10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington D.C 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended May 3, 2003

OR

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

Commission file number 0-21296

PACIFIC SUNWEAR OF CALIFORNIA, INC.

CALIFORNIA (State of Incorporation)	95-3759463 (I.R.S Employer Identification No.)
3450 East Miraloma Avenue Anaheim, California (Address of principal executive offices)	92806 (Zip code)

(714) 414-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.

Yes  [x]        No  [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  [x]        No  [  ]

     The number of shares outstanding of the registrant’s Common Stock, par value $.01 per share, at May 30, 2003, was 50,193,731.

TABLE OF CONTENTS

		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS
	ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4 — CONTROLS AND PROCEDURES
PART II—OTHER INFORMATION
	Item 1 — Legal Proceedings
	Item 2 — Changes in Securities and Use of Proceeds — Not Applicable
	Item 3 — Defaults Upon Senior Securities — Not Applicable
	Item 4 — Submission of Matters to a Vote of Security Holders
	Item 5 — Other Information — Not Applicable
	Item 6 — Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX
EXHIBIT 10.1
EXHIBIT 99.1

PACIFIC SUNWEAR OF CALIFORNIA, INC.

FORM 10-Q
For the Quarter Ended May 3, 2003

Index

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of May 3, 2003 and February 1, 2003	3
	Condensed Consolidated Statements of Income and Comprehensive Income for the thirteen weeks ended May 3, 2003 and May 4, 2002	4
	Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended May 3, 2003 and May 4, 2002	5
	Notes to Condensed Consolidated Financial Statements	6-12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4	Controls and Procedures	22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 2.	Changes in Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 5.	Other Information	24
Item 6.	Exhibits and Reports on Form 8-K	24
	SIGNATURE PAGE AND CERTIFICATIONS	25-27

2

PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share amounts)

					May 3,			February 1,
					2003			2003
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents				$	33,576		$	36,438
	Accounts receivable					1,866			2,916
	Merchandise inventories					134,883			123,433
	Prepaid expenses, includes $9,774 and $9,664 of prepaid rent, respectively					15,485			14,871
	Deferred tax asset					4,975			4,975
		Total current assets				190,785			182,633
PROPERTY AND EQUIPMENT:
	Land					12,156			12,156
	Buildings and building improvements					26,681			26,680
	Leasehold improvements					111,421			111,431
	Furniture, fixtures and equipment					155,630			148,377
		Total property and equipment				305,888			298,644
	Less accumulated depreciation and amortization					(104,767	)		(97,131	)
		Net property and equipment				201,121			201,513
OTHER ASSETS:
	Goodwill					6,492			6,492
	Deferred compensation and other assets					8,991			9,105
		Total other assets				15,483			15,597
				Total assets	$	407,389		$	399,743
				LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Line of credit				$	—		$	—
	Current portion of long-term debt					838			829
	Current portion of capital lease obligations					1,410			1,521
	Accounts payable					26,439			28,456
	Accrued liabilities					33,419			34,522
	Income taxes payable					3,738			8,000
		Total current liabilities				65,844			73,328
LONG-TERM LIABILITIES:
	Long-term debt					891			1,102
	Long-term capital lease obligations					1,987			2,236
	Deferred compensation					7,649			7,097
	Deferred rent					10,932			10,574
	Deferred tax liability					3,015			3,015
		Total long-term liabilities				24,474			24,024
Commitments and contingencies (Note 9)
SHAREHOLDERS’ EQUITY:
	Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued and Outstanding					—			—
	Common stock, $.01 par value; 113,906,250 shares authorized; 49,935,989 and 49,488,764 shares issued and outstanding, respectively					499			495
	Additional paid-in capital					99,705			93,008
	Retained earnings					216,867			208,888
		Total shareholders’ equity				317,071			302,391
			Total liabilities and shareholders’ equity		$	407,389		$	399,743

See accompanying notes

3

PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(unaudited)
(in thousands, except share and per share amounts)

	For the Thirteen Weeks Ended
	May 3, 2003		May 4, 2002
Net sales	$	198,331	$	161,710
Cost of goods sold, including buying, distribution and occupancy costs		134,476		112,544
Gross margin		63,855		49,166
Selling, general and administrative expenses		50,962		43,713
Operating income		12,893		5,453
Interest income/(expense), net		61		(147	)
Income before income tax expense		12,954		5,306
Income tax expense		4,975		2,037
Net income	$	7,979	$	3,269
Comprehensive income	$	7,979	$	3,269
Net income per share, basic	$	0.16	$	0.07
Net income per share, diluted	$	0.16	$	0.07
Weighted average shares outstanding, basic		49,683,032		49,197,137
Weighted average shares outstanding, diluted		50,981,674		50,117,441

See accompanying notes

4

PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

				For the Thirteen Weeks Ended
				May 3, 2003			May 4, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income				$	7,979		$	3,269
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization				8,783			7,823
	Loss on disposal of equipment				326			417
	Change in operating assets and liabilities:
		Accounts receivable			1,050			(319	)
		Merchandise inventories			(11,450	)		(8,915	)
		Prepaid expenses			(614	)		(1,195	)
		Deferred compensation and other assets			666			136
		Accounts payable			(2,017	)		(8,088	)
		Accrued liabilities			(1,103	)		2,985
		Income taxes and deferred taxes			(2,986	)		(7,575	)
		Deferred rent			358			448
			Net cash provided by/(used in) operating activities		992			(11,014	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Investment in property and equipment				(8,717	)		(10,618	)
			Net cash used in investing activities		(8,717	)		(10,618	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from exercise of stock options				5,425			773
	Principal payments under capital lease obligations				(360	)		(246	)
	Principal payments under long-term debt obligations				(202	)		(3	)
			Net cash provided by financing activities		4,863			524
NET DECREASE IN CASH AND CASH EQUIVALENTS:					(2,862	)		(21,108	)
CASH AND CASH EQUIVALENTS, beginning of period					36,438			23,136
CASH AND CASH EQUIVALENTS, end of period				$	33,576		$	2,028
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
	Interest			$	78		$	272
	Income taxes			$	7,961		$	9,612

Supplemental disclosures of non-cash transactions (in thousands): During the thirteen weeks ended May 3, 2003 and May 4, 2002, the Company recorded an increase to additional paid-in capital of $1,276 and $599, respectively, related to tax benefits associated with the exercise of non-qualified stock options. In addition, during the thirteen weeks ended May 4, 2002, the Company recorded an increase to additional paid-in capital of $291 related to the issuance of restricted stock to satisfy certain deferred compensation liabilities.

See accompanying notes

5

PACIFIC SUNWEAR OF CALIFORNIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, all amounts in thousands unless otherwise indicated)

NOTE 1 — BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The condensed consolidated financial statements include the accounts of Pacific Sunwear of California, Inc. and its wholly owned subsidiaries (the “Company”). All intercompany transactions have been eliminated in consolidation.

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. “Fiscal 2003” is the 52-week period ending January 31, 2004. “Fiscal 2002” was the 52-week period ended February 1, 2003. “Fiscal 2001” was the 52-week period ended February 2, 2002.

In the opinion of management, all adjustments consisting only of normal recurring entries necessary for a fair presentation have been included. The preparation of the condensed consolidated financial statements in conformity with GAAP 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 condensed consolidated financial statements and reported revenues and expenses during the reporting period. Actual results could differ from these estimates. The results of operations for the thirteen weeks ended May 3, 2003, are not necessarily indicative of the results that may be expected for fiscal 2003. For further information, refer to the financial statements and notes thereto as of and for the years ended February 1, 2003, February 2, 2002, and February 4, 2001.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation —The consolidated financial statements include the accounts of Pacific Sunwear of California, Inc. and its wholly owned subsidiaries, Pacific Sunwear Stores Corp. and ShopPacSun.com Corp. All intercompany transactions have been eliminated in consolidation.

Use of Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported revenues and expenses during the reporting period. Actual results could differ from these estimates.

Revenue Recognition — Sales are recognized upon purchase by customers at the Company’s retail store locations or upon shipment for orders received through the Company’s website. The Company has accrued $.5 million to estimate sales returns by customers based on historical sales return results. Actual return rates have historically been within management’s expectations and the accruals established. However, in the unlikely event that the actual rate of sales returns by customers increased significantly, the Company’s operational results could be adversely affected.

Inventory Valuation — Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market. Cost is determined using the retail inventory method. At any one time, inventories include items that have been marked down to management’s best estimate of their fair market value. Management bases the decision to mark down merchandise upon the age of the item and its current rate of sale. To the extent that management estimates differ from actual results, additional markdowns may have to be recorded, which could reduce the Company’s gross margins and operating results.

Goodwill and Other Intangible Assets — On February 3, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Intangible Assets,” which revised the

6

accounting for purchased goodwill and intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are tested for impairment annually and also in the event of an impairment indicator. The Company completed the required transitional impairment test and the annual test and determined that no impairment existed. Any subsequent impairment losses will be reflected in operating income. With the adoption of SFAS No. 142, the Company discontinued amortization of goodwill.

The Company evaluates the recoverability of goodwill at least annually based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds fair value, then the second step of the impairment test is performed to measure the amount of any impairment loss. Fair value is determined based on estimated future cash flows, discounted at a rate that approximates the Company’s cost of capital. Such estimates are subject to change and the Company may be required to recognize impairment losses in the future.

Other Long-Lived Assets — On February 3, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which superseded previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. Upon adoption of SFAS No. 144, the Company reviewed long-lived assets and determined that no impairment existed. Under SFAS No. 144, long-lived assets, including amortizing intangible assets, will be tested for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

Corporate Rent Reserve — During fiscal 2001, the Company recorded a $1.4 million charge to accrue for rent expense associated with the Company’s former corporate offices, which remain unused as of May 3, 2003. The current accrual of $1.3 million is approximately the amount of rent expense for one year, within which time the Company currently believes a tenant will be identified to sublease the premises. To the extent management’s estimates relating to the Company’s ability to sublease these premises within one year changes, additional charges may be recorded in the future up to the net remaining obligation under the lease. As of May 3, 2003, the aggregate net remaining obligation under this lease was approximately $6.2 million. This amount is included in the contractual obligations table in Note 9.

Income Taxes — Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing prudent and feasible tax planning in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be realized, the Company would reduce the value of these assets to their expected realizable value through a valuation allowance, thereby decreasing net income. Evaluating the value of these assets is necessarily based on the Company’s judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

Litigation — The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company and, from time to time, may make provisions for potential litigation losses. Depending on the actual outcome of pending litigation, charges in excess of any provisions could be recorded in the future which may have an adverse affect on the Company’s operating results (see Note 9).

Stock Split — On December 18, 2002, the Company effected a three-for-two stock split. All share and per share amounts have been restated to give retroactive recognition to the stock split in prior periods.

Stock-Based Compensation — The Company accounts for stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25. In March 2000, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 44 of APB Opinion No. 25, “Accounting for Certain Transactions Involving Stock Compensation,” which, among other things, addressed accounting

7

consequences of a modification that reduces the exercise price of a fixed stock option award (otherwise known as repricing). The adoption of this interpretation did not impact the Company’s consolidated financial statements.

SFAS No. 123, “Accounting for Stock-Based Compensation,” requires the disclosure of pro forma net income and earnings per share. Under SFAS No. 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, 5 years following vesting; stock volatility, 53.7% for the four quarters ended May 3, 2003 and 62.7% for the four quarters ended May 4, 2002; risk-free interest rates, 2.9% for the four quarters ended May 3, 2003 and 4.5% for the four quarters ended May 4, 2002; and no dividends during the expected term. The Company’s calculations are based on a single-option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the fiscal 2003 and fiscal 2002 awards had been amortized to expense over the vesting period of the awards, net income and earnings per share for the first quarter would have been reduced to the pro forma amounts indicated below:

			Fiscal			Fiscal
			2003			2002
		Net Income
As reported			$	7,979		$	3,269
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects				(1,499	)		(1,547	)
Pro forma			$	6,480		$	1,722
	Net Income Per Share, Basic
As reported			$	0.16		$	0.07
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects				(0.03	)		(0.04	)
Pro forma			$	0.13		$	0.03
	Net Income Per Share, Diluted
As reported			$	0.16		$	0.07
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects				(0.03	)		(0.04	)
Pro forma			$	0.13		$	0.03

New Accounting Pronouncements — In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 amended certain provisions of SFAS No. 13 and requires the fair value recognition of guarantee obligations under which the Company may become secondarily liable. The Company adopted SFAS No. 145 during fiscal 2002. The adoption of SFAS No. 145 resulted in the recognition of a $.5 million liability related to the Company’s guarantee of an assignee’s performance under a lease obligation.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (“EITF”) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit

8

cost, as defined in EITF Issue 94-3, was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The Company adopted the provisions of SFAS No. 146 for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 has not had a material impact on the Company’s financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. The adoption of FIN 45 has not had a material impact on the Company’s financial position or results of operations upon adoption.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods for voluntary transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation (“the fair value method”). SFAS No. 148 also requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financials statements. The Company is required to follow the prescribed disclosure format and has provided the additional disclosures required by SFAS No. 148 for the quarterly period ended May 3, 2003 in Note 2.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Since the Company does not currently have any variable interest entities, the adoption of the provisions of FIN 46 did not have a material impact on the Company’s financial position or results of operations.

Reclassifications — Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 3 — CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and marketable securities with original maturities of three months or less.

9

NOTE 4 — DEFERRED COMPENSATION AND OTHER ASSETS

Deferred compensation and other assets consist of the following:

	May 3,		February 1,
	2003		2003
Deferred compensation	$	7,852	$	7,565
Long-term computer maintenance contracts		938		1,359
Other assets		201		181
	$	8,991	$	9,105

NOTE 5 — CREDIT FACILITY

The Company has a credit facility with a bank, which expires March 31, 2004. The credit facility provides for a $45.0 million line of credit (the “Credit Line”) to be used for cash advances, commercial letters of credit and shipside bonds. Interest on the Credit Line is payable monthly at the bank’s prime rate (4.25% at May 3, 2003) or at optional interest rates that are primarily dependent upon the London Inter-bank Offered Rates for the time period chosen. The Company did not borrow under the Credit Line at any time during the quarter ended May 3, 2003. At May 3, 2003, the Company had no borrowings outstanding under the Credit Line and $22.8 million outstanding in letters of credit. The credit facility subjects the Company to various restrictive covenants, including maintenance of certain financial ratios, and prohibits payment of cash dividends on common stock. At May 3, 2003, the Company was in compliance with all of the covenants.

NOTE 6 — ACCRUED LIABILITIES

Accrued liabilities consist of the following:

	May 3,		February 1,
	2003		2003
Accrued compensation and benefits	$	12,805	$	14,420
Accrued gift cards and store merchandise credits		3,768		5,967
Reserve for store expansion/relocation and closing costs		3,352		3,653
Sales tax payable		3,161		2,290
Accrued medical insurance costs		1,671		980
Reserve for corporate rent — former corporate facilities		1,252		1,263
Other accrued liabilities		7,410		5,949
	$	33,419	$	34,522

NOTE 7 — FEDERAL AND STATE INCOME TAX EXPENSE

The combined federal and state income tax expense was calculated using estimated effective annual tax rates.

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NOTE 8 — NET INCOME PER SHARE, BASIC AND DILUTED

The following table summarizes the computation of EPS (all amounts in thousands except share and per share amounts):

First Quarter Ended:	May 3, 2003							May 4, 2002
						Per Share								Per Share
	Net Income			Shares		Amount			Net Income			Shares		Amount
Basic EPS:
		$	7,979		49,683,032	$	0.16			$	3,269		49,197,137	$	0.07
Diluted EPS:
Effect of dilutive stock options					1,298,642								920,304
		$	7,979		50,981,674	$	0.16			$	3,269		50,117,441	$	0.07

Options to purchase 194,244 and 703,536 shares of common stock in the first thirteen weeks of each of fiscal 2003 and fiscal 2002, respectively, were not included in the computation of diluted earnings per common share because the option exercise price was greater than the average market price of the common stock.

NOTE 9 — COMMITMENTS AND CONTINGENCIES

The Company has minimum annual rental commitments under existing store leases, the lease for its former corporate offices and distribution center, capital leases for computer equipment, and other long-term debt obligations for multi-year computer maintenance contracts. The Company leases all of its retail store locations under operating leases. The Company leases equipment, from time to time, under capital leases. In addition, at any time, the Company is contingently liable for open letters of credit with foreign suppliers of merchandise. There were $22.8 million of open letters of credit outstanding as of May 3, 2003. As of May 3, 2003, the Company’s future financial commitments under these arrangements are as follows:

	Payments Due by Period
			Less than 1		1-3		3-5		More than
Contractual Obligations	Total		year		years		years		5 years
(in millions)
Operating lease obligations	$	590.3	$	75.6	$	150.4	$	144.0	$	220.3
Capital lease obligations		3.4		1.4		2.0		—		—
Long-term debt obligations		1.7		0.8		0.9		—		—
Letters of credit		22.8		22.8		—		—		—
Total	$	618.2	$	100.6	$	153.3	$	144.0	$	220.3

Litigation — During the first quarter ended May 3, 2003, the Company reached an agreement, subject to court approval, to settle all claims related to two lawsuits concerning overtime pay for a total of $4.0 million. The Company had accrued $3.9 million related to these matters at February 1, 2003. The suits are Auden v. Pacific Sunwear of California, Inc., which was filed September 17, 2001, and Adams v. Pacific Sunwear of California, Inc., which was filed May 3, 2002. The complaints allege that the Company improperly classified certain California-based employees as “exempt” from overtime pay. The Company denies the allegations underlying the suits, but has agreed to settle the suits to avoid the cost, distraction and uncertainty associated with protracted litigation. The court has granted preliminary approval of the settlement and is expected to conduct a final fairness hearing regarding the settlement in August 2003. The settlement did not have a material impact on results of operations for the quarter ended May 3, 2003.

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The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company.

Indemnities, Commitments, and Guarantees — During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include those given to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of California. The Company has issued guarantees in the form of standby letters of credit as security for merchandise shipments from overseas. There were $22.8 million of these letters of credit outstanding at May 3, 2003. The Company has also issued a guarantee within a sublease on one of its store locations under which the Company remains secondarily liable on the sublease should the sublessee default on its lease payments. The term of the sublease ends December 31, 2014. The Company has recorded $.5 million in accrued liabilities to recognize the estimated fair value of this guarantee, assuming that another sublessee would be found within one year should the original sublessee default. The aggregate rental payments remaining on the master lease agreement at May 3, 2003, were $6.4 million. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets other than as noted.

The Company maintains a private label credit card through a third party to promote the PacSun brand image and lifestyle. The third party services the customer accounts and retains all risk and financial obligation associated with any outstanding balances on customer accounts. The Company has no financial obligation and does not provide any guarantee related to any outstanding balances resulting from the use of these private label credit cards by its customers.

NOTE 10 — RESTRICTED STOCK

During the year ended January 30, 2000, the Company granted a restricted stock award of 75,000 shares with a purchase price of $0.01 per share to its Chief Executive Officer. The 75,000 share award vests 25% on each of September 17, 2001, 2002, 2003 and 2004, if, in each instance, certain cumulative earnings per share growth targets have been satisfied. The Company recorded $229 of deferred compensation expense associated with this award during the year ended February 4, 2001. During fiscal 2001, the Company reversed all previously recognized expenses of $317 associated with this award because the cumulative earnings per share growth targets had not then been satisfied. No additional expenses have been recognized for this award because the cumulative earnings per share growth targets had not been met as of February 1, 2003. Under the award agreement, shares that do not vest at a given vesting date due to the cumulative earnings per share growth targets not being met remain available for future vesting if the cumulative earnings per share growth targets are met as of a subsequent vesting date. It is possible that the cumulative earnings per share growth target for this award may be achieved in fiscal 2003 and, if that target is met, the Company will be required to record compensation expense during the year ended January 31, 2004. If the target is met, the compensation expense to be recognized will be based on the closing market price of the Company’s stock as of January 31, 2004 minus the purchase price of $.01 per share. For example, based on the closing market price of the Company’s stock at May 2, 2003 of $22.92, the Company would, assuming the cumulative earnings per share growth target is met, record $1.4 million in compensation expense related to this award in the year ended January 31, 2004.

During the year ended February 4, 2001, the Company granted a restricted stock award of 112,500 shares with a purchase price of $0.01 per share to its Chief Executive Officer. The 112,500 share award vests 25% on each of March 15, 2002, 2003, 2004 and 2005, if, in each instance, certain cumulative earnings per share growth targets have been satisfied. The Company recorded $38 of deferred compensation expense associated with this award during the year ended February 4, 2001. During fiscal 2001, the Company reversed all previously recognized expenses of $38 associated with this award because the cumulative earnings per share growth targets had not then been satisfied. No additional expenses have been recognized for this award because the cumulative earnings per share growth targets had not been met as of February 1, 2003. Under the award agreement, shares that do not vest at a given vesting date due to the cumulative earnings per share growth targets not being met remain available for future vesting if the cumulative earnings per share growth targets are met as of a subsequent vesting date. It is possible that the cumulative earnings per share growth target for this award may be achieved in fiscal 2003 and, if that target is met, the Company will be required to record compensation expense during the year ended January 31, 2004. If the target is met, the compensation expense to be recognized will be based on the closing market price of the Company’s stock as of January 31, 2004 minus the purchase price of $.01 per share. For example, based on the closing market price of the Company’s stock at May 2, 2003 of $22.92, the Company would, assuming the cumulative earnings per share growth target is met, record $1.9 million in compensation expense related to this award in the year ended January 31, 2004.

