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 October 30, 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 December 6, 2004, was 74,237,339.

PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
For the Quarter Ended October 30, 2004

Index

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of October 30, 2004 and January 31, 2004		3
	Condensed Consolidated Statements of Income and Comprehensive Income for the third quarter and nine months ended October 30, 2004 and November 1, 2003		4
	Condensed Consolidated Statements of Cash Flows for the nine months ended October 30, 2004 and November 1, 2003		5
	Notes to Condensed Consolidated Financial Statements		6-13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27
Item 4.	Controls and Procedures		27-28
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 3.	Defaults Upon Senior Securities		28
Item 4.	Submission of Matters to a Vote of Security Holders		28
Item 5.	Other Information		28
Item 6.	Exhibits		28
	SIGNATURE PAGE		29
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)

	October 30,			January 31,
	2004			2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	45,951		$	142,840
Short-term investments		38,573			33,035
Accounts receivable		8,097			5,194
Merchandise inventories		201,010			147,751
Prepaid expenses, includes $11,810 and $10,711 of prepaid rent, respectively		20,818			16,492
Deferred income taxes		8,224			8,224
Total current assets		322,673			353,536
PROPERTY AND EQUIPMENT:
Land		12,156			12,156
Buildings and building improvements		26,691			26,686
Leasehold improvements		134,232			119,210
Furniture, fixtures and equipment		198,920			173,222
Total property and equipment		371,999			331,274
Less accumulated depreciation and amortization		(151,155	)		(127,630	)
Net property and equipment		220,844			203,644
OTHER ASSETS:
Goodwill		6,492			6,492
Deferred compensation and other assets		12,730			11,589
Total other assets		19,222			18,081
Total assets	$	562,739		$	575,261
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	58,619		$	38,668
Accrued liabilities		47,225			54,966
Current portion of capital lease obligations		1,309			1,008
Current portion of long-term debt		453			878
Income taxes payable		12,007			15,024
Total current liabilities		119,613			110,544
LONG-TERM LIABILITIES:
Long-term debt, net of current portion		—			228
Long-term capital lease obligations, net of current portion		736			1,227
Deferred compensation		12,289			10,925
Deferred rent		12,345			12,046
Deferred income taxes		11,529			11,529
Other long-term liabilities		92			—
Total long-term liabilities		36,991			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; 74,156,155 and 78,351,302 shares issued and outstanding, respectively		742			784
Additional paid-in capital		50,096			138,877
Retained earnings		355,297			289,101
Total shareholders’ equity		406,135			428,762
Total liabilities and shareholders’ equity	$	562,739		$	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 Third Quarter Ended				For the Nine Months Ended
	October 30,		November 1,		October 30,		November 1,
	2004		2003		2004		2003
Net sales *	$	329,447	$	281,541	$	850,086	$	714,672
Cost of goods sold, including buying, distribution and occupancy costs *		210,827		181,041		553,197		470,587
Gross margin *		118,620		100,500		296,889		244,085
Selling, general and administrative expenses *		67,733		61,241		191,621		170,279
Operating income		50,887		39,259		105,268		73,806
Interest income, net		404		213		1,176		342
Income before income tax expense		51,291		39,472		106,444		74,148
Income tax expense		19,394		14,963		40,248		28,281
Net income	$	31,897	$	24,509	$	66,196	$	45,867
Comprehensive income	$	31,897	$	24,509	$	66,196	$	45,867
Net income per share, basic	$	0.43	$	0.32	$	0.87	$	0.60
Net income per share, diluted	$	0.42	$	0.31	$	0.85	$	0.59
Weighted average shares outstanding, basic		74,415,403		77,685,516		76,298,445		76,031,944
Weighted average shares outstanding, diluted		75,919,451		79,876,426		77,996,056		78,322,218

* See Note 2, “Shipping and Handling Revenues and Expenses” for a reconciliation of net sales, gross margins, and selling, general and administrative expenses as reported herein to the corresponding amounts for such items as reported in the Company’s third quarter press release as furnished on Form 8-K dated November 8, 2004.

See accompanying notes

4

PACIFIC SUNWEAR OF CALIFORNIA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
(in thousands)

	For the Nine Months Ended
	October 30,			November 1,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	66,196		$	45,867
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		29,661			26,939
Loss on disposal of equipment		2,474			1,492
Tax benefits related to exercise of stock options		4,429			14,449
Change in operating assets and liabilities:
Accounts receivable		(2,903	)		(972	)
Merchandise inventories		(53,259	)		(45,751	)
Prepaid expenses		(4,326	)		(1,661	)
Deferred compensation and other assets		223			5,959
Accounts payable		19,951			9,108
Accrued liabilities		(5,677	)		3,796
Income taxes payable and deferred income taxes		(3,017	)		(550	)
Deferred rent		299			1,234
Other long-term liabilities		92			—
Net cash provided by operating activities		54,143			59,910
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(45,286	)		(27,721	)
Purchases of short-term investments		(23,374	)		(10,410	)
Maturities of short-term investments		17,836			—
Net cash used in investing activities		(50,824	)		(38,131	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock		(109,502	)		—
Proceeds from exercise of stock options		10,779			27,111
Principal payments under capital lease obligations		(832	)		(1,186	)
Principal payments under long-term debt obligations		(653	)		(614	)
Cash paid in-lieu of fractional shares due to 3-for-2 stock split		—			(33	)
Net cash (used in)/provided by financing activities		(100,208	)		25,278
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS:		(96,889	)		47,057
CASH AND CASH EQUIVALENTS, beginning of period		142,840			36,438
CASH AND CASH EQUIVALENTS, end of period	$	45,951		$	83,495
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	105		$	185
Income taxes	$	38,836		$	14,382

Supplemental disclosures of non-cash transactions (in thousands): During the nine months ended October 30, 2004, the Company recorded an increase to additional paid-in capital of $5,471 related to the issuance of restricted stock to satisfy certain deferred compensation liabilities (see Note 6). During the nine months ended October 30, 2004 and November 1, 2003, the Company’s accrued capital expenditures increased by $3,407 and $2,960, respectively.

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 Miraloma Corp. (formerly “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 third quarter and first nine months of fiscal 2004 were the 13- and 39-week periods ended October 30, 2004, respectively. The third quarter and first nine months of fiscal 2003 were the 13- and 39-week periods ended November 1, 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 third quarter and nine months ended October 30, 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 October 30, 2004, the fair value of the Company’s portfolio was $38.5 million, consisting of corporate debentures of $21.5 million, U.S. agency debentures of $10.0 million, U.S. Treasury notes of $4.0 million and corporate commercial paper of $3.0 million.

Property and Equipment — Leasehold improvements and furniture, fixtures and equipment are stated at cost. Amortization of leasehold improvements is computed on the straight-line method over the lesser of an asset’s estimated useful life or the life of the related store’s lease (generally 10 years). Depreciation on furniture, fixtures and equipment is computed on the straight-line method over five years. Depreciation on buildings and building improvements is computed on the straight-line method over the estimated useful life of the asset (generally 39 years).

Revenue Recognition — Sales are recognized upon purchase by customers at the Company’s retail store locations or upon delivery to and acceptance by the customer for orders placed through the Company’s website. The Company accrues for estimated sales returns by customers based on historical sales return

6

results. 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 (see Note 4).

