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 July 31, 2004

OR

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

Commission file number 0-21296

PACIFIC SUNWEAR OF CALIFORNIA, INC.

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

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

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

Yes [x]   No [  ]

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

Yes [x]   No [  ]

The number of shares outstanding of the registrant’s Common Stock, par value $.01 per share, at August 27, 2004, was 74,137,806.

PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
For the Quarter Ended July 31, 2004

Index

	Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of July 31, 2004 and January 31, 2004		3
Condensed Consolidated Statements of Income and Comprehensive Income for the second quarter and first half ended July 31, 2004 and August 2, 2003		4
Condensed Consolidated Statements of Cash Flows for the first half ended July 31, 2004 and August 2, 2003		5
Notes to Condensed Consolidated Financial Statements		6-12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13-25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		25
Item 4 Controls and Procedures		25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 3. Defaults Upon Senior Securities		26
Item 4. Submission of Matters to a Vote of Security Holders		26
Item 5. Other Information		26
Item 6. Exhibits and Reports on Form 8-K		26-27
SIGNATURE PAGE		28
EXHIBIT 3.1
EXHIBIT 3.2
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 31
EXHIBIT 32

2

PACIFIC SUNWEAR OF CALIFORNIA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)
(in thousands, except share amounts)

	July 31,			January 31,
	2004			2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	34,544		$	142,840
Short-term investments		50,224			33,035
Accounts receivable		7,164			5,194
Merchandise inventories		213,833			147,751
Prepaid expenses, includes $11,179 and $10,711 of prepaid rent, respectively		18,742			16,492
Deferred income taxes		8,224			8,224
Total current assets		332,731			353,536
PROPERTY AND EQUIPMENT:
Land		12,156			12,156
Buildings and building improvements		26,691			26,686
Leasehold improvements		128,605			119,210
Furniture, fixtures and equipment		189,747			173,222
Total property and equipment		357,199			331,274
Less accumulated depreciation and amortization		(142,486	)		(127,630	)
Net property and equipment		214,713			203,644
OTHER ASSETS:
Goodwill		6,492			6,492
Deferred compensation and other assets		12,254			11,589
Total other assets		18,746			18,081
Total assets	$	566,190		$	575,261
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	74,152		$	38,668
Accrued liabilities		41,517			54,966
Current portion of capital lease obligations		1,307			1,008
Current portion of long-term debt		674			878
Income taxes payable		9,191			15,024
Total current liabilities		126,841			110,544
LONG-TERM LIABILITIES:
Long-term debt, net of current portion		—			228
Long-term capital lease obligations, net of current portion		934			1,227
Deferred compensation		12,062			10,925
Deferred rent		11,960			12,046
Deferred income taxes		11,529			11,529
Other long-term liabilities		92			—
Total long-term liabilities		36,577			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; 75,496,375 and 78,351,302 shares issued and outstanding, respectively		755			784
Additional paid-in capital		78,617			138,877
Retained earnings		323,400			289,101
Total shareholders’ equity		402,772			428,762
Total liabilities and shareholders’ equity	$	566,190		$	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 Second Quarter Ended				For the First Half Ended
	July 31, 2004		August 2, 2003		July 31, 2004		August 2, 2003
Net sales	$	274,797	$	234,392	$	519,928	$	432,723
Cost of goods sold, including buying, distribution and occupancy costs		179,977		154,558		341,537		289,034
Gross margin		94,820		79,834		178,391		143,689
Selling, general and administrative expenses		64,061		58,180		124,011		109,141
Operating income		30,759		21,654		54,380		34,548
Interest income, net		316		69		773		129
Income before income tax expense		31,075		21,723		55,153		34,677
Income tax expense		11,750		8,343		20,854		13,318
Net income	$	19,325	$	13,380	$	34,299	$	21,359
Comprehensive income	$	19,325	$	13,380	$	34,299	$	21,359
Net income per share, basic	$	0.25	$	0.18	$	0.44	$	0.28
Net income per share, diluted	$	0.25	$	0.17	$	0.43	$	0.28
Weighted average shares outstanding, basic		76,322,161		75,885,641		77,239,966		75,205,094
Weighted average shares outstanding, diluted		77,911,595		78,104,037		79,035,717		77,331,519

See accompanying notes

4

PACIFIC SUNWEAR OF CALIFORNIA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
(in thousands)

	For the First Half Ended
	July 31, 2004			August 2, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	34,299		$	21,359
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,395			17,752
Loss on disposal of equipment		2,191			1,085
Tax benefits related to exercise of stock options		2,906			10,127
Change in operating assets and liabilities:
Accounts receivable		(1,970	)		(1,442	)
Merchandise inventories		(66,082	)		(62,600	)
Prepaid expenses		(2,250	)		(1,526	)
Deferred compensation and other assets		472			2,774
Accounts payable		35,484			45,688
Accrued liabilities		(11,362	)		(992	)
Income taxes payable and deferred income taxes		(5,833	)		(10,708	)
Deferred rent		(86	)		855
Other long-term liabilities		92			—
Net cash provided by operating activities		7,256			22,372
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(32,149	)		(18,603	)
Increase in accrued capital expenditures		2,766			2,303
Purchases of short-term investments		(19,829	)		—
Maturities of short-term investments		2,640			—
Net cash used in investing activities		(46,572	)		(16,300	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock		(74,931	)		—
Proceeds from exercise of stock options		6,883			21,503
Principal payments under capital lease obligations		(500	)		(771	)
Principal payments under long-term debt obligations		(432	)		(406	)
Net cash (used in)/provided by financing activities		(68,980	)		20,326
NET DECREASE IN CASH AND CASH EQUIVALENTS:		(108,296	)		26,398
CASH AND CASH EQUIVALENTS, beginning of period		142,840			36,438
CASH AND CASH EQUIVALENTS, end of period	$	34,544		$	62,836
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	81		$	135
Income taxes	$	23,781		$	13,899

