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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C 20549

FORM 10-Q/A

(Amendment No. 1)


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

For the quarterly period ended October 30, 2004


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

Commission file number 0-21296

PACIFIC SUNWEAR OF CALIFORNIA, INC.


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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

The number of shares outstanding of the registrant’s Common Stock, par value $.01 per share, at December 6, 2004, was 74,237,339.

EXPLANATORY NOTE

This Amendment No. 1 to this Quarterly Report on Form 10-Q/A (“Form 10-Q/A”) is being filed in order to correct the previously issued condensed consolidated financial statements of Pacific Sunwear of California, Inc. (the “Company”) for the quarterly period ended October 30, 2004, initially filed with the Securities and Exchange Commission (the “SEC”) on December 9, 2004 (the “Original Filing”). The corrections are required to properly account for landlord construction allowances in accordance with Statement of Financial Accounting Standards No. 13, “Accounting for Leases,” and Financial Accounting Standards Board (“FASB”) Technical Bulletin No. 88-1, “Issues Relating to Accounting for Leases”; rent holidays in accordance with FASB Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases”; and the Company’s PacBucks promotional program in accordance with Emerging Issues Task Force Issue No. 00-22, “Accounting for ‘Points’ and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future.” See Note 3, “Restatement of Prior Period Financial Statements,” under Notes to Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q/A for additional discussion and a summary of the effect of these changes on the Company’s condensed consolidated balance sheet at October 30, 2004 and on the Company’s condensed consolidated income statements and statements of cash flows for the interim periods ended October 30, 2004 and November 1, 2003.

This Form 10-Q/A amends and restates only Items 1, 2 and 4 of Part I and Item 6 of Part II of the Original Filing to reflect the effects of this restatement of our financial statements for the periods presented or as deemed necessary in connection with the completion of restated financial statements. The remaining Items contained within this Amendment No. 1 on Form 10-Q/A consist of all other items originally contained on Form 10-Q for the fiscal quarter ended October 30, 2004. These remaining items are not amended hereby, but are included for the convenience of the reader. Except for the amended information, this Form 10-Q/A continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date.

In connection with the preparation of this Form 10-Q/A, the Company concluded that it was appropriate to classify our investments in auction rate securities as marketable securities. Previously, such investments had been classified as cash and equivalents. Accordingly, we have revised the classification to report these investments as marketable securities on the consolidated balance sheets as of October 30, 2004 and January 31, 2004. The Company has also made corresponding adjustments to the consolidated statements of cash flows for the thirty-nine weeks ended October 30, 2004 and November 1, 2003, to reflect the gross purchases and sales of these investments as investing activities rather than as a component of cash and cash equivalents. See Note 3, “Restatement of Prior Period Financial Statements” under Notes to Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q/A for additional discussion on the effects of the change in classification.

PACIFIC SUNWEAR OF CALIFORNIA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands except share amounts)

ASSETS


	October 30,
	2004
	(as restated, see			January 31,
	Note 3)			2004
CURRENT ASSETS:
Cash and cash equivalents	$	27,951		$	109,640
Marketable securities		56,573			66,235
Accounts receivable		9,187			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		8,225			8,225

Total current assets		323,764			353,537
PROPERTY AND EQUIPMENT:
Land		12,156			12,156
Buildings and building improvements		26,691			26,686
Leasehold improvements		251,716			217,251
Furniture, fixtures and equipment		199,361			173,550

Total property and equipment		489,924			429,643
Less accumulated depreciation and amortization		(187,362	)		(156,774	)

Net property and equipment		302,562			272,869
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	$	645,548		$	644,487

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	59,709		$	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		11,993			15,019

Total current liabilities		120,689			110,539
LONG-TERM LIABILITIES:
Long-term debt, net of current portion		—			228
Long-term capital lease obligations, net of current portion		736			1,227
Deferred lease incentives		67,447			56,996
Deferred rent		26,696			24,325
Deferred compensation		12,289			10,925
Deferred income taxes		11,515			11,515
Other long-term liabilities		92			—

Total long-term liabilities		118,775			105,216
Commitments and contingencies (Note 9)
SHAREHOLDERS’ EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $.01 par value; 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		355,246			289,071

Total shareholders’ equity		406,084			428,732

Total liabilities and shareholders’ equity	$	645,548		$	644,487

See accompanying notes.