Shipping and Handling Revenues and Expenses — The Company accounts for shipping and handling revenues and expenses in accordance with Emerging Issues Task Force (“EITF”) Issue 00-10, “Accounting for Shipping and Handling Fees and Costs.” All shipping and handling revenues and expenses relate to sales activity generated from the Company’s website. These amounts, which were previously netted within selling, general and administrative expenses (SG&A) in our third quarter earnings press release as filed on Form 8-K dated November 8, 2004, have been reclassified for purposes of this quarterly report on Form 10-Q in accordance with EITF 00-10. Accordingly, amounts charged to the Company’s internet customers for shipping and handling revenues have been reclassified to net sales. Amounts paid by the Company for internet shipping and handling expenses have been reclassified to cost of goods sold and encompass payments to third party shippers and costs to store, move and prepare merchandise for shipment. A reconciliation of the reclassifications of shipping and handling revenues and expenses for the periods presented is provided below:

	For the Third Quarter Ended						For the Nine Months Ended
	October 30,			November 1,			October 30,			November 1,
	2004			2003			2004			2003
Net sales per 8-K	$	329,083		$	281,253		$	849,011		$	713,976
E-commerce shipping revenues		364			288			1,075			696
Net sales as reported	$	329,447		$	281,541		$	850,086		$	714,672
Gross margins per 8-K	$	118,880		$	100,617		$	297,272		$	244,305
E-commerce net shipping costs		(260	)		(117	)		(383	)		(220	)
Gross margins as reported	$	118,620		$	100,500		$	296,889		$	244,085
SG&A per 8-K	$	67,993		$	61,358		$	192,004		$	170,499
E-commerce net shipping costs		(260	)		(117	)		(383	)		(220	)
SG&A as reported	$	67,733		$	61,241		$	191,621		$	170,279

Customer Loyalty Programs - The Company’s primary customer loyalty programs are referred to as “PacBucks” for PacSun and PacSun Outlet stores and “d.e.m.o. Dollars” for d.e.m.o. stores. The Company also has a customer loyalty discount program related to its private label credit card. These programs offer customers dollar-for-dollar discounts on future merchandise purchases within stated redemption periods if they purchase specified levels of merchandise in a current transaction. These programs are recorded as a direct reduction in net sales upon redemption, which is generally within 30 days of the original issuance.

Cost of Goods Sold, including Buying, Distribution and Occupancy Costs — Cost of goods sold includes the landed cost of merchandise and all expenses incurred by the Company’s buying and distribution functions. These costs include inbound freight, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and any other costs borne by the Company’s buying department and distribution center. Occupancy costs include store rents, common area charges, as well as store expenses related to telephone service, supplies, repairs and maintenance, insurance, loss prevention, and taxes and licenses.

Selling, General and Administrative Expenses — Selling, general and administrative expenses include payroll, depreciation and amortization, advertising, credit authorization charges, expenses associated with the counting of physical inventories, and all other general and administrative expenses not directly related to merchandise or operating the Company’s stores.

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

7

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 financial statements. The Company is required to follow the prescribed disclosure format and has provided the additional disclosures required by SFAS 148 for the third quarter and nine months ended October 30, 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 40.4% to 53.7% for fiscal 2003; risk-free interest rates of 3.3% 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 third quarter and nine months ended October 30, 2004 and November 1, 2003, respectively, would have been reduced to the pro forma amounts indicated below:

	For the Third Quarter Ended						For the Nine Months Ended
	October 30,			November 1,			October 30,			November 1,
	2004			2003			2004			2003
Net Income
As reported	$	31,897		$	24,509		$	66,196		$	45,867
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,530	)		(1,437	)		(4,758	)		(4,515	)
Pro forma	$	30,367		$	23,072		$	61,438		$	41,352
Net Income Per Share, Basic
As reported	$	0.43		$	0.32		$	0.87		$	0.60
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	)		(0.06	)		(0.06	)
Pro forma	$	0.41		$	0.30		$	0.81		$	0.54
Net Income Per Share, Diluted
As reported	$	0.42		$	0.31		$	0.85		$	0.59
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	)		(0.06	)		(0.06	)
Pro forma	$	0.40		$	0.29		$	0.79		$	0.53

Segment Reporting — The Company operates exclusively in the retail apparel industry in which the Company distributes, designs and produces clothing, accessories and related products catering to the teenage/young adult demographic through primarily mall-based retail stores. The Company has identified four operating segments (PacSun stores, PacSun Outlet stores, d.e.m.o. stores, and e-commerce) as defined by SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.” The four operating segments have been aggregated into one reportable segment based on the similar nature of products sold,

8

production, merchandising and distribution processes involved, target customers, and economic characteristics among the four operating segments.

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 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 adoption of FIN 46 and FIN 46(R) did not have a material impact on the Company’s 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 adoption of EITF 03-1 did not have a material impact on the Company’s financial position or results of operations because the Company has the ability and intent to hold all of its held-to-maturity marketable securities until 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 $12,289 and $10,925 included in long-term liabilities as of October 30, 2004 and January 31, 2004, respectively.

9

	October 30,		January 31,
	2004		2004
Deferred compensation	$	12,471	$	10,919
Long-term computer maintenance contracts		128		502
Other assets		131		168
	$	12,730	$	11,589

NOTE 4 — ACCRUED LIABILITIES

Accrued liabilities consist of the following:

	October 30,		January 31,
	2004		2004
Accrued compensation and benefits	$	13,917	$	17,578
Accrued capital expenditures		9,245		5,838
Accrued sales tax payable		5,608		6,189
Accrued gift cards and store merchandise credits		2,703		4,618
Accrued medical expenses		2,196		1,260
Accrued sublease loss charges (Note 8)		1,700		5,543
Accrued restricted stock compensation (Note 6)		659		5,118
Other		11,197		8,822
	$	47,225	$	54,966

NOTE 5 — COMMON STOCK REPURCHASE AND RETIREMENT

The Company’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:

									Maximum
					# of Shares				Value of
					Purchased				Shares that
			Average		as Part of				May Yet be
			Price		Publicly		Value of		Purchased
	# of Shares		Per Paid		Announced		Shares		Under the
Period	Purchased		Share		Plan		Purchased		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
Grand Total		5,264.2	$	20.80		5,264.2	$	109,501.4	$	15,498.6

(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

10

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.

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 was 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 had been satisfied. Under the award agreement, shares that did not vest at a given vesting date due to the cumulative annual earnings per share growth targets not being met remained available for future vesting if the cumulative annual earnings per share growth targets were met as of a subsequent vesting date. During 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 vested in and received the total share award of 112,500 shares during fiscal 2004 and, as a result, the Company reclassified previously recognized compensation expense of $2.6 million from accrued liabilities to additional paid-in capital.