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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reported period. Actual results could differ from these estimates. The accounting policies that the Company believes are the most critical to aid in fully understanding and evaluating reported financial results include the following:

Revenue Recognition — Sales are recognized upon purchase by customers at the Company’s retail store locations or upon shipment for orders received through the Company’s website. The Company has accrued $.5 million to estimate sales returns by customers based on historical sales return results. Actual return rates have historically been within management’s expectations and the reserves established. However, in the unlikely event that the actual rate of sales returns by customers increased significantly, the Company’s operational results could be adversely affected.

Inventory Valuation — Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market. Cost is determined using the retail inventory method. At any one time, inventories include items that have been marked down to management’s best estimate of their fair market value. Management bases the decision to mark down merchandise upon the age of the item and its current rate of sale. To the extent that management estimates differ from actual results, additional markdowns may have to be recorded, which could reduce the Company’s gross margins and operating results.

Long-Lived Assets — In the normal course of business, the Company acquires tangible and intangible assets. The Company periodically evaluates the recoverability of the carrying amount of its long-lived assets (including property, plant and equipment, and other intangible assets) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment is assessed when the undiscounted expected future cash flows derived from an asset or asset group are less than its carrying amount. Impairments are recognized in operating earnings. The Company uses its best judgment based on the most current facts and circumstances surrounding its business when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments, and the fair value of a potentially impaired asset. Changes in assumptions used could have a significant impact on the Company’s assessment of recoverability. Numerous factors, including changes in the Company’s business, industry segment, and global economy, could significantly impact management’s decision to retain, dispose of, or idle certain of its long-lived assets.

Goodwill and Other Intangible Assets — The Company evaluates the recoverability of goodwill at least annually based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds fair value, then the second step of the impairment test is performed to measure the amount of any impairment loss. Fair value is determined based on estimated future cash flows, discounted at a rate that approximates the Company’s cost of capital. Such estimates are subject to change and the Company may be required to recognize impairment losses in the future.

Income Taxes — Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing prudent and feasible tax planning in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be realized, the Company would reduce the value of these assets to their expected realizable value through a valuation allowance, thereby decreasing net income. Evaluating the value of these assets is necessarily based on the Company’s judgment. If the Company subsequently determined that the deferred tax assets,

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which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

Corporate Rent Reserve — During fiscal 2001, the Company recorded a $1.4 million charge to accrue for rent expense associated with the Company’s former corporate offices, which remain unused as of May 3, 2003. The current accrual of $1.3 million is approximately the amount of rent expense for one year, within which time the Company currently believes a tenant will be identified to sublease the premises. To the extent management’s estimate relating to the Company’s ability to sublease these premises within one year changes, additional charges may be recorded in the future up to the net remaining obligation under the lease. As of May 3, 2003, the aggregate net remaining obligation under this lease was approximately $6.2 million.

Litigation — The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company and, from time to time, may make provisions for potential litigation losses. Depending on the actual outcome of pending litigation, charges in excess of any provisions could be recorded in the future that may have an adverse effect on the Company’s operating results (see Note 9 to the condensed consolidated financial statements).

Results of Operations

The following table sets forth selected income statement data of the Company expressed as a percentage of net sales for the periods indicated. The discussion that follows should be read in conjunction with the table below:

	May 3,			May 4,
For the thirteen weeks ended:	2003			2002
Net sales		100.0	%		100.0	%
Cost of goods sold (including buying, distribution and occupancy costs)		67.8			69.6
Gross margin		32.2			30.4
Selling, general and administrative expenses		25.7			27.0
Operating income		6.5			3.4
Interest income/(expense), net		0.0			(0.1	)
Income before income tax expense		6.5			3.3
Income tax expense		2.5			1.3
Net income		4.0	%		2.0	%

The following table sets forth the Company’s number of stores and total square footage as of the dates indicated:

	May 3,		May 4,
	2003		2002
PacSun stores		625		576
Outlet stores		74		67
d.e.m.o. stores		109		106
Total stores		808		749
Square footage (in 000’s)		2,721		2,446

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The thirteen weeks ended May 3, 2003 (first quarter) as compared to the thirteen weeks ended May 4, 2002 (first quarter)

Net Sales

Net sales increased to $198.3 million for the first quarter of fiscal 2003 from $161.7 million for the first quarter of fiscal 2002, an increase of $36.6 million, or 22.6%. Of this $36.6 million increase, $19.6 million was attributable to a 13.1% increase in comparable store net sales in the first quarter of fiscal 2003 as compared to the first quarter of fiscal 2002, $13.1 million was attributable to net sales generated by 60 new stores opened in fiscal 2002 and not yet included in the comparable store base, $3.8 million was attributable to other non-comparable store net sales, and $1.7 million was attributable to net sales generated by 18 new stores opened in fiscal 2003 and not yet included in the comparable store base. Offsetting these increases was a $1.6 million decrease attributable to the closing of one store during fiscal 2003 and three stores during fiscal 2002. Other non-comparable store net sales consist primarily of sales from stores that have been expanded or relocated and not yet included in the comparable store base as well as merchandise sold over the internet. Of the 13.1% increase in comparable store net sales in the first quarter of fiscal 2003, PacSun and PacSun Outlet comparable store net sales increased 10.4% and d.e.m.o. comparable store net sales increased 36.5%. The increase in comparable store net sales within PacSun and PacSun Outlet was primarily attributable to increases in comparable store net sales of footwear, juniors, and accessories. The increase in comparable store net sales within d.e.m.o. was attributable to increases in comparable store net sales of young men’s, juniors and accessories merchandise. Stores are deemed comparable stores on the first day of the first month following the one-year anniversary of their opening or expansion/relocation. Retail prices of the Company’s merchandise remained relatively unchanged in the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002 and had no significant impact on the net sales increase for the first quarter of fiscal 2003.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, increased to $63.9 million for the first quarter of fiscal 2003 from $49.2 million for the first quarter of fiscal 2002, an increase of $14.7 million, or 29.9%. As a percentage of net sales, gross margin was 32.2% for the first quarter of fiscal 2003 compared to 30.4% for the first quarter of fiscal 2002. Of this 1.8% increase, occupancy costs decreased 1.7% as a percentage of net sales compared to the first quarter of fiscal 2002, primarily due to leveraging these costs over higher total sales, and distribution costs as a percentage of net sales decreased .3% due to freight and labor efficiencies in the new distribution center as well as leveraging these costs over higher total sales. Offsetting these increases was a .2% decrease in net merchandise margins as a percentage of net sales, primarily due to a higher markdown rate partially offset by a higher initial markup.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $51.0 million for the first quarter of fiscal 2003 from $43.7 million for the first quarter of fiscal 2002, an increase of $7.3 million, or 16.7%. These expenses decreased to 25.7% as a percentage of net sales in the first quarter of fiscal 2003 from 27.0% in the first quarter of fiscal 2002. Of this 1.3% net decrease as a percentage of net sales, .7% was due to a decrease in store payroll expenses as a percentage of net sales and .5% was due to a decrease in depreciation and other store selling expenses as a percentage of net sales, primarily due to leveraging these costs over higher total sales, .4% was due to moving the timing and expense of physical inventories to the second quarter of fiscal 2003 from the first quarter of fiscal 2002, and .1% was due to a decrease in store closing expenses. These decreases were partially offset by a .4% increase in general and administrative expenses, primarily due to an increase in bonus accruals.

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Income Tax Expense

Income tax expense was $5.0 million for the first quarter of fiscal 2003 compared to $2.0 million for the first quarter of fiscal 2002. The effective income tax rate was 38.4% in each of the first quarters of fiscal 2003 and fiscal 2002.

Liquidity and Capital Resources

The Company has financed its operations from internally generated cash flow, short-term and long-term borrowings and equity financing. The Company’s primary capital requirements have been for the construction of new stores, remodeling, expansion, or relocation of selected stores, financing of inventories, and, in fiscal 2001, construction of the Company’s new corporate offices and distribution center.

Net cash provided by operating activities for the first quarter of fiscal 2003 was $1.0 million as compared to cash used of $11.0 million for the first quarter of fiscal 2002. This $12.0 million increase in cash provided was primarily attributable to an increase in net income of $4.7 million, an increase in accrued income taxes and deferred income taxes of $4.6 million, a decrease in inventory, net of accounts payable, of $3.5 million, a decrease in accounts receivable of $1.4 million, and other items netting to an increase in cash provided of $1.9 million, offset by a decrease in accrued liabilities of $4.1 million. Working capital at May 3, 2003, was $124.9 million compared to $109.3 million at February 1, 2003, an increase of $15.6 million. The increase in working capital at May 3, 2003, as compared to February 1, 2003, was primarily attributable to an increase in inventories of $11.5 million, a decrease in accrued income taxes of $4.3 million, and other items netting to an increase of $2.6 million, offset by a decrease in cash of $2.8 million. The increase in inventories was primarily related to increases in inventories in comparable stores which generated a 13.1% increase in comparable store net sales as well as opening 17 net new stores and expanding/relocating 5 stores with over 50% larger average square footage than their previous locations. The Company’s average store inventories vary throughout the year and increase in advance of the peak selling periods of spring break, back-to-school and Christmas.

Net cash used in investing activities was $8.7 million for property and equipment for the first quarter of fiscal 2003 compared to $10.6 million for property and equipment for the first quarter of fiscal 2002. Of the $8.7 million of net cash used for investment in property and equipment in the first quarter of fiscal 2003, $7.5 million was used for new and existing stores and $1.2 million was used for other capital expenditures, including computer hardware and software.

Net cash provided by financing activities for the first quarter of fiscal 2003 was $4.9 million compared to $.5 million for the first quarter of fiscal 2002. Of the $4.9 million of net cash provided by financing activities in the first quarter of fiscal 2003, $5.4 million was due to proceeds received from the exercise of stock options, offset by $.5 million of payments under capital lease and long-term debt obligations.

The Company has a credit facility with a bank, which expires March 31, 2004. The credit facility provides for a $45.0 million line of credit (the “Credit Line”) to be used for cash advances, commercial letters of credit and shipside bonds. Interest on the Credit Line is payable monthly at the bank’s prime rate (4.25% at May 3, 2003) or at optional interest rates that are primarily dependant upon the London Inter-bank Offered Rates for the time period chosen. The Company did not borrow under the Credit Line at any time during the first quarter ended May 3, 2003. At May 3, 2003, the Company had no borrowings outstanding under the Credit Line and $22.8 million outstanding in letters of credit. The credit facility subjects the Company to various restrictive covenants, including maintenance of certain financial ratios, and prohibits payment of cash dividends on common stock. At May 3, 2003, the Company was in compliance with all of the covenants.

The Company has minimum annual rental commitments under existing store leases, the lease for its former corporate offices and distribution center, capital leases for computer equipment, and other long-term debt obligations for multi-year computer maintenance contracts. The Company leases all of its retail store locations under operating leases. The Company leases equipment, from time to time, under capital leases.

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In addition, at any time, the Company is contingently liable for open letters of credit with foreign suppliers of merchandise. There were $22.8 million of open letters of credit outstanding as of May 3, 2003. As of May 3, 2003, the Company’s future financial commitments under these arrangements are as follows:

	Payments Due by Period
			Less than 1		1-3		3-5		More than
Contractual Obligations	Total		year		years		years		5 years
(in millions)
Operating lease obligations	$	590.3	$	75.6	$	150.4	$	144.0	$	220.3
Capital lease obligations		3.4		1.4		2.0		—		—
Long-term debt obligations		1.7		0.8		0.9		—		—
Letters of credit		22.8		22.8		—		—		—
Total	$	618.2	$	100.6	$	153.3	$	144.0	$	220.3

The Company reviews the operating performance of its stores on an ongoing basis to determine which stores, if any, to expand, relocate or close. Most leases contain cancellation or kick-out clauses in the Company’s favor that relieve the Company of any future obligation under a lease if specified sales levels are not achieved by a specified date. The Company closed twelve stores in fiscal 2002 and anticipates closing approximately seven stores in fiscal 2003.

During the remainder of fiscal 2003, the Company plans to open approximately 66 net new stores, of which approximately 52 will be PacSun stores, approximately three will be PacSun Outlet stores and approximately 11 will be d.e.m.o. stores. The Company also plans to expand or relocate approximately 25 additional existing smaller stores during the remainder of fiscal 2003. The Company estimates that capital expenditures during the remainder of fiscal 2003 will be approximately $37 million, of which approximately $36 million will be for opening, expanding, and relocating stores and approximately $1 million will be used for other capital expenditures, including computer hardware and software.

The Company relies primarily on internally generated cash flows to finance its operations. In addition, to the extent necessary, the Company relies on its credit facility to finance operations and provide additional resources for capital expenditures. Management believes that the Company’s working capital, cash flows from operating activities and credit facility will be sufficient to meet the Company’s operating and capital expenditure requirements for the next twelve months.

The Company’s success is largely dependent upon its ability to gauge the fashion tastes of its customers and provide merchandise that satisfies customer demand. Any inability to provide appropriate merchandise in sufficient quantities in a timely manner could have a material adverse effect on the Company’s business, operating results, cash flows from operations and financial condition. Any economic downturn that affects the retail industry as a whole could also adversely affect the Company’s business, operating results, cash flows from operations and financial condition.

A significant decrease in the Company’s operating results could adversely affect the Company’s ability to maintain required financial ratios under the Company’s credit facility. Required financial ratios include total liabilities to tangible net worth ratio, limitations on capital expenditures and achievement of certain rolling four-quarter EBITDA requirements. If these financial ratios are not maintained, the bank will have the option to require immediate repayment of all amounts outstanding under the credit facility. The most likely result would require the Company to renegotiate certain terms of the credit agreement, obtain a waiver from the bank, or obtain a new credit agreement with another bank, which may contain different terms. As of May 3, 2003, the Company had no borrowings outstanding under its credit facility.

New Accounting Pronouncements

Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections — In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 amended certain provisions of SFAS No. 13 and requires the fair value recognition of guarantee obligations under which the Company may become secondarily liable. The

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Company adopted SFAS No. 145 during fiscal 2002. The adoption of SFAS No. 145 resulted in the recognition of a $.5 million liability related to the Company’s guarantee of an assignee’s performance under a lease obligation (see Note 8 to the condensed consolidated financial statements).

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

Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others — In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. The Company adopted the disclosure provisions of FIN 45 during fiscal 2002. The Company is currently evaluating the recognition provisions of FIN 45 but expects that they will not have a material adverse impact on the Company’s financial position or results of operations upon adoption.

Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123 — In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods for voluntary transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation (“the fair value method”). SFAS No. 148 also requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financials statements.

Consolidation of Variable Interest Entities — In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not currently have any variable interest entities and expects that the adoption of the provisions of FIN 46 will not have a material impact on the Company’s financial position or results of operations.

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Inflation

The Company does not believe that inflation has had a material effect on the results of operations in the recent past. There can be no assurance that the Company’s business will not be affected by inflation in the future.

Seasonality and Quarterly Results

The Company’s business is seasonal by nature, with the Christmas and back-to-school periods historically accounting for the largest percentage of annual net sales. The Company’s first quarter historically accounts for the smallest percentage of annual net sales. In each of fiscal 2002 and fiscal 2001, excluding sales generated by new and relocated/expanded stores, the Christmas and back-to-school periods together accounted for approximately 36% of the Company’s annual net sales and a higher percentage of the Company’s operating income. In fiscal 2002, excluding net sales generated by new and relocated/expanded stores, approximately 43% of the Company’s annual net sales occurred in the first half of the fiscal year and approximately 57% in the second half. The Company’s quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings; the amount of revenue contributed by new stores; the timing and level of markdowns; the timing of store closings, expansions and relocations; competitive factors; and general economic conditions.

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

This report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. The Company is hereby providing cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those projected in forward-looking statements of the Company herein. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions, future events or performance (often, but not always through the use of words or phrases such as “will result,” “expects to,” “will continue,” “anticipates,” “plans,” “intends,” “estimated,” “projects” and “outlook”) are not historical facts and may be forward-looking and, accordingly, such statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. All forward-looking statements included in this report are based on information available to the Company as of the date hereof, and the Company assumes no obligation to update or revise any such forward-looking statements to reflect events or circumstances that occur after such statements are made. Such uncertainties include, among others, the following factors:

Merchandising/Fashion Sensitivity. 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 in a timely manner. The Company’s failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends could have a material adverse effect on the Company’s business, financial condition and results of operations. Misjudgments or unanticipated fashion changes could also have a material adverse effect on the Company’s image with its customers.

Private Label Merchandise. Sales from private label merchandise accounted for approximately 33% and 34% of net sales in fiscal 2002 and fiscal 2001, respectively. The Company may increase the percentage of net sales in private label merchandise in the future, although there can be no assurance that the Company will be able to achieve increases in private label merchandise sales as a percentage of net sales. Because the Company’s private label merchandise generally carries higher merchandise margins than its other merchandise, the Company’s failure to anticipate, identify and react in a timely manner to fashion trends with its private label merchandise, particularly if the percentage of net sales derived from private label merchandise increases, may have a material adverse effect on the Company’s business, financial condition and results of operations.

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Fluctuations in Comparable Store Net Sales Results. The Company’s comparable store net sales results have fluctuated significantly in the past on a monthly, quarterly, and annual basis, and are expected to continue to fluctuate in the future. A variety of factors affect the Company’s comparable store net sales results, including changes in fashion trends, changes in the Company’s merchandise mix, calendar shifts of holiday periods, actions by competitors, weather conditions and general economic conditions. The Company’s comparable store net sales results for any particular fiscal month, fiscal quarter or fiscal year in the future may decrease. As a result of these or other factors, the Company’s future comparable store net sales results are likely to have a significant effect on the market price of the Company’s common stock.

Expansion and Management of Growth. The Company’s continued growth depends to a significant degree on its ability to open and operate stores on a profitable basis and on management’s ability to manage the Company’s planned expansion of PacSun and d.e.m.o. stores. During fiscal 2003, the Company plans to open approximately 83 net new stores, of which approximately 65 will be PacSun stores, approximately five will be PacSun Outlet stores and approximately 13 will be d.e.m.o. stores. The Company’s planned expansion is dependent upon a number of factors, including the ability of the Company to locate and obtain favorable store sites, negotiate acceptable lease terms, obtain adequate supplies of merchandise and hire and train qualified management level and other employees. Factors beyond the Company’s control may also affect the Company’s ability to expand, including general economic and business conditions affecting consumer spending. There can be no assurance that the Company will achieve its planned expansion or that such expansion will be profitable or that the Company will be able to manage its growth effectively. Any failure to manage growth could have a material adverse effect on the Company’s business, financial condition and results of operations.

Reliance on Key Personnel. The continued success of the Company is dependent to a significant degree upon the services of its key personnel, particularly its executive officers. The loss of the services of any member of senior management could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company’s success in the future will also be dependent upon the Company’s ability to attract and retain qualified personnel. The Company’s inability to attract and retain qualified personnel in the future could have a material adverse effect on the Company’s business, financial condition and results of operations.

Dependence on Single Distribution Facility. The Company’s distribution functions for all of its stores and for internet sales are handled from a single facility in Anaheim, California. Any significant interruption in the operation of the distribution facility due to natural disasters, accidents, system failures or other unforeseen causes would have a material adverse effect on the Company’s business, financial condition and results of operations. There can be no assurance that the Company’s new corporate office and distribution center will be adequate to support the Company’s future growth.

Internet Sales. The Company’s internet operations are subject to numerous risks, including unanticipated operating problems, reliance on third party computer hardware and software providers, system failures and the need to invest in additional computer systems. There can be no assurance that the internet operations will achieve sales and profitability levels that justify the Company’s investment therein. The internet operations also involve other risks that could have a material adverse effect on the Company, including (i) difficulties with hiring, retention and training of key personnel to conduct the Company’s internet operations, (ii) diversion of sales from PacSun stores, (iii) rapid technological change, (iv) liability for online content and (v) risks related to the failure of the computer systems that operate the website and its related support systems, including computer viruses, telecommunication failures and electronic break-ins and similar disruptions. In addition, the internet operations involve risks which are beyond the Company’s control that could have a material adverse effect on the Company, including (i) price competition involving the items the Company intends to sell, (ii) the entry of the Company’s vendors into the internet business, in direct competition with the Company, (iii) the level of merchandise returns experienced by the Company, (iv) governmental regulation, (v) online security breaches, (vi) credit card fraud and (vii) competition and general economic conditions and economic conditions specific to the internet, online commerce and the apparel industry.

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Economic Impact of Terrorist Attacks or War/Threat of War. The majority of the Company’s stores are located in regional shopping malls. In response to the terrorist attacks of September 11, 2001, security has been heightened in public areas. Any further threat of terrorist attacks or actual terrorist events, particularly in public areas, could lead to lower customer traffic in regional shopping malls. In addition, local authorities or mall management could close regional shopping malls in response to any immediate security concern. For example, on September 11, 2001, a substantial number of the Company’s stores were closed early due to closure of the malls in response to the terrorist attacks. Mall closures, as well as lower customer traffic due to security concerns, could result in decreased sales. Additionally, war or the threat of war could significantly diminish consumer spending, resulting in decreased sales for the Company. Decreased sales would have a material adverse effect on the Company’s business, financial condition and results of operations.