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
	(as restated, see		(as restated, see		(as restated, see		(as restated, see
	Note 3)		Note 3)		Note 3)		Note 3)
Net sales	$	332,422	$	282,676	$	850,086	$	714,672

Cost of goods sold, including buying, distribution and occupancy costs		207,888		178,467		544,709		463,384


Gross margin		124,534		104,209		305,377		251,288
Selling, general and administrative expenses		70,684		63,820		200,140		177,496


Operating income		53,850		40,389		105,237		73,792

Interest income, net		404		213		1,176		342


Income before income tax expense		54,254		40,602		106,413		74,134

Income tax expense		20,515		15,392		40,238		28,275


Net income	$	33,739	$	25,210	$	66,175	$	45,859


Comprehensive income	$	33,739	$	25,210	$	66,175	$	45,859


Net income per share, basic	$	0.45	$	0.32	$	0.87	$	0.60


Net income per share, diluted	$	0.44	$	0.32	$	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 accompanying notes

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
	(as restated, see			(as restated, see
	Note 3)			Note 3)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	66,175		$	45,859
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization		37,413			33,295
Loss on disposal of equipment		3,257			1,801
Tax benefits related to exercise of stock options		4,429			14,449
Change in operating assets and liabilities:
Accounts receivable		(3,993	)		(972	)
Merchandise inventories		(53,259	)		(45,751	)
Prepaid expenses		(4,326	)		(1,661	)
Deferred compensation and other assets		223			5,959
Accounts payable		21,041			9,108
Accrued liabilities		(5,677	)		3,796
Income taxes payable and deferred income taxes		(3,026	)		(556	)
Deferred lease incentives		10,451			3,331
Deferred rent		(994	)		114
Other long-term liabilities		92			—

Net cash provided by operating activities		71,806			68,772

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(62,949	)		(36,583	)
Purchases of available-for-sale marketable securities		(911,075	)		(59,100	)
Sales of available-for-sale marketable securities		926,275			46,675
Purchases of held-to-maturity marketable securities		(23,374	)		(10,410	)
Maturities of held-to-maturity marketable securities		17,836			—

Net cash used in investing activities		(53,287	)		(59,418	)

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:		(81,689	)		34,632
CASH AND CASH EQUIVALENTS, beginning of period		109,640			36,438

CASH AND CASH EQUIVALENTS, end of period	$	27,951		$	71,070


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	105		$	185
Cash paid for income taxes	$	38,836		$	14,382
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Issuance of restricted stock to satisfy certain deferred compensation liabilities	$	5,471		$	—
Increase in accrued non-cash property and equipment	$	6,772		$	5,009

See accompanying notes

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.

Marketable Securities – Marketable securities consists of auction rate securities of $18.0 million, classified as available for sale, and other marketable securities of $38.6 million, classified as held-to-maturity.

Auction rate securities have long-term stated contractual maturities, but have variable interest rates that reset at each auction period (typically 7 days, or as long as 28 or 35 days in some cases). These securities trade in a broad, highly liquid market and the Company has never had difficulty being able to liquidate any such investment at the end of a given auction period. The Company typically reinvests these securities multiple times during each reporting period at each new auction date. As a result of the resetting variable rates, the Company had no cumulative gross unrealized or realized gains or losses from these investments. All income from these investments was recorded as interest income for each period presented.

Marketable securities, other than auction rate securities, 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, which approximates fair value at October 30, 2004 due to the relatively short maturity period of such investments. 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).

Deferred Lease Incentives – The Company accounts for landlord allowances in accordance with SFAS 13, “Accounting for Leases,” and FASB Technical Bulletin 88-1, “Issues Relating to Accounting for Leases.” Accordingly, all amounts received from landlords to fund tenant improvements are recorded as a deferred liability, which is then amortized over the related store’s lease term. See Note 3, “Restatement of Prior Period Financial Statements.”

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 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 our estimate of the portion of gift cards that will not be redeemed or recovered. The Company accrues for estimated sales returns by customers based on historical sales return results.

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, before the impact of PacBucks (see Note 3), 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 accounts for its customer loyalty programs in accordance with EITF 00-22, “Accounting for ‘Points’ and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future.” 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. The impact of these programs is recognized ratably as a direct reduction in net sales over the series of transactions required to both earn and redeem the customer discounts. Redemptions generally occur within 30 days of original issuance. See Note 3, “Restatement of Prior Period Financial Statements.”

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.

Straight-Line Rent – The Company accounts for rent expense in accordance with SFAS 13, “Accounting for Leases,” and FASB Technical Bulletin 85-3, “Accounting for Operating Leases with Scheduled Rent Increases.” Accordingly, rent expense under the Company’s store operating leases is recognized on a straight-line basis over the original term of each store’s lease, inclusive of rent holiday periods during store construction and excluding any lease renewal options. The Company capitalizes rent expense attributable to the build-out period of its stores as a component cost of construction and amortizes this amount over the life of the related store’s lease term once construction has completed, generally upon the commencement of store operations. See Note 3, “Restatement of Prior Period Financial Statements.”