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 October 30, 2004, the Company had accrued $0.7 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 October 30, 2004 of $23.44, the Company would be required to record additional compensation expense of approximately $0.3 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 earnings per share:

Third Quarter Ended:

	October 30, 2004							November 1, 2003
					Per Share							Per Share
	Net Income		Shares		Amount			Net Income		Shares		Amount
Basic EPS:	$	31,897		74,415,403	$	0.43		$	24,509		77,685,516	$	0.32
Diluted EPS:
Effect of dilutive stock options		—		1,504,048		(0.01	)		—		2,190,910		(0.01	)
	$	31,897		75,919,451	$	0.42		$	24,509		79,876,426	$	0.31

Nine Months Ended:

	October 30, 2004							November 1, 2003
					Per Share							Per Share
	Net Income		Shares		Amount			Net Income		Shares		Amount
Basic EPS:	$	66,196		76,298,445	$	0.87		$	45,867		76,031,944	$	0.60
Diluted EPS:
Effect of dilutive stock options		—		1,697,611		(0.02	)		—		2,290,274		(0.01	)
	$	66,196		77,996,056	$	0.85		$	45,867		78,322,218	$	0.59

Options to purchase 1,128,234 and 2,073 shares of common stock in the third quarter of fiscal 2004 and fiscal 2003, respectively, and 961,022 and 14,335 shares of common stock in the first nine months 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 November 1, 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 commercial letters of credit as security for merchandise shipments from overseas. There were $32.7 million of these letters of credit outstanding at October 30, 2004. The Company remains secondarily liable under a guarantee within a sublease on one of its former store locations should the sublessee default on its lease payments. The term of the sublease ends December 31, 2014. At October 30, 2004, the Company had $0.4 million recorded in accrued liabilities to recognize the estimated fair value of this guarantee assuming that another sublessee would be found within one year

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should the original sublessee default. The aggregate rental payments remaining on the master lease agreement at October 30, 2004, were $5.6 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 of fiscal 2004, the Company executed a lease termination agreement related to the Company’s former corporate offices and distribution center that resulted in the Company reversing $0.9 million in previously accrued liabilities. The Company retains no future obligations regarding these premises.

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 October 30, 2004, the Company had $1.7 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 October 30, 2004, the gross remaining obligations under the Company’s original lease, exclusive of any sublease income, were approximately $6.3 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 Consolidated 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 nine months of fiscal 2004 was 12.4% as compared to 10.3% for the first nine months of fiscal 2003. For a discussion of the changes in the components comprising operating margins, see “Results of Operations” in this section. 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 next twelve months.

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

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the reported period. Actual results could differ from these estimates. The accounting policies that the Company believes are the most critical to aid in fully understanding and evaluating reported financial results include the following:

Revenue Recognition - Sales are recognized upon purchase by customers at the Company’s retail store locations or upon delivery to and acceptance by the customer 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.

Evaluation of 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.

Evaluation of 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 executed a sublease covering 3,200 of the total 5,200 square feet of this location during the first quarter of fiscal 2004. At October 30, 2004, the Company had $1.7 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 October 30, 2004, the gross remaining obligations under the Company’s original lease, exclusive of any sublease income, were approximately $6.3 million. This amount is included in the contractual obligations table within Management’s Discussion and Analysis of Financial Condition and

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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:

	Third Quarter Ended						Nine Months Ended
	October 30,			November 1,			October 30,			November 1,
	2004			2003			2004			2003
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold, including buying, distribution and occupancy costs		64.0	%		64.3	%		65.1	%		65.9	%
Gross margin		36.0	%		35.7	%		34.9	%		34.1	%
Selling, general and administrative expenses		20.5	%		21.8	%		22.5	%		23.8	%
Operating income		15.5	%		13.9	%		12.4	%		10.3	%
Interest income, net		0.1	%		0.1	%		0.1	%		0.1	%
Income before income tax expense		15.6	%		14.0	%		12.5	%		10.4	%
Income tax expense		5.9	%		5.3	%		4.7	%		4.0	%
Net income		9.7	%		8.7	%		7.8	%		6.4	%

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

	October 30,		November 1,
	2004		2003
PacSun stores		734		664
Outlet stores		84		78
d.e.m.o. stores		159		121
Total stores		977		863
Total square footage (in 000’s)		3,391		2,937

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The third quarter (13 weeks) ended October 30, 2004 as compared to the third quarter (13 weeks) ended November 1, 2003

Net Sales

Net sales increased to $329.4 million for the third quarter of fiscal 2004 from $281.5 million for the third quarter of fiscal 2003, an increase of $47.9 million, or 17.0%. The components of this $47.9 million increase in net sales are as follows:

Amount
($million)	Attributable to
$20.8	Net sales from 105 new stores opened in fiscal 2004 not yet included in the comparable store base
16.9	6.6% increase in comparable store net sales in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003
6.9	Net sales from stores opened in fiscal 2003 not yet included in the comparable store base
4.2	Other non-comparable sales (net sales from expanded or relocated stores not yet included in the comparable store base and internet net sales, including shipping and handling revenues)
(0.9)	5 closed stores in fiscal 2004 and 4 closed stores in fiscal 2003
$47.9	Total

Of the 6.6% increase in comparable store net sales in the third quarter of fiscal 2004, PacSun and PacSun Outlet comparable store net sales increased 6.8% and d.e.m.o. comparable store net sales increased 4.8%. Total transactions per comparable store were up 1% and the average sale transaction in a comparable store was up 5%, primarily driven by a 4% increase in average retail prices per unit. The increases in average retail prices were focused in particular merchandise categories wherein the Company believed it had strategic opportunities that allowed for such increases.

Within PacSun and PacSun Outlet, comparable store net sales of girl’s and guy’s merchandise increased 8% and 5%, respectively. Girl’s comparable store net sales results were characterized by strength in sneakers, denim, skirts, accessories, tees, knits, and fleece. Guy’s comparable store net sales results were characterized by strength in sneakers, wovens, denim, tees, and fleece.

Within d.e.m.o., comparable store net sales of girl’s merchandise increased 17% while guy’s merchandise decreased 3%. Girl’s comparable store net sales results were characterized by strength in denim, outerwear, knits, and tees. Guy’s comparable store net sales results were characterized by weakness in knits, fleece, and active hookups, partially offset by strength in wovens and denim. The sales trend within d.e.m.o. was primarily driven by expanded product offerings for girls, including accessories and footwear.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, increased to $118.6 million for the third quarter of fiscal 2004 from $100.5 million for the third quarter of fiscal 2003, an increase of $18.1 million, or 18.0%. As a percentage of net sales, gross margin was 36.0% for the third quarter of fiscal 2004 compared to 35.7% for the third quarter of fiscal 2003. The 0.3% increase in gross margin as a percentage of net sales was attributable to leverage of non-merchandise margin costs over higher total sales and improved merchandise margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $67.7 million for the third quarter of fiscal 2004 from $61.2 million for the third quarter of fiscal 2003, an increase of $6.5 million, or 10.6%. These expenses decreased to 20.5% as a percentage of net sales in the third quarter of fiscal 2004 from 21.8% in the third quarter 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:

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%	Attributable to
(0.9) %	Decrease in restricted stock expense to $0.4 million (0.1% of net sales) for the third quarter of fiscal 2004 from $2.7 million (1.0% of net sales) for the third quarter of fiscal 2003. During the third quarter of fiscal 2003, a grant of restricted stock to the Chief Executive Officer was reinstated in the amount of $2.1 million upon the Company’s determination that the fiscal 2003 cumulative earnings per share growth target would be met (see Note 6 to the condensed consolidated financial statements). The Company adjusts the amount of restricted stock expense quarterly based on additional vesting of the restricted stock and changes in the Company’s stock price.
(0.3) %	Decrease in store closing expenses to $0.5 million (0.2% of net sales) for the third quarter of fiscal 2004 from $1.4 million (0.5% of net sales) for the third quarter of fiscal 2003, primarily due to executing fewer store relocations/expansions/closures in the third quarter of fiscal 2004 (3) versus the third quarter of fiscal 2003 (18)
(0.1) %	Decrease in other selling, general and administrative expenses as a percentage of net sales to 20.2% for the third quarter of fiscal 2004 from 20.3% for the third quarter of fiscal 2003, primarily due to leveraging these expenses over higher total sales. Other selling, general and administrative expenses increased in absolute dollars to $66.8 million for the third quarter of fiscal 2004 compared to $57.1 million for the third quarter of fiscal 2003, primarily due to the addition of 105 new stores in fiscal 2004 as well as increased sales volume
(1.3)%	Total

Net Interest Income

Net interest income was $0.4 million in the third quarter of fiscal 2004 compared to $0.2 million in the third quarter of fiscal 2003, an increase of $0.2 million.

