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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

   (MARK ONE)

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

                   FOR THE FISCAL YEAR ENDED: FEBRUARY 1, 1998

                                       OR

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

             FOR THE TRANSITION PERIOD FROM __________ TO __________

                         COMMISSION FILE NUMBER 0-21296

                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                         -------------------------------

               CALIFORNIA                              95-3759463
     (STATE OR OTHER JURISDICTION OF                (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                IDENTIFICATION NO.)

5200 E. LA PALMA AVENUE, ANAHEIM, CALIFORNIA              92807
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)             (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 693-8066

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          COMMON STOCK, $.01 PAR VALUE
                                (TITLE OF CLASS)

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

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].

         The aggregate market value of Common Stock held by non-affiliates of
the registrant on March 19, 1998 was approximately $534 million. All outstanding
shares of voting stock, except for shares held by executive officers and members
of the Board of Directors and their affiliates, are deemed to be held by
non-affiliates.

         On March 19, 1998 the registrant had 13,785,178 shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part III incorporates information by reference from the definitive
Proxy Statement for the 1998 Annual Meeting of Shareholders, to be filed with
the Commission no later than 120 days after the end of the registrant's fiscal
year covered by this Form 10-K.

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                                     PART I

ITEM 1.    BUSINESS

         Pacific Sunwear of California, Inc. ("Pacific Sunwear" or "the Company"
or "the Registrant") is a leading mall-based specialty retailer of everyday
casual apparel, accessories and footwear designed to meet the lifestyle needs of
active teens and young adults. The Company's customers are primarily young men
aged 12 to 22, as well as young women of the same age who generally prefer a
casual look. The Company believes its stores are differentiated by a carefully
edited selection of popular and emerging brands, which are offered together with
the Company's own private brands. The Company believes its merchandise selection
enhances its image with its customers as a key fashion resource for the casual
teen wardrobe. At February 1, 1998, Pacific Sunwear operated 272 stores in 37
states nationwide. The Company's stores are primarily concentrated in the
Northeast (26%), the Midwest (22%), the Southeast (21%), and California (18%).

         Since mid-1995, Pacific Sunwear has implemented several strategic
merchandising initiatives which it believes have enhanced its ability to serve
the fashion needs of its customers. The Company significantly expanded its pants
assortment for young men to address the apparel needs of its customers in
general and the needs of customers in colder climate regions such as the
Northeast and Midwest. In addition, the Company introduced juniors (merchandise
for young women) and footwear on a test basis in a limited number of stores
beginning in the summer of 1995. The Company introduced juniors in an effort to
broaden its customer base, as well as to provide its existing female customers
with a wider array of apparel choices. Footwear was introduced in response to
customer demand and allowed the Company to provide its customers with a complete
wardrobe for the casual teen lifestyle.

         Based on the initial success of these merchandising initiatives,
Pacific Sunwear decided to increase its prototype store size from approximately
2,000 to approximately 3,000 square feet in late 1995. In the fiscal year ended
February 1, 1998 ("fiscal 1997"), the Company opened 52 new stores in the larger
format and in the fiscal year ended February 2, 1997 ("fiscal 1996"), the
Company opened 30 new stores, 26 of which were in the larger format. In fiscal
1996, the Company also began enlarging the size of certain existing stores
through expansion or relocation in order to accommodate its new categories of
juniors and footwear. In fiscal 1997, the Company expanded or relocated 15
stores and in fiscal 1996 the Company expanded or relocated seven stores, all of
which included juniors and footwear. In addition, in fiscal 1997 the Company
continued its roll out of juniors and footwear to 40 and 29, respectively, of
its existing smaller stores. At February 1, 1998, the Company carried juniors in
248 of its stores, of which 176 also offer footwear.

STRATEGY

         Pacific Sunwear's goal is to be the dominant nationwide specialty
retailer of everyday casual apparel, footwear and accessories catering to the
teen market. The Company's target customers are young men and women between the
ages of 12 and 22. Pacific Sunwear believes its customers want to stay abreast
of fashion trends and continually seek newness in their everyday wear. The
Company endeavors to satisfy such demands by offering a complete wardrobe
selection, including footwear and accessories, representing fashion trends
considered timely by the Company's target customers. The principal aspects of
the Company's strategy are as follows:

         Offer a Broad Assortment. Pacific Sunwear offers a complete selection
of shirts, shorts, pants, overshirts, sweatshirts, outerwear, footwear and
accessories in order to satisfy the casual wardrobe needs of its teen customers.
Within each merchandise classification, the Company's stores offer a broad
selection, with the goal of being viewed by its customers as the dominant
retailer in its niche.

         Create a Pacific Sunwear Brand Image. The Company strives to make the
"Pacific Sunwear" and "PacSun" names synonymous with distinctive and
high-quality merchandise for the casual teen lifestyle. The Company projects a
strong brand image among its customers by offering a carefully edited selection
of popular and "cutting-edge" brands, together with the Company's own exclusive
brands. Key brands in young men's apparel offered by the Company include
Billabong, JNCO, Quiksilver, Rusty and Redsand and key brands in juniors include
Roxy (Quiksilver), Paris Blues, L.E.I. and JNCO. Key brands in footwear include
Dr. Martens, Airwalk, Vans and Simple. Pacific Sunwear also offers a wide
selection of private brand merchandise under various labels including "Bullhead"
and "Breakdown," which are targeted at specific customer segments. Pacific
Sunwear believes that offering high-quality private brands contributes to its
status as a key fashion resource for the casual teen lifestyle and
differentiates the Company from its competitors.


