10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: October 28, 2006

OR

o 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.

(Exact name of registrant as specified in its charter)

California
(State of incorporation) 95-3759463
(I.R.S. Employer Identification No.)

3450 East Miraloma Avenue, Anaheim, CA 92806
(Address of principal executive offices and zip code)

(714) 414-4000
(Registrant’s telephone number)

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 þ  No o 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ          Accelerated Filer o          Non-Accelerated Filer o 

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

On November 30, 2006, the registrant had 69,458,992 shares of Common Stock outstanding.

PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
For the Quarter Ended October 28, 2006

Index

		Page #
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets October 28, 2006 and January 28, 2006		3
	Condensed Consolidated Statements of Income and Comprehensive Income Third quarter (13 weeks) and nine months (39 weeks) ended October 28, 2006 and October 29, 2005		4
	Condensed Consolidated Statements of Cash Flows Nine months (39 weeks) ended October 28, 2006 and October 29, 2005		5
	Notes to Condensed Consolidated Financial Statements		6-12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13-23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		23
Item 4.	Controls and Procedures		24
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		24
Item 1A.	Risk Factors		24-28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 3.	Defaults upon Senior Securities		28
Item 4.	Submission of Matters to a Vote of Security Holders		28
Item 5.	Other Information		28
Item 6.	Exhibits		29
	SIGNATURE PAGE		30
EXHIBIT 3.1
EXHIBIT 10.5
EXHIBIT 31.1
EXHIBIT 32.1

2

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

	October 28, 2006			January 28, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	55,453		$	95,185
Marketable securities		—			74,911
Merchandise inventories		252,680			215,140
Other current assets		32,120			41,485
Total current assets		340,253			426,721
PROPERTY AND EQUIPMENT, NET:
Gross property and equipment		707,555			602,962
Less accumulated depreciation and amortization		(288,159	)		(247,140	)
Total property and equipment, net		419,396			355,822
Other Assets		16,350			25,018
TOTAL ASSETS	$	775,999		$	807,561
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	77,911		$	47,550
Other current liabilities		67,807			74,921
Total current liabilities		145,718			122,471
LONG-TERM LIABILITIES:
Deferred lease incentives		86,377			81,440
Deferred rent		31,039			28,748
Deferred income taxes		12,584			12,584
Other long-term liabilities		8,799			15,528
Total long-term liabilities		138,799			138,300
Commitments and contingencies (Note 5)
SHAREHOLDERS’ EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value; 170,859,375 shares authorized; 69,397,391 and 73,751,249 shares issued and outstanding, respectively		694			737
Additional paid-in capital		2,976			23,866
Retained earnings		487,812			522,187
Total shareholders’ equity		491,482			546,790
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	775,999		$	807,561

See accompanying footnotes

3

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

	For the Third Quarter Ended				For the Nine Months Ended
	October 28, 2006		October 29, 2005		October 28, 2006		October 29, 2005
Net sales	$	375,427	$	377,491	$	988,996	$	966,540
Cost of goods sold, including buying, distribution and occupancy costs		269,085		233,052		687,947		614,395
Gross margin		106,342		144,439		301,049		352,145
Selling, general and administrative expenses		92,562		80,905		255,355		228,618
Operating income		13,780		63,534		45,694		123,527
Interest income, net		709		1,566		3,594		3,831
Income before income tax expense		14,489		65,100		49,288		127,358
Income tax expense		5,506		24,616		18,729		48,155
Net income	$	8,983	$	40,484	$	30,559	$	79,203
Comprehensive income	$	8,983	$	40,484	$	30,559	$	79,203
Net income per share, basic	$	0.13	$	0.54	$	0.43	$	1.06
Net income per share, diluted	$	0.13	$	0.54	$	0.43	$	1.04
Wtd. avg. shares outstanding, basic		69,344,402		74,531,489		71,274,716		74,983,286
Wtd. avg. shares outstanding, diluted		69,561,420		75,337,910		71,657,385		76,003,452

See accompanying footnotes

4

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

	Nine Months Ended
	October 28, 2006			October 29, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	30,559		$	79,203
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		52,632			46,782
Stock-based compensation		5,392			—
Tax benefits related to stock-based compensation		1,556			6,895
Excess tax benefits related to stock-based compensation		(963	)		—
Loss on disposal of property and equipment		373			126
Change in operating assets and liabilities:
Merchandise inventories		(37,540	)		(68,734	)
Other current assets		12,237			(5,899	)
Other assets		8,668			(3,098	)
Accounts payable		30,361			7,970
Other current liabilities		(18,879	)		10,163
Deferred lease incentives		4,937			12,786
Deferred rent		1,969			(1,356	)
Other long-term liabilities		(6,687	)		2,456
Net cash provided by operating activities		84,615			87,294
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(107,087	)		(77,815	)
Purchases of available-for-sale marketable securities		(226,503	)		(602,925	)
Sales of available-for-sale marketable securities		286,803			599,875
Purchases of held-to-maturity marketable securities		—			(21,038	)
Maturities of held-to-maturity marketable securities		14,611			29,000
Net cash used in investing activities		(32,176	)		(72,903	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase and retirement of common stock		(99,347	)		(43,739	)
Proceeds from exercise of stock options		6,532			12,957
Excess tax benefits from stock-based compensation		963			—
Principal payments under long-term debt and capital lease obligations		(319	)		(1,216	)
Net cash used in financing activities		(92,171	)		(31,998	)
NET DECREASE IN CASH AND CASH EQUIVALENTS:		(39,732	)		(17,607	)
CASH AND CASH EQUIVALENTS, beginning of period		95,185			64,308
CASH AND CASH EQUIVALENTS, end of period	$	55,453		$	46,701
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	4		$	41
Cash paid for income taxes	$	34,941		$	35,638
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Increase to additional paid-in capital related to the issuance of stock to satisfy certain deferred compensation liabilities	$	—		$	1,142
Increase in non-cash property and equipment accruals	$	9,492		$	8,821

See accompanying footnotes

5

PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the quarterly period ended October 28, 2006
(unaudited, all amounts in thousands except share and per share amounts unless otherwise indicated)

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business — Pacific Sunwear of California, Inc. and its subsidiaries (collectively, unless the context otherwise requires, the “Company”) is a leading specialty retailer of everyday casual apparel, footwear and accessories designed to meet the needs of active teens and young adults. The Company operates four nationwide, primarily mall-based chains of retail stores, under the names “Pacific Sunwear” (as well as “PacSun”), “Pacific Sunwear Outlet” (as well as “PacSun Outlet”), “demo,” and “One Thousand Steps.” Pacific Sunwear and Pacific Sunwear Outlet stores specialize in board-sport inspired casual apparel, footwear and related accessories catering to teens and young adults. demo specializes in fashion-focused street wear, including casual apparel, footwear and related accessories catering to teens and young adults. One Thousand Steps stores specialize in fashion-forward footwear and accessories catering to young adults. The Company launched operations for One Thousand Steps in April 2006 and currently operates nine One Thousand Steps stores. In addition, the Company operates two e-commerce websites (www.pacsun.com and www.demostores.com) which sell PacSun and demo merchandise online, respectively, provide content and a community for its target customers, and provide information about the Company. The Company also operates a third website (www.onethousandsteps.com) that provides store location and product information for One Thousand Steps.

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 Rules 5-02 and 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 subsidiaries (Pacific Sunwear Stores Corp. and Miraloma Corp.). All intercompany transactions have been eliminated in consolidation.

In the opinion of management, all adjustments consisting only of normal recurring entries necessary for a fair presentation have been included. The preparation of consolidated financial statements in conformity with GAAP 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. The results of operations for the third quarter and nine months ended October 28, 2006 are not necessarily indicative of the results that may be expected for the year ending February 3, 2007 (“fiscal 2006”). For further information, refer to the Company’s consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended January 28, 2006 (“fiscal 2005”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Information regarding the Company’s significant accounting policies is contained in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the consolidated financial statements in the Company’s annual report on Form 10-K for fiscal 2005. Presented below in this and the following notes is supplemental information that should be read in conjunction with “Notes to Consolidated Financial Statements” included in that report.

New Accounting Pronouncements — In June 2006, the Financial Accounting Standards Board (the “FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 requires that the financial statement effects of a tax position be recognized when, based on the technical merits, the Company believes that the position will more likely than not be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold will initially and subsequently be recorded at the largest amount of tax benefit that will more

6

likely than not be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The Company must adopt FIN 48 for the fiscal year beginning February 4, 2007. The Company is currently evaluating the impact, if any, of the adoption of FIN 48 on its consolidated results of operations and financial position.

For a discussion regarding the adoption of Statement of Financial Accounting Standards (“SFAS”) 123R, “Share-Based Payment,” see “Stock-Based Compensation” below in this Note 2.

In October 2005, the FASB issued Staff Position (“FSP”) 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” FSP 13-1 requires rental costs associated with ground or building operating leases that are incurred during a construction period to be recognized as rental expense. The Company adopted FSP 13-1 at the beginning of fiscal 2006. The Company estimates that the adoption of FSP 13-1 will increase occupancy expenses by approximately $4 million in fiscal 2006.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections.” SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle, and that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. The Company adopted SFAS 154 at the beginning of fiscal 2006. The Company does not expect SFAS 154 to have a significant impact on its financial position or results of operations.

Stock-Based Compensation — On January 29, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R) under the modified prospective method. Prior to January 29, 2006, the Company had accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principles Board Opinion 25 (“APB 25”) and related interpretations, as permitted by SFAS 123, “Accounting for Stock-Based Compensation.” In accordance with APB 25, no compensation expense was required to be recognized for options granted to employees that had an exercise price equal to the market value of the underlying common stock on the date of grant.

For fiscal 2006, compensation expense was recognized under the modified prospective method of SFAS 123(R) for all stock-based compensation awards granted prior to, but not yet vested as of, January 29, 2006 based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and for all stock-based compensation awards granted after January 28, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company’s financial results for prior periods have not been restated.

Consistent with the valuation method used for the disclosure-only provisions of SFAS 123 prior to fiscal 2006, the Company is using the Black-Scholes option-pricing model to estimate the grant date fair value of its recognized stock-based compensation expense for fiscal 2006. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense to be recognized. The expected term of options granted is derived from historical data on employee exercises. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based primarily on the historical volatility of the Company’s stock. The Company records stock-based compensation expense using the graded vesting method over the vesting period, which is generally three to four years. The Company’s stock-based awards generally begin vesting one year after the grant date and, for stock options, expire in seven to ten years or three months after termination of employment with the Company. For fiscal 2006, the Company’s stock-based compensation expense resulted from awards of stock options, non-vested shares, and stock appreciation rights, as well as from shares purchased under the Company’s employee share purchase plan.

7

For the first nine months of fiscal 2006 and 2005, the fair value of the Company’s stock-based compensation awards was determined using the following weighted average assumptions:

	Fiscal Year
	2006		2005
Expected Option Life	5 years		5 years
Stock Volatility		41.3% — 48.7 %		53.4% — 62.8%
Risk-free Interest Rates		4.6% — 5.1%		3.9% — 4.5%
Expected Dividends	None		None

As a result of adopting SFAS 123(R), the Company’s net income and earnings per share for the first nine months of fiscal 2006 were $3.3 million and $0.05 lower, respectively, than if it had continued to account for stock-based compensation under APB 25 as it did during fiscal 2005. Stock-based compensation expense for the first nine months of fiscal 2006 was included in costs of goods sold for the Company’s buying and distribution employees ($1.5 million) and in selling, general and administrative expense for all other employees ($3.8 million). The adoption of SFAS 123(R) had no impact on the Company’s cash flows.

A summary of stock option activity under the Company’s 2005 Performance Incentive Plan for the first nine months of fiscal 2006 is presented in the following table:

						Weighted-
				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
	Shares			Exercise		Contractual		Value
Stock Options	(000s)			Price		Term (Yrs.)		($000s)
Outstanding at January 29, 2006		4,248		$	19.18
Granted		169			22.91
Exercised		(335	)		10.86
Forfeited or expired		(367	)		21.52
Outstanding at April 29, 2006		3,715		$	19.87		6.34	$	16,825
Granted		478			20.45
Exercised		(110	)		11.33
Forfeited or expired		(329	)		24.70
Outstanding at July 29, 2006		3,754		$	19.77		6.12	$	7,210
Granted		11			17.17
Exercised		(82	)		13.17
Forfeited or expired		(395	)		22.92
Outstanding at October 28, 2006		3,288		$	19.55		5.80	$	7,130
Exercisable at October 28, 2006		1,879		$	16.90		5.37	$	6,926

The weighted-average grant-date fair value of options granted during the first nine months of fiscal 2006 and 2005 was $9.36 and $14.55, respectively. The total intrinsic value of options exercised during the first nine months of fiscal 2006 and 2005 was $5.2 million and $18.7 million, respectively.

8

A summary of the status of the Company’s non-vested shares during the first nine months of fiscal 2006 is presented below. There was no activity regarding non-vested share awards during the first quarter:

				Weighted-
	Shares			Average Grant-
Non-vested Shares	(000)			Date Fair Value
Non-vested at January 29, 2006		—		$	—
Granted		284			20.10
Vested		—			—
Forfeited		(4	)		20.16
Non-vested at July 29, 2006		280		$	20.10
Granted		12			15.04
Vested		—			—
Forfeited		(15	)		20.16
Non-vested at October 28, 2006		277		$	19.87

At October 28, 2006, the Company had approximately $18.5 million of compensation cost related to non-vested stock option and non-vested share awards not yet recognized. This compensation expense is expected to be recognized over a weighted average period of approximately 2.8 years. No vesting of non-vested share awards occurred during the first nine months of fiscal 2006.