Supplemental disclosures of non-cash transactions (in thousands): During the first half ended July 31, 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

5

PACIFIC SUNWEAR OF CALIFORNIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, all amounts in thousands except share and per share amounts or 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 second quarter and first half of fiscal 2004 were the 13- and 26-week periods ended July 31, 2004, respectively. The second quarter and first half of fiscal 2003 were the 13- and 26-week periods ended August 2, 2003, respectively.

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 second quarter and first half ended July 31, 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 July 31, 2004, the market value of the Company’s portfolio was $49.6 million, consisting of corporate debentures of $23.5 million, U.S. agency debentures of $17.7 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 (“APB”) Opinion No. 25 and, accordingly, does not currently include compensation expense related to stock options in reported net income. The Company follows the disclosure provisions of Statement of Financial Accounting Standards No. 148 (“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

6

required to follow the prescribed disclosure format and has provided the additional disclosures required by SFAS 148 for the second quarter and first half ended July 31, 2004 below.

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 ranges of weighted average assumptions: expected life, 5 years; stock volatility of 37.0% to 37.8% for fiscal 2004 and 45.3% to 53.7% for fiscal 2003; risk-free interest rates of 3.6% to 3.7% for fiscal 2004 and 2.9% to 3.3% 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 second quarter and first half ended July 31, 2004 and August 2, 2003, respectively, would have been reduced to the pro forma amounts indicated below:

	For the Second Quarter Ended						For the First Half Ended
	July 31,			August 2,			July 31,			August 2,
	2004			2003			2004			2003
Net Income
As reported	$	19,325		$	13,380		$	34,299		$	21,359
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,673	)		(1,570	)		(3,231	)		(3,090	)
Pro forma	$	17,652		$	11,810		$	31,068		$	18,269
Net Income Per Share, Basic
As reported	$	0.25		$	0.18		$	0.44		$	0.28
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	)		(0.04	)		(0.04	)
Pro forma	$	0.23		$	0.16		$	0.40		$	0.24
Net Income Per Share, Diluted
As reported	$	0.25		$	0.17		$	0.43		$	0.28
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	)		(0.03	)		(0.04	)
Pro forma	$	0.23		$	0.15		$	0.40		$	0.24

New Accounting Pronouncements – In January 2003, the Financial Accounting Standards Board (“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 ARB No. 51, “Consolidated Financial

7

Statements,” 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 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 March 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.

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 03-1 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” for which the measurement and recognition provisions are effective for reporting periods beginning after June 15, 2004. EITF 03-1 provides a three-step process for determining whether investments, including debt securities, are other than temporarily impaired and requires additional disclosures in annual financial statements. An investment is impaired if the fair value of the investment is less than its cost. EITF 03-1 outlines that an impairment would be considered other-than-temporary unless: a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment, and b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. Although not presumptive, a pattern of selling investments prior to the forecasted recovery of fair value may call into question the investor’s intent. In addition, the severity and duration of the impairment should also be considered in determining whether the impairment is other-than-temporary. The Company does not expect the adoption of EITF 03-1 to have a material impact on its financial position or results of operations because the Company has the ability and intent to hold any of its held-to-maturity marketable securities with gross unrealized losses until a recovery of fair value at maturity.

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 of $12,062 and $10,925 included in long-term liabilities as of July 31, 2004 and January 31, 2004, respectively.

	July 31,		January 31,
	2004		2004
Deferred compensation	$	11,923	$	10,919
Long-term computer maintenance contracts		202		502
Other assets		129		168
	$	12,254	$	11,589

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NOTE 4 – ACCRUED LIABILITIES

Accrued liabilities consist of the following:

	July 31,		January 31,
	2004		2004
Accrued compensation and benefits	$	9,082	$	17,578
Accrued capital expenditures		8,604		5,838
Accrued sales tax payable		6,248		6,189
Accrued medical expenses		2,207		1,260
Accrued gift cards and store merchandise credits		2,071		4,618
Accrued sublease loss charges (Note 8)		1,565		5,543
Accrued restricted stock compensation (Note 6)		912		5,118
Other		10,828		8,822
	$	41,517	$	54,966

NOTE 5 – COMMON STOCK REPURCHASE AND RETIREMENT

The Company’s Board of Directors has authorized a common stock repurchase plan in three separate authorizations. The Company’s stock repurchase activity under this plan is as follows:

(all amounts in thousands, except per share amounts)

					# of Shares
					Purchased				Maximum
			Average		as Part of				Value of Shares
			Price		Publicly		Value of		that May Yet
	# of Shares		Paid Per		Announced		Shares		be Purchased
Period	Purchased		Share		Plan		Purchased		Under the Plan
Authorization #1 (1)
February 2004		75.0	$	23.99		75.0	$	1,799.3	$	48,200.7
April 2004		2,148.7	$	22.43		2,148.7	$	48,195.4	$	5.3
Total		2,223.7	$	22.48		2,223.7	$	49,994.7
Authorization #2 (2)
June 2004		482.1	$	19.70		482.1	$	9,495.3	$	15,504.7
July 2004		812.4	$	19.01		812.4	$	15,440.6	$	64.1
Total		1,294.5	$	19.26		1,294.5	$	24,935.9
Authorization #3 (3)
August 2004		1,746.0	$	19.80		1,746.0	$	34,570.8	$	15,429.2

(1) 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 authorization. During the first quarter of fiscal 2004, the Company had substantially completed its repurchase and retirement of shares pursuant to this authorization.