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         Actively Manage Merchandise Trends. Pacific Sunwear does not attempt to
dictate fashion, but instead devotes considerable effort to identifying emerging
fashion trends. By using focus groups, listening to its customers and store
employees, monitoring sell-through trends, testing small quantities of new
merchandise in a limited number of stores, and maintaining domestic and
international sourcing relationships, Pacific Sunwear enhances its ability to
identify and respond to emerging fashion trends and to develop new private brand
styles in order to capitalize on existing fashion trends. The Company believes
its proactive strategy helps minimize fashion risk and the potential need for
significant markdowns, while permitting a rapid response to changing fashions
and the timely roll out of new merchandise.

         Maintain Strong Vendor Relationships. Pacific Sunwear views its vendor
relationships as important to its success, and promotes frequent personal
interaction with its vendors. The Company believes many of its vendors view
Pacific Sunwear as an important distribution channel, not only as one of their
largest customers, but also as an enhancement of their own brand image in the
eyes of the teen customer.

         Provide Attentive Customer Service. Pacific Sunwear is committed to
offering courteous, professional and nonintrusive customer service. The Company
strives to give its teen customers the same level of respect that is generally
given to adult customers at other retail stores, and to provide friendly and
informed customer service for parents. Responding to the expressed preferences
of its customers, the Company trains its employees to greet each customer, to
give prompt and courteous assistance when asked, and to thank customers after
purchases are made, but to refrain from giving extensive unsolicited advice to
its shoppers. Pacific Sunwear's stores are designed to give a sense of
"controlled clutter," with extensive wall displays and a background of popular
music. Additionally, the stores provide a friendly and social atmosphere for
teens, while also providing a comfortable environment for parents and other
adults. The Company believes the combination of its attentive customer service
and its unique store environment is integral to its success.

         Growth Strategy. Pacific Sunwear intends to continue to grow through
the opening of new stores, the expansion or relocation of selected existing
stores and the roll out of footwear to 15 of its smaller format stores. The
Company believes that the broad appeal of the Pacific Sunwear concept enables it
to operate successfully in diverse geographic markets. In addition, in the
fiscal year ending January 31, 1999 ("fiscal 1998"), the Company plans to open a
second retail concept with the trade name "d.e.m.o."(sm) d.e.m.o. will offer a
broad assortment of popular and emerging cross-cultural brands that primarily
target young men aged 12 to 29, and, to a lesser extent, young women. The
merchandise overlap with Pacific Sunwear stores will be very limited. The
Company plans to open approximately 15 d.e.m.o. stores in fiscal 1998. The
initial store size will be approximately 2,000 square feet and the stores will
be located in regional malls.

         In fiscal 1998, the Company plans to open approximately 60 new stores,
including four d.e.m.o. stores, and to expand or relocate 15 existing stores to
the larger store format and to add footwear to approximately 15 of its existing
smaller stores. See "--Expansion."

MERCHANDISING

   Merchandise

         Pacific Sunwear offers a complete selection of shirts, shorts,
t-shirts, pants, overshirts, sweatshirts, outerwear, footwear and accessories in
order to satisfy the casual wardrobe needs of its teen customers. Within each
merchandise classification, the Company's stores offer a broad selection, with
the goal of being viewed by its customers as the dominant retailer in its niche.
Based on the Company's historical focus, a substantial portion of its
merchandise is targeted to a young male customer, although Pacific Sunwear's
customers have always included young female customers who choose to purchase
young men's apparel to wear themselves.

         Since mid-1995, Pacific Sunwear has implemented several strategic
merchandising initiatives which it believes have enhanced its ability to serve
the fashion needs of its customers. The Company significantly expanded its pants
assortment for young men to address the apparel needs of its customers in
general and the needs of customers in colder climate regions such as the
Northeast and Midwest in particular. In addition, the Company introduced the
categories of juniors and footwear on a test basis in a limited number of stores
beginning in the summer of 1995. The Company introduced juniors in an effort to
broaden its customer base, as well as to provide its existing female customers
with a wider array of apparel choices. Pacific Sunwear's junior merchandise
includes shirts, t-shirts, tanks, shorts, pants, sweatshirts, outerwear and
accessories. Footwear was introduced in response to customer demand and allowed
the Company to provide its customers with a complete wardrobe for the casual
teen lifestyle. The Company's footwear assortment includes non-athletic
sneakers, shoes, boots and


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sandals, with approximately 80 to 100 styles currently being offered. The
Company's goal with regard to its footwear selection is to offer a carefully
edited assortment of the most popular styles within its everyday casual niche.
At February 1, 1998, the Company carried juniors in 248 of its stores, of which
176 also offer footwear, and, at the end of fiscal 1998, expects to carry
juniors in approximately 303 of its stores, of which approximately 257 will also
offer footwear.

