compliance with these
covenants.

NOTE 9: RELATED PARTY TRANSACTIONS

Certain officers of Suzy Shier, Inc. provide management services to the
Company. For these services, the officers earned in the aggregate a management
fee of $250,000 during each of the years ended January 31, 1998, February 1,
1997 and February 3, 1996, respectively.

NOTE 10: RETIREMENT PLAN

Effective June 1, 1993, the Company established a qualified defined
contribution retirement plan under the Internal Revenue Code, Section 401(k).
The Wet Seal Retirement Plan (the "Plan") is available to all employees who meet
the Plan's eligibility requirements. The Plan is funded by employee
contributions, and additional contributions may be made by the Company at its
discretion. As of January 31, 1998 the Company has not made any contributions to
the Plan.

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 11: ACCRUED LIABILITIES

Accrued liabilities consist of the following:

JANUARY 31, FEBRUARY 1,
1998 1997
------------- -------------

Reserve for self insurance..................................... $ 3,219,000 $ 4,057,000
Accrued wages, bonuses and benefits............................ 5,972,000 4,735,000
Combination costs.............................................. 1,645,000 5,569,000
Gift certificate and credit memo liability..................... 2,911,000 2,331,000
Sales tax payable.............................................. 1,204,000 2,348,000
Other.......................................................... 5,619,000 5,024,000
------------- -------------
$ 20,570,000 $ 24,064,000
------------- -------------
------------- -------------

In connection with the acquisition of Contempo Casuals, Inc., the Company
assumed certain accruals, including the reserve for self insurance, which were
estimated by the seller. The total amount of these assumed accruals may not, in
fact be paid as the actual payments will be based on the future claims and
losses which are actually submitted and which are related to pre-acquisition
events. The accrual for combination costs consisted of management's estimates
for the costs of closing and/or combining certain Contempo Casuals facilities
and operations into Wet Seal's, as well as the costs of integrating management
information and security systems. At February 1, 1997, the accrual totaled
$5,569,000. As of January 31, 1998, the Company has substantially completed the
combination of facilities and the acquisition of necessary management
information systems to fully integrate Contempo Casuals' operations into Wet
Seal's. Management estimates that the accrued combination costs remaining at
January 31, 1998 totaling $1,645,000 will be fully utilized by mid-1998, at
which time the Company's in-store security systems will be integrated.

NOTE 12: SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN

The Company maintains a defined benefit supplemental employee retirement
plan (the "SERP") for certain of its key employees and a director. The SERP
provides for preretirement death benefits through life insurance and for
retirement benefits. The Company funded the SERP in 1997 through contributions
to a trust fund known as a "Rabbi" trust. Assets held in the Rabbi trust
($261,000 at January 31, 1998) are subject to claims of the Company's creditors
but otherwise must be used only for purposes of providing benefits under the
SERP.

Components of the net defined benefit pension expense are as follows:

JANUARY 31, 1998
----------------

Service cost................................................................ $ 335,000
Interest cost............................................................... 191,000
Net amortization and deferrals.............................................. 164,000
--------
Total pension expense....................................................... $ 690,000
--------
--------

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 12: SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN (CONTINUED)
The funded status of the SERP is as follows:

JANUARY 31, 1998
----------------

Actuarial present value of benefit obligations:
Vested benefit obligations................................................ $ 2,730,000
Accumulated benefit obligation............................................ 2,730,000

Projected benefit obligation................................................ 2,730,000
Unrecognized prior service cost............................................. 2,042,000
Unrecognized net gain....................................................... (2,000)
Additional liability recognized............................................. (2,040,000)
----------------
Pension liability........................................................... $ 2,730,000
----------------
----------------

The following assumptions were used to determine the annual pension expense
and benefit obligations:

JANUARY 31, 1998
-------------------

Discount rate............................................................... 7%
Long-term rate of return on assets.......................................... N/A

NOTE 13: NET INCOME PER SHARE

A reconciliation of the numerators and denominators used in basic and
diluted net income per share is as follows:

JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
------------- ------------- -------------

Net income: Basic and diluted....................................... $ 21,250,000 $ 15,252,000 $ 5,815,000
------------- ------------- -------------
------------- ------------- -------------

Weighted average number of common shares:
Basic............................................................... 13,552,502 13,219,284 12,387,140
Effect of dilutive securities--stock options........................ 347,375 240,526 113,424
------------- ------------- -------------
Diluted............................................................. 13,899,877 13,459,810 12,500,564

Net income per share:
Basic............................................................... $ 1.57 $ 1.15 $ 0.47
Effect of dilutive securities--stock options........................ 0.04 0.02 --
------------- ------------- -------------
Diluted............................................................. $ 1.53 $ 1.13 $ 0.47

Unexercised stock options to purchase 90,000 shares of common stock as of
February 3, 1996 were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of the Company's common stock during fiscal 1995.

THE WET SEAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

NOTE 14: SHAREHOLDER RIGHTS PLAN

On August 19, 1997, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Rights Plan") designed to protect company stockholders in the
event of takeover action that would deny them the full value of their
investment. Terms of the Rights Plan provide for a dividend distribution of one
right for each share of common stock to holders of record at the close of
business on August 29, 1997. The rights become exercisable only in the event,
with certain exceptions, an acquiring party accumulates 12 percent or more of
the Company's voting stock, or if a party announces an offer to acquire 20
percent or more of the Company's voting stock. Unless earlier redeemed, the
rights will expire on August 29, 2007. Each right will entitle the holder to buy
one one-hundredth of a share of a new series of preferred stock at a price of
$73.00, subject to adjustment upon the occurrence of certain events. The Company
will be entitled to redeem the rights at $0.01 per right at any time until the
tenth day following the acquisition of a 12 percent position in its voting
stock.