Reliance on Foreign Sources of Production. The Company purchases merchandise directly in foreign markets for its private label brands. In addition, the Company purchases merchandise from domestic vendors, some of which is manufactured overseas. The Company does not have any long-term merchandise supply contracts and its imports are subject to existing or potential duties, tariffs and quotas. The Company faces competition from other companies for production facilities and import quota capacity. The Company also faces a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as: (i) political instability; (ii) imposition of new legislation relating to import quotas that may limit the quantity of goods which may be imported into the United States from countries in a region that the Company does business; (iii) imposition of duties, taxes, and other charges on imports; and (iv) local business practice and political issues, including issues relating to compliance with domestic or international labor standards which may result in adverse publicity. New initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions, which, if enacted, would increase the cost of products, purchased from suppliers in countries that the Company does business with. The inability of the Company to rely on its foreign sources of production due to any of the factors listed above could have a material adverse effect on the Company’s business, financial condition and results of operations.

Credit Facility Financial Covenants. A significant decrease in the Company’s operating results could adversely affect the Company’s ability to maintain required financial ratios under the Company’s credit facility. Required financial ratios include total liabilities to tangible net worth ratio, limitations on capital expenditures and achievement of certain rolling four-quarter EBITDA requirements. If these financial ratios are not maintained, the bank will have the option to require immediate repayment of all amounts outstanding under the credit facility. The most likely result would require the Company to renegotiate certain terms of the credit agreement, obtain a waiver from the bank, or obtain a new credit agreement with another bank, which may contain different terms.

Stock Options. A number of publicly traded companies have recently announced that they will begin expensing stock option grants to employees. In addition, the FASB and the Securities and Exchange Commission (the “Commission”) have indicated that possible rule changes requiring expensing of stock options may be adopted in the near future. Currently, the Company includes such expenses on a pro forma basis in the notes to the Company’s financial statements in accordance with accounting principles generally accepted in the United States of America but does not include stock option expenses in the Company’s reported financial statements. If accounting standards are changed to require the Company to expense stock options, the Company’s reported earnings will decrease and its stock price could decline.

Litigation. The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company. However, management’s assessment of the Company’s current litigation could change in light of the discovery of facts with respect to legal actions pending against the Company not presently known to the Company or determinations by judges, juries or other finders of fact which do not accord with management’s evaluation of the possible liability or outcome of such litigation.

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Volatility of Stock Price. The market price of the Company’s common stock has fluctuated substantially in the past and there can be no assurance that the market price of the common stock will not continue to fluctuate significantly. Future announcements or management discussions concerning the Company or its competitors, internet sales results, d.e.m.o. sales and profitability results, quarterly variations in operating results or comparable store net sales, changes in earnings estimates by analysts or changes in accounting policies, among other factors, could cause the market price of the common stock to fluctuate substantially. In addition, stock markets have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated to the operating performance of the specific companies.

*************

The Company cautions that the risk factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements of the Company made by or on behalf of the Company. Further, management cannot assess the impact of each such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To the extent the Company borrows under its credit facility, the Company is exposed to market risk related to changes in interest rates. At May 3, 2003, there were no borrowings outstanding under the Company’s credit facility and the Company did not borrow under the credit facility at any time during the first quarter ended May 3, 2003. Based on the weighted average interest rate of 3.67% on the Company’s credit facility during fiscal 2002, if interest rates on the credit facility were to increase by 10%, and to the extent borrowings were outstanding, for every $1.0 million outstanding on the Company’s credit facility, net income would be reduced by approximately $3,000 per year. A discussion of the Company’s accounting policies for financial instruments and further disclosures relating to financial instruments is included in the Summary of Significant Accounting Policies and Nature of Business in the Notes to Consolidated Financial Statements in the Company’s Form 10-K for the year ended February 1, 2003. The Company is not a party with respect to derivative financial instruments.

ITEM 4 — CONTROLS AND PROCEDURES

In the 90-day period before the filing of this report, the Chief Executive Officer and Chief Financial Officer of the Company (collectively, the “certifying officers”) have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act). These disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in its periodic reports filed with the Commission is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that the information is communicated to the certifying officers on a timely basis.

The certifying officers concluded, based on their evaluation, that the Company’s disclosure controls and procedures are effective for the Company, taking into consideration the size and nature of the Company’s business and operations.

No significant changes in the Company’s internal controls or in other factors were detected that could significantly affect the Company’s internal controls subsequent to the date when the internal controls were evaluated.

PART II—OTHER INFORMATION

Item 1 — Legal Proceedings

During the first quarter ended May 3, 2003, the Company reached an agreement, subject to court approval, to settle all claims related to two lawsuits concerning overtime pay for a total of $4.0 million. The

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Company had accrued $3.9 million related to these matters at February 1, 2003. The suits are Auden v. Pacific Sunwear of California, Inc., which was filed September 17, 2001, and Adams v. Pacific Sunwear of California, Inc., which was filed May 3, 2002. The complaints allege that the Company improperly classified certain California-based employees as “exempt” from overtime pay. The Company denies the allegations underlying the suits, but has agreed to settle the suits to avoid the cost, distraction and uncertainty associated with protracted litigation. The court has granted preliminary approval of the settlement and is expected to conduct a final fairness hearing regarding the settlement in August 2003. The settlement did not have a material impact on results of operations for the quarter ended May 3, 2003.

Item 2 — Changes in Securities and Use of Proceeds — Not Applicable

Item 3 — Defaults Upon Senior Securities — Not Applicable

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

a) The 2003 Annual Meeting of Shareholders of the Company was held on May 21, 2003.

c) At the 2003 Annual Meeting, Sally Frame Kasaks, Thomas Murnane and Peter Starrett were elected as Class I Directors of the Company for a one-year term ending in 2004 and Greg H. Weaver, Julius Jensen III and Pearson C. Cummin III were elected as Class II Directors of the Company for a two-year term ending in 2005.

The shareholders voted on and approved the amended and restated Pacific Sunwear of California, Inc. 1999 Stock Award Plan which increased the number of shares authorized to be issued under the plan by 2,500,000, as well as amended certain other provisions in the plan.

The shareholders voted on and ratified the appointment of Deloitte & Touche LLP as independent auditors for the Company for the year ending January 31, 2004.

Voting at the 2003 Annual Meeting for the election of directors was as set forth below. Each of the nominees identified below was elected a director.

	VOTES CAST		VOTES
NAME	FOR		WITHHELD
Class I Directors:
Sally Frame Kasaks		39,598,106		270,768
Thomas Murnane		39,538,930		329,944
Peter Starrett		39,714,285		154,589
Class II Directors:
Greg H. Weaver		39,488,708		380,166
Julius Jensen III		38,080,922		1,787,952
Pearson C. Cummin III		38,781,781		1,087,093

With respect to the approval of the amended and restated Pacific Sunwear of California, Inc. 1999 Stock Award Plan, 22,260,537 votes were cast for approval, 12,933,729 votes were cast against, 10,165 votes abstained and there were 14,690,264 broker non-votes.

With respect to the ratification of the appointment of Deloitte & Touche LLP as independent auditors for the Company for the year ended January 31, 2004, 39,642,879 votes were cast for approval, 219,708 votes were cast against, 6,287 votes abstained and there were 10,025,821 broker non-votes.

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Item 5 — Other Information — Not Applicable

Item 6 — Exhibits and Reports on Form 8-K

Exhibit 10.1	Pacific Sunwear of California, Inc. 1999 Stock Award Plan, as amended and restated March 27, 2003 and further amended on May 21, 2003
Exhibit 99.1	Written statements of Greg Weaver and Carl Womack pursuant to section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements 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.

	Pacific Sunwear of California, Inc.
	(Registrant)
Date:  May 30, 2003	/s/    GREG H. WEAVER Greg H. Weaver
	Chairman of the Board
	and Chief Executive Officer
Date:  May 30, 2003	/s/    CARL W. WOMACK Carl W. Womack
	Senior Vice President, Chief
	Financial Officer and Secretary

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CERTIFICATIONS

I, Greg H. Weaver, certify that:

          1. I have reviewed this quarterly report on Form 10-Q of Pacific Sunwear of California, Inc.;

          2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

          3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

          4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

          5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

          6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  May 30, 2003

/s/    GREG H. WEAVER

Greg H. Weaver
Chairman of the Board and Chief Executive Officer

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I, Carl W. Womack, certify that:

          1. I have reviewed this quarterly report on Form 10-Q of Pacific Sunwear of California, Inc.;

          2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

          3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

          4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

          5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

          6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  May 30, 2003

/s/    CARL W. WOMACK

Carl W. Womack
Senior Vice President, Chief Financial Officer and Secretary

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EXHIBIT INDEX

Exhibit
No.	Description
Exhibit 10.1	Pacific Sunwear of California, Inc. 1999 Stock Award Plan, as amended and restated March 27, 2003 and further amended on May 21, 2003
Exhibit 99.1	Written statements of Greg Weaver and Carl Womack pursuant to section 906 of the Sarbanes-Oxley Act of 2002

28 EX-10.1 3 a90616exv10w1.txt EXHIBIT 10.1 EXHIBIT 10.1 PACIFIC SUNWEAR OF CALIFORNIA, INC. 1999 STOCK AWARD PLAN (As Amended and Restated March 27, 2003, and as Further Amended on May 21, 2003) TABLE OF CONTENTS

PAGE I. THE PLAN.................................................................................... 1 1.1 Purpose............................................................................ 1 1.2 Administration..................................................................... 1 1.3 Participation...................................................................... 2 1.4 Stock Subject to the Plan.......................................................... 3 1.5 Grant of Awards.................................................................... 3 1.6 Exercise of Awards................................................................. 4 1.7 No Transferability; Limited Exception to Transfer Restrictions..................... 4 II. OPTIONS..................................................................................... 5 2.1 Grants............................................................................. 5 2.2 Option Price....................................................................... 5 2.3 Option Period...................................................................... 6 2.4 Exercise of Options................................................................ 6 2.5 Limitations on Grant of Incentive Stock Options.................................... 6 2.6 Non-Employee Director Awards....................................................... 7 2.7 Options and Rights in Substitution for Stock Options Granted by Other Corporations................................................................ 8 2.8 Adjustments, No Repricing Without Prior Shareholder Approval....................... 8 III. STOCK APPRECIATION RIGHTS................................................................... 9 3.1 Grants............................................................................. 9 3.2 Exercise of Stock Appreciation Rights.............................................. 9 3.3 Payment............................................................................ 9 IV. RESTRICTED STOCK AWARDS..................................................................... 10 4.1 Grants............................................................................. 10 4.2 Restrictions....................................................................... 11 4.3 Return to the Corporation.......................................................... 11 V. PERFORMANCE SHARE AWARDS.................................................................... 11 5.1 Grants............................................................................. 11 5.2 Special Performance-Based Share Awards............................................. 11 5.3 Deferred Payments.................................................................. 13

-i- TABLE OF CONTENTS (CONTINUED)

PAGE VI. OTHER PROVISIONS............................................................................ 13 6.1 Rights of Eligible Employees, Participants and Beneficiaries....................... 13 6.2 Adjustments Upon Changes in Capitalization......................................... 14 6.3 Termination of Employment.......................................................... 15 6.4 Acceleration of Awards............................................................. 16 6.5 Government Regulations............................................................. 17 6.6 Tax Withholding.................................................................... 17 6.7 Amendment, Termination and Suspension.............................................. 17 6.8 Privileges of Stock Ownership; Nondistributive Intent.............................. 18 6.9 Effective Date of the Plan......................................................... 18 6.10 Term of the Plan................................................................... 18 6.11 Governing Law...................................................................... 19 6.12 Plan Construction.................................................................. 19 6.13 Captions........................................................................... 19 6.14 Non-Exclusivity of Plan............................................................ 19 6.15 No Corporate Action Restriction.................................................... 20 6.16 Other Company Benefit and Compensation Program..................................... 20 VII. DEFINITIONS................................................................................. 20 7.1 Definitions........................................................................ 20