Income Tax Expense

Income tax expense was $19.4 million for the third quarter of fiscal 2004 compared to $15.0 million for the third quarter of fiscal 2003. The effective income tax rate was 37.8% in the third quarter of fiscal 2004 and 37.9% in the third quarter of fiscal 2003. The lower effective income tax rate for the third 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 nine months (39 weeks) ended October 30, 2004 as compared to the nine months (39 weeks) ended November 1, 2003

Net Sales

Net sales increased to $850.1 million for the first nine months of fiscal 2004 from $714.7 million for the first nine months of fiscal 2003, an increase of $135.4 million, or 18.9%. The components of this $135.4 million increase in net sales are as follows:

Amount
($million)	Attributable to
$55.1	8.4% increase in comparable store net sales in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003
36.2	Net sales from stores opened in fiscal 2003 not yet included in the comparable store base
33.7	Net sales from 105 new stores opened in fiscal 2004 not yet included in the comparable store base
	Other non-comparable sales (net sales from expanded or relocated stores not yet included in the comparable store base and internet net sales, including shipping and handling revenues)
(1.9)	5 closed stores in fiscal 2004 and 4 closed stores in fiscal 2003
$135.4	Total

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Of the 8.4% increase in comparable store net sales in the first nine months of fiscal 2004, PacSun and PacSun Outlet comparable store net sales increased 8.8% and d.e.m.o. comparable store net sales increased 4.7%. Total transactions per comparable store were up 2% and the average sale transaction in a comparable store was up 6%, due to 3% increases in average retail prices per unit as well as the number of items per sale transaction. The increases in average retail prices were focused in particular merchandise categories wherein the Company believed it had strategic opportunities that allowed for such increases.

Within PacSun and PacSun Outlet, comparable store net sales of guy’s and girl’s merchandise increased 9% and 8%, respectively. Guy’s comparable store net sales results were characterized by strength in sneakers, wovens, tees, denim, accessories, and swimwear. Girl’s comparable store net sales results were characterized by strength in sneakers, accessories, denim, knits, skirts, shorts, swim, and tees.

Within d.e.m.o., comparable store net sales of girl’s merchandise increased 20% while guy’s merchandise decreased 4%. Girl’s comparable store net sales results were characterized by strength in denim, outerwear, knits, tees, and accessories. Guy’s comparable store net sales results were characterized by weakness in knits, fleece, active hookups, and shorts, partially offset by strength in wovens, denim, and active knits. The sales trend within d.e.m.o. was primarily driven by expanded product offerings for girls, including accessories and footwear.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, increased to $296.9 million for the first nine months of fiscal 2004 from $244.1 million for the first nine months of fiscal 2003, an increase of $52.8 million, or 21.6%. As a percentage of net sales, gross margin was 34.9% for the first nine months of fiscal 2004 compared to 34.1% for the first nine months of fiscal 2003. The 0.8% increase in gross margin as a percentage of net sales was approximately equally attributable to improved merchandise margins and leverage of non-merchandise margin costs over higher total sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $191.6 million for the first nine months of fiscal 2004 from $170.3 million for the first nine months of fiscal 2003, an increase of $21.3 million, or 12.5%. These expenses decreased to 22.5% as a percentage of net sales in the first nine months of fiscal 2004 from 23.8% in the first nine months 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
(0.6) %	Decrease in restricted stock expense to $1.0 million (0.1% of net sales) for the first nine months of fiscal 2004 from $4.8 million (0.7% of net sales) for the first nine months of fiscal 2003. During fiscal 2003, two grants of restricted stock to the Chief Executive Officer were reinstated upon the Company’s determination that the fiscal 2003 cumulative earnings per share growth targets would be met (see Note 6 to the condensed consolidated financial statements)
(0.2) %	Decrease in store closing expenses to $1.6 million (0.2% of net sales) for the first nine months of fiscal 2004 from $3.2 million (0.4% of net sales) for the first nine months of fiscal 2003, 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 $0.9 million in previously accrued liabilities (see Note 8 to the condensed consolidated financial statements)
(0.5) %	Decrease in other selling, general and administrative expenses as a percentage of net sales to 22.2% for the third quarter of fiscal 2004 from 22.7% for the third quarter of fiscal 2003, primarily due to leveraging these expenses over higher total sales. Other selling, general and administrative expenses increased in absolute dollars to $189.0 million for the third quarter of fiscal 2004 compared to $162.3 million for the third quarter of fiscal 2003, primarily due to the addition of 105 new stores in fiscal 2004 as well as increased sales volume
(1.3)%	Total

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Net Interest Income

Net interest income was $1.2 million in the first nine months of fiscal 2004 compared to $0.3 million in the first nine months of fiscal 2003, an increase of $0.9 million. This increase was primarily the result of higher average cash and short-term investment balances as well as higher investment returns in the first nine months of fiscal 2004 as compared to the first nine months of fiscal 2003.

Income Tax Expense

Income tax expense was $40.2 million for the first nine months of fiscal 2004 compared to $28.3 million for the first nine months of fiscal 2003. The effective income tax rate was 37.8% in the first nine months of fiscal 2004 and 38.1% in the first nine months of fiscal 2003. The lower effective income tax rate for the first nine months of fiscal 2004 was primarily attributable to a lower weighted effective state income tax rate for the Company. The weighted effective state income tax rate for the Company will vary depending on a number of factors, such as differing income tax rates and net sales in the respective states.

Liquidity and Capital Resources

The Company has financed its operations primarily from internally generated cash flow, with occasional short-term and long-term borrowings and equity financing in past years. The Company’s primary capital requirements have been for the construction costs of newly opened, remodeled, expanded or relocated stores, net of landlord allowances, the financing of inventories and, in the past, construction of corporate facilities. 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 $54.1 million for the first nine months of fiscal 2004 compared to $59.9 million for the first nine months of fiscal 2003. The $5.8 million decrease in cash provided by operations in the first nine months of fiscal 2004 as compared to the first nine months of fiscal 2003 was attributable to the following:

Amount
($million)	Attributable to
$(10.0)	Decrease in tax benefits from stock option exercises, primarily due to fewer stock option exercises
(9.5)	Decrease in accrued liabilities, primarily due to the payment of the Auden and Adams settlements of $4.0 million (see Note 8 to the condensed consolidated financial statements), the payment of fiscal 2003 bonuses ($7.6 million) partially offset by fiscal 2004 bonus accruals ($4.4 million), the lease termination covering the Company’s former corporate offices and distribution center which resulted in the reversal of $0.9 million in previously recognized expenses (see Note 8 to the condensed consolidated financial statements), and other items netting to a $1.4 million reduction in accrued expenses
(5.7)	Decrease in deferred compensation accruals, primarily due to the delivery of restricted stock to the Chief Executive Officer in the amount of $5.5 million (see Note 6 to the condensed consolidated financial statements)
(0.9)	Other items netting to a cash flow decrease
20.3	Increase in net income
$(5.8)	Total