A reconciliation of reported net income and earnings per share for the third quarter and first nine months of fiscal 2005 to that which would have been reported if SFAS 123(R) had been in place for that period is presented in the following table:

	Third Quarter			Nine Months
	Ended			Ended
	October 29,			October 29,
	2005			2005
Net income, as reported	$	40,484		$	79,203
Less stock-based employee compensation expense determined under the fair value based method, net of related tax effects		(1,540	)		(5,530	)
Pro forma net income	$	38,944		$	73,673
Earnings per Share
Basic, as reported	$	0.54		$	1.06
Basic, pro forma	$	0.52		$	0.98
Diluted, as reported	$	0.54		$	1.04
Diluted, pro forma	$	0.52		$	0.98

Segment Reporting — The Company operates exclusively in the retail apparel industry in which the Company distributes, designs and produces clothing, accessories, footwear and related products catering to the teenage/young adult demographic through primarily mall-based retail stores. The Company has identified four operating segments (PacSun, PacSun Outlet, demo, and One Thousand Steps) as defined by SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.” E-commerce operations for PacSun and demo are included in their respective operating segments. The four operating segments have been aggregated into three reportable segments (PacSun, demo and One Thousand Steps). Information for the first nine months of fiscal 2006 concerning each of the three reportable segments is set forth in the following table:

9

							One
							Thousand
	PacSun			demo			Steps			Total
Net Sales	$	855,402		$	130,790		$	2,804		$	988,996
Comparable Store Sales %		(4.6	)%		(6.9	)%		n/a			(4.9	)%
Contribution Margin	$	148,341		$	(1,547	)	$	(2,007	)	$	144,787
Number of Stores		945			215			9			1,169
Square Footage (in 000s)		3,582			603			24			4,209

The Company launched operations for One Thousand Steps in April 2006. The Company expects contribution margins for One Thousand Steps to be negative during at least the first full year of operations due to the significant start-up costs incurred in launching the initial nine stores opened to date. demo’s contribution margin was negative during the first nine months of fiscal 2006 primarily due to significant markdown activity taken due to negative comparable store net sales results.

3. OTHER CURRENT ASSETS

As of the dates presented, other current assets consisted of the following:

	October 28,		January 28,
	2006		2006
Prepaid expenses	$	12,800	$	22,360
Non-trade accounts receivable		10,003		12,679
Deferred income taxes		6,446		6,446
Income taxes receivable		2,871		—
Total other current assets	$	32,120	$	41,485

4. OTHER CURRENT LIABILITIES

As of the dates presented, other current liabilities consisted of the following:

	October 28,		January 28,
	2006		2006
Accrued capital expenditures	$	17,950	$	8,779
Accrued compensation and benefits		13,870		12,250
Accrued gift cards		7,282		12,620
Sales taxes payable		6,185		7,895
Income taxes payable		—		14,896
Other		22,520		18,481
Total other current liabilities	$	67,807	$	74,921

5. COMMITMENTS AND CONTINGENCIES

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 likely 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 probable 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 a material adverse affect on the Company’s operating results.

Letters of Credit — The Company has issued guarantees in the form of commercial letters of credit, of which there were approximately $21 million outstanding at October 28, 2006, as security for merchandise shipments from overseas. All in-transit merchandise covered by letters of credit is accrued for in accounts payable.

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6. COMMON STOCK REPURCHASE AND RETIREMENT

The Company entered fiscal 2006 with approximately $50 million remaining to be spent under its stock repurchase plan, which was originally approved by its Board of Directors and announced in January 2004. Over time, the Company’s Board of Directors has continued to authorize additional stock repurchases, including an additional $100 million authorized in May 2006. The repurchase authorizations do not expire until all authorized funds have been expended. In accordance with California law, all repurchased shares are immediately retired. During the first nine months of fiscal 2006 and 2005, the Company made repurchases of its own common stock of $99 million and $44 million, respectively, under these authorizations. The Company did not repurchase any stock during the third quarter of fiscal 2006. Details of the Company’s fiscal 2006 share repurchase activity are presented in the table below:

					# of Shares				Maximum Value of
					Purchased as Part				Shares that May Yet
	# of Shares		Average Price Paid		of Publicly		Value of Shares		be Purchased Under
Period	Purchased		Per Share		Announced Plan		Purchased		the Plan
2005 Authorization:									$	49,856
March 2006		1,100,000	$	22.33		1,100,000	$	24,563	$	25,293
April 2006		600,000	$	22.67		600,000	$	13,600	$	11,693
May 2006		400,000	$	22.54		400,000	$	9,016	$	2,677
June 2006		131,255	$	20.40		131,255	$	2,677	$	—
Total		2,231,255	$	22.34		2,231,255	$	49,856	$	—
2006 Authorization:									$	100,000
June 2006		468,745	$	20.05		468,745	$	9,397	$	90,603
July 2006		2,216,000	$	18.09		2,216,000	$	40,095	$	50,508
Total		2,684,745	$	18.43		2,684,745	$	49,492	$	50,508
Grand Total		4,916,000	$	20.21		4,916,000	$	99,348	$	50,508

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7. NET INCOME PER SHARE, BASIC AND DILUTED

The following table summarizes the computation of earnings per share (“EPS”):

Third Quarter Ended:	October 28, 2006							October 29, 2005
	Net							Net
	Income		Shares		EPS			Income		Shares		EPS
Basic EPS:	$	8,983		69,344,402	$	0.13		$	40,484		74,531,489	$	0.54
Diluted EPS:
Effect of dilutive equivalents		—		217,018		(0.00	)		—		806,421		(0.00	)
	$	8,983		69,561,420	$	0.13		$	40,484		75,337,910	$	0.54

Nine Months Ended:	October 28, 2006							October 29, 2005
	Net							Net
	Income		Shares		EPS			Income		Shares		EPS
Basic EPS:	$	30,559		71,274,716	$	0.43		$	79,203		74,983,286	$	1.06
Diluted EPS:
Effect of dilutive equivalents		—		382,669		(0.00	)		—		1,020,166		(0.02	)
	$	30,559		71,657,385	$	0.43		$	79,203		76,003,452	$	1.04

Options to purchase 2,476,923 and 2,056,763 shares of common stock in the third quarter of fiscal 2006 and 2005, respectively, and 2,480,699 and 1,735,008 shares of common stock in the first nine months of fiscal 2006 and 2005, respectively, were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the Company’s common stock.

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

The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the Company’s condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, and we intend that such forward-looking statements be subject to the safe harbors created thereby. We are hereby providing cautionary statements identifying important factors that could cause our 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, including discussions of future comparable store net sales, markdowns, operating margins, average store sales trends, expected effects of reducing the density of inventory in our stores, sufficiency of cash flows from operations to fund operations for the next twelve months, and expected One Thousand Steps contribution margins are based on information available to us as of the date hereof, and we do not intend, or assume any obligation, to update or revise any such forward-looking statements to reflect events or circumstances that occur after such statements are made. See “Risk Factors” in Part II, Item 1A of this Form 10-Q for a discussion of some of the important risks that may affect our business, results of operations and financial condition.

Executive Overview

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

Comparable store (or “same store”) net sales — Stores are deemed comparable stores on the first day of the month following the one-year anniversary of their opening or expansion/relocation. We consider same store sales to be an important indicator of current Company performance. Same store net sales results are important in achieving operating leverage of certain expenses such as store payroll, store occupancy, depreciation, general and administrative expenses, and other costs that are of a more fixed nature. Positive same store net sales results generate greater operating leverage of expenses while negative same store net sales results negatively impact operating leverage. Same store net sales results also have a direct impact on our total net sales, cash, and working capital. Year-to-date same store net sales are negative for fiscal 2006 and could continue to be negative during the remainder of fiscal 2006.

Net merchandise margins — We analyze the components of net merchandise margins, specifically initial markup and markdowns as a percentage of net sales. Any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse impact on our gross margin results and results of operations. During the third quarter of fiscal 2006, we incurred an inventory write-down charge of approximately $11 million at cost, primarily for footwear and accessory categories. Markdowns are expected to remain higher for fiscal 2006 than in fiscal 2005.

Operating margin — We view operating margin as a key indicator of our success. The key drivers of operating margins are comparable store net sales, net merchandise margins, and our ability to control operating expenses. Operating margins for fiscal 2006 are expected to be lower than last year due to negative same-store sales results and the expensing of stock-based compensation and pre-opening rent. See “Stock-Based Compensation” and “New Accounting Pronouncements” within Note 2 to the condensed consolidated financial statements for a discussion of stock-based compensation and pre-opening rent

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expenses. For a discussion of the changes in the components comprising operating margins, see “Results of Operations” in this section.

Store sales trends — We evaluate store sales trends in assessing the operational performance of our store expansion strategies. Important store sales trends include average net sales per store and average net sales per square foot. Average net sales per store were $1.3 million in each of fiscal 2005 and 2004. Average net sales per square foot were $371 and $374 in fiscal 2005 and 2004, respectively. If the current year-to-date same-store net sales trend continues, these average store sales trends will likely be lower for fiscal 2006.

Cash flow and liquidity (working capital) — We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs. We expect cash flows from operations will be sufficient to finance operations without borrowing significantly under our credit facility for the next twelve months.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with GAAP necessarily requires us 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 we believe are the most critical to aid in fully understanding and evaluating reported financial results include the following:

Recognition of Revenue — Sales are recognized upon purchase by customers at our retail store locations or upon delivery to and acceptance by the customer for orders placed through our website. We accrue for estimated sales returns by customers based on historical sales return results. Actual return rates have historically been within our expectations and the reserves established. However, in the event that the actual rate of sales returns by customers increased significantly, our operational results could be adversely affected. We record the sale of gift cards as a current liability and recognize a sale when a customer redeems a gift card. The amount of the gift card liability is determined taking into account our estimate of the portion of gift cards that will not be redeemed or recovered (“gift card breakage”). Gift card breakage is recognized as revenue after 24 months, at which time the likelihood of redemption is considered remote based on our historical redemption data.

Valuation of Inventories — Merchandise inventories are stated at the lower of average cost or market utilizing the retail method. At any given time, inventories include items that have been marked down to management’s best estimate of their fair market value. We base the decision to mark down merchandise primarily upon its current rate of sale and the age of the item, among other factors. To the extent that our estimates differ from actual results, additional markdowns may have to be recorded, which could reduce our gross margins and operating results.

Determination of Stock-Based Compensation Expense — Effective January 29, 2006, we adopted the fair value recognition provisions of SFAS 123(R) using the modified prospective transition method. Under this method we recognize compensation expense for all stock-based compensation awards granted after January 28, 2006 and prior to but not yet vested as of, January 28, 2006, in accordance with SFAS 123(R). Under the fair value recognition provisions of SFAS 123(R), we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest using the graded vesting method over the requisite service period of the award. Prior to SFAS 123(R) adoption, we accounted for stock-based payments under APB 25, “Accounting for Stock Issued to Employees,” and accordingly, we were not required to recognize compensation expense for options granted to employees that had an exercise price equal to the market value of the underlying common stock on the date of grant. Prior periods have not been restated.

Determining the appropriate fair value model and calculating the fair value of stock-based compensation awards require the input of highly subjective assumptions, including the expected life of the stock-based

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compensation awards and stock price volatility. We use the Black-Scholes option-pricing model to determine compensation expense. The assumptions used in calculating the fair value of stock-based compensation awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. See “Stock-Based Compensation” within Note 2 to the condensed consolidated financial statements for a further discussion on stock-based compensation.

Evaluation of Long-Lived Assets — In the normal course of business, we acquire tangible and intangible assets. We periodically evaluate the recoverability of the carrying amount of our 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. 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. We use our best judgment based on the most current facts and circumstances surrounding our 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 our assessment of recoverability. Numerous factors, including changes in our business, industry segment, and the global economy, could significantly impact our decision to retain, dispose of, or idle certain of our long-lived assets.

Evaluation of Insurance Reserves — We are responsible for workers’ compensation and medical insurance claims up to a specified aggregate stop loss amount. We maintain reserves for estimated claims, both reported and incurred but not reported, based on historical claims experience and other estimated assumptions. Actual claims activity has historically been within our expectations and the reserves established. To the extent claims experience or our estimates change, additional charges may be recorded in the future up to the aggregate stop loss amount for each policy year.

Evaluation of Income Taxes — Current income tax expense is the amount of income taxes expected to be payable for the current reporting period. The combined federal and state income tax expense was calculated using estimated effective annual tax rates. 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. We consider future taxable income and ongoing prudent and feasible tax planning in assessing the value of our deferred tax assets. Evaluating the value of these assets is necessarily based on our judgment. If we determined that it was more likely than not that the carrying value of these assets would not be realized, we would reduce the value of these assets to their expected realizable value through a valuation allowance, thereby decreasing net income. If we subsequently determined that the carrying value of these 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.

Evaluation of Litigation Matters — We are involved from time to time in litigation incidental to our business. We believe that the outcome of current litigation will not likely have a material adverse effect on our results of operations or financial condition and, from time to time, may make provisions for probable 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 effect on our operating results.

