10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 2004
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.

CALIFORNIA
(State of Incorporation) 95-3759463
(I.R.S. Employer Identification No.)

3450 East Miraloma Avenue
Anaheim, California
(Address of principal executive offices) 92806
(Zip code)

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

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

Yes x      No o

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

Yes x      No o

The number of shares outstanding of the registrant’s Common Stock, par value $.01 per share, at May 18, 2004, was 76,660,850.

PACIFIC SUNWEAR OF CALIFORNIA, INC.

FORM 10-Q

For the Quarter Ended May 1, 2004

Index

PART I.	FINANCIAL INFORMATION	Page
Item 1.	Condensed Consolidated Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of May 1, 2004 and January 31, 2004		3
	Condensed Consolidated Statements of Income and Comprehensive Income for the first quarters ended May 1, 2004 and May 3, 2003		4
	Condensed Consolidated Statements of Cash Flows for the first quarters ended May 1, 2004 and May 3, 2003		5
	Notes to Condensed Consolidated Financial Statements		6-11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12-22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22
Item 4.	Controls and Procedures		22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		23
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		23
Item 3.	Defaults Upon Senior Securities		23
Item 4.	Submission of Matters to a Vote of Security Holders		23
Item 5.	Other Information		23
Item 6.	Exhibits and Reports on Form 8-K		23
	SIGNATURE PAGE		24
EXHIBIT 31
EXHIBIT 32
EXHIBIT 99.1
EXHIBIT 99.2
EXHIBIT 99.3

2

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

ASSETS

	May 1,			January 31,
	2004			2004
CURRENT ASSETS:
Cash and cash equivalents	$	76,428		$	142,840
Short-term investments		50,104			33,035
Accounts receivable		6,676			5,194
Merchandise inventories		157,912			147,751
Prepaid expenses, includes $10,840 and $10,711 of prepaid rent, respectively		16,861			16,492
Deferred income taxes		8,224			8,224
Total current assets		316,205			353,536
PROPERTY AND EQUIPMENT:
Land		12,156			12,156
Buildings and building improvements		26,686			26,686
Leasehold improvements		121,701			119,210
Furniture, fixtures and equipment		182,537			173,222
Total property and equipment		343,080			331,274
Less accumulated depreciation and amortization		(134,091	)		(127,630	)
Net property and equipment		208,989			203,644
OTHER ASSETS:
Goodwill		6,492			6,492
Deferred compensation and other assets		12,801			11,589
Total other assets		19,293			18,081
Total assets	$	544,487		$	575,261
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	42,829		$	38,668
Accrued liabilities		51,187			54,966
Current portion of capital lease obligations		1,018			1,008
Current portion of long-term debt		892			878
Income taxes payable		5,326			15,024
Total current liabilities		101,252			110,544
LONG-TERM LIABILITIES:
Long-term debt, net of current portion		—			228
Long-term capital lease obligations, net of current portion		968			1,227
Deferred compensation		12,041			10,925
Deferred rent		12,281			12,046
Deferred income taxes		11,529			11,529
Total long-term liabilities		36,819			35,955
Commitments and contingencies (Note 8)
SHAREHOLDERS’ EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $.01 par value; 170,859,375 shares authorized; 76,652,973 and 78,351,302 shares issued and outstanding, respectively		767			784
Additional paid-in capital		101,574			138,877
Retained earnings		304,075			289,101
Total shareholders’ equity		406,416			428,762
Total liabilities and shareholders’ equity	$	544,487		$	575,261

See accompanying notes

3

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

	For the First Quarter Ended
	May 1, 2004		May 3, 2003
Net sales	$	245,131	$	198,331
Cost of goods sold, including buying, distribution and occupancy costs		161,559		134,476
Gross margin		83,572		63,855
Selling, general and administrative expenses		59,951		50,962
Operating income		23,621		12,893
Interest income, net		457		61
Income before income tax expense		24,078		12,954
Income tax expense		9,104		4,975
Net income	$	14,974	$	7,979
Comprehensive income	$	14,974	$	7,979
Net income per share, basic	$	0.19	$	0.11
Net income per share, diluted	$	0.19	$	0.10
Weighted average shares outstanding, basic		78,157,771		74,524,548
Weighted average shares outstanding, diluted		80,146,144		76,472,511

See accompanying notes

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

	For the First Quarter Ended
	May 1, 2004			May 3, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,974		$	7,979
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,475			8,783
Loss on disposal of equipment		1,528			326
Tax benefits related to exercise of stock options		2,488			1,276
Change in operating assets and liabilities:
Accounts receivable		(1,482	)		1,050
Merchandise inventories		(10,161	)		(11,450	)
Prepaid expenses		(369	)		(614	)
Deferred compensation and other assets		(96	)		666
Accounts payable		4,161			(2,017	)
Accrued liabilities		(2,129	)		(2,589	)
Income taxes payable and deferred income taxes		(9,698	)		(4,262	)
Deferred rent		235			358
Net cash provided by/(used in) operating activities		8,926			(494	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(16,348	)		(8,717	)
Increase in accrued capital expenditures		3,203			1,486
Purchases of short-term investments		(18,069	)		—
Maturities of short-term investments		1,000			—
Net cash used in investing activities		(30,214	)		(7,231	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock		(49,995	)		—
Proceeds from exercise of stock options		5,334			5,425
Principal payments under capital lease obligations		(249	)		(360	)
Principal payments under long-term debt obligations		(214	)		(202	)
Net cash (used in)/provided by financing activities		(45,124	)		4,863
NET DECREASE IN CASH AND CASH EQUIVALENTS:		(66,412	)		(2,862	)
CASH AND CASH EQUIVALENTS, beginning of period		142,840			36,438
CASH AND CASH EQUIVALENTS, end of period	$	76,428		$	33,576
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	38		$	78
Income taxes	$	16,314		$	7,961

Supplemental disclosures of non-cash transactions (in thousands): During the first quarter ended May 1, 2004, the Company recorded an increase to additional paid-in capital of $4,853 related to the issuance of restricted stock to satisfy certain deferred compensation liabilities (see Note 6).

See accompanying notes

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PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, all amounts in thousands unless otherwise indicated)

NOTE 1 – BASIS OF PRESENTATION

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

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. “Fiscal 2004” is the 52-week period ending January 29, 2005. “Fiscal 2003” was the 52-week period ended January 31, 2004. The first quarter of fiscal 2004 was the 13-week period ended May 1, 2004. The first quarter of fiscal 2003 was the 13-week period ended May 3, 2003.

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 necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported revenues and expenses during the reporting period. Actual results could differ from these estimates. The results of operations for the first quarter ended May 1, 2004 are not necessarily indicative of the results that may be expected for fiscal 2004. 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 31, 2004.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Information regarding the Company’s significant accounting policies is contained in Note 1, “Summary of Significant Accounting Policies and Nature of Business,” to the consolidated financial statements in the Company’s Form 10-K for the fiscal year ended January 31, 2004. 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.

Short-term Investments – Short-term investments are classified as held-to-maturity and consist of marketable corporate and U.S. agency debt instruments with original maturities of three months to one year and are carried at amortized cost, less other than temporary impairments in value. Cost is determined by specific identification. At May 1, 2004, the market value of the Company’s portfolio was $49.6 million, consisting of corporate debentures of $23.4 million, U.S. agency debentures of $17.8 million, corporate commercial paper of $4.4 million and U.S. Treasury notes of $4.0 million.

Stock Split — In August 2003, the Company effected a three-for-two stock split. All share and per share amounts have been restated to give effect to the stock split in prior periods.

Stock-Based Compensation – The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 (APB 25) and, accordingly, does not currently include compensation expense related to stock options in reported net income. The Company follows the disclosure provisions of SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS 148 requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financials statements. The Company is required to follow the prescribed disclosure format and has provided the additional disclosures required by SFAS 148 for the quarterly period ended May 1, 2004 below.

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SFAS 123, “Accounting for Stock-Based Compensation,” requires the disclosure of pro forma net income and earnings per share. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company’s calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions: expected life, 5 years; stock volatility, 37.8% for the first quarter of fiscal 2004 and 53.7% for the first quarter of fiscal 2003; risk-free interest rates, 3.6% for fiscal 2004 and 2.9% for fiscal 2003; and no dividends during the expected term. The Company’s calculations are based on a single-option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the fiscal 2004 and fiscal 2003 awards had been amortized to expense over the vesting period of the awards, net income and earnings per share for the first quarter ended May 1, 2004 and May 3, 2003 would have been reduced to the pro forma amounts indicated below:

	For the First Quarter Ended
	May 1, 2004			May 3, 2003
Net Income
As reported	$	14,974		$	7,979
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,558	)		(1,499	)
Pro forma	$	13,416		$	6,480
Net Income Per Share, Basic
As reported	$	0.19		$	0.11
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(0.02	)		(0.02	)
Pro forma	$	0.17		$	0.09
Net Income Per Share, Diluted
As reported	$	0.19		$	0.10
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(0.02	)		(0.01	)
Pro forma	$	0.17		$	0.09

New Accounting Pronouncements – In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities” and in December 2003, issued FIN 46(R) (revised December 2003) “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51.” In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46(R) clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (ARB 51), to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. FIN 46(R) applies immediately to variable interest entities

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created after December 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies no later than the first reporting period ending after December 15, 2004, to variable interest entities in which an enterprise holds a variable interest (other than special purpose) that it acquired before January 1, 2004. FIN 46(R) applies to public enterprises as of the beginning of the applicable interim or annual period. The Company believes that the adoption of FIN 46 and FIN 46(R) will not have a material impact on its financial position or results of operations because the Company has no interest in variable interest entities.

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

NOTE 3 – DEFERRED COMPENSATION AND OTHER ASSETS

The Company maintains an Executive Deferred Compensation Plan (the “Executive Plan”) covering Company officers that is funded by participant contributions and periodic Company discretionary contributions. The deferred compensation asset balance represents the investments held by the Company to cover the vested participant balances in the Executive Plan, which is represented by the deferred compensation liability of $12,041 and $10,925 in long-term liabilities as of May 1, 2004 and January 31, 2004, respectively.

	May 1,		January 31,
	2004		2004
Deferred compensation	$	12,201	$	10,919
Long-term computer maintenance contracts		420		502
Other assets		180		168
	$	12,801	$	11,589

NOTE 4 – ACCRUED LIABILITIES

Accrued liabilities consist of the following:

	May 1,		January 31,
	2004		2004
Accrued compensation and benefits	$	11,349	$	17,578
Accrued capital expenditures		9,692		6,489
Accrued stock repurchase trades pending settlement		7,121		—
Accrued sublease loss charges (Note 8)		5,159		5,543
Accrued sales tax payable		4,047		6,189
Accrued gift cards and store merchandise credits		2,389		4,618
Accrued restricted stock compensation (Note 6)		670		5,118
Other		10,760		9,431
	$	51,187	$	54,966

NOTE 5 – COMMON STOCK REPURCHASE AND RETIREMENT

On January 28, 2004, the Company announced that the Board of Directors had authorized the Company to purchase up to $50 million or 2.5 million shares of the Company’s common stock in open market transactions. There was no expiration date specified for this plan, but as of May 1, 2004, the Company had completed its repurchase and retirement of shares pursuant to this plan as follows:

					# of Shares		Maximum Value of
					Purchased as Part		Shares that May Yet
	# of Shares		Average		of Publicly		be Purchased Under
Period	Purchased		Price/Share		Announced Plan		the Plan
February 2004		75,000	$	23.99		75,000	$	48,200,750
April 2004		2,148,700	$	22.43		2,148,700	$	—
Total		2,223,700	$	22.48		2,223,700

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On May 10, 2004, the Company announced that the Board of Directors had authorized the Company to purchase up to an additional $25 million of the Company’s common stock in open market transactions. There was no expiration date specified for this plan. As of the date of this filing, the Company had not made any repurchases of shares pursuant to this plan.

NOTE 6 – RESTRICTED STOCK

During the year ended January 30, 2000, the Company granted a restricted stock award of 112,500 shares with a purchase price of $0.01 per share to its Chief Executive Officer (“CEO”). The award is scheduled to vest 25% on each of September 17, 2001, 2002, 2003 and 2004, if, in each instance, certain cumulative annual earnings per share growth targets have been satisfied. Under the award agreement, shares that do not vest at a given vesting date due to the cumulative annual earnings per share growth targets not being met remain available for future vesting if the cumulative annual earnings per share growth targets are met as of a subsequent vesting date. During the first quarter of fiscal 2004, the Company’s Board of Directors verified that the final cumulative annual earnings per share growth target for this award had been met. Accordingly, the CEO became immediately vested in and received 75% of the total share award, or 84,375 shares. The remaining 25%, or 28,125 shares, will become fully vested and be delivered to the CEO on September 17, 2004. As a result of the delivery of 84,375 shares to the CEO during the first quarter of fiscal 2004, the Company reclassified previously recognized compensation expense of $1.9 million from accrued liabilities to additional paid-in capital. At May 1, 2004, the Company had accrued $.5 million to recognize the cumulative vested fair value of the remaining 28,125 shares to be delivered on September 17, 2004. This amount is included in accrued liabilities (see Note 4) on the balance sheet. The Company will be required to account for these final 28,125 shares under variable accounting rules, which will require adjustments to compensation expense until the delivery date based on additional vesting of the shares and changes in the market price of the Company’s stock. For example, based on the closing market price of the Company’s stock at May 1, 2004 of $21.60, the Company would be required to record additional compensation expense of approximately $.1 million per quarter based on additional vesting of the shares until September 17, 2004. Additionally, based on any change in the market price of the Company’s stock until the delivery date, the cumulative compensation expense recognized for this portion of this award will continue to be adjusted.

During the year ended February 4, 2001, the Company granted a restricted stock award of 168,750 shares with a purchase price of $0.01 per share to its CEO. The award is scheduled to vest 25% on each of March 15, 2002, 2003, 2004 and 2005, if, in each instance, certain cumulative annual earnings per share growth targets have been satisfied. Under the award agreement, shares that do not vest at a given vesting date due to the cumulative annual earnings per share growth targets not being met remain available for future vesting if the cumulative annual earnings per share growth targets are met as of a subsequent vesting date. During the first quarter of fiscal 2004, the Company’s Board of Directors verified that the third cumulative annual earnings per share growth target for this award had been met. Accordingly, the CEO became immediately vested in and received 75% of the total share award, or 126,563 shares. The remaining 25%, or 42,187 shares, will vest and be received by the CEO in March 2005 upon confirmation by the Board of Directors that the fiscal 2004 cumulative annual earnings per share growth target has been met by the Company. As a result of the delivery of 126,563 shares to the CEO during the first quarter of fiscal 2004, the Company reclassified previously recognized compensation expense of $2.9 million from accrued liabilities to additional paid-in capital. At May 1, 2004, the Company had accrued $.2 million to recognize the cumulative vested fair value of the remaining 42,187 shares. This amount is included in accrued liabilities (see Note 4) on the balance sheet. The Company will be required to account for these final 42,187 shares

9

under variable accounting rules, which will require adjustments to compensation expense until the delivery date based on additional vesting of the shares and changes in the market price of the Company’s stock. For example, based on the market price of the Company’s stock at May 1, 2004 of $21.60, the Company would be required to record additional compensation expense of approximately $.2 million per quarter based on additional vesting of the shares until March 15, 2005. Additionally, based on any change in the market price of the Company’s stock until the delivery date, the cumulative compensation expense recognized for this portion of this award will continue to be adjusted.

NOTE 7 – NET INCOME PER SHARE, BASIC AND DILUTED

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

First Quarter Ended:	May 1, 2004							May 3, 2003
	Net Income		Shares		Per Share Amount			Net Income		Shares		Per Share Amount
Basic EPS:	$	14,974		78,157,771	$	0.19		$	7,979		74,524,548	$	0.11
Diluted EPS:
Effect of dilutive stock options		—		1,988,373		(0.00	)		—		1,947,963		(0.01	)
	$	14,974		80,146,144	$	0.19		$	7,979		76,472,511	$	0.10

Options to purchase 735,152 and 291,366 shares of common stock in the first quarter of fiscal 2004 and fiscal 2003, 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.

NOTE 8 – COMMITMENTS AND CONTINGENCIES

Litigation – During fiscal 2003, the Company reached an agreement to settle all claims related to two lawsuits concerning overtime pay for a total of $4.0 million. The suits were Auden v. Pacific Sunwear of California, Inc., which was filed September 17, 2001, and Adams v. Pacific Sunwear of California, Inc., which was filed August 2, 2002. The complaints alleged that the Company improperly classified certain California-based employees as “exempt” from overtime pay. In the first quarter of fiscal 2004, the Company paid substantially all amounts due pursuant to the terms of the settlement agreement. The settlement did not have a material impact on the Company’s results of operations for fiscal 2004 or fiscal 2003.

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

Indemnities, Commitments, and Guarantees — During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include those given to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of California. The Company has issued guarantees in the form of standby letters of credit as security for merchandise shipments from overseas. There were $21.8 million of these letters of credit outstanding at May 1, 2004. The Company has also issued a guarantee within a sublease on one of its store locations under which the Company remains secondarily liable on the sublease should the sublessee default on its lease payments. The term of the sublease ends December 31, 2014. The Company has recorded $.4 million in accrued liabilities to recognize the estimated fair value of this guarantee, assuming that another sublessee would be found within one year should the original sublessee default. The aggregate rental payments remaining on the master lease agreement at May 1, 2004, were $5.8 million. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets other than as noted.

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

Sublease Loss Charges — The Company remains liable under two operating leases covering its former corporate offices and a former store location. These facilities remain vacant at May 1, 2004. At May 1, 2004, the Company had $5.2 million recorded in accrued liabilities as compared to $5.5 at January 31, 2004, to account for the difference between the Company’s remaining contractual lease obligations and the rate and timeframe within which the Company expected to be able to sublease these properties. As of May 1, 2004, the Company had executed a sublease for the remaining term of the Company’s lease covering 3,200 of the total 5,200 square feet of the former store location that contained more favorable terms than the Company’s estimated assumptions at the end of fiscal 2003. The Company continues to update its sublease assumptions on a quarterly basis based on its review of current real estate market conditions and any on-going negotiations. To the extent management’s estimates relating to the Company’s ability to sublease these facilities at the assumed rates or within the assumed timeframes changes or is incorrect, additional charges or reversals of previous charges may be recorded in the future. At May 1, 2004, the aggregate remaining obligations under these leases were approximately $5.1 million for the former corporate offices and approximately $6.6 million for the former store location. These amounts are included in the contractual obligations table within Management's Discussion and Analysis of Financial Condition and Results of Consolidated Operations. See “Contractual Obligations” within “Liquidity and Capital Resources.”

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

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto of the Company included elsewhere in this Form 10-Q. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements and Risk Factors” in this section.

Executive Overview

Management of the Company considers the following items to be key performance indicators in evaluating Company performance:

Comparable (or “same store”) sales – Stores are deemed comparable stores on the first day of the month following the one-year anniversary of their opening or expansion/relocation. Management of the Company considers same store sales to be an important indicator of current Company performance. Same store 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 somewhat fixed. Positive same store sales results generate greater operating leverage of expenses while negative same store sales results negatively impact operating leverage. Same store sales results also have a direct impact on the Company’s total net sales, cash, and working capital.

Net merchandise margins – Management analyzes the components of net merchandise margins, specifically initial markups and markdowns as a percentage of net sales. Any inability to obtain acceptable levels of initial markups or any significant increase in the Company’s use of markdowns could have an adverse impact on the Company’s gross margin results and results of operations.

Operating margin – Management views operating margin as a key indicator of the Company’s success. The key drivers of operating margins are comparable store net sales, net merchandise margins, and the Company’s ability to control operating expenses. Operating margin for the first quarter of fiscal 2004 was 9.6% as compared to 6.5% for the first quarter of fiscal 2003. Full fiscal year operating margins for fiscal 2003, 2002 and 2001, were 12.3%, 9.6% and 6.5%, respectively. The Company’s first quarter historically accounts for the smallest percentage of annual net sales and operating margin. The Company’s highest historical operating margin was 12.9% for fiscal 1999.

Store sales trends – Management evaluates store sales trends in assessing the operational performance of the Company’s store expansion strategies. Important store sales trends include average net sales per store, average net sales per square foot, and average trend sales for new stores. Average net sales per store (in thousands) for fiscal 2003, 2002 and 2001 were $1,229, $1,102 and $1,031, respectively. Average net sales per square foot for the same years were $363, $330 and $321, respectively.

Cash flow and liquidity (working capital) – Management evaluates cash flow from operations, liquidity and working capital to determine the Company’s short-term operational financing needs. Cash flows from operations were significantly higher in the first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003, primarily due to higher net income driven by the 12.7% comparable store net sales increase in the first quarter of fiscal 2004. Management expects cash flows from operations will be sufficient to finance operations without borrowing under the Company’s credit facility during fiscal 2004.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets

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and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reported period. Actual results could differ from these estimates. The accounting policies that the Company believes are the most critical to aid in fully understanding and evaluating reported financial results include the following:

Revenue Recognition - Sales are recognized upon purchase by customers at the Company’s retail store locations or upon shipment for orders placed through the Company’s website. The Company records the sale of gift cards as a current liability and recognizes a sale when a customer redeems a gift card. The amount of the gift card liability is determined taking into account the Company’s estimate of the portion of gift cards that will not be redeemed or recovered. The Company accrues for estimated sales returns by customers based on historical sales return results. Actual return rates have historically been within management’s expectations and the reserves established. However, in the event that the actual rate of sales returns by customers increased significantly, the Company’s operational results could be adversely affected.