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Working Capital

Working capital at October 30, 2004 was $203.1 million compared to $243.0 million at January 31, 2004, a decrease of $39.9 million. The components of this $39.9 million decrease in working capital were as follows:

Amount
($million)		Attributable to
$(91.4	)	Decrease in cash and short-term investments, primarily due to $109.5 million in common stock repurchases made in the first nine months of fiscal 2004
33.3		Increase in inventories, net of accounts payable, primarily due to square footage growth of 15%
7.7		Decrease in accrued liabilities, primarily due to the payment of the Auden and Adams settlements of $4.0 million (see Note 8 to the condensed consolidated financial statements), the payment of fiscal 2003 bonuses ($7.6 million) partially offset by fiscal 2004 bonus accruals ($4.4 million), the lease termination covering the Company’s former corporate offices and distribution center which resulted in the reversal of $0.9 million in previously recognized expenses (see Note 8 to the condensed consolidated financial statements), and other items netting to a $0.4 million increase in accrued expenses
3.0		Decrease in accrued income taxes due to payment of fiscal 2003 and 2004 income taxes and accrual of tax benefits related to stock option exercises, partially offset by fiscal 2004 income tax accruals
7.5		Other items netting to a working capital increase
$(39.9	)	Total

Investing Cash Flows

Net cash used in investing activities in the first nine months of fiscal 2004 was $50.8 million compared to $38.1 million for the first nine months of fiscal 2003, an increase in cash used of $12.7 million. The components of the $50.8 million in cash used in investing activities in the first nine months of fiscal 2004 are as follows:

Amount
($million)	Attributable to
$(35.7)	Construction costs of new, expanded and relocated stores
(23.4)	Purchases of short-term investments classified as held-to-maturity
(5.0)	Other capital expenditures, including computer hardware and software
(4.5)	Maintenance capital expenditures on existing stores
17.8	Maturities of short-term investments classified as held-to-maturity
$(50.8)	Total

In the remainder of fiscal 2004, capital expenditures are expected to be approximately $10-15 million, of which approximately $8-13 million will be for opening new and relocated/expanded stores, and approximately $2 million will be used for other capital expenditures, including maintenance capital on existing stores and computer hardware and software.

During the year ended January 28, 2006 (“fiscal 2005”), the Company plans to open approximately 120 net new stores, of which approximately 70 will be PacSun stores, approximately 10 will be PacSun Outlet stores, and approximately 40 will be d.e.m.o. stores. The Company also plans to expand or relocate approximately 30-35 of its most productive stores to larger locations during fiscal 2005.

Based on the Company’s current projected store opening and relocation/expansion plans through fiscal 2007, the Company’s capital resource needs for those stores will be approximately as follows:

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	2005		2006		2007		Total
Number of new and relocated stores		155		175		185		515
Estimated capital expenditures (in ‘000s)	$	52,000	$	62,000	$	69,000	$	183,000

The Company expects cash flows from operations to be sufficient to provide the liquidity and resources necessary to achieve its stated store opening and relocation/expansion goals through fiscal 2007. Cash flows from operations (in thousands) for the first nine months of fiscal 2004 as well as for all of fiscal 2003 and 2002 were $54,143, $151,647, and $76,623, respectively. The Company has not entered into any material purchase commitments for capital expenditures related to its store opening or relocation/expansion plans. The average total cost to build new stores or expand or relocate stores will vary in the future depending on various factors, including square footage, changes in store design, local construction costs and landlord allowances.

The Company has previously stated its goal to operate 1,400 stores by the end of 2007 and that its existing corporate offices and distribution center would be adequate to support those growth plans. If growth plans were to accelerate or if the Company’s previous assumptions regarding the adequacy of its existing facilities were to be proven inaccurate, the Company may purchase additional land and begin construction of a new, additional corporate office and a new, additional distribution center at any time before the end of fiscal 2007. The Company has initiated planning efforts to assess this possible future need. Costs of this possible future construction are currently unknown. Costs to construct the Company’s current corporate offices and distribution center were approximately $52 million and were incurred during fiscal 2000 and fiscal 2001.

Financing Cash Flows

Net cash used in financing activities in the first nine months of fiscal 2004 was $100.2 million compared to cash provided of $25.3 million for the first nine months of fiscal 2003, an increase in cash used of $125.5 million. The components of the $125.5 million increase in cash used in financing activities in the first nine months of fiscal 2004 as compared to the first nine months of fiscal 2003 were as follows:

Amount
($million)	Attributable to
$(109.5)	Repurchases of common stock
(16.3)	Decrease in proceeds received from stock option exercises
0.3	Decrease in principal payments under long-term debt and capital lease obligations
$(125.5)	Total

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.

In its discretion, the Company’s Board of Directors authorized the stock repurchase plan as a means to reduce the Company’s overall number of shares outstanding, thereby providing greater value to the Company’s shareholders through increased earnings per share. The Company does not expect the impact of stock repurchases to be significant to its overall liquidity needs as it expects cash flows from operations to continue to be strong in the future. The Company believes this is a prudent use of a portion of the $175.9 million in cash and short-term investments available to it as of the end of fiscal 2003 in order to enhance shareholder value.

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,

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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 (4.75% at October 30, 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 nine months of fiscal 2004 or during fiscal 2003. The Company had $32.7 million outstanding in letters of credit at October 30, 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 October 30, 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 October 30, 2004, the Company’s future financial commitments under these arrangements were as follows:

	Payments Due by Period
Contractual Obligations			Less than		1-3		3-5		More than
(in millions)	Total		1 year		years		years		5 years
Operating lease obligations	$	635.0	$	89.8	$	177.8	$	167.0	$	200.4
Capital lease obligations		2.0		1.3		0.7		—		—
Long-term debt obligations		0.5		0.5		—		—		—
Letters of credit		32.7		32.7		—		—		—
Total	$	670.2	$	124.3	$	178.5	$	167.0	$	200.4

The contractual obligations table above does not include common area maintenance (CAM) charges, which are also a required contractual obligation under the Company’s store operating leases. In many of the Company’s leases, CAM charges are not fixed and can fluctuate significantly from year to year for any particular store. Actual CAM expenses for the first nine months of each of fiscal 2004 and fiscal 2003 were $44.2 million and $37.8 million, respectively. The Company expects total CAM expenses to continue to increase as the number of stores increases from year to year.

Operating Leases — The Company leases its retail stores, former corporate offices and distribution facilities, and certain equipment under operating lease agreements expiring at various dates through December 2016. Substantially all of the Company’s retail store leases require the Company to pay common area maintenance charges, insurance, property taxes and percentage rent ranging from 5% to 7% based on sales volumes exceeding certain minimum sales levels. The initial terms of such leases are typically eight to ten years, many of which contain renewal options exercisable at the Company’s discretion. Most leases also contain rent escalation clauses that come into effect at various times throughout the lease term. Rent expense is recorded under the straight-line method over the life of the lease. Other rent escalation clauses can take effect based on changes in primary mall tenants throughout the term of a given lease. Most leases also contain cancellation or kick-out clauses in the Company’s favor that relieve the Company of any future obligation under a lease if specified sales levels are not achieved by a specified date. None of the Company’s retail store leases contain purchase options.