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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 this table:

	Third Quarter Ended						Nine Months Ended
	Oct. 28, 2006			Oct. 29, 2005			Oct. 28, 2006			Oct. 29, 2005
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold, including buying, distribution and occupancy costs		71.7			61.7			69.6			63.6
Gross margin		28.3			38.3			30.4			36.4
Selling, general and administrative expenses		24.6			21.5			25.8			23.6
Operating income		3.7			16.8			4.6			12.8
Interest income, net		0.2			0.4			0.4			0.4
Income before income tax expense		3.9			17.2			5.0			13.2
Income tax expense		1.5			6.5			1.9			5.0
Net income		2.4	%		10.7	%		3.1	%		8.2	%

The following table sets forth the Company’s number of stores (by store concept and in total) and total square footage as of the dates indicated:

	October 28, 2006		October 29, 2005
PacSun stores		835		798
Outlet stores		110		93
demo stores		215		193
One Thousand Steps stores		9		—
Total stores		1,169		1,084
Square footage (in 000’s)		4,209		3,828

The third quarter (thirteen weeks) ended October 28, 2006 as compared to the third quarter (thirteen weeks) ended October 29, 2005

Net Sales

Net sales decreased to $375 million for the third quarter of fiscal 2006 from $377 million for the third quarter of fiscal 2005, a decrease of $2 million, or 0.5%. The components of this $2 million decrease in net sales are as follows:

$millions			Attributable to
$	(24	)	7% decrease in comparable store net sales in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005
	(1	)	3 closed stores in fiscal 2006 and 10 closed stores in fiscal 2005
	11		Net sales from stores opened in fiscal 2005 not yet included in the comparable store base
	10		67 new stores opened in fiscal 2006 not yet included in the comparable store base
	2		Other non-comparable sales (net sales from expanded or relocated stores not yet included in the comparable store base and internet net sales)
$	(2	)	Total

Of the 7% decrease in comparable store net sales in the third quarter of fiscal 2006, PacSun and PacSun Outlet comparable store net sales decreased a combined 6% and demo comparable store net sales decreased 12%. In percentage terms, the average sale transaction in a comparable store for the third quarter of fiscal 2006 was flat to the third quarter of fiscal 2005 while average retail prices were down low single digits over

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the same period. Total transactions per comparable store were down mid single digits. If the current year-to-date comparable store net sales trend continues, comparable store net sales results could continue to be negative for the remainder of fiscal 2006.

Within PacSun and PacSun Outlet, comparable store net sales of guys’ and girls’ merchandise decreased 1% and 12%, respectively. Guys’ comparable store net sales results were characterized by weakness in accessories, sneakers and tees, offset by strength in non-sneaker footwear, fleece, shorts and long-sleeve knits. Girls’ comparable store net sales results were characterized by weakness in sneakers, short-sleeve tees, casual pants and accessories, only partially offset by strength in non-sneaker footwear, long-sleeve tees and shorts.

Within demo, comparable store net sales of girls’ and guys’ merchandise both decreased 12%, characterized by weakness in tops and basic denim. We continue to expand our assortment of footwear and accessories in demo stores, but these categories were down slightly versus last year. We believe these categories present significant growth opportunities for this concept in the future. We are also continuing to expand and evolve our brand assortment to be more fashion-focused and not solely targeted towards the hip-hop lifestyle.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, decreased to $106 million for the third quarter of fiscal 2006 from $144 million for the third quarter of fiscal 2005, a decrease of $38 million, or 26%. As a percentage of net sales, gross margin was 28.3% for the third quarter of fiscal 2006 compared to 38.3% for the third quarter of fiscal 2005. The 10% decrease in gross margin as a percentage of net sales was largely attributable to higher markdowns in the third quarter of fiscal 2006 ($62 million at cost) compared to the third quarter of fiscal 2005 ($36 million at cost), resulting in a 7% decrease in gross margin as a percentage of net sales. Included in the higher markdown rate was an inventory write-down charge of approximately $11 million at cost during the third quarter of fiscal 2006, targeted primarily at our poorly performing sneaker and accessories businesses in PacSun. We have changed our inventory strategy to operate our stores with a lower overall inventory density, which we believe will allow us to improve the presentation and clarity of our merchandising assortments. Other significant factors contributing to the gross margin decline were a deleveraging of occupancy costs (a decline of 2% in gross margin as a percentage of net sales) as well as distribution and buying costs (a decline of 1% in gross margin as a percentage of net sales) due to the negative same-store sales results in the third quarter of fiscal 2006 as compared to the third quarter of fiscal 2005.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $93 million for the third quarter of fiscal 2006, up from $81 million for the third quarter of fiscal 2005, an increase of $12 million, or 14%. These expenses increased to 24.6% as a percentage of net sales in the third quarter of fiscal 2006 from 21.5% in the third quarter of fiscal 2005. The components of this 3.1% net increase in selling, general and administrative expenses as a percentage of net sales were as follows:

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%	Attributable to
1.3	Store payroll expenses as a percentage of net sales were 11.8% ($44 million) in the third quarter of fiscal 2006 as compared to 10.5% ($40 million) in the third quarter of fiscal 2005. In absolute dollars, these expenses were up primarily due to new store openings. As a percentage of net sales, these expenses were up due to deleveraging them against the negative same-store sales results in the third quarter of fiscal 2006.
1.3	Increase in direct store expenses as a percentage of net sales to 7.1% ($27 million) for the third quarter of fiscal 2006 from 5.8% ($22 million) for the third quarter of fiscal 2005. In absolute dollars, these expenses were up primarily due to increased depreciation associated with the addition of 24 net new stores during the fourth quarter of fiscal 2005 and 64 net new stores during the first nine months of fiscal 2006. As a percentage of net sales, these expenses were up due to deleveraging them against the negative same-store sales results in the third quarter of fiscal 2006.
0.5	Expenses incurred during the third quarter of fiscal 2006 that are non-comparable to the third quarter of fiscal 2005 include stock compensation expenses of $1.3 million (see Note 2, “Stock-Based Compensation,” in the notes to the condensed consolidated financial statements), and a charge of $1.1 million related to the resignation of our former CEO.
0.0	Other general and administrative expenses remained flat as a percentage of net sales at 5.2% in the third quarter of each of fiscal 2006 and 2005.
3.1	Total

Net Interest Income

Net interest income was $0.7 million and $1.6 million in the third quarters of fiscal 2006 and fiscal 2005, respectively. Interest income generated by higher interest rates was offset by the Company having lower average cash and short-term investment balances during the third quarter of fiscal 2006 as compared to the third quarter of fiscal 2005. The lower cash and investment balances were the result of stock repurchase activity earlier in the year (see Note 6 to the condensed consolidated financial statements) and negative same-store sales results.

Income Tax Expense

Income tax expense was $6 million for the third quarter of fiscal 2006 compared to $25 million for the third quarter of fiscal 2005. The effective income tax rate was 38.0% in the third quarter of fiscal 2006 versus 37.8% in the third quarter of fiscal 2005. The increase in the effective income tax rate was primarily attributable to the expected stock-based compensation expense impacts of SFAS 123R (see Note 2 to the condensed consolidated financial statements). Our weighted average effective state income tax rate will vary over time depending on a number of factors, such as differing average income tax rates and net incomes in the respective states. Our effective income tax rate may continue to change during fiscal 2006 due to the launch of One Thousand Steps, the construction of a second distribution center, and other planned business events.

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The nine months (39 weeks) ended October 28, 2006 as compared to the nine months (39 weeks) ended October 29, 2005

Net Sales

Net sales increased to $989 million for the first nine months of fiscal 2006 from $967 million for the first nine months of fiscal 2005, an increase of $22 million, or 2%. The components of this $22 million increase in net sales are as follows:

$millions			Attributable to
$	52		Net sales from stores opened in fiscal 2005 not yet included in the comparable store base
	16		Net sales from 67 new stores opened in fiscal 2006 not yet included in the comparable store base
	3		Other non-comparable sales (net sales from expanded or relocated stores not yet included in the comparable store base and internet net sales)
	(44	)	5% decrease in comparable store net sales in the first nine months of fiscal 2006 compared to the first nine months of fiscal 2005
	(5	)	3 closed stores in fiscal 2006 and 10 closed stores in fiscal 2005
$	22		Total

Of the 5% decrease in comparable store net sales in the first nine months of fiscal 2006, PacSun and PacSun Outlet comparable store net sales decreased 5% and demo comparable store net sales decreased 7%. In percentage terms, the average sale transaction was up slightly and average retail prices in a comparable store were down slightly. Total transactions per comparable store were down mid single digits. If the year-to-date comparable store net sales trend continues, comparable store net sales results could continue to be negative for the remainder of fiscal 2006.

Within PacSun and PacSun Outlet, comparable store net sales of guys’ and girls’ merchandise decreased 1% and 9%, respectively. Guys’ comparable store net sales results were characterized by weakness in sneakers, accessories, wovens, fashion denim and tees, offset by strength in shorts, non-sneaker footwear, basic denim, and knits. Girls’ comparable store net sales results were primarily characterized by weakness in sneakers, short-sleeve tees, fashion denim and woven tops, only partially offset by strength in shorts, swimwear, long-sleeve tees and non-sneaker footwear.

Within demo, comparable store net sales of guys’ and girls’ merchandise decreased 10% and 4%, respectively, both characterized by weakness in tops and basic denim. We continue to expand our assortment of footwear and accessories in demo stores as we believe these categories present significant future growth opportunities for this concept. Year-to-date, these categories were up significantly versus last year. We are also continuing to expand and evolve our brand assortment to be more fashion-focused and not solely targeted towards the hip-hop lifestyle.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, decreased to $301 million for the first nine months of fiscal 2006 from $352 million for the first nine months of fiscal 2005, a decrease of $51 million, or 15%. As a percentage of net sales, gross margin was 30.4% for the first nine months of fiscal 2006 compared to 36.4% for the first nine months of fiscal 2005. The 6% decrease in gross margin as a percentage of net sales was largely attributable to higher markdowns in the first nine months of fiscal 2006 ($131 million at cost) compared to the first nine months of fiscal 2005 ($94 million at cost), resulting in a 4% decrease in gross margin as a percentage of net sales. Included in the higher markdown rate was an inventory write-down charge of approximately $11 million at cost during the third quarter of fiscal 2006, targeted primarily at our poorly performing sneaker and accessories businesses in PacSun. We have changed our inventory strategy to operate our stores with a lower overall inventory density, which we believe will allow us to improve the presentation and clarity of our merchandising assortments. Other significant factors contributing to the gross margin decline were a deleveraging of occupancy, distribution and buying costs (a decline of 2% in gross margin as a percentage of net sales) due to the negative same-store sales results in the first nine months of fiscal 2006 as compared to the first nine months of fiscal 2005.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $255 million for the first nine months of fiscal 2006 from $229 million for the first nine months of fiscal 2005, an increase of $26 million, or 11%. These expenses increased to 25.8% as a percentage of net sales in the first nine months of fiscal 2006 from 23.6% in the first nine months of fiscal 2005. The components of this 2.2% net increase in selling, general and administrative expenses as a percentage of net sales were as follows:

%	Attributable to
1.0	Increase in direct store expenses as a percentage of net sales to 7.4% ($73 million) for the first nine months of fiscal 2006 from 6.4% ($62 million) for the first nine months of fiscal 2005, primarily due to increased depreciation expenses associated with new store openings and deleveraging these expenses over the negative same-store sales results in the first nine months of fiscal 2006.
0.9	Increase in store payroll expenses as a percentage of net sales to 12.5% ($123 million) in the first nine months of fiscal 2006 from 11.6% ($112 million) for the first nine months of fiscal 2005. In absolute dollars, these expenses were up primarily due to addition of 24 net new stores during the fourth quarter of fiscal 2005 and 64 net new stores during the first nine months of fiscal 2006. As a percentage of net sales, these expenses were up primarily due to deleveraging them against the negative same-store sales results in the first nine months of fiscal 2006.
0.5	Expenses incurred during the first nine months of fiscal 2006 that are non-comparable to the first nine months of fiscal 2005 include stock compensation expenses of $4 million (see Note 2, “Stock-Based Compensation,” in the notes to the condensed consolidated financial statements), and a charge of $1 million related to the resignation of our former CEO.
(0.2)	Decrease in all other general and administrative expenses as a percentage of net sales to 5.5% ($54 million) for the first nine months of fiscal 2006 from 5.7% ($55 million) for the first nine months of fiscal 2005.
2.2	Total

Net Interest Income

Net interest income was $4 million in the first nine months of each of fiscal 2006 and 2005. Interest income generated by higher interest rates was offset by the Company having lower average cash and short-term investment balances during fiscal 2006 versus 2005. The lower cash and investment balances were the result of stock repurchase activity earlier in the year (see Note 6 to the condensed consolidated financial statements) and negative same-store sales results.

Income Tax Expense

Income tax expense was $19 million for the first nine months of fiscal 2006 compared to $48 million for the first nine months of fiscal 2005. The effective income tax rate was 38.0% in the first nine months of fiscal 2006 as compared to 37.8% in the first nine months of fiscal 2005. The increase in the effective income tax rate was primarily attributable to stock-based compensation (see Note 2 to the condensed consolidated financial statements). Our weighted average effective state income tax rate will vary over time depending on a number of factors, such as differing average income tax rates and net incomes in the respective states. Our effective income tax rate may continue to change during fiscal 2006 due to the launch of One Thousand Steps, the construction of a second distribution center, and other planned business events.

Liquidity and Capital Resources

We have historically financed our operations primarily from internally generated cash flow, with occasional short-term and long-term borrowings as business needs have required. Our primary capital requirements are typically for the construction of newly opened, remodeled, expanded or relocated stores, the financing of inventories and, in the past, construction of corporate facilities. We believe that our working capital and cash flows from operating activities will be sufficient to meet our operating and capital expenditure requirements without borrowing significantly under our credit facility for at least the next twelve months.

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Operating Cash Flows

Net cash provided by operating activities was $85 million for the first nine months of fiscal 2006 compared to $87 million for the first nine months of fiscal 2005. The $2 million decrease in cash provided by operations in the first nine months of fiscal 2006 versus the first nine months of fiscal 2005 was attributable to the following:

$millions			Attributable to
$	(49	)	Decrease in net income.
	(23	)	Decrease in cash flows from accrued income taxes. Cash payments for income taxes were $1 million lower than prior year, but current year accruals have been lower due to reduced net income.
	54		Increase in cash flows from accounts payable, net of inventory, due to timing of payments and decreased inventory per square foot.
	14		Increase in cash flows from prepaid expenses due to timing of payments.
	2		Increase in net cash flows from all other assets and liabilities.
$	(2	)	Total

Working Capital

Working capital at October 28, 2006 was $195 million compared to $304 million at January 28, 2006, a decrease of $109 million. The changes in working capital were as follows:

$millions			Description
$	304		Working capital at January 28, 2006
	(145	)	Decrease in cash and marketable securities, net of accounts payable, primarily due to stock repurchases, capital expenditures and negative same store sales results for the first nine months of fiscal 2006, among other items (see cash flow statement).
	38		Increase in inventory, primarily due to the addition of 64 net new stores and slower inventory turns due to the negative same-store sales results during the first nine months of fiscal 2006.
	(2	)	Net decrease in working capital attributable to all other current assets and liabilities.
$	195		Working capital at October 28, 2006

Investing Cash Flows

Net cash used in investing activities in the first nine months of fiscal 2006 was $32 million versus $73 million for the first nine months of fiscal 2005, an increase in cash flows from investing activities of $41 million. Investing cash flows for the first nine months of fiscal 2006 were comprised of capital expenditures of $107 million, partially offset by $75 million in net maturities of marketable securities. Capital expenditures were predominantly for the opening of new, relocated and expanded stores and improving the visual presentation of our stores. Due to the increasing interest rate environment during fiscal 2006, the Company has liquidated longer-term marketable securities (original maturity period of 3 months to one year) as they matured in favor of shorter-term marketable securities (original maturity of less than 3 months) in order to take advantage of the increasing interest rates.