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 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 and November 1, 2003 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	$	33,739		$	25,210		$	66,175		$	45,859
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 net income	$	32,209		$	23,773		$	61,417		$	41,344


Earnings Per Share
Basic, as reported	$	0.45		$	0.32		$	0.87		$	0.60
Basic, pro forma	$	0.43		$	0.30		$	0.81		$	0.54

Diluted, as reported	$	0.44		$	0.32		$	0.85		$	0.59
Diluted, pro forma	$	0.42		$	0.30		$	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, 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.

NOTE 3 – RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS

As disclosed in the Company’s Form 10-K for the fiscal year ended January 29, 2005, the Company restated its prior year financial statements to reflect the impact of certain lease accounting corrections and certain other reclassifications related to auction rate securities (“ARS”). Additionally, as previously announced in the Company’s Form 8-K dated August 11, 2005, the Company has corrected its accounting for PacBuck issuances. There is no impact to the income statements for the nine months ended October 30, 2004 and November 1, 2003 as a result of the PacBucks corrections as all PacBucks had been issued and redeemed as of the end of the respective periods.

The corrections are required to properly account for landlord construction allowances in accordance with Statement of Financial Accounting Standards No. 13, “Accounting for Leases,” and Financial Accounting Standards Board (“FASB”) Technical Bulletin No. 88-1, “Issues Relating to Accounting for Leases”; rent holidays in accordance with FASB Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases”; and the Company’s PacBucks promotional program in accordance with Emerging Issues Task Force Issue No. 00-22, “Accounting for ‘Points’ and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future.”

A summary of the impact of those corrections to the Company’s financial statements for the third quarter and first nine months of fiscal 2004 and fiscal 2003 is as follows:


	Third Quarter Ended October 30, 2004
	As
	Previously		Lease			PacBucks		As
Consolidated Income Statement	Reported		Corrections			Corrections		Restated
Net Sales	$	329,447	$	—		$	2,975	$	332,422
Cost of Sales		210,827		(2,939	)		—		207,888

Gross Margin		118,620		2,939			2,975		124,534
SG&A Expenses		67,733		2,951			—		70,684

Operating Income		50,887		(12	)		2,975		53,850
Income Tax Provision		19,394		(4	)		1,125		20,515
Net Income		31,897		(8	)		1,850		33,739
Earnings Per Share, diluted		0.42		—			0.02		0.44


	First Nine Months Ended October 30, 2004
	As
	Previously		Lease			PacBucks		As
Consolidated Income Statement	Reported		Corrections			Corrections		Restated
Net Sales	$	850,086	$	—		$	—	$	850,086
Cost of Sales		553,197		(8,488	)		—		544,709

Gross Margin		296,889		8,488			—		305,377
SG&A Expenses		191,621		8,519			—		200,140

Operating Income		105,268		(31	)		—		105,237
Income Tax Provision		40,248		(10	)		—		40,238
Net Income		66,196		(21	)		—		66,175
Earnings Per Share, diluted		0.85		—			—		0.85


	First Nine Months Ended October 30, 2004
	As			Lease and
	Previously			ARS			As
Consolidated Cash Flow Statement	Reported			Corrections			Restated
Net Cash Provided by Operating Activities	$	54,143		$	17,663		$	71,806
Net Cash Used in Investing Activities		(50,824	)		(2,463	)		(53,287	)
Net Cash Used in Financing Activities		(100,208	)		—			(100,208	)

Net Decrease in Cash and Cash Equivalents		(96,889	)		15,200			(81,689	)
Cash and Cash Equivalents, Beginning		142,840			(33,200	)		109,640

Cash and Cash Equivalents, Ending		45,951			(18,000	)		27,951


	Third Quarter Ended November 1, 2003
	As
	Previously		Lease			PacBucks		As
Consolidated Income Statement	Reported		Corrections			Corrections		Restated
Net Sales	$	281,541	$	—		$	1,135	$	282,676
Cost of Sales		181,041		(2,574	)		—		178,467

Gross Margin		100,500		2,574			1,135		104,209
SG&A Expenses		61,241		2,579			—		63,820

Operating Income		39,259		(5	)		1,135		40,389
Income Tax Provision		14,963		(1	)		430		15,392
Net Income		24,509		(4	)		705		25,210
Earnings Per Share, diluted		0.31		(0.00	)		0.01		0.32