         The following table sets forth the Company's merchandise assortment by
classification as a percentage of net sales for the periods shown:

<TABLE>
<CAPTION>
                                                  FISCAL YEAR ENDED
                                             ----------------------------
                                             FEB. 1,    FEB. 2,    FEB. 4,
                                              1998       1997       1996
                                             ------     ------     ------
<S>                                          <C>        <C>        <C>
T-shirts, knit and woven tops                  27%         34%        44%
Pants                                          19          17         10
Juniors                                        16           8          *
Accessories (hats, sunglasses and other)       11          13         16
Bermuda shorts, other shorts and swimwear      10          12         14
Overshirts, sweatshirts, and outerwear         10          12         15
Footwear                                        7           4          1
                                              ---         ---        ---
Total                                         100%        100%       100%
                                              ===         ===        ===
</TABLE>

*  Less than one percent.

         Pacific Sunwear offers many of the brands best known by its target
customers, as well as other "cutting-edge" brands that reflect fashion trends
considered timely by the Company's customers. Key brands in young men's apparel
include Billabong, JNCO, Quiksilver, Rusty, Redsand, Stussy, O'Neill and Fresh
Jive. In the Company's juniors category, many of the brands offered are new
lines developed by the Company's existing young men's vendors, such as Roxy
(Quiksilver), JNCO, Rusty, Stussy, and 26 Red. The Company believes these lines
were developed in recognition of a trend towards more fitted and feminine styles
for young women. In addition, the Company's junior merchandise includes vendors
new to Pacific Sunwear, such as Paris Blues, L.E.I. and Generation X. Pacific
Sunwear believes that offering merchandise designed specifically for young women
broadens its customer base. The Company's footwear brands include Dr. Martens,
Airwalk, Vans, Simple, Teva and Skechers. In fiscal 1997, fiscal 1996 and the
fiscal year ended February 4, 1996 ("fiscal 1995") approximately 62%, 62% and
65%, respectively, of Pacific Sunwear's net sales consisted of brand name
merchandise. No vendor accounted for more than 9% of net sales during fiscal
1997.

         Pacific Sunwear also offers a wide selection of private brand
merchandise, most notably under the labels "Bullhead," "Breakdown," "Diversion,"
"Island Force" and "Tilt," each of which is targeted at a specific customer
segment. Pacific Sunwear believes that offering high-quality private brands
contributes to its status as a key fashion resource for the casual teen
lifestyle and differentiates the Company from its competitors. First introduced
in the late 1980s, the Company's most established private brands are those
designed for its young male customer. Beginning in late 1995, Pacific Sunwear
introduced private brand merchandise designed for juniors, corresponding by
label and brand positioning to the young men's lines. In addition, the Company
introduced new private brands targeted specifically to the junior customer. The
Company believes that the development of its brand image among its target
customers is enhanced by its private brands. In addition, the private brands
provide an opportunity to broaden its customer base by providing merchandise of
comparable quality to brand name merchandise at lower prices, to capitalize on
emerging fashion trends when branded merchandise is not available in sufficient
quantities and to provide the Company with a greater degree of control over the
flow of its merchandise. The Company's private brand merchandise is designed
internally by a 14-person product development staff in collaboration with the
Company's buying staff. The product development staff also oversees the
manufacture and delivery of the private brand merchandise, with manufacturing
done on a contract basis domestically, in Asia and Mexico. Private brand sales
accounted for 38%, 38% and 35% of the Company's net sales for fiscal 1997,
fiscal 1996 and fiscal 1995, respectively.

   Vendor and Contract Manufacturer Relationships

         Pacific Sunwear views its vendor relationships as important to its
success, and promotes frequent personal interaction with its vendors. The
Company believes many of its vendors view Pacific Sunwear as an important
distribution channel, not only as one of their largest customers, but also as an
enhancement to their own brand image in the eyes of the


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<PAGE>   5

teen customer. The Company's vendor base currently includes more than 140
vendors. The Company maintains strong and interactive relationships with its
vendors, many of whose philosophies of controlled distribution and merchandise
development are consistent with the Company's strategy. Pacific Sunwear
generally purchases merchandise from vendors who prefer distributing through
specialty retailers, small boutiques and, in some cases, better department
stores, rather than distributing their merchandise through mass market channels.

         To encourage the design and development of new merchandise, Pacific
Sunwear frequently shares ideas regarding fashion trends and merchandise
sell-through information with its vendors. Pacific Sunwear also suggests
merchandise design and fabrication with certain vendors. The Company encourages
the development of new vendor relationships by attending trade shows and through
its weekly "Open-house Wednesday" program during which new vendors are
encouraged to make presentations of their merchandise to the Company's buying
and product development staffs. A number of the Company's key vendors have been
introduced to the Company through this program.

         Pacific Sunwear has cultivated its private brand sources with a view
towards high-quality merchandise, production reliability and consistency of fit.
The Company sources its private brand merchandise both domestically and
internationally in order to benefit from the lower costs associated with foreign
manufacturing and the shorter lead times associated with domestic manufacturing.

         The Company's business is dependant upon its ability to offer current
season, brand name apparel at competitive prices and in adequate quantities.
Some of the Company's vendors have limited resources, production capacities and
operating histories and some have intentionally limited the distribution of
their merchandise. The inability or unwillingness on the part of key vendors to
expand their operations to keep pace with Pacific Sunwear's anticipated growth,
or the loss of one or more key vendors or private brand sources for any reason,
could have a material adverse effect on the Company's business.