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

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

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

Insurance Reserves – The Company is responsible for workers’ compensation insurance claims up to a specified aggregate stop loss amount. The Company maintains a reserve 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 management’s expectations and the reserves established. To the extent claims experience or management’s estimates change, additional charges may be recorded in the future up to the aggregate stop loss amount for each policy year.

Accrued Sublease Loss Charges - The Company remains liable under two operating leases covering its former corporate offices and a former store location. These facilities remain vacant at May 1, 2004. At May 1, 2004, the Company had $5.2 million recorded in accrued liabilities as compared to $5.5 million at January 31, 2004, to account for the difference between the Company’s remaining contractual lease obligations and the rate and timeframe within which the Company expected to be able to sublease these

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properties. As of May 1, 2004, the Company had executed a sublease for the remaining term of the Company’s lease covering 3,200 of the total 5,200 square feet of the former store location that contained more favorable terms than the Company’s estimated assumptions at the end of fiscal 2003. The Company continues to update its sublease assumptions on a quarterly basis based on its review of current real estate market conditions and any on-going negotiations. To the extent management’s estimates relating to the Company’s ability to sublease these facilities at the assumed rates or within the assumed timeframes changes or is incorrect, additional charges or reversals of previous charges may be recorded in the future. At May 1, 2004, the aggregate remaining obligations under these leases were approximately $5.1 million for the former corporate offices and approximately $6.6 million for the former store location. These amounts are included in the contractual obligations table within “Liquidity and Capital Resources.” See “Contractual Obligations” therein.

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

Litigation - The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company and, from time to time, may make provisions for potential litigation losses. Depending on the actual outcome of pending litigation, charges in excess of any provisions could be recorded in the future, which may have an adverse effect on the Company’s operating results (see Note 8 to the condensed consolidated financial statements for the quarter ended May 1, 2004).

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:

	May 1,			May 3,
For the first quarter ended:	2004			2003
Net sales		100.0	%		100.0	%
Cost of goods sold (including buying, distribution and occupancy costs)		65.9			67.8
Gross margin		34.1			32.2
Selling, general and administrative expenses		24.5			25.7
Operating income		9.6			6.5
Interest income, net		0.2			0.0
Income before income tax expense		9.8			6.5
Income tax expense		3.7			2.5
Net income		6.1	%		4.0	%

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

	May 1,		May 3,
	2004		2003
PacSun stores		689		625
Outlet stores		81		74
d.e.m.o. stores		137		109
Total stores		907		808
Square footage (in 000’s)		3,117		2,721

The first quarter (thirteen weeks) ended May 1, 2004 as compared to the first quarter (thirteen weeks) ended May 3, 2003

Net Sales

Net sales increased to $245.1 million for the first quarter of fiscal 2004 from $198.3 million for the first quarter of fiscal 2003, an increase of $46.8 million, or 23.6%. The components of this $46.8 million increase in net sales are as follows:

Amount
($million)	Attributable to
$23.4	12.7% increase in comparable store net sales in the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003
17.5	Net sales from stores opened in fiscal 2003 not yet included in the comparable store base
4.3	Other non-comparable sales (net sales from expanded or relocated stores not yet included in the comparable store base and internet net sales)
1.9	31 new stores opened in fiscal 2004 not yet included in the comparable store base
(.3)	1 closed store in fiscal 2004 and 4 closed stores in fiscal 2003
$46.8	Total

Of the 12.7% increase in comparable store net sales in the first quarter of fiscal 2004, PacSun and PacSun Outlet comparable store net sales increased 13.6% and d.e.m.o. comparable store net sales increased 6.0%. The increase in comparable store net sales within PacSun and PacSun Outlet was primarily attributable to increases in comparable store net sales of footwear, accessories, young men’s apparel and, to a lesser extent, juniors apparel. The increase in comparable store net sales within d.e.m.o. was attributable to increases in comparable store net sales of juniors apparel and accessories merchandise. Retail prices of the Company’s merchandise remained relatively unchanged in the first quarter of fiscal 2004 compared to the first quarter of fiscal 2003 and had no significant impact on the net sales increase for the first quarter of fiscal 2004.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, increased to $83.6 million for the first quarter of fiscal 2004 from $63.9 million for the first quarter of fiscal 2003, an increase of $19.7 million, or 30.8%. As a percentage of net sales, gross margin was 34.1% for the first quarter of fiscal 2004 compared to 32.2% for the first quarter of fiscal 2003. The components of this 1.9% increase in gross margin as a percentage of net sales are as follows:

%	Attributable to
1.3%	Decrease in occupancy costs, primarily due to leveraging these costs over higher total sales
.7%	Increase in net merchandise margins, primarily due to a higher initial markup rate partially offset by a higher markdown rate
(.1)%	Increase in distribution costs
1.9%	Total

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $60.0 million for the first quarter of fiscal 2004 from $51.0 million for the first quarter of fiscal 2003, an increase of $9.0 million, or 17.6%. These expenses decreased to 24.5% as a percentage of net sales in the first quarter of fiscal 2004 from 25.7% in the first quarter of fiscal 2003. The components of this 1.2% net decrease in selling, general and administrative expenses as a percentage of net sales were as follows:

%	Attributable to
(.9)%	Decrease in depreciation and other store expenses, primarily due to leveraging these costs over higher total sales
(.5)%	Decrease in store payroll, primarily due to leveraging these costs over higher total sales
(.1)%	Net decrease in all other general and administrative expenses
.3%	Increase in store closing, expansion and relocation expenses
(1.2)%	Total

Net Interest Income

Net interest income was $.5 million in the first quarter of fiscal 2004 compared to $.1 million in the first quarter of fiscal 2003, an increase of $.4 million. This increase was primarily the result of higher average cash balances in the first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003, primarily due to higher net income driven by the comparable store net sales increases in the first quarter of fiscal 2004 and last three quarters of fiscal 2003.

Income Tax Expense

Income tax expense was $9.1 million for the first quarter of fiscal 2004 compared to $5.0 million for the first quarter of fiscal 2003. The effective income tax rate was 37.8% in the first quarter of fiscal 2004 and 38.4% in the first quarter of fiscal 2003. The lower effective income tax rate for the first quarter of fiscal 2004 was primarily attributable to a lower weighted effective state income tax rate for the Company. The weighted effective state income tax rate for the Company will vary depending on a number of factors, such as differing income tax rates and net sales in the respective states.

Liquidity and Capital Resources

The Company has financed its operations primarily from internally generated cash flow, with occasional short-term and long-term borrowings and equity financing in past years. The Company’s primary capital requirements have been for the construction costs, net of landlord allowances, of newly opened, remodeled, expanded or relocated stores as well as for the financing of inventories. Management believes that the Company’s working capital, cash flows from operating activities and credit facility will be sufficient to meet the Company’s operating and capital expenditure requirements for the next twelve months.

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Operating Cash Flows

Net cash provided by operating activities was $8.9 million for the first quarter of fiscal 2004 compared to cash used of $.5 for the first quarter of fiscal 2003. The $9.4 million increase in cash provided by operations in the first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003 was attributable to the following:

Amount
($million)	Attributable to
$7.5	Increase in accounts payable leverage compared to the first quarter of fiscal 2003 (1)
7.0	Increase in net income
.3	Other items netting to a cash flow increase
(5.4)	Decrease in accrued income taxes primarily due to income tax payments, partially offset by fiscal 2004 income tax accruals
$9.4	Total

(1) Accounts payable as a percentage of inventories increased to 27.1% at May 1, 2004, as compared to 19.6% at May 3, 2003, primarily due to timing of payments.

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

Working Capital

Working capital at May 1, 2004 was $215.0 million compared to $243.0 million at January 31, 2004, a decrease of $28.0 million. The components of this $28.0 million decrease in working capital were as follows:

Amount
($million)	Attributable to
$(49.3)	Decrease in cash and short-term investments, primarily due to $50.0 million in stock repurchases in the first quarter of fiscal 2004
9.7	Decrease in accrued income taxes due to payment of fiscal 2003 income taxes and accrual of tax benefits related to stock option exercises, partially offset by fiscal 2004 income tax accruals
6.0	Increase in inventories, net of accounts payable, due to square footage growth of 15% and increases in inventories in comparable stores
4.9	Decrease in accrued liabilities due to the issuance of restricted stock to satisfy certain deferred compensation liabilities (see Note 6 to the condensed consolidated financial statements)
.7	Other items netting to a working capital increase
$(28.0)	Total

Investing Cash Flows

Net cash used in investing activities in the first quarter of fiscal 2004 was $30.2 million compared to $8.7 million for the first quarter of fiscal 2003, an increase in cash used of $24.7 million. The components of the $30.2 million of net cash used in investing activities in the first quarter of fiscal 2004 are as follows:

Amount
($million)	Attributable to
$(18.1)	Purchases of short-term investments classified as held-to-maturity
(11.5)	Construction costs of new, expanded and relocated stores
(1.2)	Maintenance capital expenditures on existing stores
(.4)	Other capital expenditures, including computer hardware and software
1.0	Maturities of short-term investments classified as held-to-maturity
$(30.2)	Total

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In the remainder of fiscal 2004, capital expenditures are expected to be approximately $40 million, of which approximately $33 million will be for opening new and relocated/expanded stores, and approximately $7 million will be used for other capital expenditures, including maintenance capital on existing stores and computer hardware and software.

Financing Cash Flows

Net cash used in financing activities in the first quarter of fiscal 2004 was $45.1 million compared to cash provided of $4.9 million for the first quarter of fiscal 2003. The components of the $45.1 million of net cash used in financing activities in the first quarter of fiscal 2004 were as follows:

Amount
($million)	Attributable to
$(50.0)	Repurchases of common stock
(.4)	Principal payments under long-term debt and capital lease obligations
5.3	Proceeds received from stock option exercises
$(45.1)	Total

Common Stock Repurchase and Retirement – Information regarding the Company’s common stock repurchase programs is contained in Note 5 to the condensed consolidated financial statements, which note is incorporated herein by this reference.

Credit Facility

The Company has a credit facility with a bank, which expires April 1, 2007. The credit facility provides for a $45.0 million line of credit (the “Credit Line”) through March 31, 2005 to be used for cash advances, commercial letters of credit and shipside bonds. The Credit Line increases to $50.0 million from April 1, 2005 through March 31, 2006, and $60.0 million from April 1, 2006 through expiration on April 1, 2007. Interest on the Credit Line is payable monthly at the bank’s prime rate (4.0% at May 1, 2004) or at optional interest rates that are primarily dependent upon the London Inter-bank Offered Rates for the time period chosen. The Company did not borrow under the credit facility at any time during the first quarter of fiscal 2004 or fiscal 2003. The Company had $21.8 million outstanding in letters of credit at May 1, 2004. The credit facility subjects the Company to various restrictive covenants, including maintenance of certain financial ratios, and prohibits payment of cash dividends on common stock. At May 1, 2004, the Company was in compliance with all of the credit facility covenants.

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

Contractual Obligations

The Company has minimum annual rental commitments under existing store leases, the lease for its former corporate offices and distribution center, capital leases for computer equipment, and other long-term debt obligations for multi-year computer maintenance contracts. The Company leases all of its retail store locations under operating leases. The Company leases equipment, from time to time, under capital leases. In addition, at any time, the Company is contingently liable for open letters of credit with foreign suppliers of merchandise. At May 1, 2004, the Company’s future financial commitments under these arrangements were as follows:

Contractual Obligations
(in millions)

	Payments Due by Period
			Less than		1-3		3-5		More than
	Total		1 year		years		years		5 years
Operating lease obligations	$	553.9	$	83.8	$	165.2	$	150.2	$	154.7
Capital lease obligations		2.0		1.0		1.0		—		—
Long-term debt obligations		0.9		0.9		—		—		—
Letters of credit		21.8		21.8		—		—		—
Total	$	578.6	$	107.5	$	166.2	$	150.2	$	154.7

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The Company reviews the operating performance of its stores on an ongoing basis to determine which stores, if any, to expand, relocate or close. Most leases contain cancellation or kick-out clauses in the Company’s favor that relieve the Company of any future obligation under a lease if specified sales levels are not achieved by a specified date. The Company closed four stores in fiscal 2003 and anticipates closing approximately five stores in fiscal 2004.

New Accounting Pronouncements

Information regarding new accounting pronouncements is contained in Note 2 to the condensed consolidated financial statements for the quarter ended May 1, 2004, which note is incorporated herein by this reference.

Inflation

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

Seasonality and Quarterly Results

The Company’s business is seasonal by nature, with the Christmas and back-to-school periods historically accounting for the largest percentage of annual net sales. The Company’s first quarter historically accounts for the smallest percentage of annual net sales. In fiscal 2003, excluding sales generated by new and relocated/expanded stores, the Christmas and back-to-school periods together accounted for approximately 36% of the Company’s annual net sales and a higher percentage of the Company’s operating income. In fiscal 2003, excluding net sales generated by new and relocated/expanded stores, approximately 43% of the Company’s annual net sales occurred in the first half of the fiscal year and approximately 57% in the second half. The Company’s quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings; the amount of revenue contributed by new stores; the timing and level of markdowns; the timing of store closings, expansions and relocations; competitive factors; and general economic conditions.

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

This report on Form 10-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 the Company intends that such forward-looking statements be subject to the safe harbors created thereby. The Company is hereby providing cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those projected in forward-looking statements of the Company herein. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions, future events or performance (often, but not always, through the use of words or phrases such as “will result,” “expects to,” “will continue,” “anticipates,” “plans,” “intends,” “estimated,” “projects” and “outlook”) are not historical facts and may be forward-looking and, accordingly, such statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. All forward-looking statements included in this report, including forecasts of fiscal 2004 planned new store openings, are based on information available to the Company as of the date hereof, and the Company assumes no obligation to update or revise any such forward-looking statements to reflect events or circumstances that occur after such statements are made. Such uncertainties include, among others, the following factors:

Merchandising/Fashion Sensitivity. The Company’s success is largely dependent upon its ability to gauge the fashion tastes of its customers and to provide merchandise that satisfies customer demand in a timely manner. The Company’s failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends could have a material adverse effect on the Company’s same store sales results, operating margins, financial condition and results of operations. Misjudgments or unanticipated fashion changes could also have a material adverse effect on the Company’s image with its customers.

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Private Label Merchandise. Sales from private label merchandise accounted for approximately 32% of net sales in fiscal 2003. The Company may increase the percentage of net sales in private label merchandise in the future, although there can be no assurance that the Company will be able to achieve increases in private label merchandise sales as a percentage of net sales. Because the Company’s private label merchandise generally carries higher merchandise margins than its other merchandise, the Company’s failure to anticipate, identify and react in a timely manner to fashion trends with its private label merchandise, particularly if the percentage of net sales derived from private label merchandise increases, may have a material adverse effect on the Company’s same store sales results, operating margins, financial condition and results of operations.

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

Expansion and Management of Growth. PacSun’s continued growth depends to a significant degree on its ability to open and operate stores on a profitable basis and on management’s ability to manage the Company’s planned expansion. The Company has previously announced plans to operate 1,400 stores by the end of 2007, of which approximately 900 will be PacSun stores, approximately 100 will be PacSun Outlet stores, and approximately 400 will be d.e.m.o. stores. As of May 1, 2004, the Company operated 907 stores, of which 689 were PacSun stores, 81 were PacSun Outlet stores, and 137 were d.e.m.o. stores. The Company’s planned expansion is dependent upon a number of factors, including the ability of the Company to locate and obtain favorable store sites, negotiate acceptable lease terms, obtain adequate supplies of merchandise and hire and train qualified management level and other employees. Factors beyond the Company’s control may also affect the Company’s ability to expand, including general economic and business conditions affecting consumer spending. There can be no assurance that the Company will achieve its planned expansion, that such expansion will be profitable, or that the Company will be able to manage its growth effectively. Any failure to manage growth could have a material adverse effect on the Company’s business, financial condition and results of operations.

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

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

Internet Sales. The Company’s internet operations are subject to numerous risks that could have a material adverse effect on the Company’s 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 PacSun 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,

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telecommunication failures and electronic break-ins and similar disruptions. In addition, internet operations involve risks which are beyond the Company’s control that could have a material adverse effect on the Company’s operational results, including: (i) price competition involving the items the Company intends to sell; (ii) the entry of the Company’s vendors into the internet business, in direct competition with the Company; (iii) the level of merchandise returns experienced by the Company; (iv) governmental regulation; (v) online security breaches; (vi) credit card fraud; and (vii) competition and general economic conditions specific to the internet, online commerce and the apparel industry.

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

Reliance on Foreign Sources of Production. The Company purchases merchandise directly in foreign markets for its private label brands. In addition, the Company purchases merchandise from domestic vendors, some of which is manufactured overseas. The Company does not have any long-term merchandise supply contracts and its imports are subject to existing or potential duties, tariffs and quotas. The Company faces competition from other companies for production facilities and import quota capacity. The Company also faces a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as: (i) political instability; (ii) 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 that the Company does 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; and (vi) 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 the Company does business with. The inability of the Company to rely on its foreign sources of production due to any of the factors listed above could have a material adverse effect on the Company’s business, financial condition and results of operations.

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

Stock Options. In March 2004, the FASB issued an exposure draft proposing that all publicly traded companies begin recording compensation expense related to all unvested stock options prospectively for fiscal years beginning after December 15, 2004. The comment period on the exposure draft ends June 30, 2004. Currently, the Company includes such expenses on a pro forma basis in the notes to the Company’s quarterly and annual financial statements in accordance with accounting principles generally accepted in the United States of America and does not include compensation expense related to stock options in the Company’s reported earnings in the financial statements. If accounting standards are changed to require the Company to expense stock options, the Company’s reported earnings would be lower under the new standard in the fiscal year beginning January 30, 2005 and its stock price could decline.

21

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

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

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

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

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is susceptible to market value fluctuations with regard to its short-term investments. However, due to the relatively short maturity period of those investments and the Company’s intention to hold those investments until maturity, the risk of material market value fluctuations is not expected to be significant.

To the extent the Company borrows under its credit facility, the Company is exposed to market risk related to changes in interest rates. At May 1, 2004, there were no borrowings outstanding under the Company’s credit facility and the Company did not borrow under the credit facility at any time during the first quarter of fiscal 2004. Based on the interest rate of 4.0% on the Company’s credit facility, if interest rates on the credit facility were to increase by 10%, and to the extent borrowings were outstanding, for every $1,000,000 outstanding on the Company’s credit facility, net income would be reduced by approximately $2,500 per year. For a discussion of the Company’s accounting policies for financial instruments and further disclosures relating to financial instruments, see “Summary of Significant Accounting Policies and Nature of Business” in the Notes to Consolidated Financial Statements in the Company’s Form 10-K for the year ended January 31, 2004. The Company is not a party with respect to derivative financial instruments.

ITEM 4 — CONTROLS AND PROCEDURES

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

The certifying officers concluded, based on their evaluation, that the Company’s disclosure controls and procedures were effective for the Company as of the end of the period covered by this report, taking into consideration the size and nature of the Company’s business and operations.

No change in the Company’s internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

22

PART II-OTHER INFORMATION

Item 1 — Legal Proceedings

For information on legal proceedings, see “Litigation” within Note 8 of Notes to Condensed Consolidated Financial Statements, which is incorporated by reference in response to this Item 1.

Item 2 — Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

For information on repurchases made during the first quarter, see Note 5 of Notes to Condensed Consolidated Financial Statements, which is incorporated by reference in response to this Item 2.

Item 3 — Defaults Upon Senior Securities - Not Applicable

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

a) The 2004 Annual Meeting of Shareholders of the Company was held on May 19, 2004.

c) At the 2004 Annual Meeting, Sally Frame Kasaks, Thomas Murnane and Peter Starrett were elected as Class I Directors of the Company for a two-year term ending in 2006.

The shareholders voted on and ratified the appointment of Deloitte & Touche LLP as independent auditors for the Company for the year ending January 29, 2005.

Voting at the 2004 Annual Meeting for the election of directors was as set forth below. Each of the nominees identified below was elected a director.

NAME	VOTES CAST FOR		VOTES WITHHELD
Class I Directors:
Sally Frame Kasaks		69,579,344		2,753,862
Thomas Murnane		70,361,933		1,971,273
Peter Starrett		70,508,273		1,824,933

With respect to the ratification of the appointment of Deloitte & Touche LLP as independent auditors for the Company for the year ended January 29, 2005, 69,062,159 votes were cast for approval, 1,976,280 votes were cast against, 1,294,767 votes abstained and there were zero broker non-votes.

Item 5 — Other Information - Not Applicable

Item 6 — Exhibits and Reports on Form 8-K

Exhibit 31	Written statements of Greg H. Weaver and Carl W. Womack pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	Written statement of Greg H. Weaver and Carl W. Womack pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.1	Amended and Restated Pacific Sunwear of California, Inc. 1999 Stock Award Plan dated March 24, 2004.
Exhibit 99.2	Amended and Restated Pacific Sunwear of California, Inc. Employee Stock Purchase Plan dated September 5, 2003.
Exhibit 99.3	First Amendment to Business Loan Agreement dated May 7, 2004, between the Company and Bank of America N.A.