	First Nine Months Ended November 1, 2003
	As
	Previously		Lease			PacBucks		As
Consolidated Income Statement	Reported		Corrections			Corrections		Restated
Net Sales	$	714,672	$	—		$	—	$	714,672
Cost of Sales		470,587		(7,203	)		—		463,384

Gross Margin		244,085		7,203			—		251,288
SG&A Expenses		170,279		7,217			—		177,496

Operating Income		73,806		(14	)		—		73,792
Income Tax Provision		28,281		(6	)		—		28,275
Net Income		45,867		(8	)		—		45,859
Earnings Per Share, diluted		0.59		—			—		0.59


	First Nine Months Ended November 1, 2003
	As			Lease and
	Previously			ARS
Consolidated Cash Flow Statement	Reported			Corrections			As Restated
Net Cash Provided by Operating Activities	$	59,910		$	8,862		$	68,772
Net Cash Used in Investing Activities		(38,131	)		(21,287	)		(59,418	)
Net Cash Used in Financing Activities		25,278			—			25,278

Net Decrease in Cash and Cash Equivalents		47,057			(12,425	)		34,632
Cash and Cash Equivalents, Beginning		36,438			—			36,438

Cash and Cash Equivalents, Ending		83,495			(12,425	)		71,070

NOTE 4 – 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.


	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 5 – 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 9)		1,700		5,543
Accrued restricted stock compensation (Note 7)		659		5,118
Other		11,197		8,822

	$	47,225	$	54,966

NOTE 6 – COMMON STOCK REPURCHASE AND RETIREMENT

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


									Maximum
					# of Shares				Value of
					Purchased				Shares that
			Average		as Part of				May Yet be
			Price		Publicly		Value of		Purchased
	# of Shares		Paid Per		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 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 7 – 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 5) 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.

NOTE 8 – NET INCOME PER SHARE, BASIC AND DILUTED

The following table summarizes the computation of earnings per share:


	October 30, 2004							November 1, 2003
					Per Share							Per Share
Third Quarter Ended:	Net Income		Shares		Amount			Net Income		Shares		Amount
Basic EPS:	$	33,739		74,415,403	$	0.45		$	25,210		77,685,516	$	0.32
Diluted EPS:
Effect of dilutive stock options		—		1,504,048		(0.01	)		—		2,190,910		(0.00	)

	$	33,739		75,919,451	$	0.44		$	25,210		79,876,426	$	0.32


	October 30, 2004							November 1, 2003
					Per Share							Per Share
Nine Months Ended:	Net Income		Shares		Amount			Net Income		Shares		Amount
Basic EPS:	$	66,175		76,298,445	$	0.87		$	45,859		76,031,944	$	0.60
Diluted EPS:
Effect of dilutive stock options		—		1,697,611		(0.02	)		—		2,290,274		(0.01	)

	$	66,175		77,996,056	$	0.85		$	45,859		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 9 – 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 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.

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

The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the condensed consolidated financial statements and notes thereto of the Company included elsewhere in this Form 10-Q/A. As discussed in Note 3 to the condensed consolidated financial statements included at Item 1, the financial statements for the interim periods ended October 30, 2004 and November 1, 2003 have been restated for the effects of errors in our accounting for leases and PacBucks. This MD&A gives effect to the restatements.

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

This report on Form 10-Q/A contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, and we intend that such forward-looking statements be subject to the safe harbors created thereby. We are hereby providing cautionary statements identifying important factors that could cause our actual results to differ materially from those projected in forward-looking statements of the Company herein. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions, future events or performance (often, but not always, through the use of words or phrases such as “will result,” “expects to,” “will continue,” “anticipates,” “plans,” “intends,” “estimated,” “projects” and “outlook”) are not historical facts and may be forward-looking and, accordingly, such statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. All forward-looking statements included in this report, including forecasts of fiscal 2004 planned new store openings and capital expenditures, are based on information available to us as of the date hereof, and we assume no obligation to update or revise any such forward-looking statements to reflect events or circumstances that occur after such statements are made. See “Risk Factors” within this section.

Executive Overview

We consider 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. We consider 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 our total net sales, cash, and working capital.

Net merchandise margins – We analyze 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 our use of markdowns could have an adverse impact on our gross margin results and results of operations.

Operating margin – We view operating margin as a key indicator of our success. The key drivers of operating margins are comparable store net sales, net merchandise margins, and our ability to control operating expenses. Operating 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 our fiscal year historically accounts for a smaller percentage of annual net sales and operating margin as compared to the second half. Our highest historical operating margin was 12.9% for fiscal 1999.