-ii- PACIFIC SUNWEAR OF CALIFORNIA, INC. 1999 STOCK AWARD PLAN (As Amended and Restated March 27, 2003, and as Further Amended on May 21, 2003) I. THE PLAN. 1.1 Purpose. The purpose of this Plan is to promote the success of the Company by providing an additional means to attract, motivate, retain and reward key personnel through the grant of Options and other Awards that provide added long term incentives for high levels of performance and for significant efforts to improve the financial performance of the Company. The purpose of this Plan is also to attract, motivate and retain experienced and knowledgeable independent directors through the Option grants provided under Section 2.6. 1.2 Administration. (a) This Plan shall be administered and all Awards (other than those under Section 2.6) shall be authorized by the Committee. Action of the Committee with respect to the administration of this Plan shall be taken pursuant to a majority vote or the unanimous written consent of its members. In the event action by the Committee is taken by written consent, the action shall be deemed to have been taken at the time specified in the consent or, if none is specified, at the time of the last signature. The Committee may delegate administrative functions to individuals who are officers or employees of the Company. (b) Subject to the express provisions of this Plan, the Committee shall have the authority: (i) to grant Awards to Eligible Employees, determine the price at which securities will be offered or awarded and the amount of securities to be offered or awarded to any of such persons, and determine the other specific terms and conditions of such Awards consistent with the express limits of this Plan, and establish the installments (if any) in which such Awards shall become exercisable or shall vest, or determine that no delayed exercisability or vesting is required, and establish the events of termination or reversion of such Awards; (ii) to approve the forms of Award Agreements (which need not be identical either as to type of award or among Participants); (iii) to construe and interpret this Plan and any agreements defining the rights and obligations of the Company and Participants under this Plan, further define the terms used in this Plan, and prescribe, amend and rescind rules and regulations relating to the administration of this Plan; (iv) to cancel, modify, or waive the Corporation's rights with respect to, or modify, discontinue, suspend, or terminate any or all outstanding Awards held by Eligible Employees, subject to any required consent under Section 6.7; (v) to accelerate or extend the exercisability or extend the term of any or all such outstanding Awards within the maximum ten-year term of Awards; and (vi) to make all other determinations and take such other action as contemplated by this Plan or as may be necessary or advisable for the administration of this Plan and the effectuation of its purposes. Notwithstanding the foregoing, the provisions of Section 2.6 relating to Non-Employee Director Options shall be automatic and, to the maximum extent possible, self-effectuating. (c) Any action taken by, or inaction of, the Corporation, any Subsidiary, the Board or the Committee relating or pursuant to this Plan and within its authority hereunder or under applicable law shall be within the absolute discretion of that entity or body and shall be conclusive and binding upon all persons. Neither the Board nor any Committee, nor any member thereof or person acting at the direction thereof, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with this Plan (or any Award made under this Plan), and all such persons shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, attorneys' fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors and officers liability insurance coverage that may be in effect from time to time. (d) Subject to the requirements of Section 7.1, the Board, at any time it so desires, may increase or decrease the number of members of the Committee, may remove from membership on the Committee all or any portion of its members, and may appoint such person or persons as it desires to fill any vacancy existing on the Committee, whether caused by removal, resignation or otherwise. (e) In making any determination or in taking or not taking any action under this Plan, the Committee or the Board, as the case may be, may obtain and may rely upon the advice of experts, including professional advisors to the Company. No director, officer or agent of the Company shall be liable for any such action or determination taken or made or omitted in good faith. 1.3 Participation. Awards may be granted only to Eligible Employees. An Eligible Employee who has been granted an Award may, if otherwise eligible, be granted additional Awards if the Committee shall so determine. Except as provided in Section 2.6 below, members of the Board who are not officers or employees of the Company shall not be eligible to receive Awards. 2 1.4 Stock Subject to the Plan. (a) Subject to Section 6.2, the stock to be offered under this Plan shall be shares of the Corporation's authorized but unissued Common Stock. The aggregate amount of Common Stock that may be issued or transferred pursuant to Awards (including Incentive Stock Options and Options under Section 2.6) granted under this Plan shall not exceed 7,300,000 shares. In no event shall more than 900,000 shares of Common Stock be available for Awards issued (or reissued) under this Plan as time-based Restricted Stock for nominal or no consideration other than the par value thereof. This limit on Restricted Stock does not apply to shares issued principally for past services, in respect of compensation earned but deferred, or as Performance-Based Awards under Section 5.2. The aggregate number of shares of Common Stock subject to Options and Stock Appreciation Rights that may be granted to any employee in any calendar year may not exceed 900,000. The aggregate number of shares of Common Stock subject to all Awards (including Options, Stock Appreciation Rights, and Performance-Based Awards (other than Cash-Based Awards)) that may be granted to any employee in any calendar year may not exceed 900,000. The Board may amend the Option grant levels contemplated by Section 2.6 from time to time; provided that no more than 1,000,000 shares of Common Stock shall be issued or delivered pursuant to the exercise of Options granted to Non-Employee Directors pursuant to Section 2.6. Each of the foregoing share limits is subject to adjustment as set forth in Section 6.2. (b) No Award may be granted under this Plan unless, on the date of grant, the sum of (i) the maximum number of shares issuable at any time pursuant to such Award, plus (ii) the number of shares that have previously been issued pursuant to Awards granted under this Plan, other than reacquired shares available for reissue consistent with any applicable legal limitations, plus (iii) the maximum number of shares that may be issued at any time after such date of grant pursuant to Awards that are outstanding on such date, does not exceed the share limit set forth in Section 1.4(a). Shares that are subject to or underlie Awards which expire or for any reason are cancelled or terminated, are forfeited, fail to vest, or for any other reason are not paid or delivered under this Plan, as well as reacquired shares, shall again, except to the extent prohibited by law, be available for subsequent Awards under the Plan. 1.5 Grant of Awards. Subject to the express provisions of this Plan, the Committee shall determine from the class of Eligible Employees those individuals to whom Awards under this Plan shall be granted, the number of shares of Common Stock subject to each Award, the price (if any) to be paid for the shares or the Award and, in the case of performance share awards, in addition to matters addressed in Section 1.2(b), the specific objectives, goals and performance criteria (such as an increase in sales, market value, earnings or book value over a base period, the years of service before vesting, the relevant job classification or level of responsibility or other factors) that further define the terms of the performance share award. Each Award shall be evidenced by an Award Agreement signed by the Corporation and, if required by the Committee, by the Participant. The Award Agreement shall set forth the material terms and conditions of the Award established by 3 the Committee consistent with the specific provisions of this Plan. The grant of an Award is made on the Award Date. 1.6 Exercise of Awards. An Option or Stock Appreciation Right shall be deemed to be exercised when the Secretary of the Corporation receives written notice of such exercise from the Participant, together with payment of the purchase price made in accordance with Section 2.2(a), except to the extent payment may be permitted to be made following delivery of written notice of exercise in accordance with Section 2.2(b). Notwithstanding any other provision of this Plan, the Committee may impose, by rule and in Award Agreements, such conditions upon the exercise of Awards (including, without limitation, conditions limiting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements. 1.7 No Transferability; Limited Exception to Transfer Restrictions. (a) Limit On Exercise and Transfer. Unless otherwise expressly provided in (or pursuant to) this Section 1.7, by applicable law and by the Award Agreement, as the same may be amended, (i) all Awards are non-transferable and shall not be subject in any manner to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge; Awards shall be exercised only by the Participant; and (ii) amounts payable or shares issuable pursuant to an Award shall be delivered only to (or for the account of) the Participant. (b) Exceptions. The Committee may permit Awards to be exercised by and paid to certain persons or entities related to the Participant, including but not limited to members of the Participant's immediate family, charitable institutions, or trusts or other entities whose beneficiaries or beneficial owners are members of the Participant's immediate family and/or charitable institutions, pursuant to such conditions and procedures as the Committee may establish. Any permitted transfer shall be subject to the condition that the Committee receive evidence satisfactory to it that the transfer is being made for estate and/or tax planning purposes on a gratuitous or donative basis and without consideration (other than nominal consideration). Notwithstanding the foregoing or Section 1.7(c), Incentive Stock Options and Restricted Stock Awards shall be subject to any and all additional transfer restrictions under the Code. (c) Further Exceptions to Limits On Transfer. The exercise and transfer restrictions in Section 1.7(a) shall not apply to: (i) transfers to the Corporation, (ii) the designation of a beneficiary to receive benefits in the event of the Participant's death or, if the Participant has died, transfers to or exercise by the Participant's beneficiary, or, in the absence of a validly designated beneficiary, transfers by will or the laws of descent and distribution, (iii) transfers pursuant to a QDRO order if approved or ratified by the Committee, 4 (iv) if the Participant has suffered a disability, permitted transfers or exercises on behalf of the Participant by his or her legal representative, or (v) the authorization by the Committee of "cashless exercise" procedures with third parties who provide financing for the purpose of (or who otherwise facilitate) the exercise of Awards consistent with applicable laws and the express authorization of the Committee. II. OPTIONS. 2.1 Grants. One or more Options may be granted to any Eligible Employee. Each Option so granted shall be designated by the Committee in the applicable Award Agreement as either a Nonqualified Stock Option or an Incentive Stock Option. 2.2 Option Price. (a) The purchase price per share of Common Stock covered by each Option shall be determined by the Committee, but shall not be less than 100% (110% in the case of an Incentive Stock Option grant to a Participant who owns more than 10% of the total combined voting power of all classes of stock of the Corporation or a Subsidiary) of the Fair Market Value of the Common Stock on the date the Option is granted. The purchase price of any shares purchased shall be paid in full at the time of each purchase in one or a combination of the following methods: (i) in cash or by check payable to the order of the Corporation, (ii) if authorized by the Committee or specified in the Option being exercised, by a promissory note made by the Participant in favor of the Corporation, upon the terms and conditions determined by the Committee, and secured by the Common Stock issuable upon exercise in compliance with applicable law (including, without limitation, state corporate law and federal margin requirements), or (iii) if authorized by the Committee or specified in the Option being exercised, by shares of Common Stock of the Corporation already owned by the Participant; provided, however, that the Committee may in its absolute discretion limit the Participant's ability to exercise an Award by means other than cash or check, and provided further that any shares delivered which were initially acquired upon exercise of a stock option must have been owned by the Participant at least six months as of the date of delivery. Shares of Common Stock used to satisfy the exercise price of an Option shall be valued at their Fair Market Value on the date of exercise. (b) In addition to the payment methods described in subsection (a), the Option may provide that the Option can be exercised and payment made by delivering a properly executed exercise notice together with irrevocable instructions to a bank or broker to promptly deliver to the Corporation the amount of sale or loan proceeds necessary to pay the exercise price and, unless otherwise allowed by the Committee, any applicable tax withholding under Section 6.6. The Company shall not be obligated to deliver certificates for the shares unless and until it receives full payment of the exercise price therefor. 5 2.3 Option Period. Each Option and all rights or obligations thereunder shall expire on such date as shall be determined by the Committee, but not later than 10 years after the Award Date, and shall be subject to earlier termination as hereinafter provided. 2.4 Exercise of Options. Except as otherwise provided in Section 6.3 and 6.4, an Option may become exercisable, in whole or in part, on the date or dates specified in the Award Agreement and thereafter shall remain exercisable until the expiration or earlier termination of the Option. No Option shall be exercisable for at least six months after the Award Date, except in the case of death or Total Disability. The Committee may, at any time after grant of the Option and from time to time, increase the number of shares exercisable at any time so long as the total number of shares subject to the Option is not increased. No Option shall be exercisable except in respect of whole shares, and fractional share interests shall be disregarded. Not less than 10 shares of Common Stock may be purchased at one time unless the number purchased is the total number at the time available for purchase under the terms of the Option. 2.5 Limitations on Grant of Incentive Stock Options. (a) To the extent that the aggregate fair market value of stock with respect to which incentive stock options first become exercisable by a Participant in any calendar year exceeds $100,000, taking into account both Common Stock subject to Incentive Stock Options under this Plan and stock subject to incentive stock options under all other plans of the Company, such options shall be treated as nonqualified stock options. For purposes of determining whether the $100,000 limit is exceeded, the fair market value of stock subject to options shall be determined as of the date the options are awarded. In reducing the number of options treated as incentive stock options to meet the $100,000 limit, the most recently granted options shall be reduced first. To the extent a reduction of simultaneously granted options is necessary to meet the $100,000 limit, the Corporation may, in the manner and to the extent permitted by law, designate which shares of Common Stock are to be treated as shares acquired pursuant to the exercise of an Incentive Stock Option. (b) There shall be imposed in any Award Agreement relating to Incentive Stock Options such terms and conditions as are required in order that the Option be an "incentive stock option" as that term is defined in Section 422 of the Code. (c) No Incentive Stock Option may be granted to any person who, at the time the Incentive Stock Option is granted, owns shares of outstanding Common Stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation or a Subsidiary, unless the exercise price of such Option is at least 110% of the Fair Market Value of the stock subject to the Option and such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. 6 2.6 Non-Employee Director Awards. (a) Participation. Awards under this Section 2.6 shall be made only to Non-Employee Directors. (b) Option Grants. Effective on the day after the Corporation's 1999 annual meeting, as and when any person who is not then an officer or employee of the Company shall become a director of the Corporation, there shall be granted automatically (without any action by the Board or the Committee) a Nonqualified Stock Option (the grant or award date of which shall be the date such person takes office) to such person to purchase 9,000 shares of Common Stock. (c) Subsequent Annual Options. In each calendar year during the term of the Plan, commencing with the 2000 annual meeting, there shall be granted automatically (without any action by the Committee or the Board) a Nonqualified Stock Option to purchase 9,000 shares of Common Stock to each Non-Employee Director who is re-elected as a director of the Corporation or who continues as a director (the grant or award date of which shall be the date of the annual meeting of shareholders in each such year). (d) Option Price. The purchase price per share of the Common Stock covered by each Option granted pursuant to this Section 2.6 shall be one hundred percent of the Fair Market Value of the Common Stock on the Award Date. The purchase price of any shares purchased shall be paid in full at the time of each purchase in cash or by check or in shares of Common Stock valued at their Fair Market Value on the business day next preceding the date of exercise of the Option, or partly in such shares and partly in cash. (e) Option Period. Each Option granted under this Section 2.6 and all rights or obligations thereunder shall expire on the tenth anniversary of the Award Date and shall be subject to earlier termination as provided below. (f) Exercise of Options. Except as otherwise provided in Sections 2.6(g) and 2.6(h), each Option granted under this Section 2.6 shall become exercisable (i) as to one-quarter of the covered shares on the earlier of (A) the first anniversary of the Award Date, or (B) the day immediately preceding the first regularly scheduled Annual Meeting of shareholders first occurring after the Award Date; and (ii) as to an additional 1/48th of the covered shares in each of the 36 months thereafter (using the Award Date as the date of monthly vesting). (g) Termination of Directorship. If a Non-Employee Director Participant's services as a member of the Board terminate, each Option granted pursuant to Section 2.6(b) or (c) hereof held by such Non-Employee Director Participant which is not then exercisable shall terminate; provided, however, that if a Non-Employee Director Participant's services as a member of the Board terminate by reason of death or Total Disability, the Committee may, in its discretion, consider to be exercisable a greater portion of any such Option than would otherwise be exercisable, upon such terms as the Committee shall determine. If a Non-Employee Director Participant's services as a member of the Board terminate by reason of death or Total Disability, any portion of any 7 such Option which is then exercisable may be exercised for one year after the date of such termination or the balance of such Option's term, whichever period is shorter. If a Non-Employee Director Participant's services as a member of the Board terminate for any other reason, any portion of any such Option which is then exercisable may be exercised for three months after the date of such termination or the balance of such Option's term, whichever period is shorter. (h) Acceleration Upon an Event. Immediately prior to the occurrence of an Event, in order to protect the holders of Options granted under this Section 2.6, each Option granted under Section 2.6(b) or (c) hereof shall become exercisable in full. (i) Adjustments. The specific numbers of shares stated in the foregoing provisions of Section 2.6(b) and (c) hereof and the consideration payable for such shares shall be subject to adjustment in certain events as provided in Section 6.2 of this Plan; provided, however, that the specific number of shares stated in Section 2.6(b) and in Section 2.6(c) shall not be adjusted, unless such adjustment is approved by the Board, in connection with a split or reverse split of the Common Stock. 2.7 Options and Rights in Substitution for Stock Options Granted by Other Corporations. Options and Stock Appreciation Rights may be granted to Eligible Employees under this Plan in substitution for employee stock options granted by other entities to persons who are or who will become Eligible Employees in respect of the Company, in connection with a distribution, merger or reorganization by or with the granting entity or an affiliated entity, or the acquisition by the Company, directly or indirectly, of all or a substantial part of the stock or assets of the other entity. 2.8 Adjustments, No Repricing Without Prior Shareholder Approval. Subject to Section 1.4 and Section 6.7 and the specific limitations on Awards contained in this Plan, the Committee from time to time may authorize, generally or in specific cases only, for the benefit of any Eligible Employee any adjustment in the exercise or repurchase price (except as set forth below), vesting schedule, the number of shares subject to, the restrictions upon or the term of, an Award granted under this Article by cancellation of an outstanding Award and a subsequent regranting of an Award, by amendment, by substitution of an outstanding Award, by waiver or by other legally valid means. Such amendment or other action may result among other changes in an exercise or purchase price which is higher or lower than the exercise or purchase price of the original or prior Award (except as set forth below), provide for a greater or lesser number of shares subject to the Award, or provide for a longer or shorter vesting or exercise period. Notwithstanding the foregoing, in no case shall the per share exercise price of any Option or related Stock Appreciation Right be reduced (by amendment, substitution, cancellation and regrant or other means) without stockholder approval to a price less than the Fair Market Value of a share of Common Stock on the related Award Date. 8 III. STOCK APPRECIATION RIGHTS. 3.1 Grants. In its discretion, the Committee may grant Stock Appreciation Rights concurrently with the grant of Options. A Stock Appreciation Right shall extend to all or a portion of the shares covered by the related Option. A Stock Appreciation Right shall entitle the Participant who holds the related Option, upon exercise of the Stock Appreciation Right and surrender of the related Option, or portion thereof, to the extent the Stock Appreciation Right and related Option each were previously unexercised, to receive payment of an amount determined pursuant to Section 3.3. Any Stock Appreciation Right granted in connection with an Incentive Stock Option shall contain such terms as may be required to comply with the provisions of Section 422 of the Code and the regulations promulgated thereunder. In its discretion, the Committee may also grant Stock Appreciation Rights independently of any Option subject to such conditions as the Committee may in its absolute discretion provide. 3.2 Exercise of Stock Appreciation Rights. (a) A Stock Appreciation Right granted concurrently with an Option shall be exercisable only at such time or times, and to the extent, that the related Option shall be exercisable and only when the Fair Market Value of the stock subject to the related Option exceeds the exercise price of the related Option. (b) In the event that a Stock Appreciation Right granted concurrently with an Option is exercised, the number of shares of Common Stock subject to the related Option shall be charged against the maximum amount of Common Stock that may be issued or transferred pursuant to Awards under this Plan. The number of shares subject to the Stock Appreciation Right and the related Option of the Participant shall also be reduced by such number of shares. (c) If a Stock Appreciation Right granted concurrently with an Option extends to less than all the shares covered by the related Option and if a portion of the related Option is thereafter exercised, the number of shares subject to the unexercised Stock Appreciation Right shall be reduced only if and to the extent that the remaining number of shares covered by such related Option is less than the remaining number of shares subject to such Stock Appreciation Right. (d) A Stock Appreciation Right granted independently of any Option shall be exercisable pursuant to the terms of the Award Agreement but in no event earlier than six months after the Award Date, except in the case of death or Total Disability. 3.3 Payment. (a) Upon exercise of a Stock Appreciation Right and surrender of an exercisable portion of the related Option, the Participant shall be entitled to receive payment of an amount determined by multiplying 9 (i) the difference obtained by subtracting the exercise price per share of Common Stock under the related Option from the Fair Market Value of a share of Common Stock on the date of exercise of the Stock Appreciation Right, by (ii) the number of shares with respect to which the Stock Appreciation Right shall have been exercised. (b) The Committee, in its sole discretion, may settle the amount determined under paragraph (a) above solely in cash, solely in shares of Common Stock (valued at Fair Market Value on the date of exercise of the Stock Appreciation Right), or partly in such shares and partly in cash, provided that the Committee shall have determined that such exercise and payment are consistent with applicable law. In any event, cash shall be paid in lieu of fractional shares. Absent a determination to the contrary, all Stock Appreciation Rights shall be settled in cash as soon as practicable after exercise. The exercise price for the Stock Appreciation Right shall be the exercise price of the related Option. Notwithstanding the foregoing, the Committee may, in the Award Agreement, determine the maximum amount of cash or stock or a combination thereof which may be delivered upon exercise of a Stock Appreciation Right. (c) Upon exercise of a Stock Appreciation Right granted independently of any Option, the Participant shall be entitled to receive payment of an amount based on a percentage, specified in the Award Agreement, of the difference obtained by subtracting the Fair Market Value per share of Common Stock on the Award Date from the Fair Market Value per share of Common Stock on the date of exercise of the Stock Appreciation Right. Such amount shall be paid as described in paragraph (b) above. IV. RESTRICTED STOCK AWARDS. 4.1 Grants. Subject to Section 1.4, the Committee may, in its discretion, grant one or more Restricted Stock Awards to any Eligible Employee. Each Restricted Stock Award agreement shall specify the number of shares of Common Stock to be issued to the Participant, the date of such issuance, the price, if any, to be paid for such shares by the Participant and the restrictions imposed on such shares, which restrictions shall not terminate earlier than six months after the Award Date. Stock certificates evidencing shares of Restricted Stock pending the lapse of the restrictions shall bear a legend making appropriate reference to the restrictions imposed hereunder and shall be held by the Corporation or by a third party designated by the Committee until the restrictions on such shares shall have lapsed and the shares shall have vested in accordance with the provisions of the Award. Upon issuance of the Restricted Stock Award, the Participant may be required to provide such further assurance and documents as the Committee may require to enforce the restrictions. 10 4.2 Restrictions. (a) Shares of Common Stock included in Restricted Stock Awards may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered, either voluntarily or involuntarily, until such shares have vested. (b) Unless otherwise provided in the applicable Award Agreement, Participants receiving Restricted Stock shall be entitled to dividend and voting rights for the shares issued even though they are not vested, provided that such rights shall terminate immediately as to any forfeited Restricted Stock. (c) In the event that the Participant shall have paid cash in connection with the Restricted Stock Award, the Award Agreement shall specify whether and to what extent such cash shall be returned upon a forfeiture (with or without an earnings factor). 4.3 Return to the Corporation. Unless the Committee otherwise expressly provides, shares of Restricted Stock that remain subject to restrictions at the time of termination of employment or are subject to other conditions to vesting that have not been satisfied by the time specified in the applicable Award Agreement shall not vest and shall be returned to the Corporation in such manner and on such terms as the Committee shall therein provide. V. PERFORMANCE SHARE AWARDS. 5.1 Grants. The Committee may, in its discretion, grant Performance Share Awards to Eligible Employees based upon such factors as the Committee shall determine. A Performance Share Award agreement shall specify the number of shares of Common Stock subject to the Performance Share Award, the price, if any, to be paid for such shares by the Participant and the conditions upon which issuance to the Participant shall be based, which issuance shall not be earlier than six months after the Award Date. 5.2 Special Performance-Based Share Awards. Without limiting the generality of the foregoing, and in addition to Options and Stock Appreciation Rights granted under other provisions of this Plan which are intended to satisfy the exception for "qualified performance-based compensation" under Section 162(m) of the Code (with such Awards hereinafter referred to as a "Qualifying Option" or "Qualifying Stock Appreciation Right," respectively), other performance-based awards within the meaning of Section 162(m) of the Code ("Performance-Based Awards"), whether in the form of restricted stock, performance stock, phantom stock, Cash-Based Awards or other rights, the grant, vesting, exercisability or payment of which depends on the degree of achievement of the Performance Goals relative to pre-established targeted levels for the Corporation on a consolidated, segment, subsidiary, division or unit basis, may be granted under this Plan. Any Qualifying Option or Qualifying Stock Appreciation Right shall be subject to the requirements of Section 5.3(a), (c) and (f) 11 below in order for such Award to satisfy the requirements for "qualified performance-based compensation" within the meaning of Section 162(m) of the Code. (a) Eligible Class. The eligible class of persons for Performance-Based Awards under this Section shall be the key employees (including officers) of the Company. (b) Performance Goal Alternatives. The specific performance goals for Performance-Based Awards granted under this Section (other than Qualifying Options and Qualifying Stock Appreciation Rights) shall be, on an absolute or relative basis, one or more of the Performance Goals, as selected by the Committee in its sole discretion. The Committee shall establish in the applicable Award Agreement the specific performance target(s) relative to the Performance Goal(s) which must be attained before the compensation under the Performance-Based Award becomes payable. The specific targets shall be determined within the time period permitted under Section 162(m) of the Code (and any regulations issued thereunder) so that such targets are considered to be pre-established and so that the attainment of such targets is substantially uncertain at the time of their establishment. The applicable performance measurement period may not be less than one nor more than 10 years. (c) Maximum Performance-Based Award. Notwithstanding any other provision of the Plan to the contrary, the maximum number of shares of Common Stock which may be delivered pursuant to awards that are granted as Performance-Based Awards under this Section 5.2 to any Participant in any calendar year (plus the number of shares of Common Stock subject to Options and Stock Appreciation Rights granted to that Participant in that calendar year) shall not exceed 900,000 shares, either individually or in the aggregate, subject to adjustment as provided in Section 6.2. Awards that are cancelled during the year shall be counted against this limit to the extent required by Section 162(m) of the Code. In addition, the aggregate amount of compensation that may be paid to any Participant in respect of any Cash-Based Awards that are granted to that Participant during any calendar year as Performance-Based Awards shall not exceed $3,500,000. (d) Committee Certification. Before any Performance-Based Award under this Section 5.2 (other than Qualifying Options or Qualifying Stock Appreciation Rights) is paid, the Committee must certify in writing that the Performance Goal(s) and any other material terms of the Performance-Based Award were satisfied; provided, however, that a Performance-Based Award may be paid without regard to the satisfaction of the applicable Performance Goal in the event of a change in control event in accordance with Section 162(m) of the Code and Section 6.2. (e) Terms and Conditions of Awards. The Committee will have the discretion to determine the restrictions or other limitations of the individual awards granted under this Section 5.2 including the authority to reduce awards, payouts or vesting or to pay no awards, in its sole discretion, if the Committee preserves such authority at the time of grant by language to this effect in its authorizing resolutions or otherwise. 