On March 2, 2004, the Company filed an 8-K furnishing a press release announcing results of operations for the fourth quarter and fiscal year ended January 31, 2004.

23

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Pacific Sunwear of California, Inc. (Registrant)
Date: May 19, 2004	/s/ GREG H. WEAVER
	Greg H. Weaver
	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

Date: May 19, 2004	/s/ CARL W. WOMACK
	Carl W. Womack
	Senior Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

24

EXHIBIT INDEX

Exhibit 31	Written statements of Greg H. Weaver and Carl W. Womack pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	Written statement of Greg H. Weaver and Carl W. Womack pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.1	Amended and Restated Pacific Sunwear of California, Inc. 1999 Stock Award Plan dated March 24, 2004.
Exhibit 99.2	Amended and Restated Pacific Sunwear of California, Inc. Employee Stock Purchase Plan dated September 5, 2003.
Exhibit 99.3	First Amendment to Business Loan Agreement dated May 7, 2004, between the Company and Bank of America N.A.

EX-31 2 a99238exv31.htm EXHIBIT 31

Exhibit 31

CERTIFICATIONS

I, Greg H. Weaver, certify that:

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

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods 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(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) 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) 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

c) 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(s) 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: May 19, 2004

/s/ Greg H. Weaver  

Greg H. Weaver 

Chairman of the Board and Chief Executive Officer 

I, Carl W. Womack, certify that:

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

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods 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(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) 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) 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

c) 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(s) 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: May 19, 2004

/s/ Carl W. Womack  

Carl W. Womack 

Senior Vice President, Chief Financial Officer and Secretary 

EX-32 3 a99238exv32.htm EXHIBIT 32

Exhibit 32

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

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

(i) the Quarterly Report of the Company, on Form 10-Q for the period ended May 1, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 19, 2004	/s/ Greg H. Weaver
	Greg H. Weaver
	Chairman of the Board and Chief Executive Officer Pacific Sunwear of California, Inc.

Dated: May 19, 2004	/s/ Carl W. Womack
	Carl W. Womack
	Senior Vice President, Chief Financial Officer and Secretary Pacific Sunwear of California, Inc.

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

EX-99.1 4 a99238exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 PACIFIC SUNWEAR OF CALIFORNIA, INC. 1999 STOCK AWARD PLAN (As Amended and Restated March 27, 2003, and as Further Amended on May 21, 2003 and March 24, 2004) (Composite Plan Document Reflecting Stock Splits Through September 2003) TABLE OF CONTENTS

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

-i- TABLE OF CONTENTS (CONTINUED)