Store sales trends – We evaluate store sales trends in assessing the operational performance of our store expansion strategies. Important store sales trends include average net sales per store and average net sales

per square foot. Average net sales per store (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) – We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs. We expect cash flows from operations will be sufficient to finance operations without borrowing under our 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 us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reported period. Actual results could differ from these estimates. The accounting policies that we believe are the most critical to aid in fully understanding and evaluating reported financial results include the following:

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

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 our best estimate of their fair market value. We base the decision to mark down merchandise primarily upon its current rate of sale and the age of the item, among other factors. To the extent that our estimates differ from actual results, additional markdowns may have to be recorded, which could reduce our gross margins and operating results.

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

Evaluation of Insurance Reserves – We are responsible for workers’ compensation insurance claims up to a specified aggregate stop loss amount. We maintain 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 our expectations and the reserves established. To the extent claims experience or our estimates change, additional charges may be recorded in the future up to the aggregate stop loss amount for each policy year.

Accrued Sublease Loss Charges - We remain liable under an operating lease covering a former store location. We 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, we had $1.7 million recorded in accrued liabilities to account for our net remaining contractual lease obligations for this location, which includes estimated sublease assumptions for the remaining 2,000 square feet. We continue to update our sublease assumptions on a quarterly basis based on our review of current real estate market conditions and any on-going negotiations. To the extent our estimates relating to our 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 our 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 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. We consider future taxable income and ongoing prudent and feasible tax planning in assessing the value of our deferred tax assets. Evaluating the value of these assets is necessarily based on our judgment. If we determine that it is more likely than not that these assets will not be realized, we would reduce the value of these assets to their expected realizable value through a valuation allowance, thereby decreasing net income. If we subsequently determined that the 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 - We are involved from time to time in litigation incidental to our business. We believe that the outcome of current litigation will not have a material adverse effect upon our results of operations or financial condition and, from time to time, we 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 our operating results (see Note 9 to the condensed consolidated financial statements).

Results of Operations

The following table sets forth selected income statement data of the Company expressed as a percentage of net sales for the periods indicated. The discussion that follows should be read in conjunction with 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		62.5	%		63.1	%		64.1	%		64.8	%

Gross margin		37.5	%		36.9	%		35.9	%		35.2	%
Selling, general and administrative expenses		21.3	%		22.6	%		23.5	%		24.9	%

Operating income		16.2	%		14.3	%		12.4	%		10.3	%
Interest income, net		0.1	%		0.1	%		0.1	%		0.1	%

Income before income tax expense		16.3	%		14.4	%		12.5	%		10.4	%
Income tax expense		6.2	%		5.5	%		4.7	%		4.0	%

Net income		10.1	%		8.9	%		7.8	%		6.4	%

The following table sets forth our 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

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 $332.4 million for the third quarter of fiscal 2004 from $282.7 million for the third quarter of fiscal 2003, an increase of $49.7 million, or 17.6%. The components of this $49.7 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
6.0		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

$49.7		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 merchandise categories wherein we believed we 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 $124.5 million for the third quarter of fiscal 2004 from $104.2 million for the third quarter of fiscal 2003, an increase of $20.3 million, or 19.5%. As a percentage of net sales, gross margin was 37.5% for the third quarter of fiscal 2004

compared to 36.9% for the third quarter of fiscal 2003. The 0.6% 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 $70.7 million for the third quarter of fiscal 2004 from $63.8 million for the third quarter of fiscal 2003, an increase of $6.9 million, or 10.8%. These expenses decreased to 21.3% as a percentage of net sales in the third quarter of fiscal 2004 from 22.6% 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:


%			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 7 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 21.0% for the third quarter of fiscal 2004 from 21.1% for the third quarter of fiscal 2003. Other selling, general and administrative expenses increased in absolute dollars to $69.8 million for the third quarter of fiscal 2004 compared to $59.7 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 $20.5 million for the third quarter of fiscal 2004 compared to $15.4 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. Our weighted effective state income tax rate will vary depending on a number of factors, such as differing average 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

12.3		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

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 merchandise categories wherein we believed we 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 $305.4 million for the first nine months of fiscal 2004 from $251.3 million for the first nine months of fiscal 2003, an increase of $54.1 million, or 21.5%. As a percentage of net sales, gross margin was 35.9% for the first nine months of fiscal 2004 compared to 35.2% for the first nine months of fiscal 2003. The 0.7% 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 $200.1 million for the first nine months of fiscal 2004 from $177.5 million for the first nine months of fiscal 2003, an increase of $22.6 million, or 12.7%. These expenses decreased to 23.5% as a percentage of net sales in the first nine months of fiscal 2004 from 24.8% 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 7 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 9 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 first nine months of fiscal 2004 from 22.7% for the first nine months 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 first nine months of fiscal 2004 compared to $162.3 million for the first nine months 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 $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. Our weighted effective state income tax rate will vary depending on a number of factors, such as differing average income tax rates and net sales in the respective states.