12 (f) Adjustments for Changes in Capitalization and other Material Changes. In the event of a change in corporate capitalization, such as a stock split or stock dividend, or a corporate transaction, such as a merger, consolidation, spinoff, reorganization or similar event, or any partial or complete liquidation of the Company, or any similar event consistent with regulations issued under Section 162(m) of the Code including, without limitation, any material change in accounting policies or practices affecting the Company and/or the Performance Goals or targets, then the Committee shall make adjustments to the Performance Goals and targets relating to outstanding Performance-Based Awards to the extent such adjustments are made to reflect the occurrence of such an event; provided, however, that adjustments described in this subsection may be made only to the extent that the occurrence of an event described herein was unforeseen at the time the targets for a Performance-Based Award were established by the Committee. 5.3 Deferred Payments. The Committee may authorize for the benefit of any Eligible Employee the deferral of any payment of cash or shares that may become due or of cash otherwise payable under this Plan, and provide for accredited benefits thereon based upon such deferment, at the election or at the request of such Participant, subject to the other terms of this Plan. Such deferral shall be subject to such further conditions, restrictions or requirements as the Committee may impose, subject to any then vested rights of Participants. VI. OTHER PROVISIONS. 6.1 Rights of Eligible Employees, Participants and Beneficiaries. (a) Status as an Eligible Employee shall not be construed as a commitment that any Award will be made under this Plan to any Eligible Employee generally. (b) Nothing contained in this Plan (or in Award Agreements or in any other documents related to this Plan or to Awards) shall confer upon any Eligible Employee or Participant any right to continue in the service or employ of the Company or constitute any contract or agreement of service or employment, or interfere in any way with the right of the Company to reduce such person's compensation or other benefits or to terminate the services or employment of such Eligible Employee or Participant, with or without cause, but nothing contained in this Plan or any document related thereto shall affect any other contractual right of any Eligible Employee or Participant. (c) Awards payable under this Plan shall be payable in shares or from the general assets of the Corporation, and no special or separate reserve, fund or deposit shall be made to assure payment of any such Awards. No Participant, Beneficiary or other person shall have any right, title or interest in any fund or in any specific asset (including shares of Common Stock) of the Company by reason of any Award granted hereunder. Neither the provisions of this Plan (or of any documents related hereto), nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan shall create, or be construed to create, a trust of any kind or a fiduciary 13 relationship between the Company and any Participant, Beneficiary or other person. To the extent that a Participant, Beneficiary or other person acquires a right to receive an Award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Corporation. 6.2 Adjustments Upon Changes in Capitalization. (a) If the outstanding shares of Common Stock are changed into or exchanged for cash or a different number or kind of shares or securities of the Corporation or of another issuer, or if additional shares or new or different securities are distributed with respect to the outstanding shares of the Common Stock, through a reorganization or merger to which the Corporation is a party, or through a combination, consolidation, recapitalization, reclassification, stock split, stock dividend, reverse stock split, stock consolidation or other capital change or adjustment, an appropriate adjustment shall be made in the number and kind of shares or other consideration that is subject to or may be delivered under this Plan and pursuant to outstanding Awards. A corresponding adjustment to the consideration payable with respect to Awards granted prior to any such change and to the price, if any, paid in connection with Restricted Stock Awards or Performance Share Awards or Performance-Based Awards shall also be made. Any such adjustment, however, shall be made without change in the total payment, if any, applicable to the portion of the Award not exercised but with a corresponding adjustment in the price for each share. Corresponding adjustments shall be made with respect to Stock Appreciation Rights based upon the adjustments made to the Options to which they are related or, in the case of Stock Appreciation Rights granted independently of any Option, based upon the adjustments made to Common Stock. (b) Upon the dissolution or liquidation of the Corporation, or upon a reorganization, merger or consolidation of the Corporation with one or more corporations as a result of which the Corporation is not the surviving corporation, the Plan and outstanding Awards shall terminate. Notwithstanding the foregoing, the Committee may provide in writing in connection with, or in contemplation of, any such transaction for any or all of the following alternatives (separately or in combinations): (i) for the assumption by the successor corporation of the Awards theretofore granted or the substitution by such corporation for such Awards of awards covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (ii) for the continuance of this Plan by such successor corporation in which event this Plan and the Awards shall continue in the manner and under the terms so provided; or (iii) for the payment in cash or shares of Common Stock in lieu of and in complete satisfaction of such Awards. (c) In adjusting Awards to reflect the changes described in this Section 6.2, or in determining that no such adjustment is necessary, the Committee may rely upon the advice of independent counsel and accountants of the Company, and the determination of the Committee shall be conclusive. No fractional shares of stock shall be issued under this Plan on account of any such adjustment. (d) In any of such events, the Committee may take such action prior to such event to the extent that the Committee deems the action necessary to permit the 14 Participant to realize the benefits intended to be conveyed with respect to the underlying shares in the same manner as is or will be available to shareholders generally. 6.3 Termination of Employment. (a) If the Participant's service to or employment by the Company terminates for any reason other than Retirement, death or Total Disability, the Participant shall have, subject to earlier termination pursuant to or as contemplated by Section 2.3, three months or such shorter period as is provided in the Award Agreements from the date of termination of services or employment to exercise any Option to the extent it shall have become exercisable on the date of termination of employment, and any Option not exercisable on that date shall terminate. Notwithstanding the preceding sentence, in the event the Participant is discharged for cause as determined by the Committee in its sole discretion, all Options shall lapse immediately upon such termination of services or employment. (b) If the Participant's service to or employment by the Company terminates as a result of Retirement or Total Disability, the Participant or Participant's Personal Representative, as the case may be, shall have, subject to earlier termination pursuant to or as contemplated by Section 2.3, 12 months (or, in the case of Incentive Stock Options where the Participant terminates as a result of Retirement, three months) or such shorter period as is provided in the Award Agreements from the date of termination of services or employment to exercise any Option to the extent it shall have become exercisable by the date of termination of services or employment and any Option not exercisable on that date shall terminate. (c) If the Participant's service to or employment by the Company terminates as a result of death while the Participant is rendering services to the Company or is employed by the Company or during the 12 month period (or, in the case of Incentive Stock Options where the Participant has terminated as a result of Retirement, three month period) referred to in subsection (b) above, the Participant's Option shall be exercisable by the Participant's Beneficiary, subject to earlier termination pursuant to or as contemplated by Section 2.3, during the 12 month period or such shorter period as is provided in the Award Agreements following the Participant's death, as to all or any part of the shares of Common Stock covered thereby to the extent exercisable on the date of death (or earlier termination). (d) Each Stock Appreciation Right granted concurrently with an Option shall have the same termination provisions and exercisability periods as the Option to which it relates. The termination provisions and exercisability periods of any Stock Appreciation Right granted independently of an Option shall be established in accordance with Section 3.2(d). The exercisability period of a Stock Appreciation Right shall not exceed that provided in Section 2.3 or in the related Award Agreement and the Stock Appreciation Right shall expire at the end of such exercisability period. (e) In the event of termination of services to or employment with the Company for any reason, (i) shares of Common Stock subject to the Participant's Restricted Stock Award shall be forfeited in accordance with the provisions of the related 15 Award Agreement to the extent such shares have not become vested on that date; and (ii) shares of Common Stock subject to the Participant's Performance Share Award or Performance-Based Award shall be forfeited in accordance with the provisions of the related Award Agreement to the extent such shares have not been issued or become issuable on that date. (f) In the event of termination of services to or employment with the Company for any reason, other than discharge for cause, the Committee may, in its discretion, increase the portion of the Participant's Award available to the Participant, or Participant's Beneficiary or Personal Representative, as the case may be, upon such terms as the Committee shall determine. (g) If an entity ceases to be a Subsidiary, such action shall be deemed for purposes of this Section 6.3 to be a termination of services or employment of each consultant or employee of that entity who does not continue as a consultant or as an employee of another entity within the Company. (h) Upon forfeiture of a Restricted Stock Award pursuant to this Section 6.3, the Participant, or his or her Beneficiary or Personal Representative, as the case may be, shall transfer to the Corporation the portion of the Restricted Stock Award not vested at the date of termination of services or employment, without payment of any consideration by the Corporation for such transfer unless the Participant paid a purchase price in which case repayment, if any, of that price shall be governed by the Award Agreement. Notwithstanding any such transfer to the Corporation, or failure, refusal or neglect to transfer, by the Participant, or his or her Beneficiary or Personal Representative, as the case may be, such nonvested portion of any Restricted Stock Award shall be deemed transferred automatically to the Corporation on the date of termination of services or employment. The Participant's original acceptance of the Restricted Stock Award shall constitute his or her appointment of the Corporation and each of its authorized representatives as attorney(s)-in-fact to effect such transfer and to execute such documents as the Corporation or such representatives deem necessary or advisable in connection with such transfer. 6.4 Acceleration of Awards. Unless prior to an Event the Board determines that, upon its occurrence, there shall be no acceleration of Awards or determines those Awards which shall be accelerated and the extent to which they shall be accelerated, upon the occurrence of an Event (i) each Option and each related Stock Appreciation Right shall become immediately exercisable to the full extent theretofore not exercisable, (ii) Restricted Stock shall immediately vest free of restrictions and (iii) the number of shares covered by each Performance Share Award or Performance-Based Award shall be issued to the Participant; subject, however, to compliance with applicable regulatory requirements, including without limitation and Section 422 of the Code. For purposes of this section only, the Board shall mean the Board as constituted immediately prior to the Event. 16 6.5 Government Regulations. This Plan, the granting of Awards under this Plan and the issuance or transfer of shares of Common Stock (and/or the payment of money) pursuant thereto are subject to all applicable federal and state laws, rules and regulations and to such approvals by any regulatory or governmental agency (including without limitation "no action" positions of the Commission) which may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Without limiting the generality of the foregoing, no Awards may be granted under this Plan, and no shares shall be issued by the Corporation, nor cash payments made by the Corporation, pursuant to or in connection with any such Award, unless and until, in each such case, all legal requirements applicable to the issuance or payment have, in the opinion of counsel to the Corporation, been complied with. In connection with any stock issuance or transfer, the person acquiring the shares shall, if requested by the Corporation, give assurances satisfactory to counsel to the Corporation in respect of such matters as the Corporation may deem desirable to assure compliance with all applicable legal requirements. 6.6 Tax Withholding. (a) Upon the disposition by a Participant or other person of shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option prior to satisfaction of the holding period requirements of Section 422 of the Code, or upon the exercise of a Nonqualified Stock Option, the exercise of a Stock Appreciation Right, the vesting of a Restricted Stock Award or the payment of a Performance Share Award or Performance-Based Award, the Company shall have the right to (i) require such Participant or such other person to pay by cash or check payable to the Company, the amount of any taxes which the Company may be required to withhold with respect to such transactions or (ii) deduct from amounts paid in cash the amount of any taxes which the Company may be required to withhold with respect to such cash amounts. The above notwithstanding, in any case where a tax is required to be withheld in connection with the issuance or transfer of shares of Common Stock under this Plan, the Participant may elect, pursuant to such rules as the Committee may establish, to have the Company reduce the number of such shares issued or transferred by the appropriate number of shares to accomplish such withholding; provided, the Committee may impose such conditions on the payment of any withholding obligation as may be required to satisfy applicable regulatory requirements. (b) The Committee may, in its discretion, permit a loan from the Company to a Participant in the amount of any taxes which the Company may be required to withhold with respect to shares of Common Stock received pursuant to a transaction described in subsection (a) above. Such a loan will be for a term, at a rate of interest and pursuant to such other terms and rules as the Committee may establish. 6.7 Amendment, Termination and Suspension. (a) The Board may, at any time, terminate or, from time to time, amend, modify or suspend this Plan (or any part hereof). No Awards may be granted during any suspension of this Plan or after termination of this Plan, but the Committee 17 shall retain jurisdiction as to Awards then outstanding in accordance with the terms of this Plan. (b) To the extent then required under Sections 162, 422 or 424 of the Code or any other applicable law, or deemed necessary or advisable by the Board, any amendment to this Plan shall be subject to shareholder approval. (c) Without limiting any other express authority of the Committee under (but subject to) the express limits of this Plan, the Committee by agreement or resolution may waive conditions of or limitations on Awards to Participants that the Committee in the prior exercise of its discretion has imposed, without the consent of a Participant, and may make other changes to the terms and conditions of Awards that do not affect in any manner materially adverse to the Participant, the Participant's rights and benefits under an Award. (d) No amendment, suspension or termination of this Plan or change of or affecting any outstanding Award shall, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of the Participant or obligations of the Company under any Award granted under this Plan prior to the effective date of such change. Changes contemplated by Section 6.2 shall not be deemed to constitute changes or amendments for purposes of this Section 6.7. 6.8 Privileges of Stock Ownership; Nondistributive Intent. A Participant shall not be entitled to the privilege of stock ownership as to any shares of Common Stock not actually issued to him or her. Upon the issuance and transfer of shares to the Participant, unless a registration statement is in effect under the Securities Act and applicable state securities law, relating to such issued and transferred Common Stock and there is available for delivery a prospectus meeting the requirements of Section 10 of the Securities Act, the Common Stock may be issued and transferred to the Participant only if he or she represents and warrants in writing to the Corporation that the shares are being acquired for investment and not with a view to the resale or distribution thereof. No shares shall be issued and transferred unless and until there shall have been full compliance with any then applicable regulatory requirements (including those of exchanges upon which any Common Stock of the Corporation may be listed). 6.9 Effective Date of the Plan. This Plan shall be effective upon its approval by the Board (the "Effective Date"), subject to approval by the shareholders of the Corporation within twelve months from the date of such Board approval. 6.10 Term of the Plan. Unless previously terminated by the Board, this Plan shall terminate at the close of business on the day before the tenth anniversary of the Effective Date, and no Awards shall be granted under it thereafter, but such termination shall not affect any Award theretofore granted. Unless otherwise expressly provided in this Plan or in an applicable Award Agreement, any Award granted prior to the Plan's termination date may extend 18 beyond such date, and all authority of the Committee with respect to Awards hereunder, including the authority to amend an Award, shall continue during any suspension of this Plan and in respect of Awards outstanding on the termination date. No new Performance-Based Award may be granted under Section 5.2 of the Plan after the first annual shareholders meeting of the Corporation to occur in 2008, but such termination shall not affect any Performance-Based Award theretofore granted. 6.11 Governing Law. This Plan and the documents evidencing Awards and all other related documents shall be governed by, and construed in accordance with, the laws of the State of California. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of this Plan shall continue to be fully effective. 6.12 Plan Construction. (a) Rule 16b-3. It is the intent of the Corporation that the Awards and transactions permitted by Awards generally satisfy and be interpreted in a manner that, in the case of Participants who are or may be subject to Section 16 of the Exchange Act, satisfies the applicable requirements of Rule 16b-3 promulgated thereunder so that such persons (unless they otherwise agree) will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act in respect of those transactions and will not be subjected to avoidable liability. (b) Section 162(m). It is the further intent of the Corporation that (to the extent the Corporation or Awards under this Plan may be or become subject to limitations on deductibility under Section 162(m) of the Code), Options or SARs granted with an exercise or base price not less than Fair Market Value on the date of grant and Performance-Based Awards under Section 5.2 of this Plan that are granted to or held by a person subject to Section 162(m) of the Code will qualify as performance-based compensation or otherwise be exempt from deductibility limitations under Section 162(m) of the Code, to the extent that the Committee authorizing the Award (or the payment thereof, as the case may be) satisfies any applicable administrative requirements thereof. 6.13 Captions. Captions and headings are given to the sections and subsections of this Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Plan or any provision thereof. 6.14 Non-Exclusivity of Plan. Nothing in this Plan shall limit or be deemed to limit the authority of the Board or the Committee to grant awards or authorize any other compensation, with or without reference to the Common Stock, under any other plan or authority. 19 6.15 No Corporate Action Restriction. The existence of the Plan, the Award Agreements and the Awards granted hereunder shall not limit, affect or restrict in any way the right or power of the Board or the shareholders of the Corporation to make or authorize: (a) any adjustment, recapitalization, reorganization or other change in the Corporation's or any Subsidiary's capital structure or its business, (b) any merger, amalgamation, consolidation or change in the ownership of the Corporation or any subsidiary, (c) any issue of bonds, debentures, capital, preferred or prior preference stock ahead of or affecting the Corporation's or any Subsidiary's capital stock or the rights thereof, (d) any dissolution or liquidation of the Corporation or any Subsidiary, (e) any sale or transfer of all or any part of the Corporation or any Subsidiary's assets or business, or (f) any other corporate act or proceeding by the Corporation or any Subsidiary. No participant, beneficiary or any other person shall have any claim under any Award or Award Agreement against any member of the Board or the Committee, or the Corporation or any employees, officers or agents of the Corporation or any Subsidiary, as a result of any such action. 6.16 Other Company Benefit and Compensation Program. Payments and other benefits received by a Participant under an Award made pursuant to this Plan shall not be deemed a part of a Participant's compensation for purposes of the determination of benefits under any other employee welfare or benefit plans or arrangements, if any, provided by the Corporation or any Subsidiary, except where the Committee or the Board expressly otherwise provides or authorizes in writing. Awards under this Plan may be made in addition to, in combination with, as alternatives to or in payment of grants, awards or commitments under any other plans or arrangements of the Corporation or the Subsidiaries. VII. DEFINITIONS. 7.1 Definitions. (a) "Award" means an Option, which may be designated as a Nonqualified Stock Option or an Incentive Stock Option, a Stock Appreciation Right, a Restricted Stock Award, Performance Share Award or Performance-Based Award, in each case granted under this Plan. (b) "Award Agreement" means a written agreement setting forth the terms of an Award. (c) "Award Date" means the date upon which the Committee took the action granting an Award or such later date as is prescribed by the Committee or, in the case of Options granted under Section 2.6, the date specified in such Section 2.6. (d) "Beneficiary" means the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive the benefits specified under this Plan in the event of a Participant's death, and shall mean the Participant's executor or administrator if no other Beneficiary is designated and able to act under the circumstances. 20 (e) "Board" means the Board of Directors of the Corporation. (f) "Cash-Based Award" means an Award pursuant to Section 5.2 that, if paid, must be paid in cash and is not denominated in nor have a value derived from the value of, nor an exercise or conversion privilege at a price related to, shares of Common Stock. (g) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (h) "Commission" means the Securities and Exchange Commission. (i) "Committee" means the Board or a committee appointed by the Board to administer this Plan, which committee shall be comprised only of one or more directors or such greater number of directors as may be required under applicable law. In respect of any decision with respect to an Award intended to satisfy the requirements of Section 162(m) of the Code, the Committee shall be composed of no less than two members, each of whom shall be an "outside director" within the meaning of Section 162(m) of the Code. In respect of any decision with respect to an Award intended to be exempt pursuant to Rule 16b-3 promulgated by the Commission under the Exchange Act, the Committee shall be composed of no less than two members, each of whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3(d)(1) under the Exchange Act. (j) "Common Stock" means the Common Stock of the Corporation. (k) "Company" means the Corporation and its Subsidiaries, collectively or individually, as the context may require. (l) "Corporation" means Pacific Sunwear of California, Inc., a California corporation, and its successors. (m) "Eligible Employee" means an officer or key employee of the Company and consultants to the Company whether or not such consultants are employees. (n) "Event" means any of the following: (i) Approval by the shareholders of the Corporation of the dissolution or liquidation of the Corporation; (ii) Approval by the shareholders of the Corporation of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities other than Subsidiaries, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are, or are to be, owned by former shareholders of the Corporation; or 21 (iii) Approval by the shareholders of the Corporation of the sale of substantially all of the Corporation's business assets to a person or entity which is not a Subsidiary. (o) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (p) "Fair Market Value" means (i) if the stock is listed or admitted to trade on a national securities exchange, the closing price of the stock on the Composite Tape, as published in the Western Edition of The Wall Street Journal, of the principal national securities exchange on which the stock is so listed or admitted to trade, on such date, or, if there is no trading of the stock on such date, then the closing price of the stock as quoted on such Composite Tape on the next preceding date on which there was trading in such shares; (ii) if the stock is not listed or admitted to trade on a national securities exchange, the last price for the stock on such date, as furnished by the National Association of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market Reporting System or a similar organization if the NASD is no longer reporting such information; (iii) if the stock is not listed or admitted to trade on a national securities exchange and is not reported on the National Market Reporting System, the mean between the bid and asked price for the stock on such date, as furnished by the NASD; or (iv) if the stock is not listed or admitted to trade on a national securities exchange, is not reported on the National Market Reporting System and if bid and asked prices for the stock are not furnished by the NASD or a similar organization, the values established by the Committee for purposes of the Plan. (q) "Incentive Stock Option" means an option which is designated as an incentive stock option within the meaning of Section 422 of the Code, the award of which contains such provisions as are necessary to comply with that section. (r) "Non-Employee Director" means a member of the Board who is not an officer or employee of the Company. (s) "Non-Employee Director Participant" means a Non-Employee Director who has been granted an Option under Section 2.6. (t) "Nonqualified Stock Option" means an option which is designated as a Nonqualified Stock Option and shall include any Option intended as an Incentive Stock Option that fails to meet the applicable legal requirements thereof. (u) "Option" means an option to purchase Common Stock under this Plan. An Option shall be designated by the Committee as a Nonqualified Stock Option or an Incentive Stock Option. (v) "Participant" means an Eligible Employee who has been granted an Award and a Non-Employee Director who has received an Option under Section 2.6. (w) "Performance Goal" means any one or more of the criteria set forth on Exhibit A hereto. 22 (x) "Performance-Based Awards" shall mean an Award of a right to receive shares of Common Stock or other compensation (including cash) under Section 5.2, the issuance or payment of which is contingent upon, among other conditions, the attainment of performance objectives specified by the Committee. (y) "Performance Share Award" means an award of shares of Common Stock under Section 5.1, the issuance of which is contingent upon attainment of performance objectives specified by the Committee. (z) "Personal Representative" means the person or persons who, upon the disability or incompetence of a Participant, shall have acquired on behalf of the Participant by legal proceeding or otherwise the power to exercise the rights and receive the benefits specified in this Plan. (aa) "Plan" means the Pacific Sunwear of California, Inc. 1999 Stock Award Plan, as it may be amended from time to time. (bb) "QDRO" shall mean an order requiring the transfer of an Award or portion thereof pursuant to a state domestic relations law to the spouse, former spouse, child or other dependent of a Participant. Such order must be in a form substantially identical to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended. (cc) "Restricted Stock" means those shares of Common Stock issued pursuant to a Restricted Stock Award which are subject to the restrictions set forth in the related Award Agreement. (dd) "Restricted Stock Award" means an award of a fixed number of shares of Common Stock to the Participant subject, however, to payment of such consideration, if any, and such forfeiture provisions, as are set forth in the Award Agreement. (ee) "Retirement" means retirement from employment by or providing services to the Corporation or any Subsidiary after age 65 and, in the case of employees, in accordance with the retirement policies of the Company then in effect. (ff) "Securities Act" means the Securities Act of 1933, as amended. (gg) "Stock Appreciation Right" means a right to receive a number of shares of Common Stock or an amount of cash, or a combination of shares and cash, determined as provided in Section 3.3(a). (hh) "Subsidiary" means any corporation or other entity a majority or more of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation. (ii) "Total Disability" means a "permanent and total disability" within the meaning of Section 22(e)(3) of the Code and, in the case of Awards other than Incentive Stock Options, such other disabilities, infirmities, afflictions or conditions as the Committee by rule may include. 23 EXHIBIT A PERFORMANCE GOALS The Performance Targets shall mean any one or a combination of the following. Except as otherwise expressly provided below or the context otherwise requires, financial and accounting terms herein are used as defined for purposes of, and shall be determined and construed in accordance with, generally accepted accounting principles, as from time to time in effect, as applied and reflected in the consolidated financial statements of the Corporation, prepared in the ordinary course of business. EBIT. "EBIT" means Net Income before interest expense and taxes. EBITDA. "EBITDA" means Net Income before interest expense, taxes, depreciation and amortization. EPS. "EPS" means Net Income divided by the weighted average number of common shares outstanding. Unless otherwise provided by the Committee in the related Award Agreement, common shares outstanding shall be adjusted to include the dilutive effect of stock options, restricted stock and other dilutive financial instruments. EXPENSE REDUCTION. "Expense Reduction" means reduction in actual expense or an improvement in the expense to Net Sales ratio compared to a target or prior year actual expense to Sales ratio. DEBT TO EBITDA. "Debt to EBITDA" means the ratio of debt to EBITDA. INTEREST COVERAGE. "Interest Coverage" means the ratio of EBITDA to interest expense. INVENTORY TURNS. "Inventory Turns" means the ratio of total cost of goods sold on a historical basis to average net inventory. NET INCOME. "Net Income" means the difference between total Net Sales and total costs and expenses, including income taxes. NET SALES. "Net Sales" means net sales. OPERATING CASH FLOW. "Operating Cash Flow" means the net cash provided by operating activities less net cash used by operations and investing activities as shown on the statement of cash flows. PRE-TAX MARGIN. "Pre-Tax Margin" means the ratio of earnings before income taxes to Net Sales. RETURN ON ASSETS. "Return on Assets" means the ratio of Net Income to total average assets including goodwill. RETURN ON CAPITAL. "Return on Capital" means the ratio of Net Income to average total capital. Total capital includes working capital, and other long term assets such as PP&E, goodwill and intangibles, and leased assets. Unless otherwise provided by the A-1 Committee in the related Award Agreement, cash, deferred tax assets and debt shall not be included in capital for calculation purposes. RETURN ON EQUITY. "Return on Equity" means Net Income divided by average total equity. STOCK PRICE APPRECIATION. "Stock Price Appreciation" means an increase, or an average annualized increase, in the stock price or market value of the Common Stock of the Corporation after the date of grant of an Award or above a specified price. WORKING CAPITAL IMPROVEMENT. "Working Capital Improvement" means the net change in current assets less current liabilities over the applicable period or the reduction in the current ratio (current assets divided by current liabilities), excluding changes in cash and cash equivalents, and current and deferred income taxes. A-2 EX-99.1 4 a90616exv99w1.htm EXHIBIT 99.1