   Purchasing, Allocation and Distribution

         The Company's merchandising department oversees the purchasing and
allocation of the Company's merchandise. The Company's buyers are responsible
for reviewing branded merchandise lines from new and existing vendors, selecting
branded and private brand merchandise styles in quantities, colors and sizes to
meet inventory levels established by management, and identifying emerging
fashion trends. The Company's planning and allocation department is responsible
for management of inventory levels by store and by class, allocation of
merchandise to stores and inventory replenishment based upon information
generated by the Company's merchandise management information systems. These
systems provide the planning department with current inventory levels at each
store and for the Company as a whole, as well as current selling history within
each store by merchandise classification and by style. See "--Information
Systems."

         The Company's corporate offices and distribution center are located in
Anaheim, California. The Company relocated its corporate offices in close
proximity to the previous location in the first quarter of fiscal 1998. The
Company intends to relocate its distribution center to the same building as its
new corporate offices late in the first quarter or early in the second quarter
of fiscal 1998. The Company believes its new distribution center will be capable
of servicing at least 700 stores. All merchandise is delivered by its vendors to
the main facility, where it is inspected, received into the Company's computer
system, allocated to stores, ticketed when necessary, and boxed for distribution
to the Company's stores. Each Pacific Sunwear store is typically shipped
merchandise three to five times a week, providing it with a steady flow of new
merchandise. The Company uses national and regional small package carriers to
ship merchandise to its stores and occasionally uses air freight during peak
selling periods


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<PAGE>   6

STORES

   Locations and Store Environment

         Pacific Sunwear has expanded from 11 stores in California at the end of
fiscal 1986 to 272 stores in 37 states. The Company's stores are primarily
concentrated in four regions: the Northeast (26%), the Midwest (22%), the
Southeast (21%), and California (18%). The table below sets forth the number of
stores located in each state as of the end of fiscal 1997:

<TABLE>
<CAPTION>
State                                                                  No. of Stores
------------------                                                     -------------
<S>                                                                    <C>
Alabama                                                                        1
Arizona                                                                        9
California                                                                    49
Colorado                                                                       1
Connecticut                                                                    8
Delaware                                                                       1
Florida                                                                       36
Georgia                                                                        7
Iowa                                                                           1
Illinois                                                                      12
Indiana                                                                        6
Kansas                                                                         1
Kentucky                                                                       2
Louisiana                                                                      2
Massachusetts                                                                  9
Maryland                                                                       6
Michigan                                                                      13
Minnesota                                                                      5
Nebraska                                                                       2
North Carolina                                                                 3
New Hampshire                                                                  3
New Jersey                                                                    15
New Mexico                                                                     1
Nevada                                                                         3
New York                                                                      13
Ohio                                                                          15
Oklahoma                                                                       1
Oregon                                                                         1
Pennsylvania                                                                  16
South Carolina                                                                 1
South Dakota                                                                   1
Tennessee                                                                      3
Texas                                                                         12
Vermont                                                                        4
Washington                                                                     5
Wisconsin                                                                      3
West Virginia                                                                  1
</TABLE>

     Pacific Sunwear stores are primarily located in regional shopping malls and
through fiscal 1995 averaged approximately 2,000 square feet. Based on the
initial success of juniors and footwear in fiscal 1995, the Company increased
its prototype store size to approximately 3,000 square feet. Seventy-eight of
the 82 stores opened since the beginning of fiscal 1996 were in the new larger
format. In addition, the Company opened a store in a non-mall street location in
Manhattan, New York in fiscal 1997. The Company also expanded the size of 15 and
7 existing stores to the larger format in fiscal 1997 and fiscal 1996,
respectively, in order to accommodate its new juniors and footwear categories,
bringing the current total number of stores in the larger format to 103.

     Pacific Sunwear stores are densely merchandised by classification, and are
designed to give a sense of "controlled clutter," with extensive wall displays
and a background of popular music. The stores use eye-catching graphics to
promote both brand name and private brand merchandise designed to appeal to
customers in the 12 to 22 age group. The store window displays are changed every
week and feature the latest fashions. The Company strives to give its teen
customers the same level of respect that is generally given to adult customers
at other retail stores, and to provide friendly and informed customer service
for parents. Responding to the expressed preferences of its customers, the
Company trains its employees to greet each customer, to give prompt and
courteous assistance when asked, and to thank customers after purchases are
made, but to refrain from giving extensive unsolicited advice to its shoppers.
Additionally, the stores provide a friendly and social atmosphere for teens,
while also providing a comfortable environment for parents and other adults. The
Company believes the combination of its attentive customer service and its
unique store environment is integral to its success.

   Expansion

     The Company plans to increase its current store base by opening
approximately 60 new stores in fiscal 1998. The Company also intends to expand
or relocate 15 existing smaller stores to the larger store format in fiscal
1998. The Company has identified regional malls in major metropolitan areas for
potential new store expansion, subject to financial return and site selection
criteria. The Company may open one or more stores in non-mall street locations
and one or more outlet stores in fiscal 1998. The Company opened three outlet
stores in fiscal 1997, bringing the total to four outlet stores at


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the end of fiscal 1997. In fiscal 1997, the Company opened 52 new stores in the
following states: Alabama (1), Arizona (1), California (1), Connecticut (4),
Florida (4), Georgia (3), Iowa (1), Illinois (1), Indiana (1), Kansas (1),
Kentucky (1), Louisiana (1), Maryland (1), Massachusetts (3), Michigan (3),
Nebraska (2), New Hampshire (1), New Jersey (3), New York (2), North Carolina
(1), Ohio (3), Pennsylvania (6), South Dakota (1), Tennessee (1), Texas (4) and
Wisconsin (1). In addition, in fiscal 1997 the Company acquired from Good
Vibrations, Inc., a Florida corporation, the store assets and inventory,
leasehold improvements and lease rights pertaining to 15 retail stores operated
by Good Vibrations in Florida. In the first quarter of fiscal 1998 the Company
converted 7 of the 15 Good Vibrations stores to Pacific Sunwear stores.