Liquidity and Capital Resources

We have financed our operations primarily from internally generated cash flow, with occasional short-term and long-term borrowings and equity financing in past years. Our 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. We believe that our working capital, cash flows from operating activities and credit facility will be sufficient to meet our operating and capital expenditure requirements for the next twelve months.

Operating Cash Flows

Net cash provided by operating activities was $71.8 million for the first nine months of fiscal 2004 compared to $68.8 million for the first nine months of fiscal 2003. The $3.0 million increase 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

$ 20.3		Increase in net income

7.1		Increase in deferred lease incentives due to receipt of increased landlord allowances

(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 9 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 9 to the condensed consolidated financial statements), and other items netting to a $1.4 million reduction in accrued expenses

(4.9	)	Other items netting to a cash flow decrease

$ 3.0		Total

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 15% square footage growth

7.7		Decrease in accrued liabilities, primarily due to the payment of the Auden and Adams settlements of $4.0 million (see Note 9 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 9 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 $53.3 million compared to $59.4 million for the first nine months of fiscal 2003, a decrease in cash used of $6.1 million. The components of the $53.3 million in cash used in investing activities in the first nine months of fiscal 2004 are as follows:


Amount
($million)		Attributable to

$ (53.4	)	Construction costs of new, expanded and relocated stores

(5.0	)	Other capital expenditures, including computer hardware and software

(4.5	)	Maintenance capital expenditures on existing stores

(911.1	)	Purchases of available-for-sale marketable securities

926.3		Sales of available-for-sale marketable securities

(23.4	)	Purchases of held-to-maturity marketable securities

17.8		Maturities of held-to-maturity marketable securities

$ (53.3	)	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:


	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 $71,806, $161,004, and $89,488, 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 our common stock repurchase plan is contained in Note 6 to the condensed consolidated financial statements, which note is incorporated herein by this reference.

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

Credit Facility

We have a credit facility with a bank, which expires April 1, 2007. The credit facility provides for a $45.0 million line of credit (the “Credit Line”) through March 31, 2005 to be used for cash advances, commercial letters of credit and shipside bonds. The Credit Line increases to $50.0 million from April 1, 2005 through March 31, 2006, and $60.0 million from April 1, 2006 through expiration on April 1, 2007. Interest on the Credit Line is payable monthly at the bank’s prime rate (4.75% 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. We did not borrow under the credit facility at any time during the first nine months of fiscal 2004 or during fiscal 2003. We had $32.7 million outstanding in letters of credit at October 30, 2004. The credit facility subjects us to various restrictive covenants, including maintenance of certain financial ratios, and prohibits payment of cash dividends on common stock. At October 30, 2004, we were in compliance with all of the credit facility covenants.

A significant decrease in our operating results could adversely affect our ability to maintain the required financial ratios under our 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 results would be either that we 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

We have 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, we are contingently liable for open letters of credit with foreign suppliers of merchandise. At October 30, 2004, our future financial commitments under these arrangements were as follows:


	Payments Due by Period
Contractual Obligations			Less than						More than
(in millions)	Total		1 year		1-3 years		3-5 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 our store operating leases. In many of our leases, CAM charges are not fixed and can fluctuate significantly from year to year for any particular store. 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. We expect total CAM expenses to continue to increase as the number of stores increases from year to year.

Operating Leases – We lease our retail stores, former corporate offices and distribution facilities, and certain equipment under operating lease agreements expiring at various dates through December 2016. Substantially all of our retail store leases require us 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 our discretion. Most leases also contain rent escalation clauses that come into effect at various times throughout the lease term. Rent expense is recorded under the straight-line method over the 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 our favor that relieve us of any future obligation under a lease if specified sales levels are not achieved by a specified date. None of our retail store leases contain purchase options.

We review the operating performance of our stores on an ongoing basis to determine which stores, if any, to expand, relocate or close. We closed four stores in fiscal 2003 and anticipate 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

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

Seasonality and Quarterly Results

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

Risk Factors

The products we sell are subject to significant merchandising/fashion sensitivity. Our success is largely dependent upon our ability to gauge the fashion tastes of our customers and to provide merchandise that satisfies customer demand in a timely manner. Our failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends could have a material adverse effect on our same store sales results, operating margins, financial condition and results of operations. Misjudgments or unanticipated fashion changes could also have a material adverse effect on our image with our customers.