EXHIBIT 99.1

WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350

     The undersigned, Greg H. Weaver, the Chairman of the Board and Chief Executive Officer of Pacific Sunwear of California, Inc. (the “Company”), pursuant to 18 U.S.C. Section 1350, hereby certifies that:

(i)	the Quarterly Report of the Company, on Form 10-Q for the period ended November 2, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934; and
(ii)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 30, 2003

/s/ Greg H. Weaver

Greg H. Weaver
Chairman of the Board and Chief Executive Officer
Pacific Sunwear of California, Inc.

This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350

     The undersigned, Carl W. Womack, the Senior Vice President, Chief Financial Officer and Secretary of Pacific Sunwear of California, Inc. (the “Company”), pursuant to 18 U.S.C. Section 1350, hereby certifies that:

(iii)	the Quarterly Report of the Company, on Form 10-Q for the period ended November 2, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934; and
(iv)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 30, 2003

/s/ Carl W. Womack

Carl W. Womack
Senior Vice President, Chief Financial Officer and Secretary
Pacific Sunwear of California, Inc.

This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

-----END PRIVACY-ENHANCED MESSAGE-----

EX-10.1

                                                                    EXHIBIT 10.1

                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                              1999 STOCK AWARD PLAN

(As Amended and Restated March 27, 2003, and as Further Amended on May 21, 2003)



                                TABLE OF CONTENTS



                                                                                                       PAGE
                                                                                                 
I.       THE PLAN....................................................................................    1

         1.1      Purpose............................................................................    1

         1.2      Administration.....................................................................    1

         1.3      Participation......................................................................    2

         1.4      Stock Subject to the Plan..........................................................    3

         1.5      Grant of Awards....................................................................    3

         1.6      Exercise of Awards.................................................................    4

         1.7      No Transferability; Limited Exception to Transfer Restrictions.....................    4

II.      OPTIONS.....................................................................................    5

         2.1      Grants.............................................................................    5

         2.2      Option Price.......................................................................    5

         2.3      Option Period......................................................................    6

         2.4      Exercise of Options................................................................    6

         2.5      Limitations on Grant of Incentive Stock Options....................................    6

         2.6      Non-Employee Director Awards.......................................................    7

         2.7      Options and Rights in Substitution for Stock Options Granted by
                   Other Corporations................................................................    8

         2.8      Adjustments, No Repricing Without Prior Shareholder Approval.......................    8

III.     STOCK APPRECIATION RIGHTS...................................................................    9

         3.1      Grants.............................................................................    9

         3.2      Exercise of Stock Appreciation Rights..............................................    9

         3.3      Payment............................................................................    9

IV.      RESTRICTED STOCK AWARDS.....................................................................   10

         4.1      Grants.............................................................................   10

         4.2      Restrictions.......................................................................   11

         4.3      Return to the Corporation..........................................................   11

V.       PERFORMANCE SHARE AWARDS....................................................................   11

         5.1      Grants.............................................................................   11

         5.2      Special Performance-Based Share Awards.............................................   11

         5.3      Deferred Payments..................................................................   13


                                      -i-



                                TABLE OF CONTENTS
                                   (CONTINUED)



                                                                                                       PAGE
                                                                                                 
VI.      OTHER PROVISIONS............................................................................   13

         6.1      Rights of Eligible Employees, Participants and Beneficiaries.......................   13

         6.2      Adjustments Upon Changes in Capitalization.........................................   14

         6.3      Termination of Employment..........................................................   15

         6.4      Acceleration of Awards.............................................................   16

         6.5      Government Regulations.............................................................   17

         6.6      Tax Withholding....................................................................   17

         6.7      Amendment, Termination and Suspension..............................................   17

         6.8      Privileges of Stock Ownership; Nondistributive Intent..............................   18

         6.9      Effective Date of the Plan.........................................................   18

         6.10     Term of the Plan...................................................................   18

         6.11     Governing Law......................................................................   19

         6.12     Plan Construction..................................................................   19

         6.13     Captions...........................................................................   19

         6.14     Non-Exclusivity of Plan............................................................   19

         6.15     No Corporate Action Restriction....................................................   20

         6.16     Other Company Benefit and Compensation Program.....................................   20

VII.     DEFINITIONS.................................................................................   20

         7.1      Definitions........................................................................   20


                                      -ii-



                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                              1999 STOCK AWARD PLAN

(As Amended and Restated March 27, 2003, and as Further Amended on May 21, 2003)

I.       THE PLAN.

         1.1      Purpose.

         The purpose of this Plan is to promote the success of the Company by
providing an additional means to attract, motivate, retain and reward key
personnel through the grant of Options and other Awards that provide added long
term incentives for high levels of performance and for significant efforts to
improve the financial performance of the Company. The purpose of this Plan is
also to attract, motivate and retain experienced and knowledgeable independent
directors through the Option grants provided under Section 2.6.

         1.2      Administration.

                  (a)      This Plan shall be administered and all Awards (other
than those under Section 2.6) shall be authorized by the Committee. Action of
the Committee with respect to the administration of this Plan shall be taken
pursuant to a majority vote or the unanimous written consent of its members. In
the event action by the Committee is taken by written consent, the action shall
be deemed to have been taken at the time specified in the consent or, if none is
specified, at the time of the last signature. The Committee may delegate
administrative functions to individuals who are officers or employees of the
Company.

                  (b)      Subject to the express provisions of this Plan, the
Committee shall have the authority:

                  (i)      to grant Awards to Eligible Employees, determine the
         price at which securities will be offered or awarded and the amount of
         securities to be offered or awarded to any of such persons, and
         determine the other specific terms and conditions of such Awards
         consistent with the express limits of this Plan, and establish the
         installments (if any) in which such Awards shall become exercisable or
         shall vest, or determine that no delayed exercisability or vesting is
         required, and establish the events of termination or reversion of such
         Awards;

                  (ii)     to approve the forms of Award Agreements (which need
         not be identical either as to type of award or among Participants);

                  (iii)    to construe and interpret this Plan and any
         agreements defining the rights and obligations of the Company and
         Participants under this Plan, further define the terms used in this
         Plan, and prescribe, amend and rescind rules and regulations relating
         to the administration of this Plan;



                  (iv)     to cancel, modify, or waive the Corporation's rights
         with respect to, or modify, discontinue, suspend, or terminate any or
         all outstanding Awards held by Eligible Employees, subject to any
         required consent under Section 6.7;

                  (v)      to accelerate or extend the exercisability or extend
         the term of any or all such outstanding Awards within the maximum
         ten-year term of Awards; and

                  (vi)     to make all other determinations and take such other
         action as contemplated by this Plan or as may be necessary or advisable
         for the administration of this Plan and the effectuation of its
         purposes.

Notwithstanding the foregoing, the provisions of Section 2.6 relating to
Non-Employee Director Options shall be automatic and, to the maximum extent
possible, self-effectuating.

                  (c)      Any action taken by, or inaction of, the Corporation,
any Subsidiary, the Board or the Committee relating or pursuant to this Plan and
within its authority hereunder or under applicable law shall be within the
absolute discretion of that entity or body and shall be conclusive and binding
upon all persons. Neither the Board nor any Committee, nor any member thereof or
person acting at the direction thereof, shall be liable for any act, omission,
interpretation, construction or determination made in good faith in connection
with this Plan (or any Award made under this Plan), and all such persons shall
be entitled to indemnification and reimbursement by the Company in respect of
any claim, loss, damage or expense (including, without limitation, attorneys'
fees) arising or resulting therefrom to the fullest extent permitted by law
and/or under any directors and officers liability insurance coverage that may be
in effect from time to time.

                  (d)      Subject to the requirements of Section 7.1, the
Board, at any time it so desires, may increase or decrease the number of members
of the Committee, may remove from membership on the Committee all or any portion
of its members, and may appoint such person or persons as it desires to fill any
vacancy existing on the Committee, whether caused by removal, resignation or
otherwise.

                  (e)      In making any determination or in taking or not
taking any action under this Plan, the Committee or the Board, as the case may
be, may obtain and may rely upon the advice of experts, including professional
advisors to the Company. No director, officer or agent of the Company shall be
liable for any such action or determination taken or made or omitted in good
faith.

         1.3      Participation.

         Awards may be granted only to Eligible Employees. An Eligible Employee
who has been granted an Award may, if otherwise eligible, be granted additional
Awards if the Committee shall so determine. Except as provided in Section 2.6
below, members of the Board who are not officers or employees of the Company
shall not be eligible to receive Awards.

                                       2



         1.4      Stock Subject to the Plan.

                  (a)      Subject to Section 6.2, the stock to be offered under
this Plan shall be shares of the Corporation's authorized but unissued Common
Stock. The aggregate amount of Common Stock that may be issued or transferred
pursuant to Awards (including Incentive Stock Options and Options under Section
2.6) granted under this Plan shall not exceed 7,300,000 shares. In no event
shall more than 900,000 shares of Common Stock be available for Awards issued
(or reissued) under this Plan as time-based Restricted Stock for nominal or no
consideration other than the par value thereof. This limit on Restricted Stock
does not apply to shares issued principally for past services, in respect of
compensation earned but deferred, or as Performance-Based Awards under Section
5.2. The aggregate number of shares of Common Stock subject to Options and Stock
Appreciation Rights that may be granted to any employee in any calendar year may
not exceed 900,000. The aggregate number of shares of Common Stock subject to
all Awards (including Options, Stock Appreciation Rights, and Performance-Based
Awards (other than Cash-Based Awards)) that may be granted to any employee in
any calendar year may not exceed 900,000. The Board may amend the Option grant
levels contemplated by Section 2.6 from time to time; provided that no more than
1,000,000 shares of Common Stock shall be issued or delivered pursuant to the
exercise of Options granted to Non-Employee Directors pursuant to Section 2.6.
Each of the foregoing share limits is subject to adjustment as set forth in
Section 6.2.

                  (b)      No Award may be granted under this Plan unless, on
the date of grant, the sum of (i) the maximum number of shares issuable at any
time pursuant to such Award, plus (ii) the number of shares that have previously
been issued pursuant to Awards granted under this Plan, other than reacquired
shares available for reissue consistent with any applicable legal limitations,
plus (iii) the maximum number of shares that may be issued at any time after
such date of grant pursuant to Awards that are outstanding on such date, does
not exceed the share limit set forth in Section 1.4(a). Shares that are subject
to or underlie Awards which expire or for any reason are cancelled or
terminated, are forfeited, fail to vest, or for any other reason are not paid or
delivered under this Plan, as well as reacquired shares, shall again, except to
the extent prohibited by law, be available for subsequent Awards under the Plan.

         1.5      Grant of Awards.

         Subject to the express provisions of this Plan, the Committee shall
determine from the class of Eligible Employees those individuals to whom Awards
under this Plan shall be granted, the number of shares of Common Stock subject
to each Award, the price (if any) to be paid for the shares or the Award and, in
the case of performance share awards, in addition to matters addressed in
Section 1.2(b), the specific objectives, goals and performance criteria (such as
an increase in sales, market value, earnings or book value over a base period,
the years of service before vesting, the relevant job classification or level of
responsibility or other factors) that further define the terms of the
performance share award. Each Award shall be evidenced by an Award Agreement
signed by the Corporation and, if required by the Committee, by the Participant.
The Award Agreement shall set forth the material terms and conditions of the
Award established by

                                       3



the Committee consistent with the specific provisions of this Plan. The grant of
an Award is made on the Award Date.

         1.6      Exercise of Awards.

         An Option or Stock Appreciation Right shall be deemed to be exercised
when the Secretary of the Corporation receives written notice of such exercise
from the Participant, together with payment of the purchase price made in
accordance with Section 2.2(a), except to the extent payment may be permitted to
be made following delivery of written notice of exercise in accordance with
Section 2.2(b). Notwithstanding any other provision of this Plan, the Committee
may impose, by rule and in Award Agreements, such conditions upon the exercise
of Awards (including, without limitation, conditions limiting the time of
exercise to specified periods) as may be required to satisfy applicable
regulatory requirements.

         1.7      No Transferability; Limited Exception to Transfer
Restrictions.

                  (a)      Limit On Exercise and Transfer. Unless otherwise
expressly provided in (or pursuant to) this Section 1.7, by applicable law and
by the Award Agreement, as the same may be amended, (i) all Awards are
non-transferable and shall not be subject in any manner to sale, transfer,
anticipation, alienation, assignment, pledge, encumbrance or charge; Awards
shall be exercised only by the Participant; and (ii) amounts payable or shares
issuable pursuant to an Award shall be delivered only to (or for the account of)
the Participant.

                  (b)      Exceptions. The Committee may permit Awards to be
exercised by and paid to certain persons or entities related to the Participant,
including but not limited to members of the Participant's immediate family,
charitable institutions, or trusts or other entities whose beneficiaries or
beneficial owners are members of the Participant's immediate family and/or
charitable institutions, pursuant to such conditions and procedures as the
Committee may establish. Any permitted transfer shall be subject to the
condition that the Committee receive evidence satisfactory to it that the
transfer is being made for estate and/or tax planning purposes on a gratuitous
or donative basis and without consideration (other than nominal consideration).
Notwithstanding the foregoing or Section 1.7(c), Incentive Stock Options and
Restricted Stock Awards shall be subject to any and all additional transfer
restrictions under the Code.

                  (c)      Further Exceptions to Limits On Transfer. The
exercise and transfer restrictions in Section 1.7(a) shall not apply to:

                  (i)      transfers to the Corporation,

                  (ii)     the designation of a beneficiary to receive benefits
         in the event of the Participant's death or, if the Participant has
         died, transfers to or exercise by the Participant's beneficiary, or, in
         the absence of a validly designated beneficiary, transfers by will or
         the laws of descent and distribution,

                  (iii)    transfers pursuant to a QDRO order if approved or
         ratified by the Committee,

                                       4



                  (iv)     if the Participant has suffered a disability,
         permitted transfers or exercises on behalf of the Participant by his or
         her legal representative, or

                  (v)      the authorization by the Committee of "cashless
         exercise" procedures with third parties who provide financing for the
         purpose of (or who otherwise facilitate) the exercise of Awards
         consistent with applicable laws and the express authorization of the
         Committee.

II.      OPTIONS.

         2.1      Grants.

         One or more Options may be granted to any Eligible Employee. Each
Option so granted shall be designated by the Committee in the applicable Award
Agreement as either a Nonqualified Stock Option or an Incentive Stock Option.

         2.2      Option Price.

                  (a)      The purchase price per share of Common Stock covered
by each Option shall be determined by the Committee, but shall not be less than
100% (110% in the case of an Incentive Stock Option grant to a Participant who
owns more than 10% of the total combined voting power of all classes of stock of
the Corporation or a Subsidiary) of the Fair Market Value of the Common Stock on
the date the Option is granted. The purchase price of any shares purchased shall
be paid in full at the time of each purchase in one or a combination of the
following methods: (i) in cash or by check payable to the order of the
Corporation, (ii) if authorized by the Committee or specified in the Option
being exercised, by a promissory note made by the Participant in favor of the
Corporation, upon the terms and conditions determined by the Committee, and
secured by the Common Stock issuable upon exercise in compliance with applicable
law (including, without limitation, state corporate law and federal margin
requirements), or (iii) if authorized by the Committee or specified in the
Option being exercised, by shares of Common Stock of the Corporation already
owned by the Participant; provided, however, that the Committee may in its
absolute discretion limit the Participant's ability to exercise an Award by
means other than cash or check, and provided further that any shares delivered
which were initially acquired upon exercise of a stock option must have been
owned by the Participant at least six months as of the date of delivery. Shares
of Common Stock used to satisfy the exercise price of an Option shall be valued
at their Fair Market Value on the date of exercise.

                  (b)      In addition to the payment methods described in
subsection (a), the Option may provide that the Option can be exercised and
payment made by delivering a properly executed exercise notice together with
irrevocable instructions to a bank or broker to promptly deliver to the
Corporation the amount of sale or loan proceeds necessary to pay the exercise
price and, unless otherwise allowed by the Committee, any applicable tax
withholding under Section 6.6. The Company shall not be obligated to deliver
certificates for the shares unless and until it receives full payment of the
exercise price therefor.

                                       5



         2.3      Option Period.

         Each Option and all rights or obligations thereunder shall expire on
such date as shall be determined by the Committee, but not later than 10 years
after the Award Date, and shall be subject to earlier termination as hereinafter
provided.

         2.4      Exercise of Options.

         Except as otherwise provided in Section 6.3 and 6.4, an Option may
become exercisable, in whole or in part, on the date or dates specified in the
Award Agreement and thereafter shall remain exercisable until the expiration or
earlier termination of the Option. No Option shall be exercisable for at least
six months after the Award Date, except in the case of death or Total
Disability. The Committee may, at any time after grant of the Option and from
time to time, increase the number of shares exercisable at any time so long as
the total number of shares subject to the Option is not increased. No Option
shall be exercisable except in respect of whole shares, and fractional share
interests shall be disregarded. Not less than 10 shares of Common Stock may be
purchased at one time unless the number purchased is the total number at the
time available for purchase under the terms of the Option.

         2.5      Limitations on Grant of Incentive Stock Options.

                  (a)      To the extent that the aggregate fair market value of
stock with respect to which incentive stock options first become exercisable by
a Participant in any calendar year exceeds $100,000, taking into account both
Common Stock subject to Incentive Stock Options under this Plan and stock
subject to incentive stock options under all other plans of the Company, such
options shall be treated as nonqualified stock options. For purposes of
determining whether the $100,000 limit is exceeded, the fair market value of
stock subject to options shall be determined as of the date the options are
awarded. In reducing the number of options treated as incentive stock options to
meet the $100,000 limit, the most recently granted options shall be reduced
first. To the extent a reduction of simultaneously granted options is necessary
to meet the $100,000 limit, the Corporation may, in the manner and to the extent
permitted by law, designate which shares of Common Stock are to be treated as
shares acquired pursuant to the exercise of an Incentive Stock Option.

                  (b)      There shall be imposed in any Award Agreement
relating to Incentive Stock Options such terms and conditions as are required in
order that the Option be an "incentive stock option" as that term is defined in
Section 422 of the Code.

                  (c)      No Incentive Stock Option may be granted to any
person who, at the time the Incentive Stock Option is granted, owns shares of
outstanding Common Stock possessing more than 10% of the total combined voting
power of all classes of stock of the Corporation or a Subsidiary, unless the
exercise price of such Option is at least 110% of the Fair Market Value of the
stock subject to the Option and such Option by its terms is not exercisable
after the expiration of five years from the date such Option is granted.

                                       6



         2.6      Non-Employee Director Awards.

                  (a)      Participation. Awards under this Section 2.6 shall be
made only to Non-Employee Directors.

                  (b)      Option Grants. Effective on the day after the
Corporation's 1999 annual meeting, as and when any person who is not then an
officer or employee of the Company shall become a director of the Corporation,
there shall be granted automatically (without any action by the Board or the
Committee) a Nonqualified Stock Option (the grant or award date of which shall
be the date such person takes office) to such person to purchase 9,000 shares of
Common Stock.

                  (c)      Subsequent Annual Options. In each calendar year
during the term of the Plan, commencing with the 2000 annual meeting, there
shall be granted automatically (without any action by the Committee or the
Board) a Nonqualified Stock Option to purchase 9,000 shares of Common Stock to
each Non-Employee Director who is re-elected as a director of the Corporation or
who continues as a director (the grant or award date of which shall be the date
of the annual meeting of shareholders in each such year).

                  (d)      Option Price. The purchase price per share of the
Common Stock covered by each Option granted pursuant to this Section 2.6 shall
be one hundred percent of the Fair Market Value of the Common Stock on the Award
Date. The purchase price of any shares purchased shall be paid in full at the
time of each purchase in cash or by check or in shares of Common Stock valued at
their Fair Market Value on the business day next preceding the date of exercise
of the Option, or partly in such shares and partly in cash.

                  (e)      Option Period. Each Option granted under this Section
2.6 and all rights or obligations thereunder shall expire on the tenth
anniversary of the Award Date and shall be subject to earlier termination as
provided below.