NOTE 15: UNAUDITED QUARTERLY FINANCIAL DATA

FISCAL YEAR ENDED JANUARY 31, 1998

NET INCOME NET INCOME
PER SHARE, PER SHARE,
QUARTER SALES GROSS MARGIN NET INCOME BASIC DILUTED
- --------------------------------------- -------------- -------------- ------------- ------------- -------------

First Quarter.......................... $ 95,563,000 $ 25,441,000 $ 3,515,000 $ 0.26 $ 0.25
Second Quarter......................... 94,254,000 25,337,000 3,417,000 0.25 0.25
Third Quarter.......................... 104,435,000 30,432,000 5,479,000 0.40 0.39
Fourth Quarter......................... 118,211,000 38,609,000 8,839,000 0.65 0.63
-------------- -------------- -------------
For the Year........................... $ 412,463,000 $ 119,819,000 $ 21,250,000 $ 1.57 $ 1.53
-------------- -------------- -------------
-------------- -------------- -------------

FISCAL YEAR ENDED FEBRUARY 1, 1997

First Quarter.......................... $ 80,575,000 $ 19,038,000 $ 722,000 $ 0.06 $ 0.06
Second Quarter......................... 94,356,000 24,786,000 3,315,000 0.25 0.25
Third Quarter.......................... 95,571,000 26,419,000 4,194,000 0.31 0.30
Fourth Quarter......................... 104,440,000 32,510,000 7,021,000 0.52 0.51
-------------- -------------- -------------
For the year........................... $ 374,942,000 $ 102,753,000 $ 15,252,000 $ 1.15 $ 1.13
-------------- -------------- -------------
-------------- -------------- -------------

Net Income per share is computed independently for each of the quarters
presented and therefore may not sum to the totals for the year.

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------

*3.1 -- Restated Certificate of Incorporation of the Company.
*3.2 -- Bylaws of the Company.
*4.1 -- Specimen Certificate of the Class A Stock, par value $.10 per share.
*4.2 -- Specimen Certificate of the Class B Stock, par value $.10 per share.
*******4.3 -- Shareholder Rights Plan.
10.1 -- Lease between the Company and Foothill-Parkstone I, LLC, dated November 21, 1996.
*10.3 -- First amendment to Services Agreement between the Company and Kathy Bronstein, dated December 30,
1988.
**10.3.1 -- Second amendment to Services Agreement between the Company and Kathy Bronstein, dated March 23,
1992.
***10.3.2 -- Services Agreement between the Company and Edmond Thomas, dated June 22, 1992.
****10.3.3 -- Third amendment to Services Agreement between the Company and Kathy Bronstein, dated November 17,
1994.
****10.3.4 -- First amendment to Services Agreement between the Company and Edmond Thomas, dated November 17,
1994.
****10.3.5 -- Fourth amendment to Services Agreement between the Company and Kathy Bronstein, dated January 13,
1995.
****10.3.6 -- Second amendment to Services Agreement between the Company and Edmond Thomas, dated January 13,
1995.
*****10.3.7 -- Fifth amendment to Services Agreement between the Company and Kathy Bronstein, dated January 30,
1995.
*****10.3.8 -- Sixth amendment to Services Agreement between the Company and Kathy Bronstein, dated February 2,
1996.
*****10.3.9 -- Third amendment to Services Agreement between the Company and Edmond Thomas, dated February 2,
1996.
*10.4 -- 1990 Long-Term Incentive Plan.
**10.5 -- Credit Agreement between the Company and Bank of America, dated as of April 20, 1992.
***10.5.1 -- Credit Agreement between the Company and Bank of America, dated June 23, 1993, as amended.
****10.5.2 -- Amendments No. 1 and No. 2 to Credit Agreement between the Company and Bank of America, dated
January 25, 1994 and June 1, 1994, respectively.
*****10.5.3 -- Business Loan Agreement between the Company and Bank of America, containing Term Loan and
Revolving Line of Credit, dated June 30, 1995.
*****10.5.4 -- Business Loan Agreement between the Company and Bank of America, containing Revolving Line of
Credit for Contempo Casuals, dated June 30, 1995.
**10.6 -- Key Man life insurance policy for Kathy Bronstein.
******10.6.1 -- Key Man life insurance policy for Edmond Thomas.
***10.7 -- 1994 Long-Term Incentive Plan.
*10.8 -- Stock Purchase and Stock Transfer Restriction Agreement among Kathy Bronstein, Suzy Shier, Inc.
and the Company dated December 30, 1988.
****10.9 -- Indemnification Agreement between the Company and various Executives and Directors, dated January
3, 1995, and schedule listing all parties thereto.
******10.10 -- 1996 Long-Term Incentive Plan.
10.11 -- Supplemental Employee Retirement Plan.
*****21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Deloitte & Touche LLP, independent auditors.
27.1 -- Financial Data Schedule--Fiscal year end 1997
27.2 -- Financial Data Schedule--Fiscal year ends 1995, 1996 and Quarters 1, 2, 3 of 1996 (Restated)
27.3 -- Financial Data Schedule--Quarters 1, 2, 3 of 1997 (Restated)

- ------------------------------

* Denotes exhibits incorporated by reference to the Company's Registration Statement File No. 33-34895.
** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended January 30, 1993.
*** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended January 29, 1994.
**** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended January 28, 1995.
***** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended February 3, 1996.
****** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended February 1, 1997.
******* Denotes exhibits incorporated by reference to the Company's Current Report on Form 8-K filed on August 25,
1997.