(2) 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 authorization. During the second quarter of fiscal 2004, the Company had substantially completed its repurchase and retirement of shares pursuant to this authorization.

(3) On August 18, 2004, the Company’s Board of Directors authorized the Company to purchase up to an additional $50 million of the Company’s common stock in open market transactions. There was no expiration date specified for this authorization.

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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 July 31, 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 July 31, 2004 of $20.40, the Company would be required to record additional compensation expense of approximately $.1 million through 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 July 31, 2004, the Company had accrued $.4 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 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 July 31, 2004 of $20.40, the Company would be required to record additional compensation expense of approximately $.5 million through 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.

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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):

Second Quarter Ended:

	July 31, 2004						August 2, 2003
					Per Share							Per Share
	Net Income		Shares		Amount			Net Income		Shares		Amount
Basic EPS:	$	19,325		76,322,161	$	0.25		$	13,380		75,885,641	$	0.18
Diluted EPS:
Effect of dilutive stock options		—		1,589,434		—			—		2,218,396		(0.01	)
	$	19,325		77,911,595	$	0.25		$	13,380		78,104,037	$	0.17

First Half Ended:

	July 31, 2004							August 2, 2003
					Per Share							Per Share
	Net Income		Shares		Amount			Net Income		Shares		Amount
Basic EPS:	$	34,299		77,239,966	$	0.44		$	21,359		75,205,094	$	0.28
Diluted EPS:
Effect of dilutive stock options		—		1,795,751		(0.01	)		—		2,126,425		(0.00	)
	$	34,299		79,035,717	$	0.43		$	21,359		77,331,519	$	0.28

Options to purchase 1,221,266 and 3,750 shares of common stock in the second quarter of fiscal 2004 and fiscal 2003, respectively, and 915,644 and 138,066 shares of common stock in the first half of fiscal 2004 and fiscal 2003, respectively, were not included in the computation of diluted earnings per common share because the option exercise price was greater than the average market price of the common stock.

NOTE 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.

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 $18.9 million of these letters of credit outstanding at July 31, 2004. In the first quarter of fiscal 2003, the Company issued a guarantee within a sublease on one of its former 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. At July 31, 2004, the Company had $.4 million recorded in accrued liabilities to recognize the estimated fair value of this guarantee

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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 July 31, 2004, were $5.7 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 – During the second quarter ended July 31, 2004, the Company executed a lease termination agreement related to the Company’s former corporate offices and distribution center. As a result of executing this agreement, the Company retains no future obligations regarding these premises. The terms of this agreement resulted in the Company reversing $.9 million in previously accrued liabilities.

The Company remains liable under an operating lease covering a former store location. The Company has subleased 3,200 of a total 5,200 square feet of these premises. At July 31, 2004, the Company had $1.6 million recorded in accrued liabilities to account for the Company’s net remaining contractual lease obligations for this location, which includes estimated sublease assumptions for the remaining 2,000 square feet. 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 July 31, 2004, the gross remaining obligations under the Company’s original lease, exclusive of any sublease income, were approximately $6.5 million.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto of the Company included elsewhere in this Form 10-Q. This discussion 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 as a percentage of net sales for the first half of fiscal 2004 was 10.5% as compared to 8.0% for the first half of fiscal 2003. Full fiscal year operating margins for fiscal 2003, 2002 and 2001, were 12.3%, 9.6% and 6.5%, respectively. The first half of the Company’s fiscal year historically accounts for a smaller percentage of annual net sales and operating margin as compared to the second half. 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 and average net sales per square foot. 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. Management expects cash flows from operations will be sufficient to finance operations without borrowing under the Company’s credit facility during the remainder of 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 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

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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 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. 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.

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’s 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 an operating lease covering a former store location. The Company has subleased 3,200 of a total 5,200 square feet of these premises. At July 31, 2004, the Company had $1.6 million recorded in accrued liabilities to account for the Company’s net remaining contractual lease obligations for this location, which includes estimated sublease assumptions for the remaining 2,000 square feet. 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

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rates or within the assumed timeframes changes or is incorrect, additional charges or reversals of previous charges may be recorded in the future. At July 31, 2004, the gross remaining obligations under the Company’s original lease, exclusive of any sublease income, were approximately $6.5 million. This amount is 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.”

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).