23

The Company reviews the operating performance of its stores on an ongoing basis to determine which stores, if any, to expand, relocate or close. The Company closed four stores in fiscal 2003 and anticipates closing approximately four 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 October 30, 2004, which note is incorporated herein by this reference.

Inflation

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

Seasonality and Quarterly Results

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

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

This report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. The Company is hereby providing cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those projected in forward-looking statements of the Company herein. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions, future events or performance (often, but not always, through the use of words or phrases such as “will result,” “expects to,” “will continue,” “anticipates,” “plans,” “intends,” “estimated,” “projects” and “outlook”) are not historical facts and may be forward-looking and, accordingly, such statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. All forward-looking statements included in this report, including forecasts of fiscal 2004 planned new store openings 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.

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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.

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. 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

25

on the Company’s operational results, including: (i) price competition involving the items the Company intends to sell; (ii) the entry of the Company’s vendors into the internet business, in direct competition with the Company; (iii) the level of merchandise returns experienced by the Company; (iv) governmental regulation; (v) online security breaches; (vi) credit card fraud; and (vii) competition and general economic conditions specific to the internet, online commerce and the apparel industry.

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

Reliance on Foreign Sources of Production. The Company purchases merchandise directly in foreign markets for its 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) delayed receipt or non-delivery of goods due to organized labor strikes or unexpected or significant port congestion at United States ports; and (vii) local business practice and political issues, including issues relating to compliance with domestic or international labor standards which may result in adverse publicity. New initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions that, if enacted, would increase the cost of products purchased from suppliers in countries that 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 interim fiscal periods beginning after June 15, 2005. 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. When 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 second half of the fiscal year beginning January 30, 2005 and its stock price could decline.

26

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

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

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

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

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

To the extent the Company borrows under its credit facility, the Company is exposed to market risk related to changes in interest rates. At October 30, 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 nine months of fiscal 2004. Based on the interest rate of 4.75% 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 the Principal Financial and Accounting 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.

27

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.

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 nine months 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 - Not Applicable

Item 5 — Other Information - Not Applicable

Item 6 — Exhibits

Exhibit 10.1	Amended and Restated Pacific Sunwear of California, Inc. Employee Stock Purchase Plan dated November 17, 2004
Exhibit 10.2	Form of Performance-Based Bonus Award Agreement
Exhibit 10.3	Description of 2004 cash bonus arrangements
Exhibit 31	Written statements of Greg H. Weaver and Gerald M. Chaney pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	Written statement of Greg H. Weaver and Gerald M. Chaney pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	Pacific Sunwear of California, Inc. (Registrant)
Date: December 7, 2004	/s/ GREG H. WEAVER
	Greg H. Weaver
	Chairman of the Board
	and Chief Executive Officer
	(Principal Executive Officer)
Date: December 7, 2004	/s/ GERALD M. CHANEY
	Gerald M. Chaney
	Senior Vice President, Chief
	Financial Officer and Secretary
	(Principal Financial and Accounting Officer)

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Exhibit Index

Exhibit 10.1	Amended and Restated Pacific Sunwear of California, Inc. Employee Stock Purchase Plan dated November 17, 2004
Exhibit 10.2	Form of Performance-Based Bonus Award Agreement
Exhibit 10.3	Description of 2004 cash bonus arrangements
Exhibit 31	Written statements of Greg H. Weaver and Gerald M. Chaney pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	Written statement of Greg H. Weaver and Gerald M. Chaney pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

30

EX-10.1

                                                                    EXHIBIT 10.1

                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                          EMPLOYEE STOCK PURCHASE PLAN

(Composite Plan Document Reflecting Stock Splits and Amendments Through
November 2004)




                                TABLE OF CONTENTS



                                                                                                               Page
                                                                                                         

1.       PURPOSE..............................................................................................  1

2.       DEFINITIONS..........................................................................................  1

3.       ELIGIBILITY..........................................................................................  3

4.       STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS........................................................  3

5.       OFFERING PERIODS.....................................................................................  4

6.       PARTICIPATION........................................................................................  4

7.       METHOD OF PAYMENT OF CONTRIBUTIONS...................................................................  4

8.       GRANT OF OPTION......................................................................................  5

9.       EXERCISE OF OPTION...................................................................................  5

10.      DELIVERY.............................................................................................  6

11.      TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS.................................................  6

12.      ADMINISTRATION.......................................................................................  6

13.      DESIGNATION OF BENEFICIARY...........................................................................  7

14.      TRANSFERABILITY......................................................................................  7

15.      USE OF FUNDS; INTEREST...............................................................................  8

16.      REPORTS..............................................................................................  8

17.      ADJUSTMENTS OF AND CHANGES IN THE STOCK..............................................................  8

18.      POSSIBLE EARLY TERMINATION OF PLAN AND OPTIONS.......................................................  8

19.      TERM OF PLAN; AMENDMENT OR TERMINATION...............................................................  9

20.      NOTICES..............................................................................................  9

21.      CONDITIONS UPON ISSUANCE OF SHARES...................................................................  9

22.      PLAN CONSTRUCTION....................................................................................  9

23.      EMPLOYEES' RIGHTS....................................................................................  10

24.      MISCELLANEOUS........................................................................................  10

25.      EFFECTIVE DATE.......................................................................................  11



                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                          EMPLOYEE STOCK PURCHASE PLAN

(Composite Plan Document Reflecting Stock Splits and Amendments Through
November 2004)

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

1.    PURPOSE

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

2.    DEFINITIONS

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

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

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

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

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

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

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

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

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

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

                                       1



            "Company" shall mean the Corporation and its Subsidiaries.

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

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

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

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

            "Effective Date" shall mean January 1, 1998.

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

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

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

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

                                       2



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

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

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

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

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

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

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

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

            "Share" shall mean a share of Common Stock.

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

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

3.    ELIGIBILITY

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

                                       3



4.    STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS

      The total number of Shares to be made available under this Plan is 607,500
      authorized and unissued or treasury shares of Common Stock, or Shares
      repurchased on the open market, subject to adjustments pursuant to Section
      17. In the event that all of the Shares made available under this Plan are
      subscribed prior to the expiration of this Plan, this Plan may be
      terminated in accordance with Section 19.

5.    OFFERING PERIODS

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

6.    PARTICIPATION

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

7.    METHOD OF PAYMENT OF CONTRIBUTIONS

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

      (b) Payroll deductions with respect to an Offering Period shall commence
      as of the first day of the payroll period which coincides with or
      immediately follows the applicable Grant Date and shall end on the last
      day of the payroll period which coincides with or immediately precedes the
      applicable Exercise Date, unless sooner terminated by the

                                       4



      Participant as provided in this Section or until his or her participation
      terminates pursuant to Section 11.

      (c) A Participant may terminate his or her Contributions during an
      Offering Period by completing and filing with the Corporation, in such
      form and on such terms as the Committee (or its delegate) may prescribe, a
      written withdrawal form which shall be signed by the Participant. Such
      termination shall be effective as soon as administratively practicable
      after its receipt by the Corporation.

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

8.    GRANT OF OPTION

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

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

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

9.    EXERCISE OF OPTION

      Unless a Participant's Plan participation is terminated as provided in
      Section 11, his or her Option for the purchase of Shares shall be
      exercised automatically on the Exercise Date for that Offering Period,
      without any further action on the Participant's part, and the maximum
      number of whole Shares subject to such Option shall be purchased at the
      Option Price with the balance of such Participant's Account. If any amount
      (which is not sufficient to purchase a whole Share) remains in a
      Participant's Account after the

                                       5



      exercise of his or her Option on the Exercise Date: (i) such amount shall
      be credited to such Participant's Account for the next Offering Period, if
      he or she is then a Participant; or (ii) if such Participant is not a
      Participant in the next Offering Period, or if the Committee so elects,
      such amount shall be refunded to such Participant as soon as
      administratively practicable after such date.