Our customers may not accept our proprietary brand merchandise. Sales from proprietary brand merchandise accounted for approximately 32% of net sales in fiscal 2003. We may increase the percentage of net sales in proprietary brand merchandise in the future, although there can be no assurance that we will be able to achieve increases in proprietary brand merchandise sales as a percentage of net sales. Because our proprietary brand merchandise generally carries higher merchandise margins than our branded merchandise, our failure to anticipate, identify and react in a timely manner to fashion trends with our proprietary brand merchandise, particularly if the percentage of net sales derived from proprietary brand merchandise increases, may have a material adverse effect on our same store sales results, operating margins, financial condition and results of operations.

Our comparable store net sales results can fluctuate significantly. Our 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 our comparable store net sales results, including changes in fashion trends, changes in our merchandise mix, calendar shifts of holiday periods, actions by competitors, weather conditions and general economic conditions. Our comparable store net sales results for any particular fiscal month, fiscal quarter or fiscal year in the future may decrease. As a result of these or other factors, our future comparable store net sales results are likely to have a significant effect on the market price of our common stock.

We may not be able to manage our planned expansion effectively. Our continued growth depends to a significant degree on our ability to open and operate stores on a profitable basis and on our ability to manage our planned expansion. We have 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. Our planned expansion is dependent upon a number of factors, including our ability 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 our control may also affect our ability to expand, including general economic and business conditions affecting consumer spending. There can be no assurance that we will achieve our planned expansion, that such expansion will be profitable, or that we will be able to manage our growth effectively. Any failure to manage growth could have a material adverse effect on our business, financial condition and results of operations.

We could lose key personnel at any time. Our continued success is dependent to a significant degree upon the services of our key personnel, particularly our executive officers. The loss of the services of any member of senior management could have a material adverse effect on our business, financial condition and results of operations. Our success in the future will also be dependent upon our ability to attract and retain qualified personnel. Our inability to attract and retain qualified personnel in the future could have a material adverse effect on our business, financial condition and results of operations.

Our dependence on a single distribution facility exposes us to significant operational risks. Our distribution functions for all of our 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 our business, financial condition and results of operations. There can be no assurance that our corporate office and distribution center will be adequate to support our future growth.

Selling merchandise over the internet carries particular risks that can distract attention from our core business. Our internet operations are subject to numerous risks that could have a material adverse effect on our operational results, including unanticipated operating problems, reliance on third party computer hardware and software providers, system failures and the need to invest in additional computer systems. Specific risks include: (i) diversion of sales from 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 our control that could have a material adverse effect on our operational results, including: (i) price competition involving the items we intend to sell; (ii) the entry of our vendors into the internet business, in direct competition with us; (iii) the level of merchandise returns experienced by us; (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.

Any terrorist attacks or war/threat of war could significantly affect consumer spending. The majority of our 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 us. Decreased sales would have a material adverse effect on our business, financial condition and results of operations.

Our foreign sources of production may not always be reliable. We purchase merchandise directly in foreign markets for our proprietary brands. In addition, we purchase merchandise from domestic vendors, some of which is manufactured overseas. We do not have any long-term merchandise supply contracts and its imports are subject to existing or potential duties, tariffs and quotas. We face competition from other companies for production facilities and import quota capacity. We also face a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as: (i) political instability; (ii) enhanced security measures at United States ports, which could delay delivery of imports; (iii) imposition of new legislation relating to import quotas that may limit the quantity of goods which may be imported into the United States from countries in a region that we do business; (iv) imposition of duties, taxes, and other charges on imports; (v) delayed receipt or non-delivery of goods due to the failure of foreign-source suppliers to comply with applicable import regulations; (vi) delayed receipt or non-delivery of goods due to organized labor strikes or unexpected or significant port congestion at United States ports; and (vii) local business practice and political issues, including issues relating to compliance with domestic or international labor standards which may result in adverse publicity. New initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions that, if enacted, would increase the cost of products purchased from suppliers in countries that we do business with. Our inability to rely on our foreign sources of production due to any of the factors listed above could have a material adverse effect on our business, financial condition and results of operations.

Any failure by us to maintain credit facility financial covenants could have a material adverse impact on our business. A significant decrease in our operating results could adversely affect our ability to maintain required financial ratios under our credit facility. Required financial ratios include a rolling four-quarter 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 results would be that we would either 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.