                  (f)      Exercise of Options. Except as otherwise provided in
Sections 2.6(g) and 2.6(h), each Option granted under this Section 2.6 shall
become exercisable (i) as to one-quarter of the covered shares on the earlier of
(A) the first anniversary of the Award Date, or (B) the day immediately
preceding the first regularly scheduled Annual Meeting of shareholders first
occurring after the Award Date; and (ii) as to an additional 1/48th of the
covered shares in each of the 36 months thereafter (using the Award Date as the
date of monthly vesting).

                  (g)      Termination of Directorship. If a Non-Employee
Director Participant's services as a member of the Board terminate, each Option
granted pursuant to Section 2.6(b) or (c) hereof held by such Non-Employee
Director Participant which is not then exercisable shall terminate; provided,
however, that if a Non-Employee Director Participant's services as a member of
the Board terminate by reason of death or Total Disability, the Committee may,
in its discretion, consider to be exercisable a greater portion of any such
Option than would otherwise be exercisable, upon such terms as the Committee
shall determine. If a Non-Employee Director Participant's services as a member
of the Board terminate by reason of death or Total Disability, any portion of
any

                                       7



such Option which is then exercisable may be exercised for one year after the
date of such termination or the balance of such Option's term, whichever period
is shorter. If a Non-Employee Director Participant's services as a member of the
Board terminate for any other reason, any portion of any such Option which is
then exercisable may be exercised for three months after the date of such
termination or the balance of such Option's term, whichever period is shorter.

                  (h)      Acceleration Upon an Event. Immediately prior to the
occurrence of an Event, in order to protect the holders of Options granted under
this Section 2.6, each Option granted under Section 2.6(b) or (c) hereof shall
become exercisable in full.

                  (i)      Adjustments. The specific numbers of shares stated in
the foregoing provisions of Section 2.6(b) and (c) hereof and the consideration
payable for such shares shall be subject to adjustment in certain events as
provided in Section 6.2 of this Plan; provided, however, that the specific
number of shares stated in Section 2.6(b) and in Section 2.6(c) shall not be
adjusted, unless such adjustment is approved by the Board, in connection with a
split or reverse split of the Common Stock.

         2.7      Options and Rights in Substitution for Stock Options Granted
by Other Corporations.

         Options and Stock Appreciation Rights may be granted to Eligible
Employees under this Plan in substitution for employee stock options granted by
other entities to persons who are or who will become Eligible Employees in
respect of the Company, in connection with a distribution, merger or
reorganization by or with the granting entity or an affiliated entity, or the
acquisition by the Company, directly or indirectly, of all or a substantial part
of the stock or assets of the other entity.

         2.8      Adjustments, No Repricing Without Prior Shareholder Approval.

         Subject to Section 1.4 and Section 6.7 and the specific limitations on
Awards contained in this Plan, the Committee from time to time may authorize,
generally or in specific cases only, for the benefit of any Eligible Employee
any adjustment in the exercise or repurchase price (except as set forth below),
vesting schedule, the number of shares subject to, the restrictions upon or the
term of, an Award granted under this Article by cancellation of an outstanding
Award and a subsequent regranting of an Award, by amendment, by substitution of
an outstanding Award, by waiver or by other legally valid means. Such amendment
or other action may result among other changes in an exercise or purchase price
which is higher or lower than the exercise or purchase price of the original or
prior Award (except as set forth below), provide for a greater or lesser number
of shares subject to the Award, or provide for a longer or shorter vesting or
exercise period. Notwithstanding the foregoing, in no case shall the per share
exercise price of any Option or related Stock Appreciation Right be reduced (by
amendment, substitution, cancellation and regrant or other means) without
stockholder approval to a price less than the Fair Market Value of a share of
Common Stock on the related Award Date.

                                       8



III.     STOCK APPRECIATION RIGHTS.

         3.1      Grants.

         In its discretion, the Committee may grant Stock Appreciation Rights
concurrently with the grant of Options. A Stock Appreciation Right shall extend
to all or a portion of the shares covered by the related Option. A Stock
Appreciation Right shall entitle the Participant who holds the related Option,
upon exercise of the Stock Appreciation Right and surrender of the related
Option, or portion thereof, to the extent the Stock Appreciation Right and
related Option each were previously unexercised, to receive payment of an amount
determined pursuant to Section 3.3. Any Stock Appreciation Right granted in
connection with an Incentive Stock Option shall contain such terms as may be
required to comply with the provisions of Section 422 of the Code and the
regulations promulgated thereunder. In its discretion, the Committee may also
grant Stock Appreciation Rights independently of any Option subject to such
conditions as the Committee may in its absolute discretion provide.

         3.2      Exercise of Stock Appreciation Rights.

                  (a)      A Stock Appreciation Right granted concurrently with
an Option shall be exercisable only at such time or times, and to the extent,
that the related Option shall be exercisable and only when the Fair Market Value
of the stock subject to the related Option exceeds the exercise price of the
related Option.

                  (b)      In the event that a Stock Appreciation Right granted
concurrently with an Option is exercised, the number of shares of Common Stock
subject to the related Option shall be charged against the maximum amount of
Common Stock that may be issued or transferred pursuant to Awards under this
Plan. The number of shares subject to the Stock Appreciation Right and the
related Option of the Participant shall also be reduced by such number of
shares.

                  (c)      If a Stock Appreciation Right granted concurrently
with an Option extends to less than all the shares covered by the related Option
and if a portion of the related Option is thereafter exercised, the number of
shares subject to the unexercised Stock Appreciation Right shall be reduced only
if and to the extent that the remaining number of shares covered by such related
Option is less than the remaining number of shares subject to such Stock
Appreciation Right.

                  (d)      A Stock Appreciation Right granted independently of
any Option shall be exercisable pursuant to the terms of the Award Agreement but
in no event earlier than six months after the Award Date, except in the case of
death or Total Disability.

         3.3      Payment.

                  (a)      Upon exercise of a Stock Appreciation Right and
surrender of an exercisable portion of the related Option, the Participant shall
be entitled to receive payment of an amount determined by multiplying

                                       9



                  (i)      the difference obtained by subtracting the exercise
         price per share of Common Stock under the related Option from the Fair
         Market Value of a share of Common Stock on the date of exercise of the
         Stock Appreciation Right, by

                  (ii)     the number of shares with respect to which the Stock
         Appreciation Right shall have been exercised.

                  (b)      The Committee, in its sole discretion, may settle the
amount determined under paragraph (a) above solely in cash, solely in shares of
Common Stock (valued at Fair Market Value on the date of exercise of the Stock
Appreciation Right), or partly in such shares and partly in cash, provided that
the Committee shall have determined that such exercise and payment are
consistent with applicable law. In any event, cash shall be paid in lieu of
fractional shares. Absent a determination to the contrary, all Stock
Appreciation Rights shall be settled in cash as soon as practicable after
exercise. The exercise price for the Stock Appreciation Right shall be the
exercise price of the related Option. Notwithstanding the foregoing, the
Committee may, in the Award Agreement, determine the maximum amount of cash or
stock or a combination thereof which may be delivered upon exercise of a Stock
Appreciation Right.

                  (c)      Upon exercise of a Stock Appreciation Right granted
independently of any Option, the Participant shall be entitled to receive
payment of an amount based on a percentage, specified in the Award Agreement, of
the difference obtained by subtracting the Fair Market Value per share of Common
Stock on the Award Date from the Fair Market Value per share of Common Stock on
the date of exercise of the Stock Appreciation Right. Such amount shall be paid
as described in paragraph (b) above.

IV.      RESTRICTED STOCK AWARDS.

         4.1      Grants.

         Subject to Section 1.4, the Committee may, in its discretion, grant one
or more Restricted Stock Awards to any Eligible Employee. Each Restricted Stock
Award agreement shall specify the number of shares of Common Stock to be issued
to the Participant, the date of such issuance, the price, if any, to be paid for
such shares by the Participant and the restrictions imposed on such shares,
which restrictions shall not terminate earlier than six months after the Award
Date. Stock certificates evidencing shares of Restricted Stock pending the lapse
of the restrictions shall bear a legend making appropriate reference to the
restrictions imposed hereunder and shall be held by the Corporation or by a
third party designated by the Committee until the restrictions on such shares
shall have lapsed and the shares shall have vested in accordance with the
provisions of the Award. Upon issuance of the Restricted Stock Award, the
Participant may be required to provide such further assurance and documents as
the Committee may require to enforce the restrictions.

                                       10



         4.2      Restrictions.

                  (a)      Shares of Common Stock included in Restricted Stock
Awards may not be sold, assigned, transferred, pledged or otherwise disposed of
or encumbered, either voluntarily or involuntarily, until such shares have
vested.

                  (b)      Unless otherwise provided in the applicable Award
Agreement, Participants receiving Restricted Stock shall be entitled to dividend
and voting rights for the shares issued even though they are not vested,
provided that such rights shall terminate immediately as to any forfeited
Restricted Stock.

                  (c)      In the event that the Participant shall have paid
cash in connection with the Restricted Stock Award, the Award Agreement shall
specify whether and to what extent such cash shall be returned upon a forfeiture
(with or without an earnings factor).

         4.3      Return to the Corporation.

         Unless the Committee otherwise expressly provides, shares of Restricted
Stock that remain subject to restrictions at the time of termination of
employment or are subject to other conditions to vesting that have not been
satisfied by the time specified in the applicable Award Agreement shall not vest
and shall be returned to the Corporation in such manner and on such terms as the
Committee shall therein provide.

V.       PERFORMANCE SHARE AWARDS.

         5.1      Grants.

         The Committee may, in its discretion, grant Performance Share Awards to
Eligible Employees based upon such factors as the Committee shall determine. A
Performance Share Award agreement shall specify the number of shares of Common
Stock subject to the Performance Share Award, the price, if any, to be paid for
such shares by the Participant and the conditions upon which issuance to the
Participant shall be based, which issuance shall not be earlier than six months
after the Award Date.

         5.2      Special Performance-Based Share Awards.

         Without limiting the generality of the foregoing, and in addition to
Options and Stock Appreciation Rights granted under other provisions of this
Plan which are intended to satisfy the exception for "qualified
performance-based compensation" under Section 162(m) of the Code (with such
Awards hereinafter referred to as a "Qualifying Option" or "Qualifying Stock
Appreciation Right," respectively), other performance-based awards within the
meaning of Section 162(m) of the Code ("Performance-Based Awards"), whether in
the form of restricted stock, performance stock, phantom stock, Cash-Based
Awards or other rights, the grant, vesting, exercisability or payment of which
depends on the degree of achievement of the Performance Goals relative to
pre-established targeted levels for the Corporation on a consolidated, segment,
subsidiary, division or unit basis, may be granted under this Plan. Any
Qualifying Option or Qualifying Stock Appreciation Right shall be subject to the
requirements of Section 5.3(a), (c) and (f)

                                       11



below in order for such Award to satisfy the requirements for "qualified
performance-based compensation" within the meaning of Section 162(m) of the
Code.

                  (a)      Eligible Class. The eligible class of persons for
Performance-Based Awards under this Section shall be the key employees
(including officers) of the Company.

                  (b)      Performance Goal Alternatives. The specific
performance goals for Performance-Based Awards granted under this Section (other
than Qualifying Options and Qualifying Stock Appreciation Rights) shall be, on
an absolute or relative basis, one or more of the Performance Goals, as selected
by the Committee in its sole discretion. The Committee shall establish in the
applicable Award Agreement the specific performance target(s) relative to the
Performance Goal(s) which must be attained before the compensation under the
Performance-Based Award becomes payable. The specific targets shall be
determined within the time period permitted under Section 162(m) of the Code
(and any regulations issued thereunder) so that such targets are considered to
be pre-established and so that the attainment of such targets is substantially
uncertain at the time of their establishment. The applicable performance
measurement period may not be less than one nor more than 10 years.

                  (c)      Maximum Performance-Based Award. Notwithstanding any
other provision of the Plan to the contrary, the maximum number of shares of
Common Stock which may be delivered pursuant to awards that are granted as
Performance-Based Awards under this Section 5.2 to any Participant in any
calendar year (plus the number of shares of Common Stock subject to Options and
Stock Appreciation Rights granted to that Participant in that calendar year)
shall not exceed 900,000 shares, either individually or in the aggregate,
subject to adjustment as provided in Section 6.2. Awards that are cancelled
during the year shall be counted against this limit to the extent required by
Section 162(m) of the Code. In addition, the aggregate amount of compensation
that may be paid to any Participant in respect of any Cash-Based Awards that are
granted to that Participant during any calendar year as Performance-Based Awards
shall not exceed $3,500,000.

                  (d)      Committee Certification. Before any Performance-Based
Award under this Section 5.2 (other than Qualifying Options or Qualifying Stock
Appreciation Rights) is paid, the Committee must certify in writing that the
Performance Goal(s) and any other material terms of the Performance-Based Award
were satisfied; provided, however, that a Performance-Based Award may be paid
without regard to the satisfaction of the applicable Performance Goal in the
event of a change in control event in accordance with Section 162(m) of the Code
and Section 6.2.

                  (e)      Terms and Conditions of Awards. The Committee will
have the discretion to determine the restrictions or other limitations of the
individual awards granted under this Section 5.2 including the authority to
reduce awards, payouts or vesting or to pay no awards, in its sole discretion,
if the Committee preserves such authority at the time of grant by language to
this effect in its authorizing resolutions or otherwise.

                                       12



                  (f)      Adjustments for Changes in Capitalization and other
Material Changes. In the event of a change in corporate capitalization, such as
a stock split or stock dividend, or a corporate transaction, such as a merger,
consolidation, spinoff, reorganization or similar event, or any partial or
complete liquidation of the Company, or any similar event consistent with
regulations issued under Section 162(m) of the Code including, without
limitation, any material change in accounting policies or practices affecting
the Company and/or the Performance Goals or targets, then the Committee shall
make adjustments to the Performance Goals and targets relating to outstanding
Performance-Based Awards to the extent such adjustments are made to reflect the
occurrence of such an event; provided, however, that adjustments described in
this subsection may be made only to the extent that the occurrence of an event
described herein was unforeseen at the time the targets for a Performance-Based
Award were established by the Committee.

         5.3      Deferred Payments.

         The Committee may authorize for the benefit of any Eligible Employee
the deferral of any payment of cash or shares that may become due or of cash
otherwise payable under this Plan, and provide for accredited benefits thereon
based upon such deferment, at the election or at the request of such
Participant, subject to the other terms of this Plan. Such deferral shall be
subject to such further conditions, restrictions or requirements as the
Committee may impose, subject to any then vested rights of Participants.

VI.      OTHER PROVISIONS.

         6.1      Rights of Eligible Employees, Participants and Beneficiaries.

                  (a)      Status as an Eligible Employee shall not be construed
as a commitment that any Award will be made under this Plan to any Eligible
Employee generally.

                  (b)      Nothing contained in this Plan (or in Award
Agreements or in any other documents related to this Plan or to Awards) shall
confer upon any Eligible Employee or Participant any right to continue in the
service or employ of the Company or constitute any contract or agreement of
service or employment, or interfere in any way with the right of the Company to
reduce such person's compensation or other benefits or to terminate the services
or employment of such Eligible Employee or Participant, with or without cause,
but nothing contained in this Plan or any document related thereto shall affect
any other contractual right of any Eligible Employee or Participant.

                  (c)      Awards payable under this Plan shall be payable in
shares or from the general assets of the Corporation, and no special or separate
reserve, fund or deposit shall be made to assure payment of any such Awards. No
Participant, Beneficiary or other person shall have any right, title or interest
in any fund or in any specific asset (including shares of Common Stock) of the
Company by reason of any Award granted hereunder. Neither the provisions of this
Plan (or of any documents related hereto), nor the creation or adoption of this
Plan, nor any action taken pursuant to the provisions of this Plan shall create,
or be construed to create, a trust of any kind or a fiduciary

                                       13



relationship between the Company and any Participant, Beneficiary or other
person. To the extent that a Participant, Beneficiary or other person acquires a
right to receive an Award hereunder, such right shall be no greater than the
right of any unsecured general creditor of the Corporation.

         6.2      Adjustments Upon Changes in Capitalization.

                  (a)      If the outstanding shares of Common Stock are changed
into or exchanged for cash or a different number or kind of shares or securities
of the Corporation or of another issuer, or if additional shares or new or
different securities are distributed with respect to the outstanding shares of
the Common Stock, through a reorganization or merger to which the Corporation is
a party, or through a combination, consolidation, recapitalization,
reclassification, stock split, stock dividend, reverse stock split, stock
consolidation or other capital change or adjustment, an appropriate adjustment
shall be made in the number and kind of shares or other consideration that is
subject to or may be delivered under this Plan and pursuant to outstanding
Awards. A corresponding adjustment to the consideration payable with respect to
Awards granted prior to any such change and to the price, if any, paid in
connection with Restricted Stock Awards or Performance Share Awards or
Performance-Based Awards shall also be made. Any such adjustment, however, shall
be made without change in the total payment, if any, applicable to the portion
of the Award not exercised but with a corresponding adjustment in the price for
each share. Corresponding adjustments shall be made with respect to Stock
Appreciation Rights based upon the adjustments made to the Options to which they
are related or, in the case of Stock Appreciation Rights granted independently
of any Option, based upon the adjustments made to Common Stock.

                  (b)      Upon the dissolution or liquidation of the
Corporation, or upon a reorganization, merger or consolidation of the
Corporation with one or more corporations as a result of which the Corporation
is not the surviving corporation, the Plan and outstanding Awards shall
terminate. Notwithstanding the foregoing, the Committee may provide in writing
in connection with, or in contemplation of, any such transaction for any or all
of the following alternatives (separately or in combinations): (i) for the
assumption by the successor corporation of the Awards theretofore granted or the
substitution by such corporation for such Awards of awards covering the stock of
the successor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices; (ii) for the
continuance of this Plan by such successor corporation in which event this Plan
and the Awards shall continue in the manner and under the terms so provided; or
(iii) for the payment in cash or shares of Common Stock in lieu of and in
complete satisfaction of such Awards.

                  (c)      In adjusting Awards to reflect the changes described
in this Section 6.2, or in determining that no such adjustment is necessary, the
Committee may rely upon the advice of independent counsel and accountants of the
Company, and the determination of the Committee shall be conclusive. No
fractional shares of stock shall be issued under this Plan on account of any
such adjustment.

                  (d)      In any of such events, the Committee may take such
action prior to such event to the extent that the Committee deems the action
necessary to permit the

                                       14



Participant to realize the benefits intended to be conveyed with respect to the
underlying shares in the same manner as is or will be available to shareholders
generally.

         6.3      Termination of Employment.

                  (a)      If the Participant's service to or employment by the
Company terminates for any reason other than Retirement, death or Total
Disability, the Participant shall have, subject to earlier termination pursuant
to or as contemplated by Section 2.3, three months or such shorter period as is
provided in the Award Agreements from the date of termination of services or
employment to exercise any Option to the extent it shall have become exercisable
on the date of termination of employment, and any Option not exercisable on that
date shall terminate. Notwithstanding the preceding sentence, in the event the
Participant is discharged for cause as determined by the Committee in its sole
discretion, all Options shall lapse immediately upon such termination of
services or employment.

                  (b)      If the Participant's service to or employment by the
Company terminates as a result of Retirement or Total Disability, the
Participant or Participant's Personal Representative, as the case may be, shall
have, subject to earlier termination pursuant to or as contemplated by Section
2.3, 12 months (or, in the case of Incentive Stock Options where the Participant
terminates as a result of Retirement, three months) or such shorter period as is
provided in the Award Agreements from the date of termination of services or
employment to exercise any Option to the extent it shall have become exercisable
by the date of termination of services or employment and any Option not
exercisable on that date shall terminate.

                  (c)      If the Participant's service to or employment by the
Company terminates as a result of death while the Participant is rendering
services to the Company or is employed by the Company or during the 12 month
period (or, in the case of Incentive Stock Options where the Participant has
terminated as a result of Retirement, three month period) referred to in
subsection (b) above, the Participant's Option shall be exercisable by the
Participant's Beneficiary, subject to earlier termination pursuant to or as
contemplated by Section 2.3, during the 12 month period or such shorter period
as is provided in the Award Agreements following the Participant's death, as to
all or any part of the shares of Common Stock covered thereby to the extent
exercisable on the date of death (or earlier termination).

                  (d)      Each Stock Appreciation Right granted concurrently
with an Option shall have the same termination provisions and exercisability
periods as the Option to which it relates. The termination provisions and
exercisability periods of any Stock Appreciation Right granted independently of
an Option shall be established in accordance with Section 3.2(d). The
exercisability period of a Stock Appreciation Right shall not exceed that
provided in Section 2.3 or in the related Award Agreement and the Stock
Appreciation Right shall expire at the end of such exercisability period.

                  (e)      In the event of termination of services to or
employment with the Company for any reason, (i) shares of Common Stock subject
to the Participant's Restricted Stock Award shall be forfeited in accordance
with the provisions of the related

                                       15



Award Agreement to the extent such shares have not become vested on that date;
and (ii) shares of Common Stock subject to the Participant's Performance Share
Award or Performance-Based Award shall be forfeited in accordance with the
provisions of the related Award Agreement to the extent such shares have not
been issued or become issuable on that date.