     The Company plans to open approximately 15 stores in fiscal 1998 under a
new retail concept with the trade name, "d.e.m.o." Of the 15 stores, the Company
plans to convert five underperforming, but appropriate, Pacific Sunwear stores
and convert the remaining six overlapping Good Vibrations stores to d.e.m.o. In
addition, of the approximately 60 stores the Company plans to open in fiscal
1998, 4 will operate as d.e.m.o., bringing the total number of stores operating
as d.e.m.o. to 15. Of the approximately 60 stores the Company expects to open in
fiscal 1998, Pacific Sunwear has executed 41 leases.

     The Company's site selection strategy is to locate its stores primarily in
regional malls serving markets which meet its demographic criteria, including
average household income and population density. The Company also considers mall
sales per square foot, the performance of other retail tenants serving teens and
young adult customers, anchor tenants and occupancy costs. The Company currently
seeks Pacific Sunwear store locations of approximately 3,000 square feet
primarily in high-traffic locations within a mall. As a result of the increased
average new store size beginning in fiscal 1996 and changes in store design, the
Company's average total cost per store, including leasehold improvements,
furniture and fixtures and landlord allowances, was approximately $241,000,
$193,000 and $156,500 in fiscal 1997, fiscal 1996 and fiscal 1995, respectively.
The average cost of expanding or relocating a store was approximately $280,000
and $239,000 in fiscal 1997 and fiscal 1996, respectively. The average total
cost to build new stores and relocate or expand 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's average initial
inventory for new stores was approximately $158,000, $130,000 and $88,000 in
fiscal 1997, fiscal 1996 and fiscal 1995, respectively. The Company's initial
inventory for new stores will vary in the future depending on various factors,
including store concept and square footage.

     The Company's continued growth depends on its ability to open and operate
stores on a profitable basis. The Company's ability to expand successfully will
be dependent upon a number of factors, including sufficient demand for the
Company's merchandise in its existing and new markets, and the ability of the
Company to locate and obtain favorable store sites, negotiate acceptable lease
terms, obtain adequate merchandise supply and hire and train qualified
management-level and other employees.

   Store Operations

     Store operations are managed by a Vice President of Stores, four regional
managers and 31 district managers, each of whom typically manages from eight to
10 stores. These managers and individual store managers participate in a bonus
program based on achieving predetermined levels of sales and, in the case of the
district managers, inventory shrinkage. Each store also has a co-manager, an
assistant manager and approximately four to 10 sales associates. Pacific Sunwear
stores are open during mall shopping hours. The Company has well-established
store operating policies and procedures and an extensive four week in-store
training program for new store managers and co-managers. The Company places
great emphasis on its loss prevention program in order to control inventory
shrinkage. This program includes the installation of electronic article
surveillance systems in all stores, education of store personnel on loss
prevention, and monitoring of returns, voids and employee sales. Since fiscal
1991, the Company has achieved an inventory shrinkage rate of less than 1.0% of
net sales in each fiscal year, which the Company believes is among the lowest
shrinkage rates among national specialty apparel retailers.

INFORMATION SYSTEMS

     Pacific Sunwear's merchandise, financial and store computer systems are
fully integrated and operate using IBM equipment. The systems have been in
operation since 1986, and the software, which is primarily provided by one of
the largest vendors to the retail trade, is regularly upgraded or modified as
needs arise or change. See-- "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000 Date Conversion." Pacific
Sunwear's information systems provide management, buyers and planners
comprehensive data which helps them identify emerging trends and manage
inventories. The systems include purchase order management, open order
reporting, open-to-buy,


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<PAGE>   8

receiving, distribution, merchandise allocation, basic stock replenishment,
inter-store transfers, inventory and price management. Weekly best/worst item
sales reports are used by management to enhance the timeliness and effectiveness
of purchasing and markdown decisions. Merchandise purchases are based on planned
sales and inventories and are frequently revised to reflect changes in demand
for a particular item or classification.

     All of the Company's stores have a point-of-sale system operating on IBM
in-store computer hardware. The system features bar-coded ticket scanning,
automatic price look-up, dial-out check and credit authorization, and automatic
nightly transmittal of data between the store and the Company's corporate
offices. Each of the regional and district managers use a laptop computer and
can instantly access Company-wide information, including actual and budgeted
sales by store, district and region; transaction information; and payroll data.
The Company believes its management information systems are adequate to support
its planned expansion at least through fiscal 1999.

COMPETITION

     The retail apparel, footwear and accessory business is highly competitive.
The Company competes on a national level with certain leading department stores
and national chains that offer the same or similar brands and styles of
merchandise. Pacific Sunwear also competes with a wide variety of regional and
local specialty stores. Many of the Company's competitors are larger and have
significantly greater resources than the Company. The Company believes the
principal competitive factors in its industry are fashion, merchandise
assortment, quality, price, store location and environment, and customer
service.