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

-ii- PACIFIC SUNWEAR OF CALIFORNIA, INC. 1999 STOCK AWARD PLAN (As Amended and Restated March 27, 2003, and as Further Amended on May 21, 2003 and March 24, 2004) (Composite Plan Document Reflecting Stock Splits Through September 2003) I. THE PLAN. 1.1 Purpose. The purpose of this Plan is to promote the success of the Company by providing an additional means to attract, motivate, retain and reward key personnel through the grant of Options and other Awards that provide added long term incentives for high levels of performance and for significant efforts to improve the financial performance of the Company. The purpose of this Plan is also to attract, motivate and retain experienced and knowledgeable independent directors through the Option grants provided under Section 2.6. 1.2 Administration. (a) This Plan shall be administered and all Awards (other than those under Section 2.6) shall be authorized by the Committee. Action of the Committee with respect to the administration of this Plan shall be taken pursuant to a majority vote or the unanimous written consent of its members. In the event action by the Committee is taken by written consent, the action shall be deemed to have been taken at the time specified in the consent or, if none is specified, at the time of the last signature. The Committee may delegate administrative functions to individuals who are officers or employees of the Company. (b) Subject to the express provisions of this Plan, the Committee shall have the authority: (i) to grant Awards to Eligible Employees, determine the price at which securities will be offered or awarded and the amount of securities to be offered or awarded to any of such persons, and determine the other specific terms and conditions of such Awards consistent with the express limits of this Plan, and establish the installments (if any) in which such Awards shall become exercisable or shall vest, or determine that no delayed exercisability or vesting is required, and establish the events of termination or reversion of such Awards; (ii) to approve the forms of Award Agreements (which need not be identical either as to type of award or among Participants); (iii) to construe and interpret this Plan and any agreements defining the rights and obligations of the Company and Participants under this Plan, further define the terms used in this Plan, and prescribe, amend and rescind rules and regulations relating to the administration of this Plan; (iv) to cancel, modify, or waive the Corporation's rights with respect to, or modify, discontinue, suspend, or terminate any or all outstanding Awards held by Eligible Employees, subject to any required consent under Section 6.7; (v) to accelerate or extend the exercisability or extend the term of any or all such outstanding Awards within the maximum ten-year term of Awards; and (vi) to make all other determinations and take such other action as contemplated by this Plan or as may be necessary or advisable for the administration of this Plan and the effectuation of its purposes. Notwithstanding the foregoing, the provisions of Section 2.6 relating to Non-Employee Director Options shall be automatic and, to the maximum extent possible, self-effectuating. (c) Any action taken by, or inaction of, the Corporation, any Subsidiary, the Board or the Committee relating or pursuant to this Plan and within its authority hereunder or under applicable law shall be within the absolute discretion of that entity or body and shall be conclusive and binding upon all persons. Neither the Board nor any Committee, nor any member thereof or person acting at the direction thereof, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with this Plan (or any Award made under this Plan), and all such persons shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, attorneys' fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors and officers liability insurance coverage that may be in effect from time to time. (d) Subject to the requirements of Section 7.1, the Board, at any time it so desires, may increase or decrease the number of members of the Committee, may remove from membership on the Committee all or any portion of its members, and may appoint such person or persons as it desires to fill any vacancy existing on the Committee, whether caused by removal, resignation or otherwise. (e) In making any determination or in taking or not taking any action under this Plan, the Committee or the Board, as the case may be, may obtain and may rely upon the advice of experts, including professional advisors to the Company. No director, officer or agent of the Company shall be liable for any such action or determination taken or made or omitted in good faith. 1.3 Participation. Awards may be granted only to Eligible Employees. An Eligible Employee who has been granted an Award may, if otherwise eligible, be granted additional Awards if the Committee shall so determine. Except as provided in Section 2.6 below, members of the Board who are not officers or employees of the Company shall not be eligible to receive Awards. 2 1.4 Stock Subject to the Plan. (a) Subject to Section 6.2, the stock to be offered under this Plan shall be shares of the Corporation's authorized but unissued Common Stock. The aggregate amount of Common Stock that may be issued or transferred pursuant to Awards (including Incentive Stock Options and Options under Section 2.6) granted under this Plan shall not exceed 10,950,000 shares. In no event shall more than 1,350,000 shares of Common Stock be available for Awards issued (or reissued) under this Plan as time-based Restricted Stock for nominal or no consideration other than the par value thereof. This limit on Restricted Stock does not apply to shares issued principally for past services, in respect of compensation earned but deferred, or as Performance-Based Awards under Section 5.2. The aggregate number of shares of Common Stock subject to Options and Stock Appreciation Rights that may be granted to any employee in any calendar year may not exceed 1,350,000. The aggregate number of shares of Common Stock subject to all Awards (including Options, Stock Appreciation Rights, and Performance-Based Awards (other than Cash-Based Awards)) that may be granted to any employee in any calendar year may not exceed 1,350,000. The Board may amend the Option grant levels contemplated by Section 2.6 from time to time; provided that no more than 1,500,000 shares of Common Stock shall be issued or delivered pursuant to the exercise of Options granted to Non-Employee Directors pursuant to Section 2.6. Each of the foregoing share limits is subject to adjustment as set forth in Section 6.2. (b) No Award may be granted under this Plan unless, on the date of grant, the sum of (i) the maximum number of shares issuable at any time pursuant to such Award, plus (ii) the number of shares that have previously been issued pursuant to Awards granted under this Plan, other than reacquired shares available for reissue consistent with any applicable legal limitations, plus (iii) the maximum number of shares that may be issued at any time after such date of grant pursuant to Awards that are outstanding on such date, does not exceed the share limit set forth in Section 1.4(a). Shares that are subject to or underlie Awards which expire or for any reason are cancelled or terminated, are forfeited, fail to vest, or for any other reason are not paid or delivered under this Plan, as well as reacquired shares, shall again, except to the extent prohibited by law, be available for subsequent Awards under the Plan. 1.5 Grant of Awards. Subject to the express provisions of this Plan, the Committee shall determine from the class of Eligible Employees those individuals to whom Awards under this Plan shall be granted, the number of shares of Common Stock subject to each Award, the price (if any) to be paid for the shares or the Award and, in the case of performance share awards, in addition to matters addressed in Section 1.2(b), the specific objectives, goals and performance criteria (such as an increase in sales, market value, earnings or book value over a base period, the years of service before vesting, the relevant job classification or level of responsibility or other factors) that further define the terms of the performance share award. Each Award shall be evidenced by an Award Agreement signed by the Corporation and, if required by the Committee, by the Participant. The Award Agreement shall set forth the material terms and conditions of the Award established by the Committee consistent with the specific provisions of this Plan. The grant of an Award is made on the Award Date. 3 1.6 Exercise of Awards. An Option or Stock Appreciation Right shall be deemed to be exercised when the Secretary of the Corporation receives written notice of such exercise from the Participant, together with payment of the purchase price made in accordance with Section 2.2(a), except to the extent payment may be permitted to be made following delivery of written notice of exercise in accordance with Section 2.2(b). Notwithstanding any other provision of this Plan, the Committee may impose, by rule and in Award Agreements, such conditions upon the exercise of Awards (including, without limitation, conditions limiting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements. 1.7 No Transferability; Limited Exception to Transfer Restrictions. (a) Limit On Exercise and Transfer. Unless otherwise expressly provided in (or pursuant to) this Section 1.7, by applicable law and by the Award Agreement, as the same may be amended, (i) all Awards are non-transferable and shall not be subject in any manner to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge; Awards shall be exercised only by the Participant; and (ii) amounts payable or shares issuable pursuant to an Award shall be delivered only to (or for the account of) the Participant. (b) Exceptions. The Committee may permit Awards to be exercised by and paid to certain persons or entities related to the Participant, including but not limited to members of the Participant's immediate family, charitable institutions, or trusts or other entities whose beneficiaries or beneficial owners are members of the Participant's immediate family and/or charitable institutions, pursuant to such conditions and procedures as the Committee may establish. Any permitted transfer shall be subject to the condition that the Committee receive evidence satisfactory to it that the transfer is being made for estate and/or tax planning purposes on a gratuitous or donative basis and without consideration (other than nominal consideration). Notwithstanding the foregoing or Section 1.7(c), Incentive Stock Options and Restricted Stock Awards shall be subject to any and all additional transfer restrictions under the Code. (c) Further Exceptions to Limits On Transfer. The exercise and transfer restrictions in Section 1.7(a) shall not apply to: (i) transfers to the Corporation, (ii) the designation of a beneficiary to receive benefits in the event of the Participant's death or, if the Participant has died, transfers to or exercise by the Participant's beneficiary, or, in the absence of a validly designated beneficiary, transfers by will or the laws of descent and distribution, (iii) transfers pursuant to a QDRO order if approved or ratified by the Committee, (iv) if the Participant has suffered a disability, permitted transfers or exercises on behalf of the Participant by his or her legal representative, or 4 (v) the authorization by the Committee of "cashless exercise" procedures with third parties who provide financing for the purpose of (or who otherwise facilitate) the exercise of Awards consistent with applicable laws and the express authorization of the Committee. II. OPTIONS. 2.1 Grants. One or more Options may be granted to any Eligible Employee. Each Option so granted shall be designated by the Committee in the applicable Award Agreement as either a Nonqualified Stock Option or an Incentive Stock Option. 2.2 Option Price. (a) The purchase price per share of Common Stock covered by each Option shall be determined by the Committee, but shall not be less than 100% (110% in the case of an Incentive Stock Option grant to a Participant who owns more than 10% of the total combined voting power of all classes of stock of the Corporation or a Subsidiary) of the Fair Market Value of the Common Stock on the date the Option is granted. The purchase price of any shares purchased shall be paid in full at the time of each purchase in one or a combination of the following methods: (i) in cash or by check payable to the order of the Corporation, (ii) if authorized by the Committee or specified in the Option being exercised, by a promissory note made by the Participant in favor of the Corporation, upon the terms and conditions determined by the Committee, and secured by the Common Stock issuable upon exercise in compliance with applicable law (including, without limitation, state corporate law and federal margin requirements), or (iii) if authorized by the Committee or specified in the Option being exercised, by shares of Common Stock of the Corporation already owned by the Participant; provided, however, that the Committee may in its absolute discretion limit the Participant's ability to exercise an Award by means other than cash or check, and provided further that any shares delivered which were initially acquired upon exercise of a stock option must have been owned by the Participant at least six months as of the date of delivery. Shares of Common Stock used to satisfy the exercise price of an Option shall be valued at their Fair Market Value on the date of exercise. (b) In addition to the payment methods described in subsection (a), the Option may provide that the Option can be exercised and payment made by delivering a properly executed exercise notice together with irrevocable instructions to a bank or broker to promptly deliver to the Corporation the amount of sale or loan proceeds necessary to pay the exercise price and, unless otherwise allowed by the Committee, any applicable tax withholding under Section 6.6. The Company shall not be obligated to deliver certificates for the shares unless and until it receives full payment of the exercise price therefor. 2.3 Option Period. Each Option and all rights or obligations thereunder shall expire on such date as shall be determined by the Committee, but not later than 10 years after the Award Date, and shall be subject to earlier termination as hereinafter provided. 5 2.4 Exercise of Options. Except as otherwise provided in Section 6.3 and 6.4, an Option may become exercisable, in whole or in part, on the date or dates specified in the Award Agreement and thereafter shall remain exercisable until the expiration or earlier termination of the Option. No Option shall be exercisable for at least six months after the Award Date, except in the case of death or Total Disability. The Committee may, at any time after grant of the Option and from time to time, increase the number of shares exercisable at any time so long as the total number of shares subject to the Option is not increased. No Option shall be exercisable except in respect of whole shares, and fractional share interests shall be disregarded. Not less than 10 shares of Common Stock may be purchased at one time unless the number purchased is the total number at the time available for purchase under the terms of the Option. 2.5 Limitations on Grant of Incentive Stock Options. (a) To the extent that the aggregate fair market value of stock with respect to which incentive stock options first become exercisable by a Participant in any calendar year exceeds $100,000, taking into account both Common Stock subject to Incentive Stock Options under this Plan and stock subject to incentive stock options under all other plans of the Company, such options shall be treated as nonqualified stock options. For purposes of determining whether the $100,000 limit is exceeded, the fair market value of stock subject to options shall be determined as of the date the options are awarded. In reducing the number of options treated as incentive stock options to meet the $100,000 limit, the most recently granted options shall be reduced first. To the extent a reduction of simultaneously granted options is necessary to meet the $100,000 limit, the Corporation may, in the manner and to the extent permitted by law, designate which shares of Common Stock are to be treated as shares acquired pursuant to the exercise of an Incentive Stock Option. (b) There shall be imposed in any Award Agreement relating to Incentive Stock Options such terms and conditions as are required in order that the Option be an "incentive stock option" as that term is defined in Section 422 of the Code. (c) No Incentive Stock Option may be granted to any person who, at the time the Incentive Stock Option is granted, owns shares of outstanding Common Stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation or a Subsidiary, unless the exercise price of such Option is at least 110% of the Fair Market Value of the stock subject to the Option and such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. 2.6 Non-Employee Director Awards. (a) Participation. Awards under this Section 2.6 shall be made only to Non-Employee Directors. (b) Option Grants. Effective on the day after the Corporation's 1999 annual meeting, as and when any person who is not then an officer or employee of the Company shall become a director of the Corporation, there shall be granted automatically 6 (without any action by the Board or the Committee) a Nonqualified Stock Option (the grant or award date of which shall be the date such person takes office) to such person to purchase 9,000 shares of Common Stock. (c) Subsequent Annual Options. In each calendar year during the term of the Plan, commencing with the 2000 annual meeting, there shall be granted automatically (without any action by the Committee or the Board) a Nonqualified Stock Option to purchase 9,000 shares of Common Stock to each Non-Employee Director who is re-elected as a director of the Corporation or who continues as a director (the grant or award date of which shall be the date of the annual meeting of shareholders in each such year). (d) Option Price. The purchase price per share of the Common Stock covered by each Option granted pursuant to this Section 2.6 shall be one hundred percent of the Fair Market Value of the Common Stock on the Award Date. The purchase price of any shares purchased shall be paid in full at the time of each purchase in cash or by check or in shares of Common Stock valued at their Fair Market Value on the business day next preceding the date of exercise of the Option, or partly in such shares and partly in cash. (e) Option Period. Each Option granted under this Section 2.6 on or after May 21, 2003, and all rights or obligations thereunder, shall expire on the tenth anniversary of the Award Date and shall be subject to earlier termination as provided below. The expiration date of each Option granted under this Section 2.6 prior to May 21, 2003 shall be determined under the version of this Plan as in effect on the Award Date of such Option. (f) Exercise of Options. Except as otherwise provided in Sections 2.6(g) and 2.6(h), each Option granted under this Section 2.6 on or after March 24, 2004 shall become exercisable (i) as to one-third of the covered shares on the earlier of (A) the first anniversary of the Award Date, or (B) the day immediately preceding the first regularly scheduled Annual Meeting of shareholders first occurring after the Award Date; and (ii) as to an additional 1/36th of the covered shares in each of the 24 months thereafter (using the Award Date as the date of monthly vesting). Each Option granted under this Section 2.6 prior to March 24, 2004 shall vest as provided in the version of this Section 2.6(f) in effect on the Award Date of such Option. (g) Termination of Directorship. If a Non-Employee Director Participant's services as a member of the Board terminate, each Option granted pursuant to Section 2.6(b) or (c) hereof held by such Non-Employee Director Participant which is not then exercisable shall terminate; provided, however, that if a Non-Employee Director Participant's services as a member of the Board terminate by reason of death or Total Disability, the Committee may, in its discretion, consider to be exercisable a greater portion of any such Option than would otherwise be exercisable, upon such terms as the Committee shall determine. If a Non-Employee Director Participant's services as a member of the Board terminate by reason of death or Total Disability, any portion of any such Option which is then exercisable may be exercised for one year after the date of such termination or the balance of such Option's term, whichever period is shorter. If a Non-Employee Director Participant's services as a member of the Board terminate for 7 any other reason, any portion of any such Option which is then exercisable may be exercised for three months after the date of such termination or the balance of such Option's term, whichever period is shorter. (h) Acceleration Upon an Event. Immediately prior to the occurrence of an Event, in order to protect the holders of Options granted under this Section 2.6, each Option granted under Section 2.6(b) or (c) hereof shall become exercisable in full. (i) Adjustments. The specific numbers of shares stated in the foregoing provisions of Section 2.6(b) and (c) hereof and the consideration payable for such shares shall be subject to adjustment in certain events as provided in Section 6.2 of this Plan; provided, however, that the specific number of shares stated in Section 2.6(b) and in Section 2.6(c) shall not be adjusted, unless such adjustment is approved by the Board, in connection with a split or reverse split of the Common Stock. 2.7 Options and Rights in Substitution for Stock Options Granted by Other Corporations. Options and Stock Appreciation Rights may be granted to Eligible Employees under this Plan in substitution for employee stock options granted by other entities to persons who are or who will become Eligible Employees in respect of the Company, in connection with a distribution, merger or reorganization by or with the granting entity or an affiliated entity, or the acquisition by the Company, directly or indirectly, of all or a substantial part of the stock or assets of the other entity. 2.8 Adjustments, No Repricing Without Prior Shareholder Approval. Subject to Section 1.4 and Section 6.7 and the specific limitations on Awards contained in this Plan, the Committee from time to time may authorize, generally or in specific cases only, for the benefit of any Eligible Employee any adjustment in the exercise or repurchase price (except as set forth below), vesting schedule, the number of shares subject to, the restrictions upon or the term of, an Award granted under this Article by cancellation of an outstanding Award and a subsequent regranting of an Award, by amendment, by substitution of an outstanding Award, by waiver or by other legally valid means. Such amendment or other action may result among other changes in an exercise or purchase price which is higher or lower than the exercise or purchase price of the original or prior Award (except as set forth below), provide for a greater or lesser number of shares subject to the Award, or provide for a longer or shorter vesting or exercise period. Notwithstanding the foregoing, in no case shall the per share exercise price of any Option or related Stock Appreciation Right be reduced (by amendment, substitution, cancellation and regrant or other means) without stockholder approval to a price less than the Fair Market Value of a share of Common Stock on the related Award Date. III. STOCK APPRECIATION RIGHTS. 3.1 Grants. In its discretion, the Committee may grant Stock Appreciation Rights concurrently with the grant of Options. A Stock Appreciation Right shall extend to all or a portion of the shares covered by the related Option. A Stock Appreciation Right shall 8 entitle the Participant who holds the related Option, upon exercise of the Stock Appreciation Right and surrender of the related Option, or portion thereof, to the extent the Stock Appreciation Right and related Option each were previously unexercised, to receive payment of an amount determined pursuant to Section 3.3. Any Stock Appreciation Right granted in connection with an Incentive Stock Option shall contain such terms as may be required to comply with the provisions of Section 422 of the Code and the regulations promulgated thereunder. In its discretion, the Committee may also grant Stock Appreciation Rights independently of any Option subject to such conditions as the Committee may in its absolute discretion provide. 3.2 Exercise of Stock Appreciation Rights. (a) A Stock Appreciation Right granted concurrently with an Option shall be exercisable only at such time or times, and to the extent, that the related Option shall be exercisable and only when the Fair Market Value of the stock subject to the related Option exceeds the exercise price of the related Option. (b) In the event that a Stock Appreciation Right granted concurrently with an Option is exercised, the number of shares of Common Stock subject to the related Option shall be charged against the maximum amount of Common Stock that may be issued or transferred pursuant to Awards under this Plan. The number of shares subject to the Stock Appreciation Right and the related Option of the Participant shall also be reduced by such number of shares. (c) If a Stock Appreciation Right granted concurrently with an Option extends to less than all the shares covered by the related Option and if a portion of the related Option is thereafter exercised, the number of shares subject to the unexercised Stock Appreciation Right shall be reduced only if and to the extent that the remaining number of shares covered by such related Option is less than the remaining number of shares subject to such Stock Appreciation Right. (d) A Stock Appreciation Right granted independently of any Option shall be exercisable pursuant to the terms of the Award Agreement but in no event earlier than six months after the Award Date, except in the case of death or Total Disability. 3.3 Payment. (a) Upon exercise of a Stock Appreciation Right and surrender of an exercisable portion of the related Option, the Participant shall be entitled to receive payment of an amount determined by multiplying (i) the difference obtained by subtracting the exercise price per share of Common Stock under the related Option from the Fair Market Value of a share of Common Stock on the date of exercise of the Stock Appreciation Right, by (ii) the number of shares with respect to which the Stock Appreciation Right shall have been exercised. (b) The Committee, in its sole discretion, may settle the amount determined under paragraph (a) above solely in cash, solely in shares of Common Stock 9 (valued at Fair Market Value on the date of exercise of the Stock Appreciation Right), or partly in such shares and partly in cash, provided that the Committee shall have determined that such exercise and payment are consistent with applicable law. In any event, cash shall be paid in lieu of fractional shares. Absent a determination to the contrary, all Stock Appreciation Rights shall be settled in cash as soon as practicable after exercise. The exercise price for the Stock Appreciation Right shall be the exercise price of the related Option. Notwithstanding the foregoing, the Committee may, in the Award Agreement, determine the maximum amount of cash or stock or a combination thereof which may be delivered upon exercise of a Stock Appreciation Right. (c) Upon exercise of a Stock Appreciation Right granted independently of any Option, the Participant shall be entitled to receive payment of an amount based on a percentage, specified in the Award Agreement, of the difference obtained by subtracting the Fair Market Value per share of Common Stock on the Award Date from the Fair Market Value per share of Common Stock on the date of exercise of the Stock Appreciation Right. Such amount shall be paid as described in paragraph (b) above. IV. RESTRICTED STOCK AWARDS. 4.1 Grants. Subject to Section 1.4, the Committee may, in its discretion, grant one or more Restricted Stock Awards to any Eligible Employee. Each Restricted Stock Award agreement shall specify the number of shares of Common Stock to be issued to the Participant, the date of such issuance, the price, if any, to be paid for such shares by the Participant and the restrictions imposed on such shares, which restrictions shall not terminate earlier than six months after the Award Date. Stock certificates evidencing shares of Restricted Stock pending the lapse of the restrictions shall bear a legend making appropriate reference to the restrictions imposed hereunder and shall be held by the Corporation or by a third party designated by the Committee until the restrictions on such shares shall have lapsed and the shares shall have vested in accordance with the provisions of the Award. Upon issuance of the Restricted Stock Award, the Participant may be required to provide such further assurance and documents as the Committee may require to enforce the restrictions. 4.2 Restrictions. (a) Shares of Common Stock included in Restricted Stock Awards may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered, either voluntarily or involuntarily, until such shares have vested. (b) Unless otherwise provided in the applicable Award Agreement, Participants receiving Restricted Stock shall be entitled to dividend and voting rights for the shares issued even though they are not vested, provided that such rights shall terminate immediately as to any forfeited Restricted Stock. (c) In the event that the Participant shall have paid cash in connection with the Restricted Stock Award, the Award Agreement shall specify whether and to 10 what extent such cash shall be returned upon a forfeiture (with or without an earnings factor). 4.3 Return to the Corporation. Unless the Committee otherwise expressly provides, shares of Restricted Stock that remain subject to restrictions at the time of termination of employment or are subject to other conditions to vesting that have not been satisfied by the time specified in the applicable Award Agreement shall not vest and shall be returned to the Corporation in such manner and on such terms as the Committee shall therein provide. V. PERFORMANCE SHARE AWARDS. 5.1 Grants. The Committee may, in its discretion, grant Performance Share Awards to Eligible Employees based upon such factors as the Committee shall determine. A Performance Share Award agreement shall specify the number of shares of Common Stock subject to the Performance Share Award, the price, if any, to be paid for such shares by the Participant and the conditions upon which issuance to the Participant shall be based, which issuance shall not be earlier than six months after the Award Date. 5.2 Special Performance-Based Share Awards. Without limiting the generality of the foregoing, and in addition to Options and Stock Appreciation Rights granted under other provisions of this Plan which are intended to satisfy the exception for "qualified performance-based compensation" under Section 162(m) of the Code (with such Awards hereinafter referred to as a "Qualifying Option" or "Qualifying Stock Appreciation Right," respectively), other performance-based awards within the meaning of Section 162(m) of the Code ("Performance-Based Awards"), whether in the form of restricted stock, performance stock, phantom stock, Cash-Based Awards or other rights, the grant, vesting, exercisability or payment of which depends on the degree of achievement of the Performance Goals relative to pre-established targeted levels for the Corporation on a consolidated, segment, subsidiary, division or unit basis, may be granted under this Plan. Any Qualifying Option or Qualifying Stock Appreciation Right shall be subject to the requirements of Section 5.3(a), (c) and (f) below in order for such Award to satisfy the requirements for "qualified performance-based compensation" within the meaning of Section 162(m) of the Code. (a) Eligible Class. The eligible class of persons for Performance-Based Awards under this Section shall be the key employees (including officers) of the Company. (b) Performance Goal Alternatives. The specific performance goals for Performance-Based Awards granted under this Section (other than Qualifying Options and Qualifying Stock Appreciation Rights) shall be, on an absolute or relative basis, one or more of the Performance Goals, as selected by the Committee in its sole discretion. The Committee shall establish in the applicable Award Agreement the specific performance target(s) relative to the Performance Goal(s) which must be attained before the compensation under the Performance-Based Award becomes payable. The specific 11 targets shall be determined within the time period permitted under Section 162(m) of the Code (and any regulations issued thereunder) so that such targets are considered to be pre-established and so that the attainment of such targets is substantially uncertain at the time of their establishment. The applicable performance measurement period may not be less than one nor more than 10 years. (c) Maximum Performance-Based Award. Notwithstanding any other provision of the Plan to the contrary, the maximum number of shares of Common Stock which may be delivered pursuant to awards that are granted as Performance-Based Awards under this Section 5.2 to any Participant in any calendar year (plus the number of shares of Common Stock subject to Options and Stock Appreciation Rights granted to that Participant in that calendar year) shall not exceed 1,350,000 shares, either individually or in the aggregate, subject to adjustment as provided in Section 6.2. Awards that are cancelled during the year shall be counted against this limit to the extent required by Section 162(m) of the Code. In addition, the aggregate amount of compensation that may be paid to any Participant in respect of any Cash-Based Awards that are granted to that Participant during any calendar year as Performance-Based Awards shall not exceed $3,500,000. (d) Committee Certification. Before any Performance-Based Award under this Section 5.2 (other than Qualifying Options or Qualifying Stock Appreciation Rights) is paid, the Committee must certify in writing that the Performance Goal(s) and any other material terms of the Performance-Based Award were satisfied; provided, however, that a Performance-Based Award may be paid without regard to the satisfaction of the applicable Performance Goal in the event of a change in control event in accordance with Section 162(m) of the Code and Section 6.2. (e) Terms and Conditions of Awards. The Committee will have the discretion to determine the restrictions or other limitations of the individual awards granted under this Section 5.2 including the authority to reduce awards, payouts or vesting or to pay no awards, in its sole discretion, if the Committee preserves such authority at the time of grant by language to this effect in its authorizing resolutions or otherwise. (f) Adjustments for Changes in Capitalization and other Material Changes. In the event of a change in corporate capitalization, such as a stock split or stock dividend, or a corporate transaction, such as a merger, consolidation, spinoff, reorganization or similar event, or any partial or complete liquidation of the Company, or any similar event consistent with regulations issued under Section 162(m) of the Code including, without limitation, any material change in accounting policies or practices affecting the Company and/or the Performance Goals or targets, then the Committee shall make adjustments to the Performance Goals and targets relating to outstanding Performance-Based Awards to the extent such adjustments are made to reflect the occurrence of such an event; provided, however, that adjustments described in this subsection may be made only to the extent that the occurrence of an event described herein was unforeseen at the time the targets for a Performance-Based Award were established by the Committee. 