Fiscal 2007 Store Opening Plans

Given the current trend in our business, we feel it is prudent to slow the pace of our store openings for fiscal 2007. As a result, we currently anticipate opening approximately 40 new stores and 30-35 expansions/relocations during fiscal 2007, primarily focused within the PacSun concept. This will result in total square footage growth for fiscal 2007 of approximately four percent.

Financing Cash Flows

Net cash used in financing activities in the first nine months of fiscal 2006 was $92 million compared to $32 million for the first nine months of fiscal 2005. The Company repurchased and retired common stock in the amount of $99 million during the first nine months of fiscal 2006 as compared to $44 million in the

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first nine months of fiscal 2005. Proceeds from employee exercises of stock options were $6 million lower in the first nine months of fiscal 2006 ($7 million) than in the first nine months of fiscal 2005 ($13 million).

Information regarding the Company’s common stock repurchase program is contained in Note 6 to the condensed consolidated financial statements, which note is incorporated herein by this reference.

Credit Facility

We have an unsecured $200 million credit agreement with a syndicate of lenders which expires September 14, 2010. The credit facility provides for a $200 million revolving line of credit that can be increased to up to $275 million at our option under certain circumstances. The credit facility is available for direct borrowing and the issuance of letters of credit with a portion also available for swing-line loans. Direct borrowings under the credit facility bear interest at the Administrative Agent’s alternate base rate (as defined, 5.3% at October 28, 2006) or at optional interest rates that are primarily dependent upon LIBOR for the time period chosen. We had no direct borrowings outstanding under the credit facility at October 28, 2006. The credit facility requires us to maintain certain financial covenants, all of which we were in compliance with as of October 28, 2006.

Contractual Obligations

We have minimum annual rental commitments under existing store leases as well as leases for computer and other equipment as of October 28, 2006. We lease all of our retail store locations under operating leases. We lease equipment primarily under operating leases, but also occasionally under capital leases. In addition, at any time, we are contingently liable for commercial letters of credit with foreign suppliers of merchandise. At October 28, 2006, our future financial commitments under these arrangements were as follows:

Contractual Obligations	Payments Due by Period
(in $millions)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligations	$	681	$	108	$	206	$	171	$	196
Letters of credit		21		21		—		—		—
Total	$	702	$	129	$	206	$	171	$	196

The contractual obligations table above does not include common area maintenance (CAM) charges, which are also a required contractual obligation under our store operating leases. In many of our leases, CAM charges are not fixed and can fluctuate significantly from year to year for any particular store. Total store rental expenses, including CAM for fiscal 2005 and 2004 were $161 million and $138 million, respectively. We expect total CAM expenses to continue to increase as the number of stores increases from year to year.

Operating Leases — We lease our retail stores and certain equipment under operating lease agreements expiring at various dates through January 2019. Substantially all of our retail store leases require us to pay CAM charges, insurance, property taxes and percentage rent ranging from 5% to 7% based on sales volumes exceeding certain minimum sales levels. The initial terms of such leases are typically 8 to 10 years, many of which contain renewal options exercisable at our discretion. Most leases also contain rent escalation clauses that come into effect at various times throughout the lease term. Rent expense is recorded under the straight-line method over the initial term of the lease. Other rent escalation clauses can take effect based on changes in primary mall tenants throughout the term of a given lease. Most leases also contain cancellation or kick-out clauses in our favor that relieve us of any future obligation under a lease if specified sales levels are not achieved by a specified date. None of our retail store leases contain purchase options.

We review the operating performance of our stores on an ongoing basis to determine which stores, if any, to expand, relocate or close. We anticipate closing approximately five to ten stores during fiscal 2006.

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Indemnifications

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers in certain circumstances.

It is not possible to determine our maximum potential liability under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements.

New Accounting Pronouncements

Information regarding new accounting pronouncements is contained in Note 2 to the condensed consolidated financial statements for the quarter ended October 28, 2006, which note is incorporated herein by this reference.

Inflation

We do not believe that inflation has had a material effect on the results of operations in the recent past. There can be no assurance that our business will not be affected by inflation in the future.

Seasonality and Quarterly Results

Our business is seasonal by nature. Our first quarter historically accounts for the smallest percentage of annual net sales with each successive quarter contributing a greater percentage than the last. In recent years, excluding sales generated by new and relocated/expanded stores, 44% of our net sales have occurred in the first half of the fiscal year and 56% have occurred in the second half, with the Christmas and back-to-school selling periods together accounting for approximately 30% of our annual net sales and a higher percentage of our operating income. Our 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.

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To the extent we borrow under our credit facility, we are exposed to market risk related to changes in interest rates. At October 28, 2006, there were no borrowings outstanding under our credit facility and we did not borrow under the credit facility at any time during fiscal 2006 or 2005. Based on the interest rate of 5.3% on our credit facility at October 28, 2006, if interest rates on the credit facility were to increase by 10%, net income would not be materially affected. We are not a party to any derivative financial instruments.

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ITEM 4 — CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). These disclosure controls and procedures are designed to provide reasonable assurance 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. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of October 28, 2006.

No change in our internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

For information on legal proceedings, see “Litigation” within Note 5 of Notes to Condensed Consolidated Financial Statements, which is incorporated by reference in response to this Item 1.

Item 1A — Risk Factors

We have updated and expanded our risk factors from those disclosed in Item 1A of our annual report on Form 10-K for the year ended January 28, 2006, which was filed with the Securities and Exchange Commission on March 31, 2006. We have added risk factors addressing future growth prospects for the Company, competition in the retail environment, vendor relationships, store design, and information system infrastructure. In addition, we have revised the captions of our risk factors to describe in more detail the principal concept addressed in the text of the related risk factor.

Our comparable store net sales results will fluctuate significantly, which can cause volatility in our operating performance and stock price.

Our comparable store net sales results have fluctuated significantly on a monthly, quarterly, and annual basis, and are expected to continue to fluctuate in the future. For example, over the past five years, monthly comparable store net sales results have varied from a low of minus 11% to a high of plus 20%. A variety of factors affect our comparable store net sales results, including changes in fashion trends and customer preferences, changes in our merchandise mix, calendar shifts of holiday periods, actions by competitors, weather conditions and general economic conditions. Our comparable store net sales results for any particular fiscal month, quarter or year may decrease. As a result of these or other factors, our comparable store net sales results, both past and future, are likely to have a significant effect on our operating performance and the market price of our common stock.

Our failure to identify and respond appropriately to changing consumer preferences and fashion trends in a timely manner could have a material adverse impact on our profitability.

Our success is largely dependent upon our ability to gauge the fashion tastes of our customers and to provide merchandise at competitive prices and in adequate quantities that satisfies customer demand in a timely manner. Our failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends could have a material adverse effect on our same store sales results, gross margins, operating margins, financial condition and results of operations. Misjudgments or unanticipated fashion changes could also have a material adverse effect on our image with our customers. Some of our vendors have limited resources, production capacities and operating histories and some have intentionally limited the distribution of their merchandise. The inability or unwillingness on the part of key vendors to expand their operations to keep pace with the anticipated growth of our store concepts, or the loss of one or more key vendors or proprietary brand sources for any reason, could have a material adverse effect on our business.

24

Our continued growth depends on our ability to develop new store concepts and open new stores in our existing concepts. Any failure to do so may negatively impact our stock price and operational performance.

Our continued growth depends to a significant degree on the success of our existing retail stores, our ability to open and operate stores on a profitable basis, and to manage our planned expansion. Our store concepts are located principally in enclosed regional shopping malls. Our PacSun concept is a relatively mature concept with limited domestic opportunities to open new stores in such malls. The performance of our demo concept has been inconsistent and the size of the market for this concept is uncertain. Our newest concept, One Thousand Steps, is at a very early stage (nine stores) and is not yet proven. Given the current trend of our business, we have slowed the pace of planned store openings for fiscal 2007. There can be no assurance that we will achieve our planned expansion, that such expansion will be profitable, or that we will be able to manage our growth effectively. In addition, our ability to sustain future long-term growth is dependent, in part, on our ability to successfully develop, implement and evolve new retail concepts, including demo and One Thousand Steps. Our planned expansion is dependent upon a number of factors, including the performance of our existing stores, our ability to locate and obtain favorable store sites, negotiate acceptable lease terms, obtain adequate supplies of merchandise and hire and train additional qualified management level and other employees with the skills required to create or acquire new, unrelated retail concepts. Factors beyond our control may also affect our ability to expand, including general economic and business conditions affecting consumer spending. Any failure to manage growth or develop profitable new retail concepts could have a material adverse effect on our business, stock price, financial condition and results of operations.

We launched operations of a new retail concept, One Thousand Steps, in fiscal 2006, which could divert attention from existing operations.

We have launched operations for One Thousand Steps in fiscal 2006 through the opening of the first nine test stores. This new concept is at a very early stage and is not yet proven. Our ability to make this new retail concept successful is subject to numerous risks, including, but not limited to, (i) lower productivity (in terms of sales per square foot) than anticipated or required to make the concept profitable and expandable, (ii) higher than anticipated construction costs, (iii) unanticipated operating problems, (iv) lack of customer acceptance, (v) new vendor relationships, (vi) competition from existing and new retailers, and (vii) lack of sufficient product differentiation. There can be no assurance that this new retail concept will achieve sales and profitability levels that justify the Company’s investment in it. Additionally, the expansion of this new retail concept involves other risks that could have a material adverse effect on the Company, including, but not limited to, (i) diversion of management’s attention from the Company’s core businesses, (ii) inability to attract, train and retain qualified personnel, including management and product designers, and (iii) difficulty in locating and obtaining favorable store sites and negotiating acceptable lease terms. Any inability to succeed in developing this new retail concept could have a material adverse effect on our continued growth and results of operations.

We face significant competition from both vertically-integrated and brand-based competitors that are growing rapidly, which could have a material adverse effect on our business.

The retail apparel, footwear and accessory business is highly competitive. All of our store concepts compete on a national level with a diverse group of retailers, including vertically-integrated and brand-based national, regional and local specialty retail stores and certain leading department stores that offer the same or similar brands and styles of merchandise as we do. Many of our competitors are larger and have significantly greater resources than we do. We believe the principal competitive factors in our industry are fashion, merchandise assortment, quality, price, store location, environment and customer service.

Our customers may not prefer our proprietary brand merchandise, which may negatively impact our profitability.

Sales from proprietary brand merchandise accounted for approximately 31%, 30%, and 32% of net sales in fiscal 2005, 2004 and 2003, respectively. There can be no assurance that we will be able to achieve increases in proprietary brand merchandise sales as a percentage of net sales. Because our proprietary brand merchandise generally carries higher merchandise margins than our other merchandise, our failure to anticipate, identify and react in a timely manner to fashion trends with our proprietary brand merchandise, particularly if the percentage of net sales derived from proprietary brand merchandise changes significantly

25

(up or down), may have a material adverse effect on our same store sales results, operating margins, financial condition and results of operations.

Our current or prospective vendors may be unable or unwilling to supply us with adequate quantities of their merchandise in a timely manner or at acceptable prices, which could have a material adverse impact on our business.

The success of our business is dependant upon developing and maintaining good relationships with our vendors. We work very closely with our vendors to develop and acquire appropriate merchandise at acceptable prices for our stores. However, we do not have any contractual relationships with our vendors. In addition, some of our vendors are relatively unsophisticated or underdeveloped and may have difficulty in providing adequate quantities or quality of merchandise to us in a timely manner. Also, certain of our vendors sell their merchandise directly to retail customers in direct competition with us. Our vendors could discontinue their relationship with us or raise prices on their merchandise at any time. There can be no assurance that we will be able to acquire sufficient quantities of quality merchandise at acceptable prices in a timely manner in the future. Any inability to do so, or the loss of one or more of our key vendors, could have a material adverse impact on our business, results of operations and financial condition.

Our foreign sources of production may not always be reliable, which may result in a disruption in the flow of new merchandise to our stores.

We purchase merchandise directly in foreign markets for our proprietary brands. In addition, we purchase merchandise from domestic vendors, some of which is manufactured overseas. We do not have any long-term merchandise supply contracts and our imports are subject to existing or potential duties, tariffs and quotas. We face competition from other companies for production facilities and import quota capacity. We also face a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as: (i) political instability; (ii) enhanced security measures at United States ports, which could delay delivery of imports; (iii) 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 within which we do business; (iv) imposition of duties, taxes, and other charges on imports; (v) delayed receipt or non-delivery of goods due to the failure of foreign-source suppliers to comply with applicable import regulations; (vi) delayed receipt or non-delivery of goods due to organized labor strikes or unexpected or significant port congestion at United States ports; and (vii) 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 that, if enacted, would increase the cost of products purchased from suppliers in countries that we do business with. Any inability on our part to rely on our foreign sources of production due to any of the factors listed above could have a material adverse effect on our business, financial condition and results of operations.