TRADEMARKS AND SERVICE MARKS

     Pacific Sunwear is the owner in the United States of the service marks
"Pacific Sunwear of California," "Good Vibrations," "Betty's Space," and the
trademarks "Pacific Sunwear," "Pac Sun," "Good Vibrations," "Bullhead,"
"Breakdown," "Diversion," "Island Force," "Hoax," "Violation," "Rare Brew,"
"d.e.m.o.," "Betty's Space," "Lulu," "Venus Girl Trap," "Distortion," and
"Tilt." The Company believes its rights in its marks are important to its
business and the Company intends to maintain its marks and the related
registrations.

EMPLOYEES

     At February 1, 1998, Pacific Sunwear had approximately 3,161 employees of
whom 103 were employed in general and administrative functions at the Company's
corporate headquarters, 35 were employed in distribution center functions, 33
were employed as regional or district managers and approximately 2,990 were
store employees, of whom approximately 2,119 were part-time. A significant
number of seasonal employees are hired during peak selling periods. None of the
Company's employees is represented by a labor union, and the Company believes
that its relationships with its employees are good.


                                        8

<PAGE>   9

                      EXECUTIVE OFFICERS OF THE REGISTRANT

     Set forth below are the names, ages, titles, and present and past positions
of persons serving as executive officers of the Company as of March 19, 1998.

<TABLE>
<CAPTION>
      NAME                AGE      POSITION
      ----                ---      --------
<S>                       <C>      <C>
Greg H. Weaver             44      Chairman of the Board and Chief Executive Officer
Timothy M. Harmon          46      President and Chief Merchandising Officer
Carl W. Womack             46      Senior Vice President, Chief Financial Officer and
                                     Secretary
Gary C.W. Hunt             47      Vice President of Product Development
Robert G. Entersz          52      Vice President of Merchandising, Juniors and Footwear
                                     and Outlets
Robert M. Sayre            42      Vice President of Merchandising, Young Men's and
                                     Accessories
Larry J. Fesler            47      Vice President of Stores
Shelley Smith              39      Vice President of Real Estate
Ronald L. Ehlers           46      Vice President of Information Systems
Frank J. Schools           40      Vice President of Finance
</TABLE>

         Greg H. Weaver has served as Chairman of the Board and Chief Executive
Officer since November 1997. He served as President and Chief Executive Officer
from October 1996 to November 1997 and as a director since February 1996. Mr.
Weaver served as President and Chief Operating Officer from February 1996 to
October 1996 and as Chief Operating Officer and Executive Vice President from
October 1994 to February 1996. He served as Executive Vice President of Store
Operations and Real Estate from September 1993 to October 1994. Mr. Weaver
served as Senior Vice President of Store Operations and Real Estate from
November 1990 to September 1993 and as Vice President of Stores from July 1987
to October 1990. Prior to joining the Company, he was employed for 13 years by
Jaeger Sportswear Ltd. in both operational and merchandising capacities for the
U.S. and Canadian stores.

         Timothy M. Harmon, who joined the Company in September 1991, has served
as President and Chief Merchandising Officer from November 1997. He served as
Executive Vice President of Merchandising from December 1996 to November 1997
and as Senior Vice President of Merchandising from October 1994 to November
1996. He served as Vice President of Merchandising from September 1991 to
September 1994. Prior to joining the Company, he served as Vice President and
General Manager of Wideworld/MTV Sportswear, a domestic apparel manufacturer,
from May 1990 until May 1991. From March 1986 until March 1990, Mr. Harmon
served as Vice President and General Manager, Women's Division, of Chauvin
International, an apparel manufacturer. Prior to that, he served as Divisional
Merchandise Manager for Millers Outpost, a young men's apparel retailer, where
he was employed for six years.

         Carl W. Womack, who joined the Company in May 1986, has served as
Senior Vice President and Chief Financial Officer since October 1994. He served
as Vice President of Finance and Chief Financial Officer from May 1986 to
September 1994. He has served as Secretary of the Company since November 1992.
Prior to joining the Company, Mr. Womack served in several positions in public
and private accounting. Mr. Womack is a certified public accountant.

         Gary C.W. Hunt joined the Company as Vice President of Product
Development in October 1993. Prior to joining the Company, he served as Vice
President of Merchandising with Pepe Clothing (USA), a jeanswear collection
company, from November 1990 to September 1993 and as Vice President of
Merchandising with Filippo Enterprises, Inc., a national jeanswear manufacturer,
from September 1988 to August 1990. Previously, he served as Vice President of
Merchandising for Jordache and for Zena Enterprises, Inc., each of which is a
jeanswear manufacturer.

         Robert G. Entersz joined the Company in November 1995 as Vice President
of Merchandising, Juniors, Footwear and Outlet stores. Prior to joining the
Company, he was President of Journey's, a specialty shoe retailer, from May 1993
to February 1995. Previously he was Executive Vice President at Broadway
Southwest, a department store, from January 1991 to April 1993. Prior to that,
he was Senior Vice President and General Merchandise Manager at Rich's, a
division of Federated Department Stores.