The expensing of stock options will reduce our future reported earnings. 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, we include such expenses on a pro forma basis in the notes to our quarterly and annual financial statements in accordance with accounting principles generally accepted in the United States of America and do not include compensation expense related to stock options in our reported earnings in the financial statements. When accounting standards are changed to require us to expense stock options, our reported earnings would be lower under the new standard in the second half of the fiscal year beginning January 30, 2005 and our stock price could decline.

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

Our stock price can fluctuate significantly. The market price of our 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 our 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.

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

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

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

To the extent we borrow under our credit facility, we are exposed to market risk related to changes in interest rates. At October 30, 2004, there were no borrowings outstanding under our credit facility and we 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 our 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 our credit facility, net income would be reduced by approximately $3,000 per year. For a discussion of our 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. We are not a party with respect to derivative financial instruments.

ITEM 4 – CONTROLS AND PROCEDURES

In each of the quarterly periods ended October 30, 2004 and November 1, 2003, our Company’s then principal executive and financial officers (collectively, the “certifying officers”) evaluated the effectiveness of our 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 us in our periodic reports filed with the Commission is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that the information is communicated to the certifying officers on a timely basis. The certifying officers concluded, based on their evaluation, that our disclosure controls and procedures were effective as of each of the periods covered by the respective Quarterly Reports on Form 10-Q.

As a result of the need to restate the financial statements for the periods presented herein due to lease accounting issues and the impact of our PacBucks promotional program, our certifying officers and management have considered again whether our disclosure controls and procedures were effective on those dates. Based on the corrections required to be made, our certifying officers and management have concluded that a control deficiency existed with respect to lease accounting and PacBucks at each of October 30, 2004 and November 1, 2003. Our certifying officers and management have concluded that this represents a control deficiency and that our disclosure controls and procedures as of October 30, 2004 and November 1, 2003 were not effective. While assessing its internal control over financial reporting for Sarbanes-Oxley purposes for fiscal 2004, the Company effectively remediated these issues.

No change in our internal control over financial reporting occurred during the quarter ended October 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

For information regarding legal proceedings, see “Litigation” within Note 9 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 common stock repurchases made during the first nine months of fiscal 2004, see Note 6 of Notes to Condensed Consolidated Financial Statements, which is incorporated by reference in response to this Item 2.

Item 3 – Defaults Upon Senior Securities - 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 Seth R. Johnson and Gerald M. Chaney pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32		Written statement of Seth R. Johnson and Gerald M. Chaney pursuant to section 906 of the Sarbanes-Oxley Act of 2002.


+		Previously filed


	Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of October 30, 2004 (as restated) and January 31, 2004		4
Condensed Consolidated Statements of Income and Comprehensive Income for the third quarter and nine months ended October 30, 2004 and November 1, 2003 (as restated)		5
Condensed Consolidated Statements of Cash Flows for the nine months ended October 30, 2004 and November 1, 2003 (as restated)		6
Notes to Condensed Consolidated Financial Statements (as restated)		7-16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17-30
Item 3. Quantitative and Qualitative Disclosures About Market Risk		30
Item 4. Controls and Procedures		30-31

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 3. Defaults Upon Senior Securities		31
Item 4. Submission of Matters to a Vote of Security Holders		31
Item 5. Other Information		31
Item 6. Exhibits		31

SIGNATURE PAGE		32
EXHIBIT 31
EXHIBIT 32


		Pacific Sunwear of California, Inc.
		(Registrant)

Date: August 31, 2005		/s/ SETH R. JOHNSON

		Seth R. Johnson
		Chief Executive Officer
		(Principal Executive Officer)

Date: August 31, 2005		/s/ GERALD M. CHANEY

		Gerald M. Chaney
		Senior Vice President, Chief Financial Officer
		(Principal Financial and Accounting Officer)

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


Date: August 31, 2005		/s/ GERALD M. CHANEY

		Gerald M. Chaney
		Senior Vice President, Chief Financial Officer

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Exhibits		Description
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 Seth R. Johnson and Gerald M. Chaney pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32		Written statement of Seth R. Johnson and Gerald M. Chaney pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

	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.

	(i)		the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

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


Dated: August 31, 2005		/s/ SETH R. JOHNSON

		Seth R. Johnson
		Chief Executive Officer
		Pacific Sunwear of California, Inc.
		(Principal Executive Officer)

Dated: August 31, 2005		/s/ GERALD M. CHANEY

		Gerald M. Chaney
		Senior Vice President
		and Chief Financial Officer
		Pacific Sunwear of California, Inc.
		(Principal Financial Officer)