12 5.3 Deferred Payments. The Committee may authorize for the benefit of any Eligible Employee the deferral of any payment of cash or shares that may become due or of cash otherwise payable under this Plan, and provide for accredited benefits thereon based upon such deferment, at the election or at the request of such Participant, subject to the other terms of this Plan. Such deferral shall be subject to such further conditions, restrictions or requirements as the Committee may impose, subject to any then vested rights of Participants. VI. OTHER PROVISIONS. 6.1 Rights of Eligible Employees, Participants and Beneficiaries. (a) Status as an Eligible Employee shall not be construed as a commitment that any Award will be made under this Plan to any Eligible Employee generally. (b) Nothing contained in this Plan (or in Award Agreements or in any other documents related to this Plan or to Awards) shall confer upon any Eligible Employee or Participant any right to continue in the service or employ of the Company or constitute any contract or agreement of service or employment, or interfere in any way with the right of the Company to reduce such person's compensation or other benefits or to terminate the services or employment of such Eligible Employee or Participant, with or without cause, but nothing contained in this Plan or any document related thereto shall affect any other contractual right of any Eligible Employee or Participant. (c) Awards payable under this Plan shall be payable in shares or from the general assets of the Corporation, and no special or separate reserve, fund or deposit shall be made to assure payment of any such Awards. No Participant, Beneficiary or other person shall have any right, title or interest in any fund or in any specific asset (including shares of Common Stock) of the Company by reason of any Award granted hereunder. Neither the provisions of this Plan (or of any documents related hereto), nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan shall create, or be construed to create, a trust of any kind or a fiduciary relationship between the Company and any Participant, Beneficiary or other person. To the extent that a Participant, Beneficiary or other person acquires a right to receive an Award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Corporation. 6.2 Adjustments Upon Changes in Capitalization. (a) If the outstanding shares of Common Stock are changed into or exchanged for cash or a different number or kind of shares or securities of the Corporation or of another issuer, or if additional shares or new or different securities are distributed with respect to the outstanding shares of the Common Stock, through a reorganization or merger to which the Corporation is a party, or through a combination, consolidation, recapitalization, reclassification, stock split, stock dividend, reverse stock split, stock consolidation or other capital change or adjustment, an appropriate adjustment shall be made in the number and kind of shares or other consideration that is subject to or 13 may be delivered under this Plan and pursuant to outstanding Awards. A corresponding adjustment to the consideration payable with respect to Awards granted prior to any such change and to the price, if any, paid in connection with Restricted Stock Awards or Performance Share Awards or Performance-Based Awards shall also be made. Any such adjustment, however, shall be made without change in the total payment, if any, applicable to the portion of the Award not exercised but with a corresponding adjustment in the price for each share. Corresponding adjustments shall be made with respect to Stock Appreciation Rights based upon the adjustments made to the Options to which they are related or, in the case of Stock Appreciation Rights granted independently of any Option, based upon the adjustments made to Common Stock. (b) Upon the dissolution or liquidation of the Corporation, or upon a reorganization, merger or consolidation of the Corporation with one or more corporations as a result of which the Corporation is not the surviving corporation, the Plan and outstanding Awards shall terminate. Notwithstanding the foregoing, the Committee may provide in writing in connection with, or in contemplation of, any such transaction for any or all of the following alternatives (separately or in combinations): (i) for the assumption by the successor corporation of the Awards theretofore granted or the substitution by such corporation for such Awards of awards covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (ii) for the continuance of this Plan by such successor corporation in which event this Plan and the Awards shall continue in the manner and under the terms so provided; or (iii) for the payment in cash or shares of Common Stock in lieu of and in complete satisfaction of such Awards. (c) In adjusting Awards to reflect the changes described in this Section 6.2, or in determining that no such adjustment is necessary, the Committee may rely upon the advice of independent counsel and accountants of the Company, and the determination of the Committee shall be conclusive. No fractional shares of stock shall be issued under this Plan on account of any such adjustment. (d) In any of such events, the Committee may take such action prior to such event to the extent that the Committee deems the action necessary to permit the Participant to realize the benefits intended to be conveyed with respect to the underlying shares in the same manner as is or will be available to shareholders generally. 6.3 Termination of Employment. (a) If the Participant's service to or employment by the Company terminates for any reason other than Retirement, death or Total Disability, the Participant shall have, subject to earlier termination pursuant to or as contemplated by Section 2.3, three months or such shorter period as is provided in the Award Agreements from the date of termination of services or employment to exercise any Option to the extent it shall have become exercisable on the date of termination of employment, and any Option not exercisable on that date shall terminate. Notwithstanding the preceding sentence, in the event the Participant is discharged for cause as determined by the Committee in its sole discretion, all Options shall lapse immediately upon such termination of services or employment. 14 (b) If the Participant's service to or employment by the Company terminates as a result of Retirement or Total Disability, the Participant or Participant's Personal Representative, as the case may be, shall have, subject to earlier termination pursuant to or as contemplated by Section 2.3, 12 months (or, in the case of Incentive Stock Options where the Participant terminates as a result of Retirement, three months) or such shorter period as is provided in the Award Agreements from the date of termination of services or employment to exercise any Option to the extent it shall have become exercisable by the date of termination of services or employment and any Option not exercisable on that date shall terminate. (c) If the Participant's service to or employment by the Company terminates as a result of death while the Participant is rendering services to the Company or is employed by the Company or during the 12 month period (or, in the case of Incentive Stock Options where the Participant has terminated as a result of Retirement, three month period) referred to in subsection (b) above, the Participant's Option shall be exercisable by the Participant's Beneficiary, subject to earlier termination pursuant to or as contemplated by Section 2.3, during the 12 month period or such shorter period as is provided in the Award Agreements following the Participant's death, as to all or any part of the shares of Common Stock covered thereby to the extent exercisable on the date of death (or earlier termination). (d) Each Stock Appreciation Right granted concurrently with an Option shall have the same termination provisions and exercisability periods as the Option to which it relates. The termination provisions and exercisability periods of any Stock Appreciation Right granted independently of an Option shall be established in accordance with Section 3.2(d). The exercisability period of a Stock Appreciation Right shall not exceed that provided in Section 2.3 or in the related Award Agreement and the Stock Appreciation Right shall expire at the end of such exercisability period. (e) In the event of termination of services to or employment with the Company for any reason, (i) shares of Common Stock subject to the Participant's Restricted Stock Award shall be forfeited in accordance with the provisions of the related Award Agreement to the extent such shares have not become vested on that date; and (ii) shares of Common Stock subject to the Participant's Performance Share Award or Performance-Based Award shall be forfeited in accordance with the provisions of the related Award Agreement to the extent such shares have not been issued or become issuable on that date. (f) In the event of termination of services to or employment with the Company for any reason, other than discharge for cause, the Committee may, in its discretion, increase the portion of the Participant's Award available to the Participant, or Participant's Beneficiary or Personal Representative, as the case may be, upon such terms as the Committee shall determine. (g) If an entity ceases to be a Subsidiary, such action shall be deemed for purposes of this Section 6.3 to be a termination of services or employment of each consultant or employee of that entity who does not continue as a consultant or as an employee of another entity within the Company. 15 (h) Upon forfeiture of a Restricted Stock Award pursuant to this Section 6.3, the Participant, or his or her Beneficiary or Personal Representative, as the case may be, shall transfer to the Corporation the portion of the Restricted Stock Award not vested at the date of termination of services or employment, without payment of any consideration by the Corporation for such transfer unless the Participant paid a purchase price in which case repayment, if any, of that price shall be governed by the Award Agreement. Notwithstanding any such transfer to the Corporation, or failure, refusal or neglect to transfer, by the Participant, or his or her Beneficiary or Personal Representative, as the case may be, such nonvested portion of any Restricted Stock Award shall be deemed transferred automatically to the Corporation on the date of termination of services or employment. The Participant's original acceptance of the Restricted Stock Award shall constitute his or her appointment of the Corporation and each of its authorized representatives as attorney(s)-in-fact to effect such transfer and to execute such documents as the Corporation or such representatives deem necessary or advisable in connection with such transfer. 6.4 Acceleration of Awards. Unless prior to an Event the Board determines that, upon its occurrence, there shall be no acceleration of Awards or determines those Awards which shall be accelerated and the extent to which they shall be accelerated, upon the occurrence of an Event (i) each Option and each related Stock Appreciation Right shall become immediately exercisable to the full extent theretofore not exercisable, (ii) Restricted Stock shall immediately vest free of restrictions and (iii) the number of shares covered by each Performance Share Award or Performance-Based Award shall be issued to the Participant; subject, however, to compliance with applicable regulatory requirements, including without limitation and Section 422 of the Code. For purposes of this section only, the Board shall mean the Board as constituted immediately prior to the Event. 6.5 Government Regulations. This Plan, the granting of Awards under this Plan and the issuance or transfer of shares of Common Stock (and/or the payment of money) pursuant thereto are subject to all applicable federal and state laws, rules and regulations and to such approvals by any regulatory or governmental agency (including without limitation "no action" positions of the Commission) which may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Without limiting the generality of the foregoing, no Awards may be granted under this Plan, and no shares shall be issued by the Corporation, nor cash payments made by the Corporation, pursuant to or in connection with any such Award, unless and until, in each such case, all legal requirements applicable to the issuance or payment have, in the opinion of counsel to the Corporation, been complied with. In connection with any stock issuance or transfer, the person acquiring the shares shall, if requested by the Corporation, give assurances satisfactory to counsel to the Corporation in respect of such matters as the Corporation may deem desirable to assure compliance with all applicable legal requirements. 6.6 Tax Withholding. (a) Upon the disposition by a Participant or other person of shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option prior to 16 satisfaction of the holding period requirements of Section 422 of the Code, or upon the exercise of a Nonqualified Stock Option, the exercise of a Stock Appreciation Right, the vesting of a Restricted Stock Award or the payment of a Performance Share Award or Performance-Based Award, the Company shall have the right to (i) require such Participant or such other person to pay by cash or check payable to the Company, the amount of any taxes which the Company may be required to withhold with respect to such transactions or (ii) deduct from amounts paid in cash the amount of any taxes which the Company may be required to withhold with respect to such cash amounts. The above notwithstanding, in any case where a tax is required to be withheld in connection with the issuance or transfer of shares of Common Stock under this Plan, the Participant may elect, pursuant to such rules as the Committee may establish, to have the Company reduce the number of such shares issued or transferred by the appropriate number of shares to accomplish such withholding; provided, the Committee may impose such conditions on the payment of any withholding obligation as may be required to satisfy applicable regulatory requirements. (b) The Committee may, in its discretion, permit a loan from the Company to a Participant in the amount of any taxes which the Company may be required to withhold with respect to shares of Common Stock received pursuant to a transaction described in subsection (a) above. Such a loan will be for a term, at a rate of interest and pursuant to such other terms and rules as the Committee may establish. 6.7 Amendment, Termination and Suspension. (a) The Board may, at any time, terminate or, from time to time, amend, modify or suspend this Plan (or any part hereof). No Awards may be granted during any suspension of this Plan or after termination of this Plan, but the Committee shall retain jurisdiction as to Awards then outstanding in accordance with the terms of this Plan. (b) To the extent then required under Sections 162, 422 or 424 of the Code or any other applicable law, or deemed necessary or advisable by the Board, any amendment to this Plan shall be subject to shareholder approval. (c) Without limiting any other express authority of the Committee under (but subject to) the express limits of this Plan, the Committee by agreement or resolution may waive conditions of or limitations on Awards to Participants that the Committee in the prior exercise of its discretion has imposed, without the consent of a Participant, and may make other changes to the terms and conditions of Awards that do not affect in any manner materially adverse to the Participant, the Participant's rights and benefits under an Award. (d) No amendment, suspension or termination of this Plan or change of or affecting any outstanding Award shall, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of the Participant or obligations of the Company under any Award granted under this Plan prior to the effective date of such change. Changes contemplated by Section 6.2 shall not be deemed to constitute changes or amendments for purposes of this Section 6.7. 17 6.8 Privileges of Stock Ownership; Nondistributive Intent. A Participant shall not be entitled to the privilege of stock ownership as to any shares of Common Stock not actually issued to him or her. Upon the issuance and transfer of shares to the Participant, unless a registration statement is in effect under the Securities Act and applicable state securities law, relating to such issued and transferred Common Stock and there is available for delivery a prospectus meeting the requirements of Section 10 of the Securities Act, the Common Stock may be issued and transferred to the Participant only if he or she represents and warrants in writing to the Corporation that the shares are being acquired for investment and not with a view to the resale or distribution thereof. No shares shall be issued and transferred unless and until there shall have been full compliance with any then applicable regulatory requirements (including those of exchanges upon which any Common Stock of the Corporation may be listed). 6.9 Effective Date of the Plan. This Plan shall be effective upon its approval by the Board (the "Effective Date"), subject to approval by the shareholders of the Corporation within twelve months from the date of such Board approval. 6.10 Term of the Plan. Unless previously terminated by the Board, this Plan shall terminate at the close of business on the day before the tenth anniversary of the Effective Date, and no Awards shall be granted under it thereafter, but such termination shall not affect any Award theretofore granted. Unless otherwise expressly provided in this Plan or in an applicable Award Agreement, any Award granted prior to the Plan's termination date may extend beyond such date, and all authority of the Committee with respect to Awards hereunder, including the authority to amend an Award, shall continue during any suspension of this Plan and in respect of Awards outstanding on the termination date. No new Performance-Based Award may be granted under Section 5.2 of the Plan after the first annual shareholders meeting of the Corporation to occur in 2008, but such termination shall not affect any Performance-Based Award theretofore granted. 6.11 Governing Law. This Plan and the documents evidencing Awards and all other related documents shall be governed by, and construed in accordance with, the laws of the State of California. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of this Plan shall continue to be fully effective. 6.12 Plan Construction. (a) Rule 16b-3. It is the intent of the Corporation that the Awards and transactions permitted by Awards generally satisfy and be interpreted in a manner that, in the case of Participants who are or may be subject to Section 16 of the Exchange Act, satisfies the applicable requirements of Rule 16b-3 promulgated thereunder so that such persons (unless they otherwise agree) will be entitled to the benefits of Rule 16b-3 or 18 other exemptive rules under Section 16 of the Exchange Act in respect of those transactions and will not be subjected to avoidable liability. (b) Section 162(m). It is the further intent of the Corporation that (to the extent the Corporation or Awards under this Plan may be or become subject to limitations on deductibility under Section 162(m) of the Code), Options or SARs granted with an exercise or base price not less than Fair Market Value on the date of grant and Performance-Based Awards under Section 5.2 of this Plan that are granted to or held by a person subject to Section 162(m) of the Code will qualify as performance-based compensation or otherwise be exempt from deductibility limitations under Section 162(m) of the Code, to the extent that the Committee authorizing the Award (or the payment thereof, as the case may be) satisfies any applicable administrative requirements thereof. 6.13 Captions. Captions and headings are given to the sections and subsections of this Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Plan or any provision thereof. 6.14 Non-Exclusivity of Plan. Nothing in this Plan shall limit or be deemed to limit the authority of the Board or the Committee to grant awards or authorize any other compensation, with or without reference to the Common Stock, under any other plan or authority. 6.15 No Corporate Action Restriction. The existence of the Plan, the Award Agreements and the Awards granted hereunder shall not limit, affect or restrict in any way the right or power of the Board or the shareholders of the Corporation to make or authorize: (a) any adjustment, recapitalization, reorganization or other change in the Corporation's or any Subsidiary's capital structure or its business, (b) any merger, amalgamation, consolidation or change in the ownership of the Corporation or any subsidiary, (c) any issue of bonds, debentures, capital, preferred or prior preference stock ahead of or affecting the Corporation's or any Subsidiary's capital stock or the rights thereof, (d) any dissolution or liquidation of the Corporation or any Subsidiary, (e) any sale or transfer of all or any part of the Corporation or any Subsidiary's assets or business, or (f) any other corporate act or proceeding by the Corporation or any Subsidiary. No participant, beneficiary or any other person shall have any claim under any Award or Award Agreement against any member of the Board or the Committee, or the Corporation or any employees, officers or agents of the Corporation or any Subsidiary, as a result of any such action. 6.16 Other Company Benefit and Compensation Program. Payments and other benefits received by a Participant under an Award made pursuant to this Plan shall not be deemed a part of a Participant's compensation for purposes of the determination of benefits under any other employee welfare or benefit plans or arrangements, if any, provided by the Corporation or any Subsidiary, except 19 where the Committee or the Board expressly otherwise provides or authorizes in writing. Awards under this Plan may be made in addition to, in combination with, as alternatives to or in payment of grants, awards or commitments under any other plans or arrangements of the Corporation or the Subsidiaries. VII. DEFINITIONS. 7.1 Definitions. (a) "Award" means an Option, which may be designated as a Nonqualified Stock Option or an Incentive Stock Option, a Stock Appreciation Right, a Restricted Stock Award, Performance Share Award or Performance-Based Award, in each case granted under this Plan. (b) "Award Agreement" means a written agreement setting forth the terms of an Award. (c) "Award Date" means the date upon which the Committee took the action granting an Award or such later date as is prescribed by the Committee or, in the case of Options granted under Section 2.6, the date specified in such Section 2.6. (d) "Beneficiary" means the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive the benefits specified under this Plan in the event of a Participant's death, and shall mean the Participant's executor or administrator if no other Beneficiary is designated and able to act under the circumstances. (e) "Board" means the Board of Directors of the Corporation. (f) "Cash-Based Award" means an Award pursuant to Section 5.2 that, if paid, must be paid in cash and is not denominated in nor have a value derived from the value of, nor an exercise or conversion privilege at a price related to, shares of Common Stock. (g) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (h) "Commission" means the Securities and Exchange Commission. (i) "Committee" means the Board or a committee appointed by the Board to administer this Plan, which committee shall be comprised only of one or more directors or such greater number of directors as may be required under applicable law. In respect of any decision with respect to an Award intended to satisfy the requirements of Section 162(m) of the Code, the Committee shall be composed of no less than two members, each of whom shall be an "outside director" within the meaning of Section 162(m) of the Code. In respect of any decision with respect to an Award intended to be exempt pursuant to Rule 16b-3 promulgated by the Commission under the Exchange Act, the Committee shall be composed of no less than two members, each of whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3(d)(1) under the Exchange Act. 20 (j) "Common Stock" means the Common Stock of the Corporation. (k) "Company" means the Corporation and its Subsidiaries, collectively or individually, as the context may require. (l) "Corporation" means Pacific Sunwear of California, Inc., a California corporation, and its successors. (m) "Eligible Employee" means an officer or key employee of the Company and consultants to the Company whether or not such consultants are employees. (n) "Event" means any of the following: (i) Approval by the shareholders of the Corporation of the dissolution or liquidation of the Corporation; (ii) Approval by the shareholders of the Corporation of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities other than Subsidiaries, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are, or are to be, owned by former shareholders of the Corporation; or (iii) Approval by the shareholders of the Corporation of the sale of substantially all of the Corporation's business assets to a person or entity which is not a Subsidiary. (o) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (p) "Fair Market Value" means (i) if the stock is listed or admitted to trade on a national securities exchange, the closing price of the stock on the Composite Tape, as published in the Western Edition of The Wall Street Journal, of the principal national securities exchange on which the stock is so listed or admitted to trade, on such date, or, if there is no trading of the stock on such date, then the closing price of the stock as quoted on such Composite Tape on the next preceding date on which there was trading in such shares; (ii) if the stock is not listed or admitted to trade on a national securities exchange, the last price for the stock on such date, as furnished by the National Association of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market Reporting System or a similar organization if the NASD is no longer reporting such information; (iii) if the stock is not listed or admitted to trade on a national securities exchange and is not reported on the National Market Reporting System, the mean between the bid and asked price for the stock on such date, as furnished by the NASD; or (iv) if the stock is not listed or admitted to trade on a national securities exchange, is not reported on the National Market Reporting System and if bid and asked prices for the stock are not furnished by the NASD or a similar organization, the values established by the Committee for purposes of the Plan. 21 (q) "Incentive Stock Option" means an option which is designated as an incentive stock option within the meaning of Section 422 of the Code, the award of which contains such provisions as are necessary to comply with that section. (r) "Non-Employee Director" means a member of the Board who is not an officer or employee of the Company. (s) "Non-Employee Director Participant" means a Non-Employee Director who has been granted an Option under Section 2.6. (t) "Nonqualified Stock Option" means an option which is designated as a Nonqualified Stock Option and shall include any Option intended as an Incentive Stock Option that fails to meet the applicable legal requirements thereof. (u) "Option" means an option to purchase Common Stock under this Plan. An Option shall be designated by the Committee as a Nonqualified Stock Option or an Incentive Stock Option. (v) "Participant" means an Eligible Employee who has been granted an Award and a Non-Employee Director who has received an Option under Section 2.6. (w) "Performance Goal" means any one or more of the criteria set forth on Exhibit A hereto. (x) "Performance-Based Awards" shall mean an Award of a right to receive shares of Common Stock or other compensation (including cash) under Section 5.2, the issuance or payment of which is contingent upon, among other conditions, the attainment of performance objectives specified by the Committee. (y) "Performance Share Award" means an award of shares of Common Stock under Section 5.1, the issuance of which is contingent upon attainment of performance objectives specified by the Committee. (z) "Personal Representative" means the person or persons who, upon the disability or incompetence of a Participant, shall have acquired on behalf of the Participant by legal proceeding or otherwise the power to exercise the rights and receive the benefits specified in this Plan. (aa) "Plan" means the Pacific Sunwear of California, Inc. 1999 Stock Award Plan, as it may be amended from time to time. (bb) "QDRO" shall mean an order requiring the transfer of an Award or portion thereof pursuant to a state domestic relations law to the spouse, former spouse, child or other dependent of a Participant. Such order must be in a form substantially identical to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended. (cc) "Restricted Stock" means those shares of Common Stock issued pursuant to a Restricted Stock Award which are subject to the restrictions set forth in the related Award Agreement. 22 (dd) "Restricted Stock Award" means an award of a fixed number of shares of Common Stock to the Participant subject, however, to payment of such consideration, if any, and such forfeiture provisions, as are set forth in the Award Agreement. (ee) "Retirement" means retirement from employment by or providing services to the Corporation or any Subsidiary after age 65 and, in the case of employees, in accordance with the retirement policies of the Company then in effect. (ff) "Securities Act" means the Securities Act of 1933, as amended. (gg) "Stock Appreciation Right" means a right to receive a number of shares of Common Stock or an amount of cash, or a combination of shares and cash, determined as provided in Section 3.3(a). (hh) "Subsidiary" means any corporation or other entity a majority or more of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation. (ii) "Total Disability" means a "permanent and total disability" within the meaning of Section 22(e)(3) of the Code and, in the case of Awards other than Incentive Stock Options, such other disabilities, infirmities, afflictions or conditions as the Committee by rule may include. 23 EXHIBIT A PERFORMANCE GOALS The Performance Targets shall mean any one or a combination of the following. Except as otherwise expressly provided below or the context otherwise requires, financial and accounting terms herein are used as defined for purposes of, and shall be determined and construed in accordance with, generally accepted accounting principles, as from time to time in effect, as applied and reflected in the consolidated financial statements of the Corporation, prepared in the ordinary course of business. EBIT. "EBIT" means Net Income before interest expense and taxes. EBITDA. "EBITDA" means Net Income before interest expense, taxes, depreciation and amortization. EPS. "EPS" means Net Income divided by the weighted average number of common shares outstanding. Unless otherwise provided by the Committee in the related Award Agreement, common shares outstanding shall be adjusted to include the dilutive effect of stock options, restricted stock and other dilutive financial instruments. EXPENSE REDUCTION. "Expense Reduction" means reduction in actual expense or an improvement in the expense to Net Sales ratio compared to a target or prior year actual expense to Sales ratio. DEBT TO EBITDA. "Debt to EBITDA" means the ratio of debt to EBITDA. INTEREST COVERAGE. "Interest Coverage" means the ratio of EBITDA to interest expense. INVENTORY TURNS. "Inventory Turns" means the ratio of total cost of goods sold on a historical basis to average net inventory. NET INCOME. "Net Income" means the difference between total Net Sales and total costs and expenses, including income taxes. NET SALES. "Net Sales" means net sales. OPERATING CASH FLOW. "Operating Cash Flow" means the net cash provided by operating activities less net cash used by operations and investing activities as shown on the statement of cash flows. PRE-TAX MARGIN. "Pre-Tax Margin" means the ratio of earnings before income taxes to Net Sales. RETURN ON ASSETS. "Return on Assets" means the ratio of Net Income to total average assets including goodwill. RETURN ON CAPITAL. "Return on Capital" means the ratio of Net Income to average total capital. Total capital includes working capital, and other long term assets such as PP&E, goodwill and intangibles, and leased assets. Unless otherwise provided by the A-1 Committee in the related Award Agreement, cash, deferred tax assets and debt shall not be included in capital for calculation purposes. RETURN ON EQUITY. "Return on Equity" means Net Income divided by average total equity. STOCK PRICE APPRECIATION. "Stock Price Appreciation" means an increase, or an average annualized increase, in the stock price or market value of the Common Stock of the Corporation after the date of grant of an Award or above a specified price. WORKING CAPITAL IMPROVEMENT. "Working Capital Improvement" means the net change in current assets less current liabilities over the applicable period or the reduction in the current ratio (current assets divided by current liabilities), excluding changes in cash and cash equivalents, and current and deferred income taxes. A-2 EX-99.2 5 a99238exv99w2.txt EXHIBIT 99.2 EXHIBIT 99.2 PACIFIC SUNWEAR OF CALIFORNIA, INC. EMPLOYEE STOCK PURCHASE PLAN (Composite Plan Document Reflecting Stock Splits Through September 5, 2003) TABLE OF CONTENTS