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:

	Second Quarter Ended						First Half Ended
	July 31,			August 2,			July 31,			August 2,
	2004			2003			2004			2003
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold, including buying, distribution and occupancy costs		65.5			66.0			65.7			66.8
Gross margin		34.5			34.0			34.3			33.2
Selling, general and administrative expenses		23.3			24.8			23.9			25.2
Operating income		11.2			9.2			10.4			8.0
Interest income, net		0.1			0.0			0.2			0.0
Income before income tax expense		11.3			9.2			10.6			8.0
Income tax expense		4.3			3.5			4.0			3.1
Net income		7.0	%		5.7	%		6.6	%		4.9	%

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

	July 31,		August 2,
	2004		2003
PacSun stores		717		650
Outlet stores		82		75
d.e.m.o. stores		148		114
Total stores		947		839
Total square footage (in 000’s)		3,266		2,844

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The second quarter (13 weeks) ended July 31, 2004 as compared to the second quarter (13 weeks) ended August 2, 2003

Net Sales

Net sales increased to $274.8 million for the second quarter of fiscal 2004 from $234.4 million for the second quarter of fiscal 2003, an increase of $40.4 million, or 17.2%. The components of this $40.4 million increase in net sales are as follows:

Amount
($ million)			Attributable to
$	14.7		6.8% increase in comparable store net sales in the second quarter of fiscal 2004 compared to the second quarter of fiscal 2003
	12.0		Net sales from stores opened in fiscal 2003 not yet included in the comparable store base
	10.9		Net sales from 74 new stores opened in fiscal 2004 not yet included in the comparable store base
	3.6		Other non-comparable sales (net sales from expanded or relocated stores not yet included in the comparable store base and internet net sales)
	(.8	)	4 closed stores in fiscal 2004 and 4 closed stores in fiscal 2003
$	40.4		Total

Of the 6.8% increase in comparable store net sales in the second quarter of fiscal 2004, PacSun and PacSun Outlet comparable store net sales increased 7.2% and d.e.m.o. comparable store net sales increased 3.0%. 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 and young men’s 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 second quarter of fiscal 2004 compared to the second quarter of fiscal 2003 and had no significant impact on the net sales increase for the second quarter of fiscal 2004.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, increased to $94.8 million for the second quarter of fiscal 2004 from $79.8 million for the second quarter of fiscal 2003, an increase of $15.0 million, or 18.8%. As a percentage of net sales, gross margin was 34.5% for the second quarter of fiscal 2004 compared to 34.0% for the second quarter of fiscal 2003. The components of this .5% increase in gross margin as a percentage of net sales are as follows:

%			Attributable to
	.4	%	Increase in net merchandise margins, primarily due to a higher initial markup rate partially offset by a higher markdown rate
	.2	%	Decrease in occupancy costs, primarily due to leveraging these costs over higher total sales
	(.1	)%	Increase in distribution costs
	.5	%	Total

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $64.1 million for the second quarter of fiscal 2004 from $58.2 million for the second quarter of fiscal 2003, an increase of $5.9 million, or 10.1%. These expenses decreased to 23.3% as a percentage of net sales in the second quarter of fiscal 2004 from 24.8% in the second quarter of fiscal 2003. The components of this 1.5% net decrease in selling, general and administrative expenses as a percentage of net sales were as follows:

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%			Attributable to
	(1.0	)%	Net decrease in general and administrative expenses, primarily due to reduced restricted stock expense of .8%
	(.4	)%	Decrease in store closing, expansion and relocation expenses and other store expenses, primarily due to the lease termination agreement related to the Company’s former corporate offices and distribution center; the lease termination resulted in the Company reversing $.9 million in previously accrued liabilities (see Note 8 to the condensed consolidated financial statements)
	(.1	)%	Decrease in store payroll, primarily due to leveraging these costs over higher total sales
	(1.5	)%	Total

Net Interest Income

Net interest income was $.3 million in the second quarter of fiscal 2004 compared to $.1 million in the second quarter of fiscal 2003, an increase of $.2 million. This increase was primarily the result of higher average cash and short-term investment balances in the second quarter of fiscal 2004 as compared to the second quarter of fiscal 2003, primarily due to higher net income driven by the comparable store net sales increases in the first half of fiscal 2004.

Income Tax Expense

Income tax expense was $11.8 million for the second quarter of fiscal 2004 compared to $8.3 million for the second quarter of fiscal 2003. The effective income tax rate was 37.8% in the second quarter of fiscal 2004 and 38.4% in the second quarter of fiscal 2003. The lower effective income tax rate for the second 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.

The first half (26 weeks) ended July 31, 2004 as compared to the first half (26 weeks) ended August 2, 2003

Net Sales

Net sales increased to $519.9 million for the first half of fiscal 2004 from $432.7 million for the first half of fiscal 2003, an increase of $87.2 million, or 20.2%. The components of this $87.2 million increase in net sales are as follows:

Amount
($ million)			Attributable to
$	38.1		9.5% increase in comparable store net sales in the first half of fiscal 2004 compared to the first half of fiscal 2003
	29.5		Net sales from stores opened in fiscal 2003 not yet included in the comparable store base
	12.8		Net sales from 74 new stores opened in fiscal 2004 not yet included in the comparable store base
	7.8		Other non-comparable sales (net sales from expanded or relocated stores not yet included in the comparable store base and internet net sales)
	(1.0	)	4 closed stores in fiscal 2004 and 4 closed stores in fiscal 2003
$	87.2		Total

Of the 9.5% increase in comparable store net sales in the first half of fiscal 2004, PacSun and PacSun Outlet comparable store net sales increased 10.1% and d.e.m.o. comparable store net sales increased 4.6%. 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 and young men’s 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

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relatively unchanged in the first half of fiscal 2004 compared to the first half of fiscal 2003 and had no significant impact on the net sales increase for the first half of fiscal 2004.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, increased to $178.4 million for the first half of fiscal 2004 from $143.7 million for the first half of fiscal 2003, an increase of $34.7 million, or 24.1%. As a percentage of net sales, gross margin was 34.3% for the first half of fiscal 2004 compared to 33.2% for the first half of fiscal 2003. The components of this 1.1% increase in gross margin as a percentage of net sales are as follows:

%			Attributable to
	.7	%	Decrease in occupancy costs, primarily due to leveraging these costs over higher total sales
	.5	%	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
	1.1	%	Total

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $124.0 million for the first half of fiscal 2004 from $109.1 million for the first half of fiscal 2003, an increase of $14.9 million, or 13.7%. These expenses decreased to 23.9% as a percentage of net sales in the first half of fiscal 2004 from 25.2% in the first half of fiscal 2003. The components of this 1.3% net decrease in selling, general and administrative expenses as a percentage of net sales were as follows:

%			Attributable to
	(.6	)%	Net decrease in general and administrative expenses, primarily due to reduced restricted stock expense of .4%
	(.5	)%	Decrease in store closing, expansion and relocation expenses and other store expenses, primarily due to the lease termination agreement related to the Company’s former corporate offices and distribution center; the lease termination resulted in the Company reversing $.9 million in previously accrued liabilities (see Note 8 to the condensed consolidated financial statements)
	(.2	)%	Decrease in store payroll, primarily due to leveraging these costs over higher total sales
	(1.3	)%	Total

Net Interest Income

Net interest income was $.8 million in the first half of fiscal 2004 compared to $.1 million in the first half of fiscal 2003, an increase of $.7 million. This increase was primarily the result of higher average cash and short-term investment balances in the first half of fiscal 2004 as compared to the first half of fiscal 2003, primarily due to higher net income driven by the comparable store net sales increases in the first half of fiscal 2004.

Income Tax Expense

Income tax expense was $20.9 million for the first half of fiscal 2004 compared to $13.3 million for the first half of fiscal 2003. The effective income tax rate was 37.8% in the first half of fiscal 2004 and 38.4% in the first half of fiscal 2003. The lower effective income tax rate for the first half 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.

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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 of newly opened, remodeled, expanded or relocated stores, net of landlord allowances, 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.

Operating Cash Flows

Net cash provided by operating activities was $7.3 million for the first half of fiscal 2004 compared to $22.4 million for the first half of fiscal 2003. The $15.1 million decrease in cash provided by operations in the first half of fiscal 2004 as compared to the first half of fiscal 2003 was attributable to the following:

Amount
($ million)			Attributable to
$	(10.4	)	Decrease in accrued liabilities, primarily due to the payment of fiscal 2003 bonuses, the Auden and Adams settlements (see Note 8 to the condensed consolidated financial statements), and the lease termination covering the Company’s former corporate offices and distribution center (see Note 8 to the condensed consolidated financial statements)
	(10.2	)	Decrease in accounts payable leverage compared to the first half of fiscal 2003 (Accounts payable as a percentage of inventories decreased to 34.7% at July 31, 2004, as compared to 39.9% at August 2, 2003, primarily due to timing of payments)
	(3.5	)	Increase in inventories
	(2.3	)	Decrease in income taxes payable, primarily due to increased income tax payments and reduced tax benefits from the exercise of stock options, partially offset by higher income tax provisions
	12.9		Increase in net income
	(1.6	)	Other items netting to a cash flow decrease
$	(15.1	)	Total

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 July 31, 2004 was $205.9 million compared to $243.0 million at January 31, 2004, a decrease of $37.1 million. The components of this $37.1 million decrease in working capital were as follows:

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Amount
($ million)			Attributable to
$	(91.1	)	Decrease in cash and short-term investments, primarily due to $74.9 million in common stock repurchases made in the first half of fiscal 2004
	30.6		Increase in inventories, net of accounts payable, primarily due to square footage growth of 15%
	13.4		Decrease in accrued liabilities, primarily due to the payment of fiscal 2003 bonuses, the Auden and Adams settlements (see Note 8 to the condensed consolidated financial statements), and the lease termination covering the Company’s former corporate offices and distribution center (see Note 8 to the condensed consolidated financial statements), as well as the issuance of restricted stock to satisfy certain deferred compensation liabilities (see Note 6 to the condensed consolidated financial statements)
	5.8		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
	4.2		Other items netting to a working capital increase
$	(37.1	)	Total

Investing Cash Flows

Net cash used in investing activities in the first half of fiscal 2004 was $46.6 million compared to $16.3 million for the first half of fiscal 2003, an increase in cash used of $30.3 million. The components of the $46.6 million in cash used in investing activities in the first half of fiscal 2004 are as follows:

Amount
($ million)			Attributable to
$	(24.0	)	Construction costs of new, expanded and relocated stores
	(19.8	)	Purchases of short-term investments classified as held-to-maturity
	(2.8	)	Other capital expenditures, including computer hardware and software
	(2.6	)	Maintenance capital expenditures on existing stores
	2.6		Maturities of short-term investments classified as held-to-maturity
$	(46.6	)	Total

In the remainder of fiscal 2004, capital expenditures are expected to be approximately $23 million, of which approximately $20 million will be for opening new and relocated/expanded stores, and approximately $3 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 half of fiscal 2004 was $69.0 million compared to cash provided of $20.3 million for the first half of fiscal 2003, an increase in cash used of $89.3 million. The components of the $89.3 million increase in cash used in financing activities in the first half of fiscal 2004 as compared to the first half of fiscal 2003 were as follows:

Amount
($ million)			Attributable to
$	(74.9	)	Repurchases of common stock
	(14.6	)	Decrease in proceeds received from stock option exercises
	.2		Decrease in principal payments under long-term debt and capital lease obligations
$	(89.3	)	Total