We are currently evaluating store design alternatives for all of our retail concepts, which may not result in improved operational performance.

We believe that store design is an important element in the customer shopping experience. Many of our stores have been in operation for many years and have not been updated or renovated since opening. Some of our competitors are in the process of updating, or have updated, their store designs, which may make our stores appear less attractive visually. We have been testing or plan to test new store design alternatives for all of our retail concepts in an attempt to update the look of our stores and improve their productivity. This process carries additional risks such as higher than anticipated construction costs, lack of customer acceptance, and lower store productivity than planned or anticipated, among others. There can be no assurance that this process will prove successful in improving operational results or that we can achieve meaningful results in an adequate timeframe. Any inability on our part to successfully implement new store designs in a timely manner could have a material adverse effect on our business, financial condition and results of operations.

The loss of key personnel could have a material adverse effect on our business at any time.

Our continued success is dependent to a significant degree upon the services of our key personnel, particularly our executive officers. The loss of the services of any member of our senior management team could have a material adverse effect on our business, financial condition and results of operations. Our

26

success in the future will also be dependent upon our ability to attract and retain qualified personnel. Our inability to attract and retain qualified personnel in the future could have a material adverse effect on our business, financial condition and results of operations.

Our information systems may not be adequate to support future growth, which could disrupt business operations.

We have experienced periods of rapid growth in the past. While we regularly evaluate our information systems capabilities and requirements, there can be no assurance that our existing information systems will be adequate to support future growth or will remain adequate to support the existing needs of our business. In order to support future growth, we may have to undertake significant information system implementations, modifications and/or upgrades in the future at significant cost to us. Such projects involve inherent risks associated with replacing and/or changing existing systems, such as system disruptions and the failure to accurately capture data, among others. Information system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our business, results of operations and financial condition.

Adverse outcomes of litigation matters could significantly affect our operational results.

We are involved from time to time in litigation incidental to our business. We believe that the outcome of current litigation will not have a material adverse effect upon our results of operations or financial condition. However, our assessment of current litigation could change in light of the discovery of facts with respect to legal actions pending against us not presently known to us or determinations by judges, juries or other finders of fact which do not accord with our evaluation of the possible liability or outcome of such litigation.

Our dependence on a single distribution facility exposes us to significant business disruption risks.

All of our current distribution functions continue to reside within a single facility in Anaheim, California. The Company has purchased land in Olathe, Kansas and plans to construct a second distribution center at that site. This new distribution center is currently expected to become operational during fiscal 2007. Any significant interruption in the operation of the existing distribution facility due to natural disasters, accidents, system failures or other unforeseen causes would have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that our current and planned distribution centers will be adequate to support our future growth.

Our stock price can fluctuate significantly due to a variety of factors, which can negatively impact our total market value.

The market price of our common stock has fluctuated substantially 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, net sales and profitability results, quarterly variations in operating results or comparable store net sales, changes in earnings estimates made by management or 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 the past. This volatility has had a substantial effect on the market prices of securities of many public companies for reasons frequently unrelated to the operating performance of the specific companies.

Selling merchandise over the internet carries particular risks that can have a negative impact on our business.

Our internet operations are subject to numerous risks that could have a material adverse effect on our operational results, including unanticipated operating problems, reliance on third party computer hardware and software providers, system failures and the need to invest in additional computer systems. Specific risks include: (i) diversion of sales from our stores; (ii) rapid technological change; (iii) liability for online content; and (iv) 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, internet operations involve risks which are beyond our control that could have a material adverse effect on our operational results, including: (i) price competition involving the items we intend to sell; (ii) the entry of our vendors into the internet business, in direct competition with us;

27

(iii) the level of merchandise returns experienced by us; (iv) governmental regulation; (v) online security breaches involving unauthorized access to Company and/or customer information; (vi) credit card fraud; and (vii) competition and general economic conditions specific to the internet, online commerce and the apparel industry.

Any failure by us to maintain credit facility financial covenants could have a material adverse impact on our business.

A significant decrease in our operating results could adversely affect our ability to maintain required financial ratios under our credit facility. Required financial ratios include a rolling four-quarter minimum fixed charge coverage ratio as well as a maximum leverage ratio. If these financial ratios are not maintained, the lenders will have the option to terminate the facility and require immediate repayment of all amounts outstanding under the credit facility, if any. The alternatives available to the Company if in default of its covenants would include renegotiating certain terms of the credit agreement, obtaining waivers from the lenders, or obtaining a new credit agreement with another bank or group of lenders, which may contain different terms.

The effects of terrorism or war could significantly impact consumer spending and our operational performance.

The majority of our stores are located in regional shopping malls. Any threat or actual act of terrorism, 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. 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 our business, financial condition and results of operations.

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

We caution that the risk factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on behalf of the Company. Further, we cannot assess the impact of each such factor on our 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 2 — Unregistered Sales of Equity Securities and Use of Proceeds

For information on repurchases made during the first half of fiscal 2006, see Note 6 of Notes to Condensed Consolidated Financial Statements, which is incorporated by reference in response to this Item 2.

Item 3 — Defaults upon Senior Securities

None

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

None

Item 5 — Other Information

None

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Item 6 — Exhibits

Exhibit 3.1	Third Amended and Restated Bylaws of the Company, as amended to date
Exhibit 10.1	Amendment No. 1 to Credit Agreement, dated as of October 12, 2006, with JPMorgan Chase Bank, N.A., as Administrative Agent, and a syndicate of other lenders (1)
Exhibit 10.2	Amendment to Employment Agreement and Resignation, dated September 29, 2006, between the Company and Seth R. Johnson (2)
Exhibit 10.3	Summary of Board of Directors Compensation dated August 16, 2006 (3)
Exhibit 10.4	Notice of Election to Extend Employment Agreement of Seth R. Johnson (4)
Exhibit 10.5	Summary of Compensation Arrangements with Sally Frame Kasaks, Interim Chief Executive Officer
Exhibit 31.1	Written statements of Sally Frame Kasaks and Gerald M. Chaney pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Written statement of Sally Frame Kasaks and Gerald M. Chaney pursuant to section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated by reference from the Company’s Current Report on From 8-K, as filed with the Securities and Exchange Commission on October 18, 2006
(2)	Incorporated by reference from the Company’s Current Report on From 8-K, as filed with the Securities and Exchange Commission on October 2, 2006
(3)	Incorporated by reference from the Company’s Current Report on From 8-K, as filed with the Securities and Exchange Commission on August 21, 2006
(4)	Incorporated by reference from the Company’s Current Report on From 8-K, as filed with the Securities and Exchange Commission on August 2, 2006

29

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: December 4, 2006	/s/ SALLY FRAME KASAKS
	Sally Frame Kasaks
	Director and Interim Chief Executive Officer (Principal Executive Officer)

Date: December 4, 2006	/s/ GERALD M. CHANEY
	Gerald M. Chaney
	Senior Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

30

Exhibit Index

Exhibit 3.1	Third Amended and Restated Bylaws of the Company, as amended to date
Exhibit 10.1	Amendment No. 1 to Credit Agreement, dated as of October 12, 2006, with JPMorgan Chase Bank, N.A., as Administrative Agent, and a syndicate of other lenders (1)
Exhibit 10.2	Amendment to Employment Agreement and Resignation, dated September 29, 2006, between the Company and Seth R. Johnson (2)
Exhibit 10.3	Summary of Board of Directors Compensation dated August 16, 2006 (3)
Exhibit 10.4	Notice of Election to Extend Employment Agreement of Seth R. Johnson (4)
Exhibit 10.5	Summary of Compensation Arrangements with Sally Frame Kasaks, Interim Chief Executive Officer
Exhibit 31.1	Written statements of Sally Frame Kasaks and Gerald M. Chaney pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Written statement of Sally Frame Kasaks and Gerald M. Chaney pursuant to section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated by reference from the Company’s Current Report on From 8-K, as filed with the Securities and Exchange Commission on October 18, 2006
(2)	Incorporated by reference from the Company’s Current Report on From 8-K, as filed with the Securities and Exchange Commission on October 2, 2006
(3)	Incorporated by reference from the Company’s Current Report on From 8-K, as filed with the Securities and Exchange Commission on August 21, 2006
(4)	Incorporated by reference from the Company’s Current Report on From 8-K, as filed with the Securities and Exchange Commission on August 2, 2006

31

EX-3.1

                                                                     EXHIBIT 3.1

    THIRD AMENDED AND RESTATED BYLAWS FOR THE REGULATION, EXCEPT AS OTHERWISE
   PROVIDED BY STATUTE OR ITS ARTICLES OF INCORPORATION, OF PACIFIC SUNWEAR OF
                    CALIFORNIA, INC. A CALIFORNIA CORPORATION

                                    ARTICLE I

                                     OFFICES

          SECTION 1. PRINCIPAL EXECUTIVE OFFICE. The corporation's principal
executive office shall be fixed and located at such place as the Board of
Directors shall determine. The Board of Directors is granted full power and
authority to change the principal executive office from one location to another.

          SECTION 2. OTHER OFFICES. Other business offices may at any time be
established by the Board of Directors at any place or places where the
corporation is qualified to do business.

                                   ARTICLE II

                            MEETINGS OF SHAREHOLDERS

          SECTION 1. PLACE OF MEETINGS. All annual or other meetings of
shareholders shall be held at the principal executive office of the corporation,
or at any other place within or without the State of California which may be
designated by the Board of Directors or by the written consent of all persons
entitled to vote thereat and not present at the meeting, given either before or
after the meeting and filed with the secretary of the corporation.

          SECTION 2. ANNUAL MEETINGS. The annual meetings of shareholders shall
be held on such dates and at such times as shall be designated by the Board of
Directors and stated in the notice of the meeting given to each shareholder as
provided below. At such meetings, directors shall be elected, reports of the
affairs of the corporation shall be considered, and any other business may be
transacted which is within the powers of the shareholders. Written notice of
each annual meeting shall be given to each shareholder entitled to vote, either
personally or by mail or other means of written communication, charges prepaid,
addressed to such shareholder at its address appearing on the books of the
corporation or given to the corporation for the purpose of notice. If any notice
or report addressed to the shareholder at the address of such shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice or report to the shareholder at such
address, all future notices or reports shall be deemed to have been duly given
without further mailing if the same shall be available for the shareholder upon
written demand of the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice
or report to all other shareholders. If a shareholder gives no address, notice
shall be deemed to have been given if sent by mail or other means of written
communication addressed to the place where the principal executive office of the
corporation is situated, or if published at least once in some newspaper of
general circulation in the county in which the principal executive office is
located.



          All such notices shall be given to each shareholder entitled thereto
not less than ten (10) days nor more than sixty (60) days before each annual
meeting. Any such notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by other means of written
communication. An affidavit of mailing of any such notice in accordance with the
foregoing provisions, executed by the secretary, assistant secretary or any
transfer agent of the corporation, shall be prima facie evidence of the giving
of the notice.

          Such notices shall specify:

               (a) the place, the date, and the hour of such meeting;

               (b) those matters which the Board, at the time of the mailing of
     the notice, intends to present for action by the shareholders at the
     meeting;

               (c) if directors are to be elected, the names of nominees
     intended at the time of the notice to be presented by management for
     election;

               (d) the general nature of a proposal, if any, to take action with
     respect to approval of (i) a contract or other transaction with an
     interested director, (ii) amendment of the Articles of Incorporation, (iii)
     a reorganization of the corporation as defined in Section 181 of the
     California General Corporation Law (the "CGCL"), (iv) voluntary dissolution
     of the corporation, or (v) a distribution in dissolution other than in
     accordance with the rights of outstanding preferred shares, if any; and

               (e) such other matters, if any, as may be expressly required by
     statute.

          SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders for
the purpose of taking any action permitted by the shareholders under the CGCL
and the Articles of Incorporation of this corporation, may be called at any time
by the chairman of the Board or the chief executive officer (if there shall be
such an officer or officers) or the president, or by any two directors, or by
holders of shares entitled to cast not less than ten percent (10%) of the votes
at the meeting. Upon request in writing that a special meeting of shareholders
be called for any proper purpose, directed to the chairman of the Board,
president, vice president or secretary by any person (other than the Board)
entitled to call a special meeting of shareholders, the officer forthwith shall
cause notice to be given to shareholders entitled to vote that a meeting will be
held at a time requested by the person or persons calling the meeting, not less
than thirty-five (35) nor more than sixty (60) days after receipt of the
request. Except in special cases where other express provision is made by
statute, notice of such special meetings shall be given in the same manner as
for the annual meeting of shareholders. In addition to the matters required by
items (a) and, if applicable, (c) of the preceding Section, notice of any
special meeting shall specify the general nature of the business to be
transacted, and no other business may be transacted at such meeting.

          SECTION 4. QUORUM. The presence in person or by proxy of the persons
entitled to vote a majority of the shares at any meeting shall constitute a
quorum for the transaction of business at that meeting. The shareholders present
at a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the


                                       2



withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.

          SECTION 5. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders'
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to time by the vote of a majority of the shares, the holders of which
are either present in person or by proxy thereat, but in the absence of a quorum
no other business may be transacted at such meeting, except as provided in
Section 4 above. When any shareholders' meeting, either annual or special, is
adjourned for forty-five days or more, or if after adjournment a new record date
is fixed for the adjourned meeting, notice of the adjourned meeting shall be
given as in the case of an original meeting. Except as provided above, it shall
not be necessary to give any notice of the time and place of the adjourned
meeting or of the business to be transacted thereat, other than by announcement
of the time and place of the adjourned meeting at the meeting at which the
adjournment is taken.