Page ---- 1. PURPOSE................................................................3 2. DEFINITIONS............................................................3 3. ELIGIBILITY............................................................5 4. STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS..........................5 5. OFFERING PERIODS.......................................................6 6. PARTICIPATION..........................................................6 7. METHOD OF PAYMENT OF CONTRIBUTIONS.....................................6 8. GRANT OF OPTION........................................................7 9. EXERCISE OF OPTION.....................................................7 10. DELIVERY...............................................................8 11. TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS...................8 12. ADMINISTRATION.........................................................8 13. DESIGNATION OF BENEFICIARY.............................................9 14. TRANSFERABILITY........................................................9 15. USE OF FUNDS; INTEREST................................................10 16. REPORTS...............................................................10 17. ADJUSTMENTS OF AND CHANGES IN THE STOCK...............................10 18. POSSIBLE EARLY TERMINATION OF PLAN AND OPTIONS........................10 19. TERM OF PLAN; AMENDMENT OR TERMINATION................................11 20. NOTICES...............................................................11 21. CONDITIONS UPON ISSUANCE OF SHARES....................................11 22. PLAN CONSTRUCTION.....................................................11 23. EMPLOYEES' RIGHTS.....................................................12 24. MISCELLANEOUS.........................................................12

2 PACIFIC SUNWEAR OF CALIFORNIA, INC. EMPLOYEE STOCK PURCHASE PLAN (Composite Plan Document Reflecting Stock Splits Through September 5, 2003) The following constitute the provisions of the Pacific Sunwear of California, Inc. Employee Stock Purchase Plan (this "Plan"). 1. PURPOSE The purpose of this Plan is to provide Eligible Employees with an incentive to advance the best interests of the Corporation (and those Subsidiaries which may be designated by the Committee as "Participating Corporations") by providing a method whereby they may voluntarily purchase Common Stock at a favorable price and upon favorable terms. 2. DEFINITIONS Capitalized terms used herein which are not otherwise defined shall have the following meanings. "Account" shall mean the bookkeeping account maintained by the Corporation, or by a recordkeeper on behalf of the Corporation, for a Participant pursuant to Section 7(a). "Board" shall mean the Board of Directors of the Corporation. "Change in Control" shall mean any of the following: a. Approval by the shareholders of the Corporation of the dissolution or liquidation of the Corporation; b. Approval by the shareholders of the Corporation of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities other than Subsidiaries, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are, or are to be, owned by former shareholders of the Corporation; c. Approval by the shareholders of the Corporation of the sale of substantially all of the Corporation's business assets to a person or entity that is not a Subsidiary. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Committee" shall mean the committee appointed by the Board to administer this Plan pursuant to Section 12. "Common Stock" shall mean the common stock of the Corporation. 3 "Company" shall mean the Corporation and its Subsidiaries. "Compensation" shall mean an Eligible Employee's regular earnings, overtime pay, sick pay, shift differential, shift premium, vacation pay, incentive compensation, commissions and bonuses. Compensation also includes any amounts contributed as salary reduction contributions to a plan qualifying under Section 401(k), 125 or 129 of the Code. Any other form of remuneration is excluded from Compensation, including (but not limited to) the following: prizes, awards, housing allowances, stock option exercises, stock appreciation rights, restricted stock exercises, performance awards, auto allowances, tuition reimbursement and other forms of imputed income. Notwithstanding the foregoing, Compensation shall not include any amounts deferred under or paid from the Corporation's Executive Deferred Compensation Plan. "Contributions" shall mean all bookkeeping amounts credited to the Account of a Participant pursuant to Section 7(a). "Corporation" shall mean Pacific Sunwear of California, Inc., a California corporation. "Eligible Employee" shall mean any employee of the Corporation, or of any Subsidiary which has been designated in writing by the Committee as a "Participating Corporation" (including any Subsidiaries which have become such after the date that this Plan is approved by shareholders). Notwithstanding the foregoing, "Eligible Employee" shall not include any employee who (i) has not as of the Grant Date completed at least three months of continuous full-time employment with the Company, (ii) whose customary employment is for 20 hours per week or less; or (iii) whose customary employment is for not more than five months in a calendar year. In addition, no Officer shall be an Eligible Employee. "Effective Date" shall mean January 1, 1998. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exercise Date" shall mean, with respect to an Offering Period, the last day of that Offering Period. "Fair Market Value" shall mean the closing price of a Share on The New York Stock Exchange on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street Journal or, in the event the Common Stock is not listed on The New York Stock Exchange, the "Fair Market Value" shall be the closing price of the Common Stock for such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported by the National Association of Securities Dealers Automated Quotation ("NASDAQ") or, if such price is not reported, the mean of the bid and asked prices per Share as reported by NASDAQ or, if such prices are not so listed or reported, as determined by the Committee (or its delegate), in its discretion. 4 "Grant Date" shall mean the first day of each Offering Period. "Offering Period" shall mean the six-consecutive month periods commencing on each January 1 and July 1. "Officer" shall mean (i) any individual who is a named officer of the Corporation pursuant to the Corporation's By-Laws, and (ii) any other individual who the Committee determines, in its sole discretion, to be (A) a highly compensated employee (within the meaning of Section 414(q) of the Code) and (B) an officer of the Company for purposes of this Plan. "Option" shall mean the stock option to acquire Shares granted to a Participant pursuant to Section 8. "Option Price" shall mean the per share exercise price of an Option as determined in accordance with Section 8(b). "Participant" shall mean an Eligible Employee who has elected to participate in this Plan and who has filed a valid and effective Subscription Agreement to make Contributions pursuant to Section 6. "Plan" shall mean this Pacific Sunwear of California, Inc. Employee Stock Purchase Plan, as amended from time to time. "Rule 16b-3" shall mean Rule 16b-3 promulgated under Section 16. "Section 16" shall mean Section 16 of the Exchange Act. "Share" shall mean a share of Common Stock. "Subscription Agreement" shall mean the written agreement filed by an Eligible Employee with the Corporation pursuant to Section 6 to participate in this Plan. "Subsidiary" shall mean any corporation in an unbroken chain of corporations (beginning with the Corporation) in which each corporation (other than the last corporation) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one or more of the other corporations in the chain. 3. ELIGIBILITY Any person employed as an Eligible Employee as of a Grant Date shall be eligible to participate in this Plan during the Offering Period in which such Grant Date occurs, subject to the Eligible Employee satisfying the requirements of Section 6. 4. STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS The total number of Shares to be made available under this Plan is 607,500 authorized and unissued or treasury shares of Common Stock, or Shares repurchased on the open market, subject to adjustments pursuant to Section 17. In the event that all of the Shares 5 made available under this Plan are subscribed prior to the expiration of this Plan, this Plan may be terminated in accordance with Section 19. 5. OFFERING PERIODS During the term of this Plan, the Corporation will offer Options to purchase Shares to all Participants during each Offering Period. Each Option shall become effective on the Grant Date. The term of each Option shall be six months and shall end on the Exercise Date. The first Offering Period shall commence on or after the Effective Date. Offering Periods shall continue until this Plan is terminated in accordance with Section 18 or 19, or, if earlier, until no Shares remain available for Options pursuant to Section 4. 6. PARTICIPATION An Eligible Employee may become a participant in this Plan by completing a Subscription Agreement on a form approved by and in a manner prescribed by the Committee (or its delegate). To become effective, a Subscription Agreement must be filed with the Corporation prior to the start of the Offering Period with respect to which it is to become effective and must set forth the percentage of the Eligible Employee's Compensation (which shall be a whole percentage point not less than 1% and not more than 10%) to be credited to the Participant's Account as Contributions each pay period. Subscription Agreements shall contain the Eligible Employee's authorization and consent to the Corporation's withholding from his or her Compensation the amount of his or her Contributions. Subscription Agreements shall remain valid for all Offering Periods until (i) an Eligible Employee's participation terminates pursuant to the terms hereof, or (ii) until a new Subscription Agreement becomes effective. 7. METHOD OF PAYMENT OF CONTRIBUTIONS (a) The Corporation shall maintain on its books, or cause to be maintained by a recordkeeper, an Account in the name of each Participant. The percentage of Compensation elected to be applied as Contributions by a Participant shall be deducted from such Participant's Compensation on each payday during the period for payroll deductions set forth below and such payroll deductions shall be credited to that Participant's Account as soon as administratively practicable after such date. A Participant may not make any additional payments to his or her Account. A Participant's Account shall be reduced by any amounts used to pay the Option Price of Shares acquired, or by any other amounts distributed pursuant to the terms hereof. (b) Payroll deductions with respect to an Offering Period shall commence as of the first day of the payroll period which coincides with or immediately follows the applicable Grant Date and shall end on the last day of the payroll period which coincides with or immediately precedes the applicable Exercise Date, unless sooner terminated by the Participant as provided in this Section or until his or her participation terminates pursuant to Section 11. (c) A Participant may terminate his or her Contributions during an Offering Period by completing and filing with the Corporation, in such form and on such terms as the Committee (or its delegate) may prescribe, a written withdrawal form which shall be 6 signed by the Participant. Such termination shall be effective as soon as administratively practicable after its receipt by the Corporation. (d) A Participant may discontinue or otherwise change the level of his or her Contributions (within Plan limits) effective as of the next Grant Date by completing and filing with the Corporation, on such terms as the Committee (or its delegate) may prescribe, a new Subscription Agreement. 8. GRANT OF OPTION (a) On each Grant Date, each Eligible Employee who is a participant during that Offering Period shall be granted an Option to purchase a number of Shares. The Option shall be exercised on the Exercise Date. The number of Shares subject to the Option shall be determined by dividing the Participant's Account balance as of the applicable Exercise Date by the Option Price. (b) The Option Price per Share of the Shares subject to an Option shall be the lesser of: (i) 90% of the Fair Market Value of a Share on the applicable Grant Date; or (ii) 90% of the Fair Market Value of a Share on the applicable Exercise Date. (c) Notwithstanding anything else contained herein, a person who is otherwise an Eligible Employee shall not be granted any Option or other right to purchase Shares under this Plan to the extent (i) it would, if exercised, cause the person to own "stock" (as such term is defined for purposes of Section 423(b)(3) of the Code) possessing 5% or more of the total combined voting power or value of all classes of stock of the Corporation, or any Subsidiary, or (ii) such Option causes such individual to have rights to purchase stock under this Plan and any other plan of the Company qualified under Section 423 of the Code which accrue at a rate which exceeds $25,000 of the fair market value of the stock of the Corporation or of a Subsidiary (determined at the time the right to purchase such Stock is granted) for each calendar year in which such right is outstanding. For this purpose a right to purchase Shares accrues when it first become exercisable during the calendar year. In determining whether the stock ownership of an Eligible Employee equals or exceeds the 5% limit set forth above, the rules of Section 424(d) of the Code (relating to attribution of stock ownership) shall apply. 9. EXERCISE OF OPTION Unless a Participant's Plan participation is terminated as provided in Section 11, his or her Option for the purchase of Shares shall be exercised automatically on the Exercise Date for that Offering Period, without any further action on the Participant's part, and the maximum number of whole Shares subject to such Option shall be purchased at the Option Price with the balance of such Participant's Account. If any amount (which is not sufficient to purchase a whole Share) remains in a Participant's Account after the exercise of his or her Option on the Exercise Date: (i) such amount shall be credited to such Participant's Account for the next Offering Period, if he or she is then a Participant; or (ii) if such Participant is not a Participant in the next Offering Period, or if the Committee so elects, such amount shall be refunded to such Participant as soon as administratively practicable after such date. 7 10. DELIVERY As soon as administratively practicable after the Exercise Date, the Corporation shall deliver to each Participant a certificate representing the Shares purchased upon exercise of his or her Option. The Corporation may make available an alternative arrangement for delivery of Shares to a recordkeeping service. The Committee (or its delegate), in its discretion, may either require or permit the Participant to elect that such certificates be delivered to such recordkeeping service. In the event the Corporation is required to obtain from any commission or agency authority to issue any such certificate, the Corporation will seek to obtain such authority. Inability of the Corporation to obtain from any such commission or agency authority which counsel for the Corporation deems necessary for the lawful issuance of any such certificate shall relieve the Corporation from liability to any Participant except to return to the Participant the amount of the balance in his or her Account. 11. TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS (a) Upon a Participant's termination from employment with the Company for any reason or in the event that a Participant is no longer an Eligible Employee or if the Participant elects to terminate Contributions pursuant to Section 7(c), at any time prior to the last day of an Offering Period in which he or she participates, such Participant's Account shall be paid to him or her or in cash, or, in the event of such Participant's death, paid to the person or persons entitled thereto under Section 13, and such Participant's Option and participation in the Plan shall be automatically terminated. (b) A Participant's termination from Plan participation precludes the Participant from again participating in this Plan during that Offering Period. However, such termination shall not have any effect upon his or her ability to participate in any succeeding Offering Period, provided that the applicable eligibility and participation requirements are again then met. A Participant's termination from Plan participation shall be deemed to be a revocation of that Participant's Subscription Agreement and such Participant must file a new Subscription Agreement to resume Plan participation in any succeeding Offering Period. 12. ADMINISTRATION (a) The Board shall appoint the Committee, which shall be composed of not less than two members of the Board. Each member of the Committee, in respect of any transaction at a time when an affected Participant may be subject to Section 16 of the Exchange Act, shall be a "non-employee director" within the meaning of Rule 16b-3 promulgated under Section 16. The Board may, at any time, increase or decrease the number of members of the Committee, may remove from membership on the Committee all or any portion of its members, and may appoint such person or persons as it desires to fill any vacancy existing on the Committee, whether caused by removal, resignation, or otherwise. The Board may also, at any time, assume or change the administration of this Plan. (b) The Committee shall supervise and administer this Plan and shall have full power and discretion to adopt, amend and rescind any rules deemed desirable and appropriate for the administration of this Plan and not inconsistent with the terms of this Plan, and to 8 make all other determinations necessary or advisable for the administration of this Plan. The Committee shall act by majority vote or by unanimous written consent. No member of the Committee shall be entitled to act on or decide any matter relating solely to himself or herself or any of his or her rights or benefits under this Plan. The Committee shall have full power and discretionary authority to construe and interpret the terms and conditions of this Plan, which construction or interpretation shall be final and binding on all parties including the Corporation, Participants and beneficiaries. The Committee may delegate ministerial non-discretionary functions to third parties, including officers of the Corporation. (c) Any action taken by, or inaction of, the Corporation, the Board or the Committee relating to this Plan shall be within the absolute discretion of that entity or body. No member of the Board or Committee, or officer of the Corporation shall be liable for any such action or inaction. 13. DESIGNATION OF BENEFICIARY (a) A Participant may file, in a manner prescribed by the Committee (or its delegate), a written designation of a beneficiary who is to receive any Shares or cash from such Participant's Account under this Plan in the event of such Participant's death. If a Participant's death occurs subsequent to the end of an Offering Period but prior to the delivery to him or her of any Shares deliverable under the terms of this Plan, such Shares and any remaining balance of such Participant's Account shall be paid to such beneficiary (or such other person as set forth in Section 13(b)) as soon as administratively practicable after the Corporation receives notice of such Participant's death and any outstanding unexercised Option shall terminate. If a Participant's death occurs at any other time, the balance of such Participant's Account shall be paid to such beneficiary (or such other person as set forth in Section 13(b)) in cash as soon as administratively practicable after the Corporation receives notice of such Participant's death and such Participant's Option shall terminate. If a Participant is married and the designated beneficiary is not his or her spouse, spousal consent shall be required for such designation to be effective. (b) Beneficiary designations may be changed by the Participant (and his or her spouse, if required) at any time on forms provided and in the manner prescribed by the Committee (or its delegate). If a Participant dies with no validly designated beneficiary under this Plan who is living at the time of such Participant's death, the Corporation shall deliver all Shares and/or cash payable pursuant to the terms hereof to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed, the Corporation, in its discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Corporation, then to such other person as the Corporation may designate. 14. TRANSFERABILITY Neither Contributions credited to a Participant's Account nor any Options or rights with respect to the exercise of Options or right to receive Shares under this Plan may be anticipated, alienated, encumbered, assigned, transferred, pledged or otherwise disposed 9 of in any way (other than by will, the laws of descent and distribution, or as provided in Section 13) by the Participant. Any such attempt at anticipation, alienation, encumbrance, assignment, transfer, pledge or other disposition shall be without effect and all amounts shall be paid and all shares shall be delivered in accordance with the provisions of this Plan. Amounts payable or Shares deliverable pursuant to this Plan shall be paid or delivered only to the Participant or, in the event of the Participant's death, to the Participant's beneficiary pursuant to Section 13. 15. USE OF FUNDS; INTEREST All Contributions received or held by the Corporation under this Plan will be included in the general assets of the Corporation and may be used for any corporate purpose. No interest will be paid to any Participant or credited to his or her Account under this Plan. 16. REPORTS Statements shall be provided to Participants as soon as administratively practicable following each Exercise Date. Each Participant's statement shall set forth, as of such Exercise Date, that Participant's Account balance immediately prior to the exercise of his or her Option, the Fair Market Value of a Share, the Option Price, the number of whole Shares purchased and his or her remaining Account balance, if any. 17. ADJUSTMENTS OF AND CHANGES IN THE STOCK In the event that the Shares shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation (whether by reason of merger, consolidation, recapitalization, stock split, combination of shares, or otherwise), or if the number of Shares shall be increased through a stock split or the payment of a stock dividend, then there shall be substituted for or added to each Share theretofore reserved for sale under this Plan, the number and kind of shares of stock or other securities into which each outstanding Share shall be so changed, or for which each such Share shall be exchanged, or to which each such Share is entitled, as the case may be, or the number or kind of securities which may be sold under this Plan and the purchase price per Share shall be appropriately adjusted consistent with such change in such manner as the Committee (or its delegate) may deem equitable to prevent substantial dilution or enlargement of rights granted to, or available for, Eligible Employees under this Plan. 18. POSSIBLE EARLY TERMINATION OF PLAN AND OPTIONS Upon a dissolution of the Corporation, an event described in Section 17 that the Corporation does not survive, or the occurrence of a Change in Control, the Plan and, if prior to the last day of an Offering Period, any outstanding Option granted with respect to that Offering Period shall terminate, subject to any provision that has been expressly made by the Committee through a plan or reorganization approved by the Board or otherwise for the survival, substitution, assumption, exchange or other settlement of the Plan and Options. In the event a Participant's Option is terminated pursuant to this Section 18, such Participant's Account shall be paid to him or her in cash without interest. 10 19. TERM OF PLAN; AMENDMENT OR TERMINATION (a) This Plan shall become effective as of the Effective Date. No new Offering Periods shall commence on or after the tenth anniversary of the Effective Date and this Plan shall terminate on such date unless sooner terminated pursuant to Section 18 or this Section 19. (b) The Board may amend, modify or terminate this Plan at any time without notice. Shareholder approval for any amendment or modification shall not be required, except to the extent required by Section 423 of the Code or other applicable law, or deemed necessary or advisable by the Board. No amendment, modification, or termination pursuant to this Section 18(b) shall, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of such Participant or obligations of the Corporation under any Option granted under this Plan prior to the effective date of such change. Changes contemplated by Section 17 shall not be deemed to constitute changes or amendments requiring Participant consent. Notwithstanding the foregoing, the Committee shall have the right to designate from time to time the Subsidiaries whose employees may be eligible to participate in this Plan and such designation shall not constitute any amendment to this Plan requiring shareholder approval. 20. NOTICES All notices or other communications by a Participant to the Corporation contemplated by this Plan shall be deemed to have been duly given when received in the form and manner specified by the Committee (or its delegate) at the location, or by the person, designated by the Committee (or its delegate) for that purpose. 21. CONDITIONS UPON ISSUANCE OF SHARES Shares shall not be issued with respect to an Option unless the exercise of such Option and the issuance and delivery of such Shares complies with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, any applicable state securities laws, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed. As a condition precedent to the exercise of any Option, if, in the opinion of counsel for the Corporation such a representation is required under applicable law, the Corporation may require any person exercising such Option to represent and warrant that the Shares subject thereto are being acquired only for investment and without any present intention to sell or distribute such Shares. 22. PLAN CONSTRUCTION (a) It is the intent of the Corporation that transactions in and affecting Options in the case of Participants who are or may be subject to the prohibitions of Section 16 satisfy 11 any then applicable requirements of Rule 16b-3 so that such persons (unless they otherwise agree) will be entitled to the exemptive relief of Rule 16b-3 in respect of those transactions and will not be subject to avoidable liability thereunder. Accordingly, this Plan shall be deemed to contain and the Shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 with respect to Plan transactions. (b) This Plan and Options are intended to qualify under Section 423 of the Code. (c) If any provision of this Plan or of any Option would otherwise frustrate or conflict with the intents expressed above, that provision to the extent possible shall be interpreted so as to avoid such conflict. If the conflict remains irreconcilable, the Committee may disregard the provision if it concludes that to do so furthers the interest of the Corporation and is consistent with the purposes of this Plan as to such persons in the circumstances. 23. EMPLOYEES' RIGHTS Nothing in this Plan (or in any agreement related to this Plan) shall confer upon any Eligible Employee or Participant any right to continue in the service or employ of the Company or constitute any contract or agreement of service or employment, or interfere in any way with the right of the Company to reduce such person's compensation or other benefits or to terminate the services or employment or such Eligible Employee or Participant, with or without cause, but nothing contained in this Plan or any document related hereto shall affect any other contractual right of any Eligible Employee or Participant. No Participant shall have any rights as a shareholder until a certificate for Shares has been issued in the Participant's name following exercise of his or her Option. No adjustment will be made for dividends or other rights as a shareholder for which a record date is prior to the issuance of such Share certificate. Nothing in this Plan shall be deemed to create any fiduciary relationship between the Corporation and any Participant. 24. MISCELLANEOUS (a) This Plan and related documents shall be governed by, and construed in accordance with, the laws of the State of California. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of this Plan shall continue to be fully effective. (b) Captions and headings are given to the sections of this Plan solely as a convenience to facilitate reference. Such captions and headings shall not be deemed in any way material or relevant to the construction of interpretation of this Plan or any provision hereof. (c) The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company. Nothing in this Plan shall be construed to limit the right of the Company (i) to establish any other forms of incentives or compensation for employees of the Company, or (ii) to grant or assume options (outside the scope of and in addition to those contemplated by this Plan) in connection with any proper corporate purpose. 12 25. EFFECTIVE DATE This Plan shall be effective on the Effective Date, subject, however, to the approval of this Plan by the shareholders of the Company within twelve months after the date on which the Board approved this Plan. Notwithstanding anything else contained herein to the contrary, no Shares shall be issued or delivered under this Plan until such shareholder approval is obtained and, if such shareholder approval is not obtained within such 12-month period of time, all Contributions credited to a Participant's Account hereunder shall be refunded to such Participant (without interest) as soon as practicable after the end of such 12-month period. 13 EX-99.3 6 a99238exv99w3.txt EXHIBIT 99.3 EXHIBIT 99.3 FIRST AMENDMENT TO BUSINESS LOAN AGREEMENT This First Amendment to Business Loan Agreement (the "Amendment") is made as of May 7, 2004, between Bank of America, N. A.("Bank"), and Pacific Sunwear of California, Inc., a California corporation (the "Borrower"). RECITALS A. Borrower and Bank entered into that certain Business Loan Agreement dated as of January 30, 2004 (the "Agreement"). B. Borrower and Bank desire to amend the Agreement as herein provided. AGREEMENT 1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement. 2. Amendments. The Agreement is hereby amended as follows: 2.1 Section 3.1(a) of the Agreement is amended in its entirety to read as follows: "(a) Unused Commitment Fee. The Borrower agrees to pay a fee on any difference between the Commitment and the amount of credit it actually uses, determined by the weighted average credit outstanding during the specified period. The fee will be calculated at (i) 0.20% per year, if consolidated EBITDA (as defined in Section 7.3 hereof) is equal to or greater than $100,000,000, or (ii) 0.25% per year, if consolidated EBITDA is less than $100,000,000. The calculation of credit outstanding shall include undrawn amounts of letters of credit and shipside bonds. The fee will be payable quarterly in arrears until expiration of the availability period." 2.2 In subsection (c) of Section 7.10 of the Agreement, the first sentence is amended to read as follows: "(c) capital stock repurchases not in excess of (x) Fifty Million Dollars ($50,000,000) in the aggregate from the date of this Agreement through May 6, 2004, or (y) Twenty-Five Million Dollars ($25,000,000) in the aggregate from May 7, 2004 through the Expiration Date; provided that, after giving effect to such stock repurchase (i) No Event of Default under this Agreement has occurred and is continuing and (ii) Borrower has not less than Fifty Million Dollars ($50,000,000) in Unencumbered Liquid Assets. . . . " 3. Representations and Warranties. Borrower hereby represents and warrants to Bank that: (i) no default specified in the Agreement and no event which with notice or 1 lapse of time or both would become such a default has occurred and is continuing and has not been previously waived, (ii) the representations and warranties of Borrower pursuant to the Agreement are true on and as of the date hereof as if made on and as of said date, (iii) the making and performance by Borrower of this Amendment have been duly authorized by all necessary action, and (iv) no consent, approval, authorization, permit or license is required in connection with the making or performance of the Agreement as amended hereby. 4. Conditions. This Amendment will be effective when the Bank receives the following items, in form and content acceptable to the Bank: 4.1 This Amendment duly executed by all parties hereto. 4.2 Payment of all out-of-pocket expenses, including attorneys' fees, incurred by the Bank in connection with the preparation of this Amendment. 5. Effect of Amendment. Except as provided in this Amendment, the Agreement shall remain in full force and effect and shall be performed by the parties hereto according to its terms and provisions. IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as of the date first above written. BANK OF AMERICA, N.A. By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- PACIFIC SUNWEAR OF CALIFORNIA, INC. By: ---------------------------------- Name: Greg Weaver Title: Chairman and Chief Executive Officer By: ---------------------------------- Name: Carl Womack Title: Chief Financial Officer 2 -----END PRIVACY-ENHANCED MESSAGE-----

EX-31

Exhibit 31

CERTIFICATIONS

I, Greg H. Weaver, certify that:

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

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods 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(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) 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) 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

c) 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(s) 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: May 19, 2004

/s/ Greg H. Weaver  

Greg H. Weaver 

Chairman of the Board and Chief Executive Officer 

I, Carl W. Womack, certify that:

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

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods 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(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) 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) 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

c) 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(s) 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: May 19, 2004

/s/ Carl W. Womack  

Carl W. Womack 

Senior Vice President, Chief Financial Officer and Secretary 

EX-32

Exhibit 32

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

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

(i) the Quarterly Report of the Company, on Form 10-Q for the period ended May 1, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 19, 2004	/s/ Greg H. Weaver
	Greg H. Weaver
	Chairman of the Board and Chief Executive Officer Pacific Sunwear of California, Inc.

Dated: May 19, 2004	/s/ Carl W. Womack
	Carl W. Womack
	Senior Vice President, Chief Financial Officer and Secretary Pacific Sunwear of California, Inc.