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Common Stock Repurchase and Retirement – Information regarding the Company’s common stock repurchase plan 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 (4.25% at July 31, 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 half of fiscal 2004 or during fiscal 2003. The Company had $18.9 million outstanding in letters of credit at July 31, 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 July 31, 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 be that the Company would 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 operating leases, capital leases for computer equipment, and other long-term debt obligations for multi-year computer maintenance contracts. In addition, at any time, the Company is contingently liable for open letters of credit with foreign suppliers of merchandise. At July 31, 2004, the Company’s future financial commitments under these arrangements were as follows:

Contractual Obligations

	Payments Due by Period
			Less than		1-3		3-5		More than
(in millions)	Total		1 year		years		years		5 years
Operating lease obligations	$	592.6	$	86.2	$	169.9	$	158.2	$	178.3
Capital lease obligations		2.2		1.3		0.9		—		—
Long-term debt obligations		0.7		0.7		—		—		—
Letters of credit		18.9		18.9		—		—		—
Total	$	614.4	$	107.1	$	170.8	$	158.2	$	178.3

The Company reviews the operating performance of its stores on an ongoing basis to determine which stores, if any, to expand, relocate or close. Most leases contain cancellation or kick-out clauses in the Company’s favor that relieve the Company of any future obligation under a lease if certain sales levels are not achieved by a specified date. The Company closed four stores in fiscal 2003 and anticipates closing approximately six 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 July 31, 2004, which note is incorporated herein by this reference.

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Inflation

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

Seasonality and Quarterly Results

The Company’s business is seasonal by nature, with the Christmas and back-to-school periods historically accounting for the largest percentage of annual net sales. The Company’s first quarter historically accounts for the smallest percentage of annual net sales. In 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 and capital expenditures, 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.

Proprietary Brand Merchandise. Sales from proprietary brand merchandise accounted for approximately 32% of net sales in fiscal 2003. The Company may increase the percentage of net sales in proprietary brand merchandise in the future, although there can be no assurance that the Company will be able to achieve increases in proprietary brand merchandise sales as a percentage of net sales. Because the Company’s proprietary brand 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 proprietary brand merchandise, particularly if the percentage of net sales derived from proprietary brand merchandise increases, may have a material adverse effect on the Company’s same store sales results, operating margins, financial condition and results of operations.

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

Expansion and Management of Growth. 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. At July 31, 2004, the Company operated 947 stores, of which 717 were PacSun stores, 82 were PacSun Outlet stores, and 148 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 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, 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

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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 proprietary 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; (vi) organized labor strikes or slowdowns at United States ports; and (vii) local business practice and political issues, including issues relating to compliance with domestic or international labor standards which may result in adverse publicity. New initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions that, if enacted, would increase the cost of products purchased from suppliers in countries that 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 be that the Company would 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.

Expensing of Stock Options. The FASB currently expects to issue a final standard regarding equity-based compensation in the fourth quarter of 2004. The FASB’s existing exposure draft proposes that all publicly traded companies begin recording compensation expense related to all unvested and newly granted stock options prospectively for fiscal years beginning after December 15, 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.

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

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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 July 31, 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 half of fiscal 2004. Based on the interest rate of 4.25% 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 $3,000 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.

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PART II-OTHER INFORMATION

Item 1 – Legal Proceedings

For information regarding 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 – Unregistered Sales of Equity Securities and Use of Proceeds

For information on repurchases made during the first half of fiscal 2004, 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 is 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 no broker non-votes.

Item 5 – Other Information - Not Applicable

Item 6 – Exhibits and Reports on Form 8-K

Exhibit 3.1	Third Amended and Restated Articles of Incorporation of the Company
Exhibit 3.2	Third Amended and Restated Bylaws of the Company
Exhibit 10.1	First Amendment to Business Loan Agreement dated May 7, 2004 between the Company and Bank of America, N.A.
Exhibit 10.2	Second Amendment to Business Loan Agreement dated August 18, 2004 between the Company and Bank of America, N.A.
Exhibit 10.3	Amendment No. 1 to Rights Agreement dated June 18, 2004

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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.

On May 10, 2004, the Company filed an 8-K furnishing a press release announcing results of operations for the first quarter ended May 1, 2004.

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SIGNATURES

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

	Pacific Sunwear of California, Inc. (Registrant)
Date: August 30, 2004	/s/ GREG H. WEAVER
	Greg H. Weaver
	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

Date: August 30, 2004	/s/ CARL W. WOMACK
	Carl W. Womack
	Senior Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit 3.1	Third Amended and Restated Articles of Incorporation of the Company
Exhibit 3.2	Third Amended and Restated Bylaws of the Company
Exhibit 10.1	First Amendment to Business Loan Agreement dated May 7, 2004 between the Company and Bank of America, N.A.
Exhibit 10.2	Second Amendment to Business Loan Agreement dated August 18, 2004 between the Company and Bank of America, N.A.
Exhibit 10.3	Amendment No. 1 to Rights Agreement dated June 18, 2004
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.

EX-3.1

Exhibit 3.1

THIRD AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
PACIFIC SUNWEAR OF CALIFORNIA, INC.

FIRST: The name of the corporation is Pacific Sunwear of California, Inc.

SECOND: The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the general corporation law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations code.