          SECTION 6. VOTING. Unless a record date for voting purposes be fixed
as provided in Section 1 of Article V of these Bylaws, then, subject to the
provisions of Sections 702 and 704, inclusive, of the CGCL (relating to voting
of shares held by a fiduciary, in the name of a corporation, or in joint
ownership) only persons in whose names shares entitled to vote stand on the
stock records of the corporation at the close of business on the business day
next preceding the day on which notice of the meeting is given or if such notice
is waived, at the close of business on the business day next preceding the day
on which the meeting of shareholders is held, shall be entitled to vote at such
meeting, and such day shall be the record date for such meeting. Such vote may
be viva voce or by ballot; provided, however, that all elections for directors
must be by ballot upon demand made by a shareholder at any election and before
the voting begins. If a quorum is present, except with respect to election of
directors, the affirmative vote of the majority of the shares represented at the
meeting and voting on the matter shall be the act of the shareholders, unless
the vote of a greater number or voting by classes is required by the CGCL or the
Articles of Incorporation. Subject to the requirements of the next sentence and
any provision contained in the Articles of Incorporation, every shareholder
entitled to vote at any election for directors shall have the right to cumulate
its votes and give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which its shares
are entitled, or to distribute its votes on the same principle among as many
candidates as such shareholder shall think fit. No shareholder shall be entitled
to cumulate votes unless the name of the candidate or candidates for whom such
votes would be cast has been placed in nomination prior to the meeting, and any
shareholder has given notice at the meeting prior to the voting of such
shareholder's intention to cumulate its votes. The candidates receiving the
highest number of votes of shares entitled to be voted for them, up to the
number of directors to be elected, shall be elected.

          SECTION 7. VALIDATION OF DEFECTIVE CALLED OR NOTICED MEETINGS. The
transactions of any meeting of shareholders, either annual or special, however
called and noticed, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present either in person or by proxy,
and if, whether before or after the meeting, each of the persons entitled to
vote, not present in person or by proxy, or who, though present, has, at the
beginning of the meeting, properly objected to the transaction of any business
thereat because the meeting was not lawfully called or convened, or to
particular matters of business legally required


                                       3



to be included in the notice, but not so included, signs a written waiver of
notice, or a consent to the holding of such meeting, or an approval of the
minutes thereof. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.

          SECTION 8. ACTION WITHOUT A MEETING. Subject to any provision
contained in the Articles of Incorporation, directors may be elected without a
meeting by consent in writing, setting forth the action so taken, signed by all
of the persons who would be entitled to vote for the election of directors,
provided that, without notice except as hereinafter set forth, a director may be
elected at any time to fill a vacancy on the Board of Directors not filled by
the directors by the written consent of persons holding a majority of the
outstanding shares entitled to vote for the election of directors.

          Subject to any provision contained in the Articles of Incorporation,
any other action which, under any provision of the CGCL, may be taken at a
meeting of the shareholders, may be taken without a meeting, and without notice
except as hereinafter set forth, if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding shares having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted. Unless the consents of all shareholders entitled to vote have
been solicited in writing,

          (a) Notice of any proposed shareholder approval of a (i) contract or
          other transaction with an interested director, (ii) indemnification of
          an agent of the corporation as authorized by Section 15 of Article III
          of these Bylaws, (iii) a reorganization of the corporation as defined
          in Section 181 of the CGCL, or (iv) a distribution in dissolution
          other than in accordance with the rights of outstanding preferred
          shares, if any, without a meeting shall be given a least ten (10) days
          before consummation of the action authorized by such approval; and

          (b) Prompt notice shall be given of the taking of any other corporate
          action approved by the shareholders without a meeting by less than
          unanimous written consent to those shareholders entitled to vote who
          have not consented in writing. Such notices shall be given in the
          manner and shall be deemed to have been given as provided in Section 2
          of Article II of these Bylaws.

          Unless, as provided in Section 1 of Article V of these Bylaws, the
Board of Directors has fixed a record date for the determination of shareholders
entitled to notice of and to give such written consent, the record date for such
determination shall be the day on which the first written consent is given. All
such written consents shall be filed with the secretary of the corporation.

          Any shareholder giving a written consent, or the shareholder's
proxyholders, or a transferee of the shares or a personal representative of the
shareholder or their respective proxyholders, may revoke the consent by a
writing received by the corporation prior to the time that written consents of
the number of shares required to authorize the proposed action have been filed
with the secretary of the corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the secretary of the corporation.


                                       4



          SECTION 9. PROXIES. Every person entitled to vote or execute consents
shall have the right to do so whether in person or by one or more agents
authorized by a written proxy executed by such person or such person's duly
authorized agent and filed with the secretary of the corporation. Any proxy duly
executed is not revoked and continues in full force and effect until (i) an
instrument revoking it or a duly executed proxy bearing a later date is filed
with the secretary of the corporation prior to the vote pursuant thereto, (ii)
the person executing the proxy attends the meeting and votes in person, or (iii)
written notice of the death or incapacity of the maker of the proxy is received
by the corporation before the vote pursuant thereto is counted; provided that no
proxy shall be valid after the expiration of eleven (11) months from the date of
its execution, unless the person executing it specifies therein the length of
time for which such proxy is to continue in force.

          SECTION 10. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Board of Directors may appoint any person other than nominees
for office as inspectors of election to act at such meeting or any adjournment
thereof. If inspectors of election be not so appointed, the chairman of any such
meeting may, and on the request of any shareholder or its proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one or three. If appointed at a meeting on the request of one or more
shareholders or proxies, the majority of shares represented in person or by
proxy shall determine whether one or three inspectors are to be appointed. In
case any person appointed as inspector fails to appear or fails or refuses to
act, the vacancy may, and on the request of any shareholder or a shareholder's
proxy shall, be filled by appointment by the Board of Directors in advance of
the meeting, or at the meeting by the chairman of the meeting.

          The duties of such inspectors shall be as prescribed by Section 707 of
the CGCL and shall include determining the number of shares outstanding and the
voting power of each, the shares represented at the meeting, the existence of a
quorum, the authenticity, validity and effect of proxies; receiving votes,
ballots or consents; hearing and determining all challenges and questions in any
way arising in connection with the right to vote; counting and tabulating all
votes or consents; determining when the polls close; determining the result; and
such acts as may be proper to conduct the election or vote with fairness to all
shareholders. In the determination of the validity and effect of proxies, the
dates contained on the forms of proxy shall presumptively determine the order of
execution of the proxies, regardless of the postmark dates on the envelopes in
which they are mailed.

          The inspectors of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is practical.
If there be three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all. Any report or certificate made by the inspectors of election is prima facie
evidence of the facts stated therein.

                                   ARTICLE III

                                    DIRECTORS

          SECTION 1. POWERS. Subject to limitations of the Articles of
Incorporation and the CGCL as to action to be authorized or approved by the
shareholders, and subject to the duties of


                                       5



directors as prescribed by these Bylaws, all corporate powers shall be exercised
by or under the authority of, and the business and affairs of the corporation
shall be controlled by, the Board of Directors. Without prejudice to such
general powers, but subject to the same limitations, it is hereby expressly
declared that the directors shall have the following powers, to wit:

          First - To select and remove all the officers, agents and employees of
the corporation, prescribe such powers and duties for them as may not be
inconsistent with law, with the Articles of Incorporation or these Bylaws, fix
their compensation and require from them security for faithful service.

          Second - To conduct, manage and control the affairs and business of
the corporation, and to make such rules and regulations therefor not
inconsistent with law, or with the Articles of Incorporation or these Bylaws, as
they may deem best.

          Third - To adopt, make and use a corporate seal, and to prescribe the
forms of certificates of stock, and to alter the form of such seal and of such
certificates from time to time, as in their judgment they may deem best,
provided such seal and such certificates shall at all times comply with the
provisions of law.

          Fourth - To authorize the issue of shares of stock of the corporation
from time to time, upon such terms as may be lawful.

          Fifth - To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations or other evidences of debt and securities therefor.

          Sixth - By resolution adopted by a majority of the authorized number
of directors, to designate an executive and other committees, each consisting of
two or more directors, to serve at the pleasure of the Board, and to prescribe
the manner in which proceedings of such committees shall be conducted. Unless
the Board of Directors shall otherwise prescribe the manner of proceedings of
any such committee, meetings of such committee may be regularly scheduled in
advance and may be called at any time by any two members thereof; otherwise, the
provisions of these Bylaws with respect to notice and conduct of meetings of the
Board shall govern. Any such committee, to the extent provided in a resolution
of the Board, shall have all of the authority of the Board, except with respect
to:

          (i) the approval of any action for which the CGCL or the Articles of
          Incorporation also require shareholder approval;

          (ii) the filling of vacancies on the Board or in any committee;

          (iii) the fixing of compensation of the directors for serving on the
          Board or on any committee;

          (iv) the adoption, amendment or repeal of bylaws;


                                       6



          (v) the amendment or repeal of any resolution of the Board which by
          its express terms is not so amendable or repealable;

          (vi) any distribution to the shareholders, except at a rate or in a
          periodic amount or within a price range determined by the Board;

          (vii) the appointment of other committees of the Board or the members
          thereof.

          SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized
number of directors shall be not less than five or more than nine until changed
by Amendment of the Articles of Incorporation or by a bylaw duly adopted by
approval of the outstanding shares. The exact number of directors shall be
fixed, within the limits specified, by amendment of the next sentence duly
adopted either by the Board of Directors or the shareholders. The exact number
of directors shall be seven until changed as provided in this Section 2.

          SECTION 3. ELECTION AND TERM OF OFFICE. This section shall become
effective only when this corporation becomes a listed corporation within the
meaning of Section 301.5 of the CGCL.

          In the event that the authorized number of directors shall be fixed
with at least six (6) but less than nine (9) directors, the Board of Directors
shall be divided into two classes, designated Class I and Class II, effective as
of the first annual meeting following the effective date of this Bylaw (the
"Initial Annual Meeting"). Each class shall consist of one-half of the directors
or as close an approximation as possible. The initial term of office of the
directors of Class I shall expire at the annual meeting to be held during the
fiscal year following the Initial Annual Meeting, and the initial term of office
of the directors of Class II shall expire at the annual meeting to be held
during the second fiscal year following the Initial Annual Meeting. At each
annual meeting, commencing with the first annual meeting following the Initial
Annual Meeting, each of the successors to the directors of the class whose term
shall have expired at such annual meeting shall be elected for a term running
until the second annual meeting next succeeding his or her election and until
his or her successor shall have been duly elected and qualified.

          In the event that the authorized number of directors shall be fixed at
nine (9) or more, the Board of Directors shall be divided into three classes,
designated Class I, Class II and Class III, effective as of the first annual
meeting coinciding with or following the division into three classes (the
"Effective Date"). Each class shall consist of one-third of the directors or as
close an approximation as possible. The initial term of office of the directors
of Class I shall expire at the annual meeting to be held during the first fiscal
year following the Effective Date, the initial term of office of the directors
of Class II shall expire at the annual meeting to be held during second fiscal
year following the Effective Date and the initial term of office of the
directors of Class III shall expire at the annual meeting to be held during the
third fiscal year following the Effective Date. At each annual meeting,
commencing with the first annual meeting following the Effective Date, each of
the successors to the directors of the class whose term shall have expired at
such annual meeting shall be elected for a term running until the third annual
meeting next succeeding his or her election and until his or her successor shall
have been duly elected qualified.


                                       7



          Notwithstanding the rule that the classes shall be as nearly equal in
number of directors as possible, in the event of any change in the authorized
number of directors, each director then continuing to serve as such shall
nevertheless continue as a director of the class of which he or she is a member
until the expiration of his or her current term, or his or her prior death,
resignation or removal.

          At each annual election, the directors chosen to succeed those whose
terms then expire shall be of the same class as the directors they succeed,
unless, by reason of any intervening changes in the authorized number of
directors, the Board of Directors shall designate one or more directorships
whose term then expires as directorships of another class in order more nearly
to achieve equality of number of directors among the classes.

          This section only may be amended or repealed by the approval of the
Board of Directors and the outstanding shares (as defined in Section 152 of the
CGCL) voting as a single class, notwithstanding Section 903 of the CGCL.

          SECTION 4. VACANCIES. A vacancy in the Board of Directors shall be
deemed to exist in the case of the death, resignation or removal of any
director, if a director has been declared of unsound mind by order of court or
convicted of a felony, if the authorized number of directors be increased, or if
the shareholders fail, at any annual or special meeting of shareholders at which
any director or directors are elected, to elect the full authorized number of
directors to be voted for at that meeting. No reduction of the authorized number
of directors shall have the effect of removing any director prior to the
expiration of his or her term of office.

          Subject to any provision contained in the Articles of Incorporation,
vacancies in the Board of Directors, except for a vacancy created by the removal
of a director, may be filled by a majority of the remaining directors, though
less than a quorum, or by a sole remaining director; and each director so
elected shall hold office until his or her successor is elected at an annual or
special meeting of the shareholders. Subject to any provision contained in the
Articles of Incorporation, a vacancy in the Board of Directors created by the
removal of a director may only be filled by the vote of a majority of the shares
entitled to vote represented at a duly held meeting at which a quorum is
present, or, subject to any provision contained in the Articles of
Incorporation, by the written consent of the holders of a majority of the
outstanding shares.

          Subject to any provision contained in the Articles of Incorporation,
the shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors. Any such election by written
consent shall require the consent of holders of a majority of the outstanding
shares entitled to vote.

          Any director may resign effective upon giving written notice to the
chairman of the Board, the president, the secretary of the Board or the Board of
Directors of the corporation, unless the notice specifies a later time for the
effectiveness of such resignation. If the Board of Directors accepts the
resignation of a director tendered to take effect at a future time, the Board
or, subject to any provision contained in the Articles of Incorporation, the
shareholders shall have the power to elect a successor to take office when the
resignation is to become effective.


                                       8



          SECTION 5. PLACE OF MEETING. Regular meetings of the Board of
Directors shall be held at any place within or without the State of California
which has been designated from time to time by resolution of the Board or by
written consent of all members of the Board. In the absence of such designation,
regular meetings shall be held at the principal executive office of the
corporation. Special meetings of the Board may be held either at a place so
designated or at the principal executive office of the corporation.