10.   DELIVERY

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

11.   TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS

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

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

12.   ADMINISTRATION

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

                                       6



      existing on the Committee, whether caused by removal, resignation, or
      otherwise. The Board may also, at any time, assume or change the
      administration of this Plan.

      (b) The Committee shall supervise and administer this Plan and shall have
      full power and discretion to adopt, amend and rescind any rules deemed
      desirable and appropriate for the administration of this Plan and not
      inconsistent with the terms of this Plan, and to make all other
      determinations necessary or advisable for the administration of this Plan.
      The Committee shall act by majority vote or by unanimous written consent.
      No member of the Committee shall be entitled to act on or decide any
      matter relating solely to himself or herself or any of his or her rights
      or benefits under this Plan. The Committee shall have full power and
      discretionary authority to construe and interpret the terms and conditions
      of this Plan, which construction or interpretation shall be final and
      binding on all parties including the Corporation, Participants and
      beneficiaries. The Committee may delegate ministerial non-discretionary
      functions to third parties, including officers of the Corporation.

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

13.   DESIGNATION OF BENEFICIARY

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

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

                                       7



14.   TRANSFERABILITY

      Neither Contributions credited to a Participant's Account nor any Options
      or rights with respect to the exercise of Options or right to receive
      Shares under this Plan may be anticipated, alienated, encumbered,
      assigned, transferred, pledged or otherwise disposed of in any way (other
      than by will, the laws of descent and distribution, or as provided in
      Section 13) by the Participant. Any such attempt at anticipation,
      alienation, encumbrance, assignment, transfer, pledge or other disposition
      shall be without effect and all amounts shall be paid and all shares shall
      be delivered in accordance with the provisions of this Plan. Amounts
      payable or Shares deliverable pursuant to this Plan shall be paid or
      delivered only to the Participant or, in the event of the Participant's
      death, to the Participant's beneficiary pursuant to Section 13.

15.   USE OF FUNDS; INTEREST

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

16.   REPORTS

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

17.   ADJUSTMENTS OF AND CHANGES IN THE STOCK

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

18.   POSSIBLE EARLY TERMINATION OF PLAN AND OPTIONS

      Upon a dissolution of the Corporation, an event described in Section 17
      that the Corporation does not survive, or the occurrence of a Change in
      Control, the Plan and, if prior to the last day of an Offering Period, any
      outstanding Option granted with respect to that Offering Period shall
      terminate, subject to any provision that has been expressly

                                       8



      made by the Committee through a plan or reorganization approved by the
      Board or otherwise for the survival, substitution, assumption, exchange or
      other settlement of the Plan and Options. In the event a Participant's
      Option is terminated pursuant to this Section 18, such Participant's
      Account shall be paid to him or her in cash without interest.

19.   TERM OF PLAN; AMENDMENT OR TERMINATION

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

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

20.   NOTICES

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

21.   CONDITIONS UPON ISSUANCE OF SHARES

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

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

                                       9



22.   PLAN CONSTRUCTION

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

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

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

23.   EMPLOYEES' RIGHTS

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

24.   MISCELLANEOUS

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

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

      (c) The adoption of this Plan shall not affect any other compensation or
      incentive plans in effect for the Company. Nothing in this Plan shall be
      construed to limit the right of the Company (i) to establish any other
      forms of incentives or compensation for

                                       10



      employees of the Company, or (ii) to grant or assume options (outside the
      scope of and in addition to those contemplated by this Plan) in connection
      with any proper corporate purpose.

25.   EFFECTIVE DATE

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

                                       11

EX-10.2

                                                                    EXHIBIT 10.2

                       PACIFIC SUNWEAR OF CALIFORNIA, INC.
                              1999 STOCK AWARD PLAN
                 [YEAR] PERFORMANCE-BASED BONUS AWARD AGREEMENT

      THIS [YEAR] PERFORMANCE-BASED BONUS AWARD AGREEMENT (this "Agreement") is
entered into by and between PACIFIC SUNWEAR OF CALIFORNIA, INC., a California
corporation (the "Company"), and [Executive Name] (the "Participant") as of this
___ day of _______, _____.


                               W I T N E S S E T H

      WHEREAS, the Company has adopted the Pacific Sunwear of California, Inc.
1999 Stock Award Plan, as amended and restated March 27, 2003 (the "Plan"); and

      WHEREAS, the Company's Compensation Committee (the "Committee") has
determined that the Participant is eligible to be granted a Performance-Based
Award pursuant to Section 5.2 of the Plan and has granted the Participant a
Performance-Based Award upon the terms and conditions set forth herein and in
the Plan (the "Award"); and

      WHEREAS, the Award has been granted to the Participant in addition to, and
not in lieu of, any other form of compensation otherwise payable or to be paid
to the Participant;

      NOW, THEREFORE, in consideration of the mutual promises and covenants made
herein and the mutual benefits to be derived herefrom, the parties agree as
follows:

1.    CAPITALIZED TERMS. Capitalized terms used herein and not otherwise defined
      herein shall have the meaning assigned to such terms in the Plan.

2.    GRANT OF AWARD. This Agreement evidences the Company's grant to the
      Participant, subject to the terms and conditions hereof and of the Plan,
      of an Award with respect to the Company's ______ fiscal year (the
      "Performance Period"). The bonus payable in respect of the Award will be
      calculated under Appendix A hereto if the Performance Target set forth
      therein (minimum EPS of the Company for the Performance Period) is
      achieved. The bonus payable in respect of the Award will increase, as set
      forth in Appendix A hereto, for certain levels of EPS of the Company for
      the Performance Period in excess of the minimum EPS of the Company for
      that period. No bonus will be payable if such minimum EPS of the Company
      is not achieved for the Performance Period. For purposes of determining
      the Participant's bonus in accordance with Appendix A, the Participant's
      "Target Bonus" is $_________. The maximum amount that will be paid
      pursuant to the Award shall not exceed the limitation contained in Section
      5.2(c) of the Plan.

3.    FORFEITURE OF AWARD; EARLY TERMINATION; ADJUSTMENT. Should the
      Participant's employment by the Company terminate for any reason prior to
      the last day of the Performance Period, the Bonus payable in respect of
      the Award shall equal: (1) the amount that would otherwise have been paid
      in respect of the Award had the Participant remained an employee of the
      Company throughout the Performance Period, multiplied by


      (2) a fraction of the numerator of which is the total number of days in
      the Performance Period that the Participant was as employee of the Company
      and the denominator of which is 365. Such amount shall otherwise be paid
      at the same time and on the same terms and conditions as though the
      Participant's employment by the Company had not terminated.

4.    CONTINUANCE OF EMPLOYMENT. Notwithstanding any commitment of the
      Participant to remain in the service or employ of the Company (or any
      affiliate), the Award shall not confer upon the Participant any right ---
      with respect to the continuation of his or her service or employment by
      the Company (or any affiliate) or alter or interfere in any way with the
      right of the Company (or any affiliate) at any time to terminate such
      service or employment or to change the compensation of the Participant or
      other terms of his or her service or employment; and neither shall these
      terms alter or in any way affect the rights of the Company (or any
      affiliate) or the Participant under any other written employment agreement
      between them, except as expressly provided herein.