THIRD: The total number of shares of all classes of stock which the corporation shall have authority to issue is 175,859,375 shares, consisting of 5,000,000 shares of Preferred Stock, $.01 par value (the “Preferred Stock”), and 170,859,375 shares of Common Stock, $.01 par value (the “Common Stock”). The Board of Directors of the corporation shall have the full authority permitted by law to fix by resolution full, limited, multiple, fractional, or no voting rights, and such designation, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, of any series that may be desired in respect of the Preferred Stock.

FOURTH: The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders.

FIFTH: No holder of any class of stock of the corporation shall be entitled to cumulate votes at any election of directors of the corporation. This provision shall become effective only when the corporation becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code.

SIXTH: No action required to be taken or which may be taken by shareholders at any annual or special meeting of shareholders of the corporation may be taken without a meeting, and the power of shareholders to consent in writing, without a meeting, to the taking of any action is specifically denied.

EX-3.2

Exhibit 3.2

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

ARTICLE I

Offices

               Section 1. Principal Executive Office. The corporation’s principal executive office shall be fixed and located at such place as the Board of Directors shall determine. The Board of Directors is granted full power and authority to change the principal executive office from one location to another.

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

ARTICLE II

Meetings of Shareholders

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

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

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

               Such notices shall specify:

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

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

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

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

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

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

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

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

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

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

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

3

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

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

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

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

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

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

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

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

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

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

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

ARTICLE III

Directors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

               Section 2. Number and Qualification of Directors. The authorized number of directors shall be not less than five nor more than nine until changed by Amendment of the Articles of Incorporation or by a bylaw duly adopted by approval of the outstanding shares. The exact number of directors shall be fixed, within the limits specified, by amendment of the next sentence duly adopted either by the Board of Directors or the shareholders. The exact number of directors shall be seven until changed as provided in this Section 2.

               Section 3. Election and Term of Office. This section shall become effective only when this corporation becomes a listed corporation within the meaning of Section 301.5 of the CGCL.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

               Section 10. Action at a Meeting: Quorum and Required Vote. Presence of a majority of the authorized number of directors at a meeting of the Board of Directors constitutes a quorum for the transaction of business, except as hereinafter provided. Members of the Board

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

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

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

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

(i)	A person participating in the meeting is a director or other person entitled to participate in the board meeting.
(ii)	All actions of, or votes by, the board are taken or cast only by the directors and not by persons who are not directors.

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

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

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

               Section 13. Notice of Adjournment. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of

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

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

               Section 15. Indemnification of Directors, Officers, Employees and Other Agents.

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

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indemnified with regard to any action brought by or in the right of the corporation for breach of duty to the corporation and its shareholders (i) for acts or omissions involving intentional misconduct or knowing and culpable violation of law; (ii) for acts or omissions that the director or officer believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director or officer; (iii) for any transaction from which the director or officer derived an improper personal benefit; (iv) for acts or omissions that show a reckless disregard for the director’s or officer’s duty to the corporation or its shareholders in circumstances in which the director or officer was aware, or should have been aware, in the ordinary course of performing his or her duties, of a risk of serious injury to the corporation or its shareholders; (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director’s or officer’s duties to the corporation or its shareholders; and (vi) for costs, charges, expenses, liabilities and losses arising under Section 310 or 316 of the CGCL. The right to indemnification conferred in this Section 15 shall be a contract right and shall include the right to be paid by the corporation expenses incurred in defending any proceeding in advance of its final disposition; provided, however, that if the CGCL permits the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, such advances shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts to the corporation if it shall be ultimately determined that such person is not entitled to be indemnified.

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

     (c) Right of Directors and Officers to Bring Suit. If a claim under Paragraph (a) of this Section 15 is not paid in full by the corporation within 30 days after a written claim has been received by the corporation, the claimant may

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at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he or she has met the applicable standard of conduct, if any, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant has not met the applicable standard of conduct, shall be a defense to the action or create a presumption for the purpose of an action that the claimant has not met the applicable standard of conduct.

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

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

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

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

     (h) Indemnity Agreements. The corporation may enter into agreements with any director, officer, employee or agent of the corporation providing for indemnification to the fullest extent permissible under the CGCL and the corporation’s Articles of Incorporation.

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

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

ARTICLE IV

Officers

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

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

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

     Section 4. Removal and Resignation. Any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting thereof, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors (subject, in each case, to the rights, if any, of an officer under any contract of employment).

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

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

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

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

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

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

     The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation’s transfer agent, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation.

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

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

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

ARTICLE V

Miscellaneous

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

     Section 2. Inspection of Corporate Records. The accounting books and records and minutes of proceedings of the shareholders and of the Board of Directors and committees of the Board of this corporation and any subsidiary of this corporation shall be open to inspection upon the written demand on the corporation of any shareholder or the holder of a voting trust certificate at any reasonable time during regular business hours, for a purpose reasonably related to such holder’s interests as a shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts.

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

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

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

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

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

     The corporation shall, upon the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared, together with a balance sheet as of the end of the same period. The financial statements referred to in this Section shall be accompanied by the report thereon, if there be any, of any

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independent accountants engaged by the corporation in respect thereof or, if there be no such report, the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation.

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

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

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

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

     Section 7. Inspection of Bylaws. The corporation shall keep in its principal executive office in California, or, if its principal executive office is not in California, then at its principal business office in California (or otherwise provide upon written request of any

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shareholder) the original or a copy of these Bylaws as amended or otherwise altered to date, certified by the secretary of the corporation, which shall be open to inspection by the shareholders at all reasonable times during office hours.