                                        9

<PAGE>   10

         Robert M. Sayre joined the Company in February of 1997 as Vice
President of Merchandising, Young Men's and Accessories. Prior to joining the
Company, he was General Merchandising Manager at J. Rigging's, a division of
Edison Brothers Stores, Inc., where he was employed from March 1991 to December
1996. Previously, he was Vice President of Menswear at Harold's & Old School
Clothing Company, a regional apparel retailer, from May 1990 to October 1990.
Prior to that, he was employed at Britches of Georgetown, a regional apparel
retailer, from May 1979 to April 1990.

         Larry J. Fesler has served as Vice President of Stores since joining
the Company in August 1993. Previously, he served for 11 years as Regional Sales
Manager with The Limited for its southwest store operations, where he was
employed for 15 years.

         Shelley Smith joined the Company in October 1994 as Vice President of
Real Estate. Previously, she was Director of Real Estate for Gymboree
Corporation, a children's apparel retailer, from October 1993 to September 1994.
From March 1989 to September 1993, she served as Director of Real Estate for
Natural Wonders, Inc., a nature and science gift retailer. Prior to that, she
was a Real Estate Representative for WNS, Inc., a specialty retailer with
several chains, where she was employed from August 1985 to February 1989.

         Ronald L. Ehlers joined the Company in June 1994 as Vice President of
Information Systems. Previously, he was Director of Management Information
Systems for Woman's World Shops, Inc., a women's specialty apparel retailer,
where he was employed for 16 years.

         Frank J. Schools, who joined the Company in July 1994, has served as
Vice President of Finance since November 1997. He served as the Company's
Controller from July 1994 to October 1997. Previously he was Assistant
Controller at Mac Frugal's Bargains. Close-outs, Inc., a general merchandise
close-out retailer, from October 1991 to July 1994. Prior to that, he served in
various accounting management positions at HomeClub, a warehouse home
improvement chain, from July 1986 to October 1991.

ITEM 2. PROPERTIES

         The Company's corporate offices and distribution center are located in
Anaheim, California. The Company relocated its corporate offices in close
proximity to the previous location in the first quarter of fiscal 1998. The
Company intends to relocate its distribution center to the same building as its
new corporate offices late in the first quarter or early in the second quarter
of fiscal 1998. The Company's new corporate offices and distribution facility
occupy an aggregate of approximately 176,000 square feet of a larger building,
under a lease expiring in February 2008. In addition, the Company has leased the
remaining portion of the same building of approximately 91,000 square feet under
a lease expiring in February 2008. The Company intends to sublease this portion
for five years.

         All of the Company's stores are leased with initial lease terms ranging
from approximately eight to ten years. Substantially all leases for the
Company's stores provide for percentage rent, in excess of specified minimums,
based upon net sales.

ITEM 3. LEGAL PROCEEDINGS

         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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of the fiscal year covered by this report.


                                       10

<PAGE>   11

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The common stock trades on the Nasdaq National Market under the symbol
"PSUN". The following table sets forth for the quarterly periods indicated the
high and low prices per share of the common stock, adjusted to give retroactive
effect to the three-for-two stock split effected in October 1997 and October
1996, as reported by Nasdaq:

<TABLE>
<CAPTION>
      FISCAL 1997      HIGH        LOW      FISCAL 1996      HIGH       LOW
      -----------     ------     ------     -----------     ------     ------
<S>                   <C>        <C>        <C>             <C>        <C>   
      1st Quarter     $24.17     $17.17     1st Quarter     $ 8.45     $ 3.11
      2nd Quarter      26.29      17.17     2nd Quarter      11.67       5.89
      3rd Quarter      30.50      19.33     3rd Quarter      16.67       8.33
      4th Quarter      34.50      24.00     4th Quarter      19.67      13.37
</TABLE>

         As of March 19, 1998, the number of holders of record of common stock
of the Company was approximately 130 and the number of beneficial holders of the
common stock was estimated to be in excess of 900.

         The Company has never declared or paid any dividends on its common
stock and does not intend to pay any dividends on its common stock in the
foreseeable future. In addition, the Company's current line of credit
arrangements prohibit the payment of cash dividends on its capital stock.

ITEM 6. SELECTED FINANCIAL DATA

         The balance sheet and income statement data as of February 1, 1998 and
February 2, 1997 and for each of the three fiscal years in the period ended
February 1, 1998 are derived from audited financial statements of the Company
included herein and should be read in conjunction with such financial
statements. Such data and the selected operating data below also should be read
in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this report. The balance sheet
and income statement data as of February 4, 1996, January 29, 1995 and January
30, 1994 and for each of the two fiscal years in the period ended January 29,
1995 are derived from audited consolidated financial statements of the Company,
which are not included herein.