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

EX-99.1

                                                                    EXHIBIT 99.1


                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                              1999 STOCK AWARD PLAN

                    (As Amended and Restated March 27, 2003,

           and as Further Amended on May 21, 2003 and March 24, 2004)

    (Composite Plan Document Reflecting Stock Splits Through September 2003)



                                TABLE OF CONTENTS



                                                                                                       PAGE
                                                                                                 

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

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

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

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

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

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

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

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

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

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

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

         2.3      Option Period.........................................................................5

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

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

         2.6      Non-Employee Director Awards..........................................................6

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

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

III.     STOCK APPRECIATION RIGHTS......................................................................8

         3.1      Grants................................................................................8

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

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

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

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

         4.2      Restrictions.........................................................................10

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

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

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

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

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



                                       -i-


                                TABLE OF CONTENTS
                                  (CONTINUED)



                                                                                                       PAGE
                                                                                                 

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

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

         6.2      Adjustments Upon Changes in Capitalization...........................................13

         6.3      Termination of Employment............................................................14

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

         6.5      Government Regulations...............................................................16

         6.6      Tax Withholding......................................................................16

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

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

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

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

         6.11     Governing Law........................................................................18

         6.12     Plan Construction....................................................................18

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

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

         6.15     No Corporate Action Restriction......................................................19

         6.16     Other Company Benefit and Compensation Program.......................................19

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

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



                                      -ii-



                       PACIFIC SUNWEAR OF CALIFORNIA, INC.
                              1999 STOCK AWARD PLAN

                    (As Amended and Restated March 27, 2003,

           and as Further Amended on May 21, 2003 and March 24, 2004)

    (Composite Plan Document Reflecting Stock Splits Through September 2003)


I.       THE PLAN.

         1.1      Purpose.

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

         1.2      Administration.

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

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

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

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

                  (iii) to construe and interpret this Plan and any agreements
         defining the rights and obligations of the Company and Participants
         under this Plan,




         further define the terms used in this Plan, and prescribe, amend and
         rescind rules and regulations relating to the administration of this
         Plan;

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

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

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

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

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

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

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

         1.3      Participation.

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


                                       2


         1.4      Stock Subject to the Plan.

                  (a) Subject to Section 6.2, the stock to be offered under this
Plan shall be shares of the Corporation's authorized but unissued Common Stock.
The aggregate amount of Common Stock that may be issued or transferred pursuant
to Awards (including Incentive Stock Options and Options under Section 2.6)
granted under this Plan shall not exceed 10,950,000 shares. In no event shall
more than 1,350,000 shares of Common Stock be available for Awards issued (or
reissued) under this Plan as time-based Restricted Stock for nominal or no
consideration other than the par value thereof. This limit on Restricted Stock
does not apply to shares issued principally for past services, in respect of
compensation earned but deferred, or as Performance-Based Awards under Section
5.2. The aggregate number of shares of Common Stock subject to Options and Stock
Appreciation Rights that may be granted to any employee in any calendar year may
not exceed 1,350,000. The aggregate number of shares of Common Stock subject to
all Awards (including Options, Stock Appreciation Rights, and Performance-Based
Awards (other than Cash-Based Awards)) that may be granted to any employee in
any calendar year may not exceed 1,350,000. The Board may amend the Option grant
levels contemplated by Section 2.6 from time to time; provided that no more than
1,500,000 shares of Common Stock shall be issued or delivered pursuant to the
exercise of Options granted to Non-Employee Directors pursuant to Section 2.6.
Each of the foregoing share limits is subject to adjustment as set forth in
Section 6.2.

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

         1.5      Grant of Awards.

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


                                       3


         1.6      Exercise of Awards.

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

         1.7      No Transferability; Limited Exception to Transfer
Restrictions.

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

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

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

                  (i) transfers to the Corporation,

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

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

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


                                       4


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

II.      OPTIONS.

         2.1      Grants.

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

         2.2      Option Price.

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

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

         2.3      Option Period.

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


                                       5


         2.4      Exercise of Options.

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

         2.5      Limitations on Grant of Incentive Stock Options.

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

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

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

         2.6      Non-Employee Director Awards.

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

                  (b) Option Grants. Effective on the day after the
Corporation's 1999 annual meeting, as and when any person who is not then an
officer or employee of the Company shall become a director of the Corporation,
there shall be granted automatically


                                       6


(without any action by the Board or the Committee) a Nonqualified Stock Option
(the grant or award date of which shall be the date such person takes office) to
such person to purchase 9,000 shares of Common Stock.

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

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

                  (e) Option Period. Each Option granted under this Section 2.6
on or after May 21, 2003, and all rights or obligations thereunder, shall expire
on the tenth anniversary of the Award Date and shall be subject to earlier
termination as provided below. The expiration date of each Option granted under
this Section 2.6 prior to May 21, 2003 shall be determined under the version of
this Plan as in effect on the Award Date of such Option.

                  (f) Exercise of Options. Except as otherwise provided in
Sections 2.6(g) and 2.6(h), each Option granted under this Section 2.6 on or
after March 24, 2004 shall become exercisable (i) as to one-third of the covered
shares on the earlier of (A) the first anniversary of the Award Date, or (B) the
day immediately preceding the first regularly scheduled Annual Meeting of
shareholders first occurring after the Award Date; and (ii) as to an additional
1/36th of the covered shares in each of the 24 months thereafter (using the
Award Date as the date of monthly vesting). Each Option granted under this
Section 2.6 prior to March 24, 2004 shall vest as provided in the version of
this Section 2.6(f) in effect on the Award Date of such Option.

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


                                       7


any other reason, any portion of any such Option which is then exercisable may
be exercised for three months after the date of such termination or the balance
of such Option's term, whichever period is shorter.

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

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

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

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

         2.8      Adjustments, No Repricing Without Prior Shareholder Approval.

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

III.     STOCK APPRECIATION RIGHTS.

         3.1      Grants.

         In its discretion, the Committee may grant Stock Appreciation Rights
concurrently with the grant of Options. A Stock Appreciation Right shall extend
to all or a portion of the shares covered by the related Option. A Stock
Appreciation Right shall


                                       8


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

         3.2      Exercise of Stock Appreciation Rights.

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

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

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

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

         3.3      Payment.

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

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

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

                  (b) The Committee, in its sole discretion, may settle the
amount determined under paragraph (a) above solely in cash, solely in shares of
Common Stock


                                       9


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

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

IV.      RESTRICTED STOCK AWARDS.

         4.1      Grants.

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

         4.2      Restrictions.

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

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

                  (c) In the event that the Participant shall have paid cash in
connection with the Restricted Stock Award, the Award Agreement shall specify
whether and to


                                       10


what extent such cash shall be returned upon a forfeiture (with or without an
earnings factor).

         4.3      Return to the Corporation.

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

V.       PERFORMANCE SHARE AWARDS.

         5.1      Grants.

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

         5.2      Special Performance-Based Share Awards.

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

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

                  (b) Performance Goal Alternatives. The specific performance
goals for Performance-Based Awards granted under this Section (other than
Qualifying Options and Qualifying Stock Appreciation Rights) shall be, on an
absolute or relative basis, one or more of the Performance Goals, as selected by
the Committee in its sole discretion. The Committee shall establish in the
applicable Award Agreement the specific performance target(s) relative to the
Performance Goal(s) which must be attained before the compensation under the
Performance-Based Award becomes payable. The specific


                                       11


targets shall be determined within the time period permitted under Section
162(m) of the Code (and any regulations issued thereunder) so that such targets
are considered to be pre-established and so that the attainment of such targets
is substantially uncertain at the time of their establishment. The applicable
performance measurement period may not be less than one nor more than 10 years.

                  (c) Maximum Performance-Based Award. Notwithstanding any other
provision of the Plan to the contrary, the maximum number of shares of Common
Stock which may be delivered pursuant to awards that are granted as
Performance-Based Awards under this Section 5.2 to any Participant in any
calendar year (plus the number of shares of Common Stock subject to Options and
Stock Appreciation Rights granted to that Participant in that calendar year)
shall not exceed 1,350,000 shares, either individually or in the aggregate,
subject to adjustment as provided in Section 6.2. Awards that are cancelled
during the year shall be counted against this limit to the extent required by
Section 162(m) of the Code. In addition, the aggregate amount of compensation
that may be paid to any Participant in respect of any Cash-Based Awards that are
granted to that Participant during any calendar year as Performance-Based Awards
shall not exceed $3,500,000.

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

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

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


                                       12


         5.3      Deferred Payments.

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

VI.      OTHER PROVISIONS.

         6.1      Rights of Eligible Employees, Participants and Beneficiaries.

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

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

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

         6.2      Adjustments Upon Changes in Capitalization.

                  (a) If the outstanding shares of Common Stock are changed into
or exchanged for cash or a different number or kind of shares or securities of
the Corporation or of another issuer, or if additional shares or new or
different securities are distributed with respect to the outstanding shares of
the Common Stock, through a reorganization or merger to which the Corporation is
a party, or through a combination, consolidation, recapitalization,
reclassification, stock split, stock dividend, reverse stock split, stock
consolidation or other capital change or adjustment, an appropriate adjustment
shall be made in the number and kind of shares or other consideration that is
subject to or


                                       13


may be delivered under this Plan and pursuant to outstanding Awards. A
corresponding adjustment to the consideration payable with respect to Awards
granted prior to any such change and to the price, if any, paid in connection
with Restricted Stock Awards or Performance Share Awards or Performance-Based
Awards shall also be made. Any such adjustment, however, shall be made without
change in the total payment, if any, applicable to the portion of the Award not
exercised but with a corresponding adjustment in the price for each share.
Corresponding adjustments shall be made with respect to Stock Appreciation
Rights based upon the adjustments made to the Options to which they are related
or, in the case of Stock Appreciation Rights granted independently of any
Option, based upon the adjustments made to Common Stock.

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

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

                  (d) In any of such events, the Committee may take such action
prior to such event to the extent that the Committee deems the action necessary
to permit the Participant to realize the benefits intended to be conveyed with
respect to the underlying shares in the same manner as is or will be available
to shareholders generally.

         6.3      Termination of Employment.

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


                                       14


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

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

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

                  (e) In the event of termination of services to or employment
with the Company for any reason, (i) shares of Common Stock subject to the
Participant's Restricted Stock Award shall be forfeited in accordance with the
provisions of the related Award Agreement to the extent such shares have not
become vested on that date; and (ii) shares of Common Stock subject to the
Participant's Performance Share Award or Performance-Based Award shall be
forfeited in accordance with the provisions of the related Award Agreement to
the extent such shares have not been issued or become issuable on that date.

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

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


                                       15


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

         6.4      Acceleration of Awards.

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

         6.5      Government Regulations.

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

         6.6      Tax Withholding.

                  (a) Upon the disposition by a Participant or other person of
shares of Common Stock acquired pursuant to the exercise of an Incentive Stock
Option prior to


                                       16


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

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

         6.7      Amendment, Termination and Suspension.

                  (a) The Board may, at any time, terminate or, from time to
time, amend, modify or suspend this Plan (or any part hereof). No Awards may be
granted during any suspension of this Plan or after termination of this Plan,
but the Committee shall retain jurisdiction as to Awards then outstanding in
accordance with the terms of this Plan.

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

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

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


                                       17


         6.8      Privileges of Stock Ownership; Nondistributive Intent.

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

         6.9      Effective Date of the Plan.

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

         6.10     Term of the Plan.

         Unless previously terminated by the Board, this Plan shall terminate at
the close of business on the day before the tenth anniversary of the Effective
Date, and no Awards shall be granted under it thereafter, but such termination
shall not affect any Award theretofore granted. Unless otherwise expressly
provided in this Plan or in an applicable Award Agreement, any Award granted
prior to the Plan's termination date may extend beyond such date, and all
authority of the Committee with respect to Awards hereunder, including the
authority to amend an Award, shall continue during any suspension of this Plan
and in respect of Awards outstanding on the termination date. No new
Performance-Based Award may be granted under Section 5.2 of the Plan after the
first annual shareholders meeting of the Corporation to occur in 2008, but such
termination shall not affect any Performance-Based Award theretofore granted.

         6.11     Governing Law.

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

         6.12     Plan Construction.

                  (a) Rule 16b-3. It is the intent of the Corporation that the
Awards and transactions permitted by Awards generally satisfy and be interpreted
in a manner that, in the case of Participants who are or may be subject to
Section 16 of the Exchange Act, satisfies the applicable requirements of Rule
16b-3 promulgated thereunder so that such persons (unless they otherwise agree)
will be entitled to the benefits of Rule 16b-3 or


                                       18


other exemptive rules under Section 16 of the Exchange Act in respect of those
transactions and will not be subjected to avoidable liability.

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

         6.13     Captions.

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

         6.14     Non-Exclusivity of Plan.

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

         6.15     No Corporate Action Restriction.

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

         6.16     Other Company Benefit and Compensation Program.

         Payments and other benefits received by a Participant under an Award
made pursuant to this Plan shall not be deemed a part of a Participant's
compensation for purposes of the determination of benefits under any other
employee welfare or benefit plans or arrangements, if any, provided by the
Corporation or any Subsidiary, except


                                       19


where the Committee or the Board expressly otherwise provides or authorizes in
writing. Awards under this Plan may be made in addition to, in combination with,
as alternatives to or in payment of grants, awards or commitments under any
other plans or arrangements of the Corporation or the Subsidiaries.

VII.     DEFINITIONS.

         7.1      Definitions.

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

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

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

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

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

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

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

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

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


                                       20


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

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

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

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

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

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

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

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

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

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


                                       21


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

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

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

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

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

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

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

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

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

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

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

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

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


                                       22


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

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

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

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

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

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


                                       23


                                    EXHIBIT A
                                PERFORMANCE GOALS


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

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

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

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

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

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

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

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

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

         NET SALES. "Net Sales" means net sales.

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

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

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

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


                                      A-1


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

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

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

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


                                      A-2

EX-99.2

                                                                    EXHIBIT 99.2


                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                          EMPLOYEE STOCK PURCHASE PLAN

   (Composite Plan Document Reflecting Stock Splits Through September 5, 2003)



                                TABLE OF CONTENTS



                                                                               Page
                                                                               ----

                                                                            
1.       PURPOSE................................................................3

2.       DEFINITIONS............................................................3

3.       ELIGIBILITY............................................................5

4.       STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS..........................5

5.       OFFERING PERIODS.......................................................6

6.       PARTICIPATION..........................................................6

7.       METHOD OF PAYMENT OF CONTRIBUTIONS.....................................6

8.       GRANT OF OPTION........................................................7

9.       EXERCISE OF OPTION.....................................................7

10.      DELIVERY...............................................................8

11.      TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS...................8

12.      ADMINISTRATION.........................................................8

13.      DESIGNATION OF BENEFICIARY.............................................9

14.      TRANSFERABILITY........................................................9

15.      USE OF FUNDS; INTEREST................................................10

16.      REPORTS...............................................................10

17.      ADJUSTMENTS OF AND CHANGES IN THE STOCK...............................10

18.      POSSIBLE EARLY TERMINATION OF PLAN AND OPTIONS........................10

19.      TERM OF PLAN; AMENDMENT OR TERMINATION................................11

20.      NOTICES...............................................................11

21.      CONDITIONS UPON ISSUANCE OF SHARES....................................11

22.      PLAN CONSTRUCTION.....................................................11

23.      EMPLOYEES' RIGHTS.....................................................12

24.      MISCELLANEOUS.........................................................12




                                       2


                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                          EMPLOYEE STOCK PURCHASE PLAN

   (Composite Plan Document Reflecting Stock Splits Through September 5, 2003)


         The following constitute the provisions of the Pacific Sunwear of
California, Inc. Employee Stock Purchase Plan (this "Plan").

1.       PURPOSE

         The purpose of this Plan is to provide Eligible Employees with an
         incentive to advance the best interests of the Corporation (and those
         Subsidiaries which may be designated by the Committee as "Participating
         Corporations") by providing a method whereby they may voluntarily
         purchase Common Stock at a favorable price and upon favorable terms.

2.       DEFINITIONS

         Capitalized terms used herein which are not otherwise defined shall
         have the following meanings.

                  "Account" shall mean the bookkeeping account maintained by the
                  Corporation, or by a recordkeeper on behalf of the
                  Corporation, for a Participant pursuant to Section 7(a).

                  "Board" shall mean the Board of Directors of the Corporation.

                  "Change in Control" shall mean any of the following:

                           a.       Approval by the shareholders of the
                                    Corporation of the dissolution or
                                    liquidation of the Corporation;

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

                           c.       Approval by the shareholders of the
                                    Corporation of the sale of substantially all
                                    of the Corporation's business assets to a
                                    person or entity that is not a Subsidiary.

                  "Code" shall mean the Internal Revenue Code of 1986, as
                  amended.

                  "Committee" shall mean the committee appointed by the Board to
                  administer this Plan pursuant to Section 12.

                  "Common Stock" shall mean the common stock of the Corporation.


                                       3


                  "Company" shall mean the Corporation and its Subsidiaries.

                  "Compensation" shall mean an Eligible Employee's regular
                  earnings, overtime pay, sick pay, shift differential, shift
                  premium, vacation pay, incentive compensation, commissions and
                  bonuses. Compensation also includes any amounts contributed as
                  salary reduction contributions to a plan qualifying under
                  Section 401(k), 125 or 129 of the Code. Any other form of
                  remuneration is excluded from Compensation, including (but not
                  limited to) the following: prizes, awards, housing allowances,
                  stock option exercises, stock appreciation rights, restricted
                  stock exercises, performance awards, auto allowances, tuition
                  reimbursement and other forms of imputed income.
                  Notwithstanding the foregoing, Compensation shall not include
                  any amounts deferred under or paid from the Corporation's
                  Executive Deferred Compensation Plan.

                  "Contributions" shall mean all bookkeeping amounts credited to
                  the Account of a Participant pursuant to Section 7(a).

                  "Corporation" shall mean Pacific Sunwear of California, Inc.,
                  a California corporation.

                  "Eligible Employee" shall mean any employee of the
                  Corporation, or of any Subsidiary which has been designated in
                  writing by the Committee as a "Participating Corporation"
                  (including any Subsidiaries which have become such after the
                  date that this Plan is approved by shareholders).
                  Notwithstanding the foregoing, "Eligible Employee" shall not
                  include any employee who (i) has not as of the Grant Date
                  completed at least three months of continuous full-time
                  employment with the Company, (ii) whose customary employment
                  is for 20 hours per week or less; or (iii) whose customary
                  employment is for not more than five months in a calendar
                  year. In addition, no Officer shall be an Eligible Employee.

                  "Effective Date" shall mean January 1, 1998.

                  "Exchange Act" shall mean the Securities Exchange Act of 1934,
                  as amended.

                  "Exercise Date" shall mean, with respect to an Offering
                  Period, the last day of that Offering Period.

                  "Fair Market Value" shall mean the closing price of a Share on
                  The New York Stock Exchange on such date (or, in the event
                  that the Common Stock is not traded on such date, on the
                  immediately preceding trading date), as reported in The Wall
                  Street Journal or, in the event the Common Stock is not listed
                  on The New York Stock Exchange, the "Fair Market Value" shall
                  be the closing price of the Common Stock for such date (or, in
                  the event that the Common Stock is not traded on such date, on
                  the immediately preceding trading date), as reported by the
                  National Association of Securities Dealers Automated Quotation
                  ("NASDAQ") or, if such price is not reported, the mean of the
                  bid and asked prices per Share as reported by NASDAQ or, if
                  such prices are not so listed or reported, as determined by
                  the Committee (or its delegate), in its discretion.


                                       4


                  "Grant Date" shall mean the first day of each Offering Period.

                  "Offering Period" shall mean the six-consecutive month periods
                  commencing on each January 1 and July 1.

                  "Officer" shall mean (i) any individual who is a named officer
                  of the Corporation pursuant to the Corporation's By-Laws, and
                  (ii) any other individual who the Committee determines, in its
                  sole discretion, to be (A) a highly compensated employee
                  (within the meaning of Section 414(q) of the Code) and (B) an
                  officer of the Company for purposes of this Plan.

                  "Option" shall mean the stock option to acquire Shares granted
                  to a Participant pursuant to Section 8.

                  "Option Price" shall mean the per share exercise price of an
                  Option as determined in accordance with Section 8(b).

                  "Participant" shall mean an Eligible Employee who has elected
                  to participate in this Plan and who has filed a valid and
                  effective Subscription Agreement to make Contributions
                  pursuant to Section 6.

                  "Plan" shall mean this Pacific Sunwear of California, Inc.
                  Employee Stock Purchase Plan, as amended from time to time.

                  "Rule 16b-3" shall mean Rule 16b-3 promulgated under Section
                  16.

                  "Section 16" shall mean Section 16 of the Exchange Act.

                  "Share" shall mean a share of Common Stock.

                  "Subscription Agreement" shall mean the written agreement
                  filed by an Eligible Employee with the Corporation pursuant to
                  Section 6 to participate in this Plan.

                  "Subsidiary" shall mean any corporation in an unbroken chain
                  of corporations (beginning with the Corporation) in which each
                  corporation (other than the last corporation) owns stock
                  possessing 50% or more of the total combined voting power of
                  all classes of stock in one or more of the other corporations
                  in the chain.

3.       ELIGIBILITY

         Any person employed as an Eligible Employee as of a Grant Date shall be
         eligible to participate in this Plan during the Offering Period in
         which such Grant Date occurs, subject to the Eligible Employee
         satisfying the requirements of Section 6.

4.       STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS

         The total number of Shares to be made available under this Plan is
         607,500 authorized and unissued or treasury shares of Common Stock, or
         Shares repurchased on the open market, subject to adjustments pursuant
         to Section 17. In the event that all of the Shares


                                       5


         made available under this Plan are subscribed prior to the expiration
         of this Plan, this Plan may be terminated in accordance with Section
         19.

5.       OFFERING PERIODS

         During the term of this Plan, the Corporation will offer Options to
         purchase Shares to all Participants during each Offering Period. Each
         Option shall become effective on the Grant Date. The term of each
         Option shall be six months and shall end on the Exercise Date. The
         first Offering Period shall commence on or after the Effective Date.
         Offering Periods shall continue until this Plan is terminated in
         accordance with Section 18 or 19, or, if earlier, until no Shares
         remain available for Options pursuant to Section 4.