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

ARTICLE VI

Amendments

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

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

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EX-10.1

Exhibit 10.1

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

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EX-10.2

Exhibit 10.2

SECOND AMENDMENT TO BUSINESS LOAN AGREEMENT

This Second Amendment to Business Loan Agreement (the “Amendment”) is made as of August 18, 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 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, (y) Twenty-Five Million Dollars ($25,000,000) in the aggregate from May 7, 2004 through August 18, 2004, or (z) Fifty Million Dollars ($50,000,000) in the aggregate from August 19, 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 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:

Title:

By:

Name:

Title:

EX-10.3

Exhibit 10.3

AMENDMENT NO. 1

to

RIGHTS AGREEMENT

          This AMENDMENT NO. 1 TO RIGHTS AGREEMENT (this “Amendment”) is dated as of June 18, 2004, between Pacific Sunwear of California, Inc., a California corporation (the “Company”), and U.S. Stock Transfer Corporation, a California corporation (the “Rights Agent”). Capitalized terms that are not defined herein shall have the meanings ascribed to them in the Agreement (as defined below).

          WHEREAS, the Company and the Rights Agent previously entered into that certain Rights Agreement dated as of December 16, 1998 (the “Agreement”);

          WHEREAS, Section 27 of the Agreement provides that, prior to the Distribution Date, the Company and the Rights Agent shall, if the Company so directs, supplement or amend any provision of the Agreement without the approval of any holders of certificates representing Common Shares and no Distribution Date, as of the date hereof, has occurred; and

          WHEREAS, the Company has determined that it is in the best interests of the shareholders of the Company to amend the terms of the Agreement as set forth herein;

          NOW, THEREFORE, the parties agree as follows:

          1. Section 1(h)(ii) of the Agreement is hereby amended and restated in its entirety to read as follows:

          “(ii) any Person designated prior to the Distribution Date by the Board of Directors of the Company as an Exempt Person, unless and until such Person shall thereafter become the Beneficial Owner of additional shares constituting 1% or more of the Common Shares otherwise than in a transaction or series of transactions approved prior to such transaction or transactions by the Board of Directors of the Company; or”

          2. The first sentence of Section 11(a)(ii) of the Agreement is hereby amended and restated in its entirety to read as follows:

          “Subject to Section 24 of this Agreement, in the event any Person becomes an Acquiring Person and the Distribution Date has occurred, each holder of a Right shall thereafter have a right to receive, upon exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of the Company as shall equal the result obtained by (x) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable and dividing that product by (y) 50% of the then current per share market price of the Company’s Common Shares (determined pursuant to Section 11(d) hereof) on the date of the occurrence of such event.” In the event that any Person shall become an Acquiring Person, the Distribution Date has occurred and the Rights are then outstanding, the

Company shall not take any action which would eliminate or diminish the benefits intended to be afforded by the Rights.

          3. The first sentence of Section 13 of the Agreement is hereby amended and restated in its entirety to read as follows:

          “In the event, directly or indirectly, at any time after a Person has become an Acquiring Person and the Distribution Date has occurred, (a) the Company shall consolidate with, or merge with and into, any other Person, (b) any Person shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the Common Shares shall be changed into or exchanged for stock or other securities of any other Person (or the Company) or cash or any other property, or (c) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person other than the Company or one or more of its wholly-owned Subsidiaries, then, and in each such case, proper provision shall be made so that (i) each holder of a Right (except as otherwise provided herein) shall thereafter have the right to receive, upon the exercise thereof at a price equal to the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of such other Person (including the Company as successor thereto or as the surviving corporation) as shall equal the result obtained by (A) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable and dividing that product by (B) 50% of the then current per share market price of the Common Shares of such other Person (determined pursuant to Section 11(d) hereof) on the date of consummation of such consolidation, merger, sale or transfer; (ii) the issuer of such Common Shares shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, sale or transfer, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term “Company” shall thereafter be deemed to refer to such issuer; and (iv) such issuer shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares in accordance with Section 9 hereof) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the Common Shares thereafter deliverable upon the exercise of the Rights.”

          4. Section 31 is amended in its entirety to read as follows:

          “Section 31. Governing Law. This Agreement and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the state of California and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed within such State.”

          5. Except as expressly modified herein, the Agreement shall remain in full force and effect in accordance with its original terms.

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          6. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

[Signatures on following page.]

3

     IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to Rights Agreement to be duly executed and delivered on the day and year first above written.

		PACIFIC SUNWEAR OF CALIFORNIA, INC.
ATTEST:
By: /s/ CARL W. WOMACK		By: /s/ GREG H. WEAVER
	Carl W. Womack		Greg H. Weaver
	Sr. Vice President,		Chairman of the Board and
	Chief Financial Officer		Chief Executive Officer
	and Secretary
ATTEST:		U.S. STOCK TRANSFER CORPORATION
By: /s/ RICHARD BROWN		By: /s/ NEIL T. ROSSO
	Richard Brown		Neil T. Rosso
	Vice President		Assistant Vice President

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: August 30, 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:

b)	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;
d)	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
e)	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):

c)	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
d)	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: August 30, 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 July 31, 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: August 30, 2004	/s/ Greg H. Weaver
	Greg H. Weaver
	Chairman of the Board and Chief Executive Officer Pacific Sunwear of California, Inc.

Dated: August 30, 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.