          SECTION 6. ORGANIZATION MEETING. Immediately following each annual
meeting of shareholders, the Board of Directors shall hold a regular meeting at
the place of said annual meeting or at such other place as shall be fixed by the
Board, for the purpose of organization of the newly elected Board, election of
officers, and the transaction of other business. Call and notice of such
meetings are hereby dispensed with.

          SECTION 7. OTHER REGULAR MEETINGS. Other regular meetings of the Board
of Directors shall be held without call as provided in a resolution adopted by
the Board from time to time; provided, however, should said day fall upon a
legal holiday, then said meeting shall be held at the same time on the next day
thereafter ensuing which is a full business day. Notice of all such regular
meetings of the Board of Directors is hereby dispensed with.

          SECTION 8. SPECIAL MEETINGS. Special meetings of the Board of
Directors for any purpose or purposes may be called at any time by the chairman
of the Board or the chief executive officer (if there shall be such an officer
or officers), the president, any vice president or the secretary, or by any two
directors.

          Written notice of the time and place of special meetings shall be
delivered personally to each director or communicated to each director by
telephone, including a voice messaging system or other system or technology
designed to record and communicate messages, telegraph, facsimile, electronic
mail or other electronic means, or by mail, charges prepaid, addressed to him or
her at his or her address as it is shown upon the records of the corporation or,
if it is not so shown on such records or is not readily ascertainable, at the
place at which meetings of the directors are regularly held. In case such notice
is mailed or telegraphed, it shall be deposited in the United States mail or
delivered to the telegraph company in the place in which the principal executive
office of the corporation is located at least forty-eight (48) hours prior to
the time of the holding of the meeting. In case such notice is delivered,
personally or by telephone, facsimile or other electronic means, as above
provided, it shall be so delivered at least twenty-four (24) hours prior to the
time of the holding of the meeting. Such mailing or delivery, as above provided,
shall be due, legal and personal notice to each such director.

          SECTION 9. ACTION WITHOUT A MEETING. Any action by the Board of
Directors may be taken without a meeting if all members of the Board shall
individually or collectively consent in writing to such action. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board and shall have the same force and effect as a unanimous vote of such
directors at a meeting duly called and held.

          SECTION 10. ACTION AT A MEETING: QUORUM AND REQUIRED VOTE. Presence of
a majority of the authorized number of directors at a meeting of the Board of
Directors constitutes a quorum for the transaction of business, except as
hereinafter provided. Members of the Board


                                       9



may participate in a meeting through use of conference telephone, electronic
video screen communication, or similar communications equipment, so long as all
members participating in such meeting can hear one another. Participation in a
meeting through the use of a conference telephone constitutes presence in person
at such meeting. Participation in a meeting through the use of electronic video
screen communication or other communications equipment, other than conference
telephone, constitutes presence in person at that meeting if all of the
following apply:

          (a) Each member participating in the meeting can communicate with all
          of the other members concurrently.

          (b) Each member is provided the means of participating in all matters
          before the board, including, without limitation, the capacity to
          propose, or to interpose an objection to, a specific action to be
          taken by the corporation.

          (c) The corporation adopts and implements some means of verifying both
          of the following:

          (i)  A person participating in the meeting is a director or other
               person entitled to participate in the board meeting.

          (ii) All actions of, or votes by, the board are taken or cast only by
               the directors and not by persons who are not directors.

          Subject to the provisions of the CGCL, every act or decision done or
made by a majority of the directors at a meeting duly held at which a quorum is
present shall be regarded as the act of the Board of Directors, unless a greater
number, or the same number after disqualifying one or more directors from
voting, is required by law, by the Articles of Incorporation, or by these
Bylaws. A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, provided that any
action taken is approved by at least a majority of the required quorum for such
meeting.

          SECTION 11. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The
transactions of any meeting of the Board of Directors, however called or noticed
or wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum is present and if, either before or after
the meeting, each of the directors not present or who, though present, has,
prior to the meeting or at its commencement, protested the lack of proper
notice, signs a written waiver of notice or a consent to holding such meeting or
an approval of the minutes thereof. All such waivers, consents or approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.

          SECTION 12. ADJOURNMENT. A quorum of the directors may adjourn any
directors' meeting to meet again at a stated day and hour; provided, however,
that in the absence of a quorum a majority of the directors present at any
directors' meeting, either regular or special, may adjourn from time to time
until the time fixed for the next regular meeting of the Board.

          SECTION 13. NOTICE OF ADJOURNMENT. If the meeting is adjourned for
more than twenty-four (24) hours, notice of any adjournment to another time or
place shall be given prior to


                                       10



the time of the adjourned meeting to the directors who were not present at the
time of adjournment. Otherwise, notice of the time and place of holding an
adjourned meeting need not be given to absent directors if the time and place be
fixed at the meeting adjourned.

          SECTION 14. FEES AND COMPENSATION. Directors and members of committees
may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by resolution of the
Board of Directors.

          SECTION 15. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
OTHER AGENTS.

               (a) Indemnification of Directors and Officers. Each person who
          was or is a party or is threatened to be made a party to or is
          involved in any threatened, pending or completed action, suit or
          proceeding, formal or informal, whether brought in the name of the
          corporation or otherwise and whether of a civil, criminal,
          administrative or investigative nature (hereinafter a "proceeding"),
          by reason of the fact that he or she, or a person of whom he or she is
          the legal representative, is or was a director or officer of the
          corporation or is or was serving at the request of the corporation as
          a director, officer, employee or agent of another corporation or of a
          partnership, joint venture, trust or other enterprise, including
          service with respect to employee benefit plans, whether the basis of
          such proceeding is an alleged action or inaction in an official
          capacity or in any other capacity while serving as a director or
          officer, shall, subject to the terms of any agreement between the
          corporation and such person, be indemnified and held harmless by the
          corporation to the fullest extent permissible under California law and
          the corporation's Articles of Incorporation, against all costs,
          charges, expenses, liabilities and losses (including attorneys' fees,
          judgments, fines, ERISA excise taxes or penalties and amounts paid or
          to be paid in settlement) reasonably incurred or suffered by such
          person in connection therewith, and such indemnification shall
          continue as to a person who has ceased to be a director or officer and
          shall inure to the benefit of his or her heirs, executors and
          administrators; provided, however, that (a) the corporation shall
          indemnify any such person seeking indemnification in connection with a
          proceeding (or part thereof) initiated by such person only if such
          proceeding (or part thereof) was authorized by the Board of the
          corporation, (b) the corporation shall indemnify any such person
          seeking indemnification in connection with a proceeding (or part
          thereof) other than a proceeding by or in the name of the corporation
          to procure a judgment in its favor only if any settlement of such a
          proceeding is approved in writing by the corporation, (c) no such
          person shall be indemnified (i) except to the extent that the
          aggregate of losses to be indemnified exceeds the amount of such
          losses for which the director or officer is paid pursuant to any
          directors' and officers' liability insurance policy maintained by the
          corporation; (ii) on account of any suit in which judgment is rendered
          against such person for an accounting of profits made from the
          purchase or sale by such person of securities of the corporation
          pursuant to the provisions of Section 16(b) of the Securities Exchange
          Act of 1934 and amendments thereto or similar provisions of any
          federal state or local statutory law; (iii) if a court of competent
          jurisdiction finally determines that


                                       11



          any indemnification hereunder is unlawful; and (iv) as to
          circumstances in which indemnity is expressly prohibited by the CGCL,
          and (d) no such person shall be indemnified with regard to any action
          brought by or in the right of the corporation for breach of duty to
          the corporation and its shareholders (i) for acts or omissions
          involving intentional misconduct or knowing and culpable violation of
          law; (ii) for acts or omissions that the director or officer believes
          to be contrary to the best interests of the corporation or its
          shareholders or that involve the absence of good faith on the part of
          the director or officer; (iii) for any transaction from which the
          director or officer derived an improper personal benefit; (iv) for
          acts or omissions that show a reckless disregard for the director's or
          officer's duty to the corporation or its shareholders in circumstances
          in which the director or officer was aware, or should have been aware,
          in the ordinary course of performing his or her duties, of a risk of
          serious injury to the corporation or its shareholders; (v) for acts or
          omissions that constitute an unexcused pattern of inattention that
          amounts to an abdication of the director's or officer's duties to the
          corporation or its shareholders; and (vi) for costs, charges,
          expenses, liabilities and losses arising under Section 310 or 316 of
          the CGCL. The right to indemnification conferred in this Section 15
          shall be a contract right and shall include the right to be paid by
          the corporation expenses incurred in defending any proceeding in
          advance of its final disposition; provided, however, that if the CGCL
          permits the payment of such expenses incurred by a director or officer
          in his or her capacity as a director or officer (and not in any other
          capacity in which service was or is rendered by such person while a
          director or officer, including, without limitation, service to an
          employee benefit plan) in advance of the final disposition of a
          proceeding, such advances shall be made only upon delivery to the
          corporation of an undertaking, by or on behalf of such director or
          officer, to repay all amounts to the corporation if it shall be
          ultimately determined that such person is not entitled to be
          indemnified.

               (b) Indemnification of Employees and Agents. A person who was or
          is a party or is threatened to be made a party to or is involved in
          any proceeding by reason of the fact that he or she is or was an
          employee or agent of the corporation or is or was serving at the
          request of the corporation as an employee or agent of another
          enterprise, including service with respect to employee benefit plans,
          whether the basis of such action is an alleged action or inaction in
          an official capacity or in any other capacity while serving as an
          employee or agent, may, subject to the terms of any agreement between
          the corporation and such person, be indemnified and held harmless by
          the corporation to the fullest extent permitted by California law and
          the corporation's Articles of Incorporation, against all costs,
          charges, expenses, liabilities and losses (including attorneys' fees,
          judgments, fines, ERISA excise taxes or penalties and amounts paid or
          to be paid in settlement) reasonably incurred or suffered by such
          person in connection therewith. The immediately preceding sentence is
          not intended to be and shall not be considered to confer a contract
          right on any employee or agent (other than directors and officers) of
          the corporation.


                                       12



               (c) Right of Directors and Officers to Bring Suit. If a claim
          under Paragraph (a) of this Section 15 is not paid in full by the
          corporation within 30 days after a written claim has been received by
          the corporation, the claimant may at any time thereafter bring suit
          against the corporation to recover the unpaid amount of the claim and,
          if successful in whole or in part, the claimant shall also be entitled
          to be paid the expense of prosecuting such claim. Neither the failure
          of the corporation (including its Board of Directors, independent
          legal counsel, or its shareholders) to have made a determination prior
          to the commencement of such action that indemnification of the
          claimant is permissible in the circumstances because he or she has met
          the applicable standard of conduct, if any, nor an actual
          determination by the corporation (including its Board of Directors,
          independent legal counsel, or its shareholders) that the claimant has
          not met the applicable standard of conduct, shall be a defense to the
          action or create a presumption for the purpose of an action that the
          claimant has not met the applicable standard of conduct.

               (d) Successful Defense. Notwithstanding any other provision of
          this Section 15, to the extent that a director or officer has been
          successful on the merits or otherwise (including the dismissal of an
          action without prejudice or the settlement of a proceeding or action
          without admission of liability) in defense of any proceeding referred
          to in paragraph (a) of this Section 15 or in defense of any claim,
          issue or matter therein, he or she shall be indemnified against
          expenses (including attorneys' fees) actually and reasonably incurred
          in connection therewith.

               (e) Non-Exclusivity of Rights. The right to indemnification
          provided by this Section 15 shall not be exclusive of any other right
          which any person may have or hereafter acquire under any statute,
          bylaw, agreement, vote of shareholders or disinterested directors or
          otherwise.

               (f) Insurance. The corporation may maintain insurance, at its
          expense, to protect itself and any director, officer, employee or
          agent of the corporation or another corporation, partnership, joint
          venture, trust or other enterprise against any expense, liability or
          loss, whether or not the corporation would have the power to indemnify
          such person against such expense, liability or loss under the CGCL.

               (g) Expenses as a Witness. To the extent that any director or
          officer or former director or former officer of the corporation is by
          reason of such position or former position, or a position with another
          entity at the request of the corporation, a witness in any action,
          suit or proceeding, he or she shall be indemnified against all costs
          and expenses actually and reasonably incurred by him or her on his or
          her behalf in connection therewith.

               (h) Indemnity Agreements. The corporation may enter into
          agreements with any director, officer, employee or agent of the
          corporation


                                       13



          providing for indemnification to the fullest extent permissible under
          the CGCL and the corporation's Articles of Incorporation.

               (i) Separability. Each and every paragraph, sentence, term and
          provision of this Section 15 is separate and distinct so that if any
          paragraph, sentence, term or provision hereof shall be held to be
          invalid or unenforceable for any reason, such invalidity or
          unenforceability shall not affect the validity or enforceability of
          any other paragraph, sentence, term or provision hereof. To the extent
          required, any paragraph, sentence, term or provision of this Section
          15 may be modified by a court of competent jurisdiction to preserve
          its validity and to provide the claimant with, subject to the
          limitations set forth in this Section 15 and any agreement between the
          corporation and claimant, the broadest possible indemnification
          permitted under applicable law.

               (j) Effect of Repeal or Modification. Any repeal or modification
          of this Section 15 shall not adversely affect any right of
          indemnification of a director or officer existing at the time of such
          repeal or modification with respect to any action or omission
          occurring prior to such repeal or modification.

                                   ARTICLE IV

                                    OFFICERS

          SECTION 1. OFFICERS. The officers of the corporation shall be a
president, a secretary and a chief financial officer. The corporation may also
have, at the discretion of the Board of Directors, a chairman of the Board, a
chief executive officer, one or more vice presidents, one or more assistant
secretaries, one or more assistant treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 3 of this Article. One
person may hold two or more offices, except that the offices of president and
secretary shall not be held by the same person.

          SECTION 2. ELECTION. The officers of the corporation, except such
officers as may be appointed in accordance with the provisions of Section 3 or
Section 5 of this Article, shall be chosen annually by the Board of Directors,
and each shall hold office until he or she shall resign or shall be removed or
otherwise disqualified to serve, or his or her successor shall be elected and
qualified.