5.    TIMING AND MANNER OF PAYMENT. Subject to any changes imposed by or allowed
      under the provisions of the Plan, benefits with respect to the Award shall
      be calculated pursuant to Section 2 and Appendix A. The Committee shall
      determine, in accordance with such provisions and after the end of the
      Performance Period, the specific amount to the paid to the Participant
      with respect to this Award. No payment shall be made with respect to the
      Award unless and until the Committee has certified, by resolution or other
      appropriate action in writing, that the amount thereof has been accurately
      determined in accordance with the terms, conditions and limits of the
      Award and that the applicable Performance Target was, in fact, satisfied.
      Any amount payable with respect to the Award shall be paid in cash as soon
      as practicable following such certification by the Committee. No interest
      or other earnings shall be paid on or accrue with respect to such amount
      for the period between the end of the Performance Period and the date of
      actual payment.

6.    ADJUSTMENTS. To preserve the intended incentives and benefits of the
      Award, the Committee shall (i) adjust the Performance Targets applicable
      to the Award to reflect any material change in corporate capitalization,
      any material corporate transaction (such as a reorganization, combination,
      separation, merger, acquisition, or any combination of the foregoing), or
      any complete or partial liquidation of the Company, (ii) calculate
      Performance Targets without regard for any change in accounting policies
      or practices affecting the Company and/or the Business Criteria or the
      Performance Targets, and (iii) adjust Business Criteria and Performance
      Targets or other features of an Award to reflect the effects of any
      special charges to the Company's earnings; in each case only to the extent
      consistent with the requirements of Section 162(m) of the Code to qualify
      the Award as "qualified performance-based compensation" thereunder.

7.    TAX WITHHOLDING. The Company shall reduce any amount otherwise payable
      with respect to the Award by the amount of any federal, state and/or local
      income and/or employment tax withholding that may be required with respect
      to such payment.


8.    DISSOLUTION OF THE COMPANY, CERTAIN MERGERS. In the event of the
      dissolution of the Company or a merger, reorganization or other event in
      which the Company ceases to be a publicly-traded company in respect of its
      Common Stock, the Committee may terminate the Performance Period as of or
      immediately prior to such event and pro-rate the Target Bonus and
      Performance Targets by multiplying each relevant amount by a fraction, the
      numerator of which is the number of days in the shortened Performance
      Period and the denominator of which is 365.

9.    DEATH OF THE PARTICIPANT. If the Participant dies prior to receiving any
      payment due with respect to the Award (other than an amount deferred under
      a Company deferred compensation program, the payment of which shall be
      governed by the terms of such program), such payment shall be made to his
      designated beneficiary. A Participant's designated beneficiary shall be
      the beneficiary designated by the Participant, in a manner determined by
      the Committee to receive amounts due the Participant in the event of his
      death. In the absence of an effective designation, a Participant's
      designated beneficiary shall be deemed to be his or her spouse, or, if he
      or she has no spouse at the time of his or her death, his or her estate.

10.   AWARD NON-TRANSFERABLE. Except as expressly provided in Section 9 above,
      the Award is non-transferable. No benefit payable with respect to the
      Award shall be subject in any manner to anticipation, alienation, sale,
      transfer, pledge, assignment, encumbrance or charge, and any such
      attempted action shall be void and no such benefit shall be in any manner
      liable for or subject to debts, contracts, liabilities, engagements or
      torts of the Participant. This Agreement shall, however, be binding upon
      any successor to all or substantially all of the business and/or assets of
      the Company.

11.   GOVERNING LAW. The interpretation, performance and enforcement of this
      Agreement shall be governed by the laws of the State of California,
      without regard to the conflict of laws principles thereof.

12.   AMENDMENT. This Agreement may only be amended in writing by an instrument
      signed by both parties. Adjustments pursuant to Section 6 shall not,
      however, be considered amendments requiring Participant consent.

13.   CONSTRUCTION. It is the intent of the Company that the Award satisfy and
      be interpreted in a manner that satisfies the applicable requirements
      under Section 162(m) of the Code to qualify the Award as "qualified
      performance-based compensation" thereunder. Any provision, application or
      interpretation of the Plan inconsistent with this intent to satisfy the
      standards in Section 162(m) of the Code shall be disregarded.

14.   GENERAL TERMS. The Award and any payment in respect thereof are subject
      to, and the Company and the Participant agree to be bound by, the
      provisions of the Plan. The provisions of the Plan are incorporated herein
      by this reference. Provisions of the Plan that grant discretionary
      authority to the Committee or the Board shall not create any rights in the
      Participant, unless such rights are expressly set forth herein.


         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first written above.

PARTICIPANT                                 PACIFIC SUNWEAR OF
                                            CALIFORNIA, INC.
                                            a California Corporation

______________________________              By: ________________________________
[Executive Name]
                                            Name: ______________________________

______________________________              Title: _____________________________



                             [YEAR] AWARD AGREEMENT
                                   APPENDIX A

    NAME OF PARTICIPANT:  [EXECUTIVE NAME]



                                                         Percentage of Target
                                                         Bonus Which Will be
                                                       Paid If Specified Level
                                                          of the Performance
                                   Performance           Target is Satisfied
Business Criteria*                 Target Level      in the Performance Period**
- -----------------                  ------------      ---------------------------
                                               
Company "EPS" (as such
term is defined in the Plan)


No portion of the Target Bonus shall be paid if the Company's EPS for the
Performance Period is less than the Performance Target of $____.

* EPS of the Company will be determined on a consolidated basis.

**Amounts are not cumulative.

EX-10.3

                                                                    EXHIBIT 10.3

                                 DESCRIPTION OF
                          2004 CASH BONUS ARRANGEMENTS

Under the Pacific Sunwear 1999 Stock Award Plan, the Company may grant cash
performance awards. In 2004, the Company established criteria for
performance-based bonus awards for its Chairman and its President under the 1999
Stock Award Plan. In addition, the Company established a bonus plan for other
officers and certain other employees. In each case, the bonus awards payable are
based on the achievement of goals relating to the performance of the Company.

The Compensation Committee established the performance goals for the Chairman
and the President, and recommended to the Board of Directors for its approval
the performance goals for other officers and employees. This committee also
established the formulae for purposes of determining the actual award (if any)
payable to such officers and employees assuming the performance goals are
achieved.

The amount of the bonus payable to the Chairman (if any) is based on the
Company's level of earnings per share. For each of the other participants, 25%
of the bonus payable is discretionary and the remaining 75% is based on the
Company's level of earnings per share.

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 period covered by this report;

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

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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: December 7, 2004

/s/ Greg H. Weaver

Greg H. Weaver

Chairman of the Board and Chief Executive Officer

I, Gerald M. Chaney, certify that:

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

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

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

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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: December 7, 2004

/s/ Gerald M. Chaney

Gerald M. Chaney

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 Gerald M. Chaney, the Senior Vice President, Chief Financial Officer and Secretary 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 October 30, 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: December 7, 2004	/s/ Greg H. Weaver
	Greg H. Weaver
	Chairman of the Board
	and Chief Executive Officer
	Pacific Sunwear of California, Inc.
Dated: December 7, 2004	/s/ Gerald M. Chaney
	Gerald M. Chaney
	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.