6.       PARTICIPATION

         An Eligible Employee may become a participant in this Plan by
         completing a Subscription Agreement on a form approved by and in a
         manner prescribed by the Committee (or its delegate). To become
         effective, a Subscription Agreement must be filed with the Corporation
         prior to the start of the Offering Period with respect to which it is
         to become effective and must set forth the percentage of the Eligible
         Employee's Compensation (which shall be a whole percentage point not
         less than 1% and not more than 10%) to be credited to the Participant's
         Account as Contributions each pay period. Subscription Agreements shall
         contain the Eligible Employee's authorization and consent to the
         Corporation's withholding from his or her Compensation the amount of
         his or her Contributions. Subscription Agreements shall remain valid
         for all Offering Periods until (i) an Eligible Employee's participation
         terminates pursuant to the terms hereof, or (ii) until a new
         Subscription Agreement becomes effective.

7.       METHOD OF PAYMENT OF CONTRIBUTIONS

         (a) The Corporation shall maintain on its books, or cause to be
         maintained by a recordkeeper, an Account in the name of each
         Participant. The percentage of Compensation elected to be applied as
         Contributions by a Participant shall be deducted from such
         Participant's Compensation on each payday during the period for payroll
         deductions set forth below and such payroll deductions shall be
         credited to that Participant's Account as soon as administratively
         practicable after such date. A Participant may not make any additional
         payments to his or her Account. A Participant's Account shall be
         reduced by any amounts used to pay the Option Price of Shares acquired,
         or by any other amounts distributed pursuant to the terms hereof.

         (b) Payroll deductions with respect to an Offering Period shall
         commence as of the first day of the payroll period which coincides with
         or immediately follows the applicable Grant Date and shall end on the
         last day of the payroll period which coincides with or immediately
         precedes the applicable Exercise Date, unless sooner terminated by the
         Participant as provided in this Section or until his or her
         participation terminates pursuant to Section 11.

         (c) A Participant may terminate his or her Contributions during an
         Offering Period by completing and filing with the Corporation, in such
         form and on such terms as the Committee (or its delegate) may
         prescribe, a written withdrawal form which shall be


                                       6


         signed by the Participant. Such termination shall be effective as soon
         as administratively practicable after its receipt by the Corporation.

         (d) A Participant may discontinue or otherwise change the level of his
         or her Contributions (within Plan limits) effective as of the next
         Grant Date by completing and filing with the Corporation, on such terms
         as the Committee (or its delegate) may prescribe, a new Subscription
         Agreement.

8.       GRANT OF OPTION

         (a) On each Grant Date, each Eligible Employee who is a participant
         during that Offering Period shall be granted an Option to purchase a
         number of Shares. The Option shall be exercised on the Exercise Date.
         The number of Shares subject to the Option shall be determined by
         dividing the Participant's Account balance as of the applicable
         Exercise Date by the Option Price.

         (b) The Option Price per Share of the Shares subject to an Option shall
         be the lesser of: (i) 90% of the Fair Market Value of a Share on the
         applicable Grant Date; or (ii) 90% of the Fair Market Value of a Share
         on the applicable Exercise Date.

         (c) Notwithstanding anything else contained herein, a person who is
         otherwise an Eligible Employee shall not be granted any Option or other
         right to purchase Shares under this Plan to the extent (i) it would, if
         exercised, cause the person to own "stock" (as such term is defined for
         purposes of Section 423(b)(3) of the Code) possessing 5% or more of the
         total combined voting power or value of all classes of stock of the
         Corporation, or any Subsidiary, or (ii) such Option causes such
         individual to have rights to purchase stock under this Plan and any
         other plan of the Company qualified under Section 423 of the Code which
         accrue at a rate which exceeds $25,000 of the fair market value of the
         stock of the Corporation or of a Subsidiary (determined at the time the
         right to purchase such Stock is granted) for each calendar year in
         which such right is outstanding. For this purpose a right to purchase
         Shares accrues when it first become exercisable during the calendar
         year. In determining whether the stock ownership of an Eligible
         Employee equals or exceeds the 5% limit set forth above, the rules of
         Section 424(d) of the Code (relating to attribution of stock ownership)
         shall apply.

9.       EXERCISE OF OPTION

         Unless a Participant's Plan participation is terminated as provided in
         Section 11, his or her Option for the purchase of Shares shall be
         exercised automatically on the Exercise Date for that Offering Period,
         without any further action on the Participant's part, and the maximum
         number of whole Shares subject to such Option shall be purchased at the
         Option Price with the balance of such Participant's Account. If any
         amount (which is not sufficient to purchase a whole Share) remains in a
         Participant's Account after the exercise of his or her Option on the
         Exercise Date: (i) such amount shall be credited to such Participant's
         Account for the next Offering Period, if he or she is then a
         Participant; or (ii) if such Participant is not a Participant in the
         next Offering Period, or if the Committee so elects, such amount shall
         be refunded to such Participant as soon as administratively practicable
         after such date.


                                       7


10.      DELIVERY

         As soon as administratively practicable after the Exercise Date, the
         Corporation shall deliver to each Participant a certificate
         representing the Shares purchased upon exercise of his or her Option.
         The Corporation may make available an alternative arrangement for
         delivery of Shares to a recordkeeping service. The Committee (or its
         delegate), in its discretion, may either require or permit the
         Participant to elect that such certificates be delivered to such
         recordkeeping service. In the event the Corporation is required to
         obtain from any commission or agency authority to issue any such
         certificate, the Corporation will seek to obtain such authority.
         Inability of the Corporation to obtain from any such commission or
         agency authority which counsel for the Corporation deems necessary for
         the lawful issuance of any such certificate shall relieve the
         Corporation from liability to any Participant except to return to the
         Participant the amount of the balance in his or her Account.

11.      TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS

         (a) Upon a Participant's termination from employment with the Company
         for any reason or in the event that a Participant is no longer an
         Eligible Employee or if the Participant elects to terminate
         Contributions pursuant to Section 7(c), at any time prior to the last
         day of an Offering Period in which he or she participates, such
         Participant's Account shall be paid to him or her or in cash, or, in
         the event of such Participant's death, paid to the person or persons
         entitled thereto under Section 13, and such Participant's Option and
         participation in the Plan shall be automatically terminated.

         (b) A Participant's termination from Plan participation precludes the
         Participant from again participating in this Plan during that Offering
         Period. However, such termination shall not have any effect upon his or
         her ability to participate in any succeeding Offering Period, provided
         that the applicable eligibility and participation requirements are
         again then met. A Participant's termination from Plan participation
         shall be deemed to be a revocation of that Participant's Subscription
         Agreement and such Participant must file a new Subscription Agreement
         to resume Plan participation in any succeeding Offering Period.

12.      ADMINISTRATION

         (a) The Board shall appoint the Committee, which shall be composed of
         not less than two members of the Board. Each member of the Committee,
         in respect of any transaction at a time when an affected Participant
         may be subject to Section 16 of the Exchange Act, shall be a
         "non-employee director" within the meaning of Rule 16b-3 promulgated
         under Section 16. The Board may, at any time, increase or decrease the
         number of members of the Committee, may remove from membership on the
         Committee all or any portion of its members, and may appoint such
         person or persons as it desires to fill any vacancy existing on the
         Committee, whether caused by removal, resignation, or otherwise. The
         Board may also, at any time, assume or change the administration of
         this Plan.

         (b) The Committee shall supervise and administer this Plan and shall
         have full power and discretion to adopt, amend and rescind any rules
         deemed desirable and appropriate for the administration of this Plan
         and not inconsistent with the terms of this Plan, and to


                                       8


         make all other determinations necessary or advisable for the
         administration of this Plan. The Committee shall act by majority vote
         or by unanimous written consent. No member of the Committee shall be
         entitled to act on or decide any matter relating solely to himself or
         herself or any of his or her rights or benefits under this Plan. The
         Committee shall have full power and discretionary authority to construe
         and interpret the terms and conditions of this Plan, which construction
         or interpretation shall be final and binding on all parties including
         the Corporation, Participants and beneficiaries. The Committee may
         delegate ministerial non-discretionary functions to third parties,
         including officers of the Corporation.

         (c) Any action taken by, or inaction of, the Corporation, the Board or
         the Committee relating to this Plan shall be within the absolute
         discretion of that entity or body. No member of the Board or Committee,
         or officer of the Corporation shall be liable for any such action or
         inaction.

13.      DESIGNATION OF BENEFICIARY

         (a) A Participant may file, in a manner prescribed by the Committee (or
         its delegate), a written designation of a beneficiary who is to receive
         any Shares or cash from such Participant's Account under this Plan in
         the event of such Participant's death. If a Participant's death occurs
         subsequent to the end of an Offering Period but prior to the delivery
         to him or her of any Shares deliverable under the terms of this Plan,
         such Shares and any remaining balance of such Participant's Account
         shall be paid to such beneficiary (or such other person as set forth in
         Section 13(b)) as soon as administratively practicable after the
         Corporation receives notice of such Participant's death and any
         outstanding unexercised Option shall terminate. If a Participant's
         death occurs at any other time, the balance of such Participant's
         Account shall be paid to such beneficiary (or such other person as set
         forth in Section 13(b)) in cash as soon as administratively practicable
         after the Corporation receives notice of such Participant's death and
         such Participant's Option shall terminate. If a Participant is married
         and the designated beneficiary is not his or her spouse, spousal
         consent shall be required for such designation to be effective.

         (b) Beneficiary designations may be changed by the Participant (and his
         or her spouse, if required) at any time on forms provided and in the
         manner prescribed by the Committee (or its delegate). If a Participant
         dies with no validly designated beneficiary under this Plan who is
         living at the time of such Participant's death, the Corporation shall
         deliver all Shares and/or cash payable pursuant to the terms hereof to
         the executor or administrator of the estate of the Participant, or if
         no such executor or administrator has been appointed, the Corporation,
         in its discretion, may deliver such Shares and/or cash to the spouse or
         to any one or more dependents or relatives of the Participant, or if no
         spouse, dependent or relative is known to the Corporation, then to such
         other person as the Corporation may designate.

14.      TRANSFERABILITY

         Neither Contributions credited to a Participant's Account nor any
         Options or rights with respect to the exercise of Options or right to
         receive Shares under this Plan may be anticipated, alienated,
         encumbered, assigned, transferred, pledged or otherwise disposed


                                       9


         of in any way (other than by will, the laws of descent and
         distribution, or as provided in Section 13) by the Participant. Any
         such attempt at anticipation, alienation, encumbrance, assignment,
         transfer, pledge or other disposition shall be without effect and all
         amounts shall be paid and all shares shall be delivered in accordance
         with the provisions of this Plan. Amounts payable or Shares deliverable
         pursuant to this Plan shall be paid or delivered only to the
         Participant or, in the event of the Participant's death, to the
         Participant's beneficiary pursuant to Section 13.

15.      USE OF FUNDS; INTEREST

         All Contributions received or held by the Corporation under this Plan
         will be included in the general assets of the Corporation and may be
         used for any corporate purpose. No interest will be paid to any
         Participant or credited to his or her Account under this Plan.

16.      REPORTS

         Statements shall be provided to Participants as soon as
         administratively practicable following each Exercise Date. Each
         Participant's statement shall set forth, as of such Exercise Date, that
         Participant's Account balance immediately prior to the exercise of his
         or her Option, the Fair Market Value of a Share, the Option Price, the
         number of whole Shares purchased and his or her remaining Account
         balance, if any.

17.      ADJUSTMENTS OF AND CHANGES IN THE STOCK

         In the event that the Shares shall be changed into or exchanged for a
         different number or kind of shares of stock or other securities of the
         Corporation or of another corporation (whether by reason of merger,
         consolidation, recapitalization, stock split, combination of shares, or
         otherwise), or if the number of Shares shall be increased through a
         stock split or the payment of a stock dividend, then there shall be
         substituted for or added to each Share theretofore reserved for sale
         under this Plan, the number and kind of shares of stock or other
         securities into which each outstanding Share shall be so changed, or
         for which each such Share shall be exchanged, or to which each such
         Share is entitled, as the case may be, or the number or kind of
         securities which may be sold under this Plan and the purchase price per
         Share shall be appropriately adjusted consistent with such change in
         such manner as the Committee (or its delegate) may deem equitable to
         prevent substantial dilution or enlargement of rights granted to, or
         available for, Eligible Employees under this Plan.

18.      POSSIBLE EARLY TERMINATION OF PLAN AND OPTIONS

         Upon a dissolution of the Corporation, an event described in Section 17
         that the Corporation does not survive, or the occurrence of a Change in
         Control, the Plan and, if prior to the last day of an Offering Period,
         any outstanding Option granted with respect to that Offering Period
         shall terminate, subject to any provision that has been expressly made
         by the Committee through a plan or reorganization approved by the Board
         or otherwise for the survival, substitution, assumption, exchange or
         other settlement of the Plan and Options. In the event a Participant's
         Option is terminated pursuant to this Section 18, such Participant's
         Account shall be paid to him or her in cash without interest.


                                       10


19.      TERM OF PLAN; AMENDMENT OR TERMINATION

         (a) This Plan shall become effective as of the Effective Date. No new
         Offering Periods shall commence on or after the tenth anniversary of
         the Effective Date and this Plan shall terminate on such date unless
         sooner terminated pursuant to Section 18 or this Section 19.

         (b) The Board may amend, modify or terminate this Plan at any time
         without notice. Shareholder approval for any amendment or modification
         shall not be required, except to the extent required by Section 423 of
         the Code or other applicable law, or deemed necessary or advisable by
         the Board. No amendment, modification, or termination pursuant to this
         Section 18(b) shall, without written consent of the Participant, affect
         in any manner materially adverse to the Participant any rights or
         benefits of such Participant or obligations of the Corporation under
         any Option granted under this Plan prior to the effective date of such
         change. Changes contemplated by Section 17 shall not be deemed to
         constitute changes or amendments requiring Participant consent.
         Notwithstanding the foregoing, the Committee shall have the right to
         designate from time to time the Subsidiaries whose employees may be
         eligible to participate in this Plan and such designation shall not
         constitute any amendment to this Plan requiring shareholder approval.

20.      NOTICES

         All notices or other communications by a Participant to the Corporation
         contemplated by this Plan shall be deemed to have been duly given when
         received in the form and manner specified by the Committee (or its
         delegate) at the location, or by the person, designated by the
         Committee (or its delegate) for that purpose.

21.      CONDITIONS UPON ISSUANCE OF SHARES

         Shares shall not be issued with respect to an Option unless the
         exercise of such Option and the issuance and delivery of such Shares
         complies with all applicable provisions of law, domestic or foreign,
         including, without limitation, the Securities Act of 1933, as amended,
         the Exchange Act, any applicable state securities laws, the rules and
         regulations promulgated thereunder, and the requirements of any stock
         exchange upon which the Shares may then be listed.

         As a condition precedent to the exercise of any Option, if, in the
         opinion of counsel for the Corporation such a representation is
         required under applicable law, the Corporation may require any person
         exercising such Option to represent and warrant that the Shares subject
         thereto are being acquired only for investment and without any present
         intention to sell or distribute such Shares.

22.      PLAN CONSTRUCTION

         (a) It is the intent of the Corporation that transactions in and
         affecting Options in the case of Participants who are or may be subject
         to the prohibitions of Section 16 satisfy


                                       11


         any then applicable requirements of Rule 16b-3 so that such persons
         (unless they otherwise agree) will be entitled to the exemptive relief
         of Rule 16b-3 in respect of those transactions and will not be subject
         to avoidable liability thereunder. Accordingly, this Plan shall be
         deemed to contain and the Shares issued upon exercise thereof shall be
         subject to, such additional conditions and restrictions as may be
         required by Rule 16b-3 to qualify for the maximum exemption from
         Section 16 with respect to Plan transactions.

         (b) This Plan and Options are intended to qualify under Section 423 of
         the Code.

         (c) If any provision of this Plan or of any Option would otherwise
         frustrate or conflict with the intents expressed above, that provision
         to the extent possible shall be interpreted so as to avoid such
         conflict. If the conflict remains irreconcilable, the Committee may
         disregard the provision if it concludes that to do so furthers the
         interest of the Corporation and is consistent with the purposes of this
         Plan as to such persons in the circumstances.

23.      EMPLOYEES' RIGHTS

         Nothing in this Plan (or in any agreement related to this Plan) shall
         confer upon any Eligible Employee or Participant any right to continue
         in the service or employ of the Company or constitute any contract or
         agreement of service or employment, or interfere in any way with the
         right of the Company to reduce such person's compensation or other
         benefits or to terminate the services or employment or such Eligible
         Employee or Participant, with or without cause, but nothing contained
         in this Plan or any document related hereto shall affect any other
         contractual right of any Eligible Employee or Participant. No
         Participant shall have any rights as a shareholder until a certificate
         for Shares has been issued in the Participant's name following exercise
         of his or her Option. No adjustment will be made for dividends or other
         rights as a shareholder for which a record date is prior to the
         issuance of such Share certificate. Nothing in this Plan shall be
         deemed to create any fiduciary relationship between the Corporation and
         any Participant.

24.      MISCELLANEOUS

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

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

         (c) The adoption of this Plan shall not affect any other compensation
         or incentive plans in effect for the Company. Nothing in this Plan
         shall be construed to limit the right of the Company (i) to establish
         any other forms of incentives or compensation for employees of the
         Company, or (ii) to grant or assume options (outside the scope of and
         in addition to those contemplated by this Plan) in connection with any
         proper corporate purpose.


                                       12


25.      EFFECTIVE DATE

         This Plan shall be effective on the Effective Date, subject, however,
         to the approval of this Plan by the shareholders of the Company within
         twelve months after the date on which the Board approved this Plan.
         Notwithstanding anything else contained herein to the contrary, no
         Shares shall be issued or delivered under this Plan until such
         shareholder approval is obtained and, if such shareholder approval is
         not obtained within such 12-month period of time, all Contributions
         credited to a Participant's Account hereunder shall be refunded to such
         Participant (without interest) as soon as practicable after the end of
         such 12-month period.


                                       13

EX-99.3

                                                                    EXHIBIT 99.3


                   FIRST AMENDMENT TO BUSINESS LOAN AGREEMENT

This First Amendment to Business Loan Agreement (the "Amendment") is made as of
May 7, 2004, between Bank of America, N. A.("Bank"), and Pacific Sunwear of
California, Inc., a California corporation (the "Borrower").

                                    RECITALS

         A.       Borrower and Bank entered into that certain Business Loan
Agreement dated as of January 30, 2004 (the "Agreement").

         B.       Borrower and Bank desire to amend the Agreement as herein
provided.

                                    AGREEMENT

         1.       Definitions. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.

         2.       Amendments. The Agreement is hereby amended as follows:

                  2.1 Section 3.1(a) of the Agreement is amended in its entirety
to read as follows:

                           "(a) Unused Commitment Fee. The Borrower agrees to
                  pay a fee on any difference between the Commitment and the
                  amount of credit it actually uses, determined by the weighted
                  average credit outstanding during the specified period. The
                  fee will be calculated at (i) 0.20% per year, if consolidated
                  EBITDA (as defined in Section 7.3 hereof) is equal to or
                  greater than $100,000,000, or (ii) 0.25% per year, if
                  consolidated EBITDA is less than $100,000,000. The calculation
                  of credit outstanding shall include undrawn amounts of letters
                  of credit and shipside bonds. The fee will be payable
                  quarterly in arrears until expiration of the availability
                  period."

                  2.2 In subsection (c) of Section 7.10 of the Agreement, the
first sentence is amended to read as follows:

                           "(c) capital stock repurchases not in excess of (x)
                  Fifty Million Dollars ($50,000,000) in the aggregate from the
                  date of this Agreement through May 6, 2004, or (y) Twenty-Five
                  Million Dollars ($25,000,000) in the aggregate from May 7,
                  2004 through the Expiration Date; provided that, after giving
                  effect to such stock repurchase (i) No Event of Default under
                  this Agreement has occurred and is continuing and (ii)
                  Borrower has not less than Fifty Million Dollars ($50,000,000)
                  in Unencumbered Liquid Assets. . . . "

         3.       Representations and Warranties. Borrower hereby represents and
warrants to Bank that: (i) no default specified in the Agreement and no event
which with notice or


                                       1


lapse of time or both would become such a default has occurred and is continuing
and has not been previously waived, (ii) the representations and warranties of
Borrower pursuant to the Agreement are true on and as of the date hereof as if
made on and as of said date, (iii) the making and performance by Borrower of
this Amendment have been duly authorized by all necessary action, and (iv) no
consent, approval, authorization, permit or license is required in connection
with the making or performance of the Agreement as amended hereby.

         4.       Conditions. This Amendment will be effective when the Bank
receives the following items, in form and content acceptable to the Bank:

                  4.1 This Amendment duly executed by all parties hereto.

                  4.2 Payment of all out-of-pocket expenses, including
attorneys' fees, incurred by the Bank in connection with the preparation of this
Amendment.

         5.       Effect of Amendment. Except as provided in this Amendment, the
Agreement shall remain in full force and effect and shall be performed by the
parties hereto according to its terms and provisions.

         IN WITNESS WHEREOF, this Amendment has been executed by the parties
hereto as of the date first above written.


                                          BANK OF AMERICA, N.A.

                                          By:
                                              ----------------------------------
                                          Name:
                                                --------------------------------
                                          Title:
                                                 -------------------------------


                                          PACIFIC SUNWEAR OF CALIFORNIA, INC.

                                          By:
                                              ----------------------------------
                                          Name: Greg Weaver
                                          Title: Chairman and Chief
                                                 Executive Officer

                                          By:
                                              ----------------------------------
                                          Name: Carl Womack
                                          Title: Chief Financial Officer


                                       2