          SECTION 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may
appoint, and may empower the president to appoint, such other officers as the
business of the corporation may require, each of whom shall hold office, for
such period, have such authority and perform such duties as are provided in
these Bylaws or as the Board of Directors may from time to time determine.

          SECTION 4. REMOVAL AND RESIGNATION. Any officer may be removed, either
with or without cause, by the Board of Directors, at any regular or special
meeting thereof, or, except in case of an officer chosen by the Board of
Directors, by any officer upon whom such power of


                                       14



removal may be conferred by the Board of Directors (subject, in each case, to
the rights, if any, of an officer under any contract of employment).

          Any officer may resign at any time by giving written notice to the
Board of Directors or the president, or to the secretary of the corporation,
without prejudice, however, to the rights, if any, of the corporation under any
contract to which the officer is a party. Any such resignation shall take effect
at the date of receipt of such notice or at any time specified therein. Unless
otherwise specified therein, acceptance of such resignation shall not be
necessary to make it effective.

          SECTION 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to such office.

          SECTION 6. CHAIRMAN OF THE BOARD. The chairman of the Board, if there
shall be such an officer, shall, if present, preside at all meetings of the
Board of Directors and exercise and perform such other powers and duties as may
be from time to time assigned by the Board of Directors or prescribed by these
Bylaws.

          SECTION 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board of Directors to the chairman of the Board or the chief
executive officer, if there shall be such an officer or officers, the president
shall be the chief executive officer of the corporation and shall, subject to
the control of the Board of Directors, have general supervision, direction and
control of the business and affairs of the corporation. The president shall
preside at all meetings of the shareholders and, in the absence of the chairman
of the Board, or if there be none, at all meetings of the Board of Directors.
The president shall be ex officio a member of all the standing committees,
including the executive committee, if any, and shall have the general powers and
duties of management usually vested in the office of president of a corporation,
and shall have such other powers and duties as may be prescribed by these Bylaws
or the Board of Directors.

          SECTION 8. VICE PRESIDENT. In the absence or disability of the
president, the vice presidents in order of their rank as fixed by the Board of
Directors or, if not ranked, the vice president designated by the Board of
Directors, shall perform all the duties of the president, and when so acting
shall have such other powers and perform such other duties as from time to time
may be prescribed for them respectively by the Board of Directors or these
Bylaws.

          SECTION 9. SECRETARY. The secretary shall record or cause to be
recorded, and shall keep or cause to be kept, at the principal executive office
and such other place as the Board of Directors may order, a book of minutes of
actions taken at all meetings of directors and shareholders, with the time and
place of holding, whether regular or special, and, if special, how authorized,
the notice given thereof, the names of those present at directors' meetings, the
number of shares present or represented at shareholders' meetings, and the
proceedings thereof.

          The secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent, a share
register, or a duplicate share register, showing the names of the shareholders
and their addresses, the number and classes of shares held


                                       15



by each, the number and date of certificates issued for the same, and the number
and date of cancellation of every certificate surrendered for cancellation.

          The secretary shall give, or cause to be given, notice of all meetings
of shareholders and of the Board of Directors required by these Bylaws or by law
to be given, and shall keep the seal of the corporation in safe custody, and
shall have such other powers and perform such other duties as may be prescribed
by the Board of Directors or these Bylaws.

          SECTION 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, surplus and shares. Any surplus, including earned surplus,
paid-in surplus, and surplus arising from a reduction of stated capital, shall
be classified according to source and shown in a separate account. The books of
account shall at all reasonable times be open to inspection by any director.

          The chief financial officer shall deposit all monies and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. The chief financial
officer shall disburse the funds of the corporation as may be ordered by the
Board of Directors, shall render to the president and directors, whenever they
request it, an account of all his or her transactions as chief financial officer
and of the financial condition of the corporation, and shall have such other
powers and perform such other duties as may be prescribed by the Board of
Directors or these Bylaws.

                                    ARTICLE V

                                  MISCELLANEOUS

          SECTION 1. RECORD DATE. The Board of Directors may fix a time in the
future as a record date for the determination of the shareholders entitled to
notice of and to vote at any meeting of shareholders or, subject to any
provision of the Articles of Incorporation, entitled to give consent to
corporate action in writing without a meeting, to receive any report, to receive
any dividend or distribution, or any allotment of rights, or to exercise rights
in respect to any change, conversion or exchange of shares. The record date so
fixed shall be not more than sixty (60) days nor less than ten (10) days prior
to the date of any meeting, nor more than sixty (60) days prior to any other
event for the purposes of which it is fixed. When a record date is so fixed,
only shareholders of record on that date are entitled to notice of and to vote
at any such meeting, to give consent without a meeting, to receive any report,
to receive a dividend, distribution or allotment of rights, or to exercise the
rights, as the case may be, notwithstanding any transfer of any shares on the
books of the corporation after the record date, except as otherwise may be
provided in the Articles of Incorporation or these Bylaws.

          SECTION 2. INSPECTION OF CORPORATE RECORDS. The accounting books and
records and minutes of proceedings of the shareholders and of the Board of
Directors and committees of the Board of this corporation and any subsidiary of
this corporation shall be open to inspection upon the written demand on the
corporation of any shareholder or the holder of a voting trust certificate at
any reasonable time during regular business hours, for a purpose


                                       16



reasonably related to such holder's interests as a shareholder or as the holder
of such voting trust certificate. Such inspection by a shareholder or holder of
a voting trust certificate may be made in person or by agent or attorney, and
the right of inspection includes the right to copy and make extracts.

          A shareholder or shareholders holding at least five percent (5%) in
the aggregate of the outstanding voting shares of the corporation or who hold at
least one percent (1%) of such voting shares and have filed a Schedule 14B with
the United States Securities and Exchange Commission relating to the election of
directors of the corporation shall have (in person, or by agent or attorney) the
right to inspect and copy the record of shareholders' names and addresses and
shareholdings during usual business hours upon five (5) business days' prior
written demand upon the corporation, and to obtain from the transfer agent for
the corporation, if there be one, upon written demand and upon the tender of its
usual charges, a list of the shareholders' names and addresses who are entitled
to vote for the election of directors, and their shareholdings, as of the most
recent record date for which it has been compiled or as of a date subsequent to
the date of demand specified by the shareholder therein. The list shall be made
available on or before the later of five (5) business days after receipt of the
demand or the date specified therein as of which the list is to be compiled.

          Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to inspect
the physical properties of the corporation. Such inspection by a director may be
made in person or by agent or attorney, and the right of inspection includes the
right to copy and make extracts.

          SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness, issued in the
name of or payable to this corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time, shall be determined
by resolution of the Board of Directors.

          SECTION 4. ANNUAL REPORT TO SHAREHOLDERS. The annual report to
shareholders referred to in Section 1501 of the CGCL is expressly waived, but
nothing herein shall be interpreted as prohibiting the Board from issuing annual
or other periodic reports to the shareholders.

          A shareholder of shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation may make a
written request to the corporation for an income statement of the corporation
for the three-month, six-month or nine-month period of the current fiscal year
ended more than thirty (30) days prior to the date of the request and a balance
sheet of the corporation as of the end of any such period, and, in addition, if
no annual report for the last fiscal year containing an income statement and
balance sheet for and as of the end of such fiscal year has been sent to
shareholders, such an income statement and balance sheet for the prior fiscal
year. The corporation shall use its best efforts to deliver the statement or
statements requested to the person making such request within thirty days after
the receipt thereof. A copy of any such statements shall be kept on file in the
principal executive office of the corporation for twelve (12) months, and they
shall be exhibited at all reasonable times to any shareholder demanding an
examination of them or a copy thereof shall be mailed to such shareholder.


                                       17



          The corporation shall, upon the written request of any shareholder,
mail to the shareholder a copy of the last annual, semi-annual or quarterly
income statement which it has prepared, together with a balance sheet as of the
end of the same period. The financial statements referred to in this Section
shall be accompanied by the report thereon, if there be any, of any independent
accountants engaged by the corporation in respect thereof or, if there be no
such report, the certificate of an authorized officer of the corporation that
such financial statements were prepared without audit from the books and records
of the corporation.

          SECTION 5. CERTIFICATES FOR SHARES. Every holder of shares in the
corporation shall be entitled to have a certificate signed in the name of the
corporation by the chairman or vice chairman of the Board or the president or
any vice president and by the chief financial officer or an assistant treasurer
or the secretary or any assistant secretary, certifying the number of shares and
the class or series of shares owned by the shareholder. Any of the signatures on
the certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be an officer, transfer agent or registrar
before such certificate is issued, it may nevertheless be issued by the
corporation with the same effect as if such person were an officer, transfer
agent or registrar at the date of issue. Any such certificate shall also contain
such legend or other statement as may be required by Section 418 of the CGCL,
the Corporate Securities Law of 1968, the federal securities laws, these Bylaws,
and any agreement between the corporation and the issuee thereof.

          Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the Board of Directors or these Bylaws may
provide; provided, however, that any such certificate so issued prior to full
payment shall state on the face thereof the amount remaining unpaid and the
terms of payment thereof.

          No new certificate for shares shall be issued in lieu of an old
certificate unless the latter is surrendered and cancelled at the same time;
provided, however, that a new certificate will be issued without surrender and
cancellation of the old certificate if (1) the old certificate is lost,
apparently destroyed or wrongfully taken; (2) the request for issuance of a new
certificate is made within a reasonable time after the owner of the old
certificate has notice of its loss, destruction or theft; (3) the request for
issuance of a new certificate is made prior to the receipt of notice by the
corporation that the old certificate has been acquired by a bona fide purchaser;
(4) the owner of the old certificate files a sufficient indemnity bond with or
provides other adequate security to the corporation; and (5) the owner satisfies
any other reasonable requirements imposed by the corporation. In the event of
the issuance of a new certificate, the rights and liabilities of the
corporation, and of the holders of the old and new certificates, shall be
governed by the provisions of Sections 8104 and 8405 of the California Uniform
Commercial Code.

          SECTION 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
president or any vice president and the secretary or any assistant secretary of
this corporation are authorized to vote, represent and exercise on behalf of
this corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of this corporation. The
authority granted to said officers to vote or represent on behalf of this
corporation any and all shares held by this corporation in any other corporation
or corporations may be exercised either by such officers in person or by any
other person authorized so to do by proxy or power of attorney duly executed by
said officers.


                                       18



          SECTION 7. INSPECTION OF BYLAWS. The corporation shall keep in its
principal executive office in California, or, if its principal executive office
is not in California, then at its principal business office in California (or
otherwise provide upon written request of any shareholder) the original or a
copy of these Bylaws as amended or otherwise altered to date, certified by the
secretary of the corporation, which shall be open to inspection by the
shareholders at all reasonable times during office hours.

          SECTION 8. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise
requires, the general provisions, rules of construction and definitions
contained in the CGCL shall govern the construction of these Bylaws. Without
limiting the generality of the foregoing, the masculine gender includes the
feminine and neuter, the singular includes the plural and the plural number
includes the singular, and the term "person" includes a corporation or other
entity as well as a natural person.

                                   ARTICLE VI

                                   AMENDMENTS

          SECTION 1. POWER OF SHAREHOLDERS. New bylaws may be adopted or these
Bylaws may be amended or repealed by the affirmative vote of a majority of the
outstanding shares entitled to vote, or by the written consent of shareholders
entitled to vote such shares, except as otherwise provided by law or by the
Articles of Incorporation.

          SECTION 2. POWER OF DIRECTORS. Subject to the right of the
shareholders as provided in Section 1 of this Article VI to adopt, amend or
repeal bylaws, bylaws, other than a bylaw or amendment thereof increasing or
decreasing the range of the authorized number of directors or changing Article
III, Section 3, may, except as otherwise provided by law or the Articles of
Incorporation, be adopted, amended or repealed by the Board of Directors.


                                       19

EX-10.5

                                                                    EXHIBIT 10.5

 SUMMARY OF COMPENSATION FOR SALLY FRAME KASAKS, INTERIM CHIEF EXECUTIVE OFFICER

During her period of service as Interim Chief Executive Officer, Ms. Kasaks will
receive a base salary of $87,500 per month, or $1,050,000 on an annualized
basis, plus an annual bonus, if any, based on the Company's performance. Ms.
Kasaks will also be reimbursed for costs incurred in connection with her
relocation to Southern California in service of the Company, including rent and
utilities for a local residence, use of a car, and travel for her and her spouse
to and from their primary residence in Vermont. While in her role as Interim
Chief Executive Officer, Ms. Kasaks will not receive any equity-based awards,
but will be entitled to receive general employee benefits such as medical,
dental, vision, basic and supplemental life and disability insurance.

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Sally Frame Kasaks, 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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 4, 2006	/s/ SALLY FRAME KASAKS
	Sally Frame Kasaks
	Interim Chief Executive Officer

I, Gerald M. Chaney, 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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 4, 2006	/s/ GERALD M. CHANEY
	Gerald M. Chaney
	Senior Vice President, Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Pacific Sunwear of California, Inc. (the “Company”) on Form 10-Q for the quarter ended October 28, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Seth R. Johnson, the Chief Executive Officer of the Company, and Gerald M. Chaney, the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(i)	the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; 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: December 4, 2006	/s/ SALLY FRAME KASAKS
	Sally Frame Kasaks
	Interim Chief Executive Officer Pacific Sunwear of California, Inc. (Principal Executive Officer)
Dated: December 4, 2006	/s/ GERALD M. CHANEY
	Gerald M. Chaney
	Senior Vice President and Chief Financial Officer Pacific Sunwear of California, Inc. (Principal Financial Officer)

This certification accompanies this Quarterly 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.

A signed original of this written statement required by Section 906 has been provided to Pacific Sunwear of California, Inc. and will be retained by Pacific Sunwear of California, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.