                  (f)      In the event of termination of services to or
employment with the Company for any reason, other than discharge for cause, the
Committee may, in its discretion, increase the portion of the Participant's
Award available to the Participant, or Participant's Beneficiary or Personal
Representative, as the case may be, upon such terms as the Committee shall
determine.

                  (g)      If an entity ceases to be a Subsidiary, such action
shall be deemed for purposes of this Section 6.3 to be a termination of services
or employment of each consultant or employee of that entity who does not
continue as a consultant or as an employee of another entity within the Company.

                  (h)      Upon forfeiture of a Restricted Stock Award pursuant
to this Section 6.3, the Participant, or his or her Beneficiary or Personal
Representative, as the case may be, shall transfer to the Corporation the
portion of the Restricted Stock Award not vested at the date of termination of
services or employment, without payment of any consideration by the Corporation
for such transfer unless the Participant paid a purchase price in which case
repayment, if any, of that price shall be governed by the Award Agreement.
Notwithstanding any such transfer to the Corporation, or failure, refusal or
neglect to transfer, by the Participant, or his or her Beneficiary or Personal
Representative, as the case may be, such nonvested portion of any Restricted
Stock Award shall be deemed transferred automatically to the Corporation on the
date of termination of services or employment. The Participant's original
acceptance of the Restricted Stock Award shall constitute his or her appointment
of the Corporation and each of its authorized representatives as
attorney(s)-in-fact to effect such transfer and to execute such documents as the
Corporation or such representatives deem necessary or advisable in connection
with such transfer.

         6.4      Acceleration of Awards.

         Unless prior to an Event the Board determines that, upon its
occurrence, there shall be no acceleration of Awards or determines those Awards
which shall be accelerated and the extent to which they shall be accelerated,
upon the occurrence of an Event (i) each Option and each related Stock
Appreciation Right shall become immediately exercisable to the full extent
theretofore not exercisable, (ii) Restricted Stock shall immediately vest free
of restrictions and (iii) the number of shares covered by each Performance Share
Award or Performance-Based Award shall be issued to the Participant; subject,
however, to compliance with applicable regulatory requirements, including
without limitation and Section 422 of the Code. For purposes of this section
only, the Board shall mean the Board as constituted immediately prior to the
Event.

                                       16



         6.5      Government Regulations.

         This Plan, the granting of Awards under this Plan and the issuance or
transfer of shares of Common Stock (and/or the payment of money) pursuant
thereto are subject to all applicable federal and state laws, rules and
regulations and to such approvals by any regulatory or governmental agency
(including without limitation "no action" positions of the Commission) which
may, in the opinion of counsel for the Corporation, be necessary or advisable in
connection therewith. Without limiting the generality of the foregoing, no
Awards may be granted under this Plan, and no shares shall be issued by the
Corporation, nor cash payments made by the Corporation, pursuant to or in
connection with any such Award, unless and until, in each such case, all legal
requirements applicable to the issuance or payment have, in the opinion of
counsel to the Corporation, been complied with. In connection with any stock
issuance or transfer, the person acquiring the shares shall, if requested by the
Corporation, give assurances satisfactory to counsel to the Corporation in
respect of such matters as the Corporation may deem desirable to assure
compliance with all applicable legal requirements.

         6.6      Tax Withholding.

                  (a)      Upon the disposition by a Participant or other person
of shares of Common Stock acquired pursuant to the exercise of an Incentive
Stock Option prior to satisfaction of the holding period requirements of Section
422 of the Code, or upon the exercise of a Nonqualified Stock Option, the
exercise of a Stock Appreciation Right, the vesting of a Restricted Stock Award
or the payment of a Performance Share Award or Performance-Based Award, the
Company shall have the right to (i) require such Participant or such other
person to pay by cash or check payable to the Company, the amount of any taxes
which the Company may be required to withhold with respect to such transactions
or (ii) deduct from amounts paid in cash the amount of any taxes which the
Company may be required to withhold with respect to such cash amounts. The above
notwithstanding, in any case where a tax is required to be withheld in
connection with the issuance or transfer of shares of Common Stock under this
Plan, the Participant may elect, pursuant to such rules as the Committee may
establish, to have the Company reduce the number of such shares issued or
transferred by the appropriate number of shares to accomplish such withholding;
provided, the Committee may impose such conditions on the payment of any
withholding obligation as may be required to satisfy applicable regulatory
requirements.

                  (b)      The Committee may, in its discretion, permit a loan
from the Company to a Participant in the amount of any taxes which the Company
may be required to withhold with respect to shares of Common Stock received
pursuant to a transaction described in subsection (a) above. Such a loan will be
for a term, at a rate of interest and pursuant to such other terms and rules as
the Committee may establish.

         6.7      Amendment, Termination and Suspension.

                  (a)      The Board may, at any time, terminate or, from time
to time, amend, modify or suspend this Plan (or any part hereof). No Awards may
be granted during any suspension of this Plan or after termination of this Plan,
but the Committee

                                       17



shall retain jurisdiction as to Awards then outstanding in accordance with the
terms of this Plan.

                  (b)      To the extent then required under Sections 162, 422
or 424 of the Code or any other applicable law, or deemed necessary or advisable
by the Board, any amendment to this Plan shall be subject to shareholder
approval.

                  (c)      Without limiting any other express authority of the
Committee under (but subject to) the express limits of this Plan, the Committee
by agreement or resolution may waive conditions of or limitations on Awards to
Participants that the Committee in the prior exercise of its discretion has
imposed, without the consent of a Participant, and may make other changes to the
terms and conditions of Awards that do not affect in any manner materially
adverse to the Participant, the Participant's rights and benefits under an
Award.

                  (d)      No amendment, suspension or termination of this Plan
or change of or affecting any outstanding Award shall, without written consent
of the Participant, affect in any manner materially adverse to the Participant
any rights or benefits of the Participant or obligations of the Company under
any Award granted under this Plan prior to the effective date of such change.
Changes contemplated by Section 6.2 shall not be deemed to constitute changes or
amendments for purposes of this Section 6.7.

         6.8      Privileges of Stock Ownership; Nondistributive Intent.

         A Participant shall not be entitled to the privilege of stock ownership
as to any shares of Common Stock not actually issued to him or her. Upon the
issuance and transfer of shares to the Participant, unless a registration
statement is in effect under the Securities Act and applicable state securities
law, relating to such issued and transferred Common Stock and there is available
for delivery a prospectus meeting the requirements of Section 10 of the
Securities Act, the Common Stock may be issued and transferred to the
Participant only if he or she represents and warrants in writing to the
Corporation that the shares are being acquired for investment and not with a
view to the resale or distribution thereof. No shares shall be issued and
transferred unless and until there shall have been full compliance with any then
applicable regulatory requirements (including those of exchanges upon which any
Common Stock of the Corporation may be listed).

         6.9      Effective Date of the Plan.

         This Plan shall be effective upon its approval by the Board (the
"Effective Date"), subject to approval by the shareholders of the Corporation
within twelve months from the date of such Board approval.

         6.10     Term of the Plan.

         Unless previously terminated by the Board, this Plan shall terminate at
the close of business on the day before the tenth anniversary of the Effective
Date, and no Awards shall be granted under it thereafter, but such termination
shall not affect any Award theretofore granted. Unless otherwise expressly
provided in this Plan or in an applicable Award Agreement, any Award granted
prior to the Plan's termination date may extend

                                       18



beyond such date, and all authority of the Committee with respect to Awards
hereunder, including the authority to amend an Award, shall continue during any
suspension of this Plan and in respect of Awards outstanding on the termination
date. No new Performance-Based Award may be granted under Section 5.2 of the
Plan after the first annual shareholders meeting of the Corporation to occur in
2008, but such termination shall not affect any Performance-Based Award
theretofore granted.

         6.11     Governing Law.

         This Plan and the documents evidencing Awards and all other related
documents shall be governed by, and construed in accordance with, the laws of
the State of California. If any provision shall be held by a court of competent
jurisdiction to be invalid and unenforceable, the remaining provisions of this
Plan shall continue to be fully effective.

         6.12     Plan Construction.

                  (a)      Rule 16b-3. It is the intent of the Corporation that
the Awards and transactions permitted by Awards generally satisfy and be
interpreted in a manner that, in the case of Participants who are or may be
subject to Section 16 of the Exchange Act, satisfies the applicable requirements
of Rule 16b-3 promulgated thereunder so that such persons (unless they otherwise
agree) will be entitled to the benefits of Rule 16b-3 or other exemptive rules
under Section 16 of the Exchange Act in respect of those transactions and will
not be subjected to avoidable liability.

                  (b)      Section 162(m). It is the further intent of the
Corporation that (to the extent the Corporation or Awards under this Plan may be
or become subject to limitations on deductibility under Section 162(m) of the
Code), Options or SARs granted with an exercise or base price not less than Fair
Market Value on the date of grant and Performance-Based Awards under Section 5.2
of this Plan that are granted to or held by a person subject to Section 162(m)
of the Code will qualify as performance-based compensation or otherwise be
exempt from deductibility limitations under Section 162(m) of the Code, to the
extent that the Committee authorizing the Award (or the payment thereof, as the
case may be) satisfies any applicable administrative requirements thereof.

         6.13     Captions.

         Captions and headings are given to the sections and subsections of this
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
this Plan or any provision thereof.

         6.14     Non-Exclusivity of Plan.

         Nothing in this Plan shall limit or be deemed to limit the authority of
the Board or the Committee to grant awards or authorize any other compensation,
with or without reference to the Common Stock, under any other plan or
authority.

                                       19



         6.15     No Corporate Action Restriction.

         The existence of the Plan, the Award Agreements and the Awards granted
hereunder shall not limit, affect or restrict in any way the right or power of
the Board or the shareholders of the Corporation to make or authorize: (a) any
adjustment, recapitalization, reorganization or other change in the
Corporation's or any Subsidiary's capital structure or its business, (b) any
merger, amalgamation, consolidation or change in the ownership of the
Corporation or any subsidiary, (c) any issue of bonds, debentures, capital,
preferred or prior preference stock ahead of or affecting the Corporation's or
any Subsidiary's capital stock or the rights thereof, (d) any dissolution or
liquidation of the Corporation or any Subsidiary, (e) any sale or transfer of
all or any part of the Corporation or any Subsidiary's assets or business, or
(f) any other corporate act or proceeding by the Corporation or any Subsidiary.
No participant, beneficiary or any other person shall have any claim under any
Award or Award Agreement against any member of the Board or the Committee, or
the Corporation or any employees, officers or agents of the Corporation or any
Subsidiary, as a result of any such action.

         6.16     Other Company Benefit and Compensation Program.

         Payments and other benefits received by a Participant under an Award
made pursuant to this Plan shall not be deemed a part of a Participant's
compensation for purposes of the determination of benefits under any other
employee welfare or benefit plans or arrangements, if any, provided by the
Corporation or any Subsidiary, except where the Committee or the Board expressly
otherwise provides or authorizes in writing. Awards under this Plan may be made
in addition to, in combination with, as alternatives to or in payment of grants,
awards or commitments under any other plans or arrangements of the Corporation
or the Subsidiaries.

VII.     DEFINITIONS.

         7.1      Definitions.

                  (a)      "Award" means an Option, which may be designated as a
Nonqualified Stock Option or an Incentive Stock Option, a Stock Appreciation
Right, a Restricted Stock Award, Performance Share Award or Performance-Based
Award, in each case granted under this Plan.

                  (b)      "Award Agreement" means a written agreement setting
forth the terms of an Award.

                  (c)      "Award Date" means the date upon which the Committee
took the action granting an Award or such later date as is prescribed by the
Committee or, in the case of Options granted under Section 2.6, the date
specified in such Section 2.6.

                  (d)      "Beneficiary" means the person, persons, trust or
trusts entitled by will or the laws of descent and distribution to receive the
benefits specified under this Plan in the event of a Participant's death, and
shall mean the Participant's executor or administrator if no other Beneficiary
is designated and able to act under the circumstances.

                                       20



                  (e)      "Board" means the Board of Directors of the
Corporation.

                  (f)      "Cash-Based Award" means an Award pursuant to Section
5.2 that, if paid, must be paid in cash and is not denominated in nor have a
value derived from the value of, nor an exercise or conversion privilege at a
price related to, shares of Common Stock.

                  (g)      "Code" means the Internal Revenue Code of 1986, as
amended from time to time.

                  (h)      "Commission" means the Securities and Exchange
Commission.

                  (i)      "Committee" means the Board or a committee appointed
by the Board to administer this Plan, which committee shall be comprised only of
one or more directors or such greater number of directors as may be required
under applicable law. In respect of any decision with respect to an Award
intended to satisfy the requirements of Section 162(m) of the Code, the
Committee shall be composed of no less than two members, each of whom shall be
an "outside director" within the meaning of Section 162(m) of the Code. In
respect of any decision with respect to an Award intended to be exempt pursuant
to Rule 16b-3 promulgated by the Commission under the Exchange Act, the
Committee shall be composed of no less than two members, each of whom shall be a
"Non-Employee Director" within the meaning of Rule 16b-3(d)(1) under the
Exchange Act.

                  (j)      "Common Stock" means the Common Stock of the
Corporation.

                  (k)      "Company" means the Corporation and its Subsidiaries,
collectively or individually, as the context may require.

                  (l)      "Corporation" means Pacific Sunwear of California,
Inc., a California corporation, and its successors.

                  (m)      "Eligible Employee" means an officer or key employee
of the Company and consultants to the Company whether or not such consultants
are employees.

                  (n)      "Event" means any of the following:

                      (i)     Approval by the shareholders of the Corporation of
                the dissolution or liquidation of the Corporation;

                      (ii)    Approval by the shareholders of the Corporation of
                an agreement to merge or consolidate, or otherwise reorganize,
                with or into one or more entities other than Subsidiaries, as a
                result of which less than 50% of the outstanding voting
                securities of the surviving or resulting entity are, or are to
                be, owned by former shareholders of the Corporation; or

                                       21



                      (iii)   Approval by the shareholders of the Corporation of
                the sale of substantially all of the Corporation's business
                assets to a person or entity which is not a Subsidiary.

                  (o)      "Exchange Act" means the Securities Exchange Act of
1934, as amended.

                  (p)      "Fair Market Value" means (i) if the stock is listed
or admitted to trade on a national securities exchange, the closing price of the
stock on the Composite Tape, as published in the Western Edition of The Wall
Street Journal, of the principal national securities exchange on which the stock
is so listed or admitted to trade, on such date, or, if there is no trading of
the stock on such date, then the closing price of the stock as quoted on such
Composite Tape on the next preceding date on which there was trading in such
shares; (ii) if the stock is not listed or admitted to trade on a national
securities exchange, the last price for the stock on such date, as furnished by
the National Association of Securities Dealers, Inc. ("NASD") through the NASDAQ
National Market Reporting System or a similar organization if the NASD is no
longer reporting such information; (iii) if the stock is not listed or admitted
to trade on a national securities exchange and is not reported on the National
Market Reporting System, the mean between the bid and asked price for the stock
on such date, as furnished by the NASD; or (iv) if the stock is not listed or
admitted to trade on a national securities exchange, is not reported on the
National Market Reporting System and if bid and asked prices for the stock are
not furnished by the NASD or a similar organization, the values established by
the Committee for purposes of the Plan.

                  (q)      "Incentive Stock Option" means an option which is
designated as an incentive stock option within the meaning of Section 422 of the
Code, the award of which contains such provisions as are necessary to comply
with that section.

                  (r)      "Non-Employee Director" means a member of the Board
who is not an officer or employee of the Company.

                  (s)      "Non-Employee Director Participant" means a
Non-Employee Director who has been granted an Option under Section 2.6.

                  (t)      "Nonqualified Stock Option" means an option which is
designated as a Nonqualified Stock Option and shall include any Option intended
as an Incentive Stock Option that fails to meet the applicable legal
requirements thereof.

                  (u)      "Option" means an option to purchase Common Stock
under this Plan. An Option shall be designated by the Committee as a
Nonqualified Stock Option or an Incentive Stock Option.

                  (v)      "Participant" means an Eligible Employee who has been
granted an Award and a Non-Employee Director who has received an Option under
Section 2.6.

                  (w)      "Performance Goal" means any one or more of the
criteria set forth on Exhibit A hereto.

                                       22



                  (x)      "Performance-Based Awards" shall mean an Award of a
right to receive shares of Common Stock or other compensation (including cash)
under Section 5.2, the issuance or payment of which is contingent upon, among
other conditions, the attainment of performance objectives specified by the
Committee.

                  (y)      "Performance Share Award" means an award of shares of
Common Stock under Section 5.1, the issuance of which is contingent upon
attainment of performance objectives specified by the Committee.

                  (z)      "Personal Representative" means the person or persons
who, upon the disability or incompetence of a Participant, shall have acquired
on behalf of the Participant by legal proceeding or otherwise the power to
exercise the rights and receive the benefits specified in this Plan.

                  (aa)     "Plan" means the Pacific Sunwear of California, Inc.
1999 Stock Award Plan, as it may be amended from time to time.

                  (bb)     "QDRO" shall mean an order requiring the transfer of
an Award or portion thereof pursuant to a state domestic relations law to the
spouse, former spouse, child or other dependent of a Participant. Such order
must be in a form substantially identical to a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act of 1974, as amended.

                  (cc)     "Restricted Stock" means those shares of Common Stock
issued pursuant to a Restricted Stock Award which are subject to the
restrictions set forth in the related Award Agreement.

                  (dd)     "Restricted Stock Award" means an award of a fixed
number of shares of Common Stock to the Participant subject, however, to payment
of such consideration, if any, and such forfeiture provisions, as are set forth
in the Award Agreement.

                  (ee)     "Retirement" means retirement from employment by or
providing services to the Corporation or any Subsidiary after age 65 and, in the
case of employees, in accordance with the retirement policies of the Company
then in effect.

                  (ff)     "Securities Act" means the Securities Act of 1933, as
amended.

                  (gg)     "Stock Appreciation Right" means a right to receive a
number of shares of Common Stock or an amount of cash, or a combination of
shares and cash, determined as provided in Section 3.3(a).

                  (hh)     "Subsidiary" means any corporation or other entity a
majority or more of whose outstanding voting stock or voting power is
beneficially owned directly or indirectly by the Corporation.

                  (ii)     "Total Disability" means a "permanent and total
disability" within the meaning of Section 22(e)(3) of the Code and, in the case
of Awards other than Incentive Stock Options, such other disabilities,
infirmities, afflictions or conditions as the Committee by rule may include.

                                       23



                                    EXHIBIT A

                                PERFORMANCE GOALS

         The Performance Targets shall mean any one or a combination of the
following. Except as otherwise expressly provided below or the context otherwise
requires, financial and accounting terms herein are used as defined for purposes
of, and shall be determined and construed in accordance with, generally accepted
accounting principles, as from time to time in effect, as applied and reflected
in the consolidated financial statements of the Corporation, prepared in the
ordinary course of business.

         EBIT. "EBIT" means Net Income before interest expense and taxes.

         EBITDA. "EBITDA" means Net Income before interest expense, taxes,
depreciation and amortization.

         EPS. "EPS" means Net Income divided by the weighted average number of
common shares outstanding. Unless otherwise provided by the Committee in the
related Award Agreement, common shares outstanding shall be adjusted to include
the dilutive effect of stock options, restricted stock and other dilutive
financial instruments.

         EXPENSE REDUCTION. "Expense Reduction" means reduction in actual
expense or an improvement in the expense to Net Sales ratio compared to a target
or prior year actual expense to Sales ratio.

         DEBT TO EBITDA. "Debt to EBITDA" means the ratio of debt to EBITDA.

         INTEREST COVERAGE. "Interest Coverage" means the ratio of EBITDA to
interest expense.

         INVENTORY TURNS. "Inventory Turns" means the ratio of total cost of
goods sold on a historical basis to average net inventory.

         NET INCOME. "Net Income" means the difference between total Net Sales
and total costs and expenses, including income taxes.

         NET SALES. "Net Sales" means net sales.

         OPERATING CASH FLOW. "Operating Cash Flow" means the net cash provided
by operating activities less net cash used by operations and investing
activities as shown on the statement of cash flows.

         PRE-TAX MARGIN. "Pre-Tax Margin" means the ratio of earnings before
income taxes to Net Sales.

         RETURN ON ASSETS. "Return on Assets" means the ratio of Net Income to
total average assets including goodwill.

         RETURN ON CAPITAL. "Return on Capital" means the ratio of Net Income to
average total capital. Total capital includes working capital, and other long
term assets such as PP&E, goodwill and intangibles, and leased assets. Unless
otherwise provided by the

                                      A-1



Committee in the related Award Agreement, cash, deferred tax assets and debt
shall not be included in capital for calculation purposes.

         RETURN ON EQUITY. "Return on Equity" means Net Income divided by
average total equity.

         STOCK PRICE APPRECIATION. "Stock Price Appreciation" means an increase,
or an average annualized increase, in the stock price or market value of the
Common Stock of the Corporation after the date of grant of an Award or above a
specified price.

         WORKING CAPITAL IMPROVEMENT. "Working Capital Improvement" means the
net change in current assets less current liabilities over the applicable period
or the reduction in the current ratio (current assets divided by current
liabilities), excluding changes in cash and cash equivalents, and current and
deferred income taxes.

                                      A-2

EX-99.1

Exhibit 99.1