                                       11

<PAGE>   12

<TABLE>
<CAPTION>
                                                                                    FISCAL YEAR ENDED (1)
                                                            -------------------------------------------------------------------
                                                             FEB. 1,       FEB. 2,       FEB. 4,        JAN. 29,      JAN 30,
                                                               1998          1997          1996           1995          1994
                                                            ----------    ----------    ----------     ----------    ----------
                                                                (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<S>                                                         <C>           <C>           <C>            <C>           <C>       
INCOME STATEMENT DATA:

Net sales                                                   $  227,130    $  155,261    $  112,921     $   85,316    $   54,928
Cost of goods sold (including buying,
distribution and occupancy costs)                              150,219       106,126        80,788         59,481        38,240
                                                            ----------    ----------    ----------     ----------    ----------
Gross margin                                                    76,911        49,135        32,133         25,835        16,688
Selling, general and administrative expenses                    51,093        37,126        27,996         20,033        12,787

                                                            ----------    ----------    ----------     ----------    ----------
Operating income                                                25,818        12,009         4,137          5,802         3,901
Net interest income                                              1,248           237            63            307           403
                                                            ----------    ----------    ----------     ----------    ----------
Income before income tax expense                                27,066        12,246         4,200          6,109         4,304
Income tax expense                                              10,707         4,834         1,576          2,258         1,593
                                                            ----------    ----------    ----------     ----------    ----------
Net income                                                  $   16,359    $    7,412    $    2,624     $    3,851    $    2,711
                                                            ==========    ==========    ==========     ==========    ==========
Net income per share, diluted(2)                            $     1.20    $     0.59    $     0.22     $     0.32    $     0.23
                                                            ==========    ==========    ==========     ==========    ==========
Weighted average shares outstanding, diluted(2)                 13,620        12,455        12,035         11,966        11,537
SELECTED OPERATING DATA:
Stores open at end of period                                       272           209           182            128            83(3)
Stores opened during period                                         52            30            55             46            24
Stores acquired during period                                       15            --            --             --            --
Stores closed during period                                          4             3             1              1             0
Capital expenditures (000's)                                $   21,020    $    8,126    $    9,761     $   11,474    $    7,756
Average net sales per gross square foot(4)(5)               $      408    $      377    $      340     $      378    $      388

Average net sales per store(4)(5)                           $  959,000    $  792,000    $  684,000     $  761,000    $  766,000
Square footage of gross store space at end of period           679,357       455,607       364,069        251,537       168,552

Comparable store net sales increase (decrease)(5)(6)              15.1%         15.7%         (2.2)%          2.3%         (2.1)%
BALANCE SHEET DATA:
Working capital                                             $   48,119    $   21,690    $   14,800     $   16,436    $   19,021
Total assets                                                   121,666        65,705        51,471         45,295        36,680
Long-term debt                                                      --            --           406            781            15
Shareholders' equity                                        $   96,563    $   47,546    $   38,309     $   35,420    $   31,165
</TABLE>

----------

(1)      Except for the fiscal year ended February 4, 1996, which included 53
         weeks, all fiscal years presented included 52 weeks.

(2)      Adjusted to give effect to a three-for-two stock split effected as of
         October 9, 1997 and a three-for-two stock split effected as of 
         October 9, 1996.

(3)      Three of the Company's stores were closed temporarily due to damage
         suffered in an earthquake in January 1994, centered in Northridge,
         California. Two of these stores, which reopened in fiscal 1994, are
         included in the number of stores open at January 30, 1994. The third
         store, located in Northridge, was reopened in fiscal 1995 and was
         treated as a new store opened during that period, but is not included
         in the number of stores open at January 30, 1994.

(4)      For purposes of calculating these amounts, the number of stores and the
         amount of square footage reflect the number of months during the period
         that new stores and closed stores were open.

(5)      These amounts have been adjusted to exclude the fifty-third week in the
         fiscal year ended February 4, 1996.

(6)      For the fiscal years ended on or before January 30, 1994, comparable
         stores were defined as those stores open at least one year as of the
         beginning of the applicable fiscal year. Effective January 31, 1994,
         the Company changed the way comparable store sales are calculated. For
         the fiscal year ended January 29, 1995 and thereafter, stores are
         deemed comparable stores on the first day of the first month following
         the one year anniversary of their opening. Commencing in fiscal 1996,
         in conjunction with the expansion or relocation of certain stores to
         the larger format, the Company excluded each such store's net sales
         results from the first day of the month of its expansion or relocation.
         Each of these stores is deemed a comparable store on the first day
         of the first month following the one-year anniversary of its expansion
         or relocation.


                                       12


<PAGE>   13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

         The following discussion should be read in conjunction with the
Financial Statements and Notes thereto of the Company included elsewhere in this
Form 10-K. Commencing in fiscal 1996, in conjunction with the expansion or
relocation of certain stores to the larger format, the Company excluded each
such store's net sales results from the first day of the month of its expansion
or relocation. Each of these stores is deemed a comparable store on the first
day of the first month following the one-year anniversary of its expansion or
relocation. The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Forward Looking
Statements" in this section.

RESULTS OF OPERATIONS

         The following table sets forth selected income statement data of the
Company expressed as a percentage of net sales for the fiscal years indicated:

<TABLE>
<CAPTION>
                                                         AS A PERCENTAGE OF NET SALES,
                                                                FISCAL YEAR ENDED
                                                        -------------------------------
                                                        FEB. 1,      FEB. 2,     FEB. 4,
                                                         1998         1997        1996
                                                        ------       ------      ------
<S>                                                     <C>         <C>          <C>   
Net sales                                                100.0%      100.0 %      100.0%
Cost of goods sold (including buying, distribution
 and occupancy costs)                                     66.1         68.4        71.5
                                                        ------       ------      ------
Gross margin                                              33.9         31.6        28.5
Selling, general and administrative expenses              22.5         23.9        24.8
                                                        ------       ------      ------
Operating income                                          11.4          7.7         3.7
Interest income, net                                       0.5          0.2          --
                                                        ------       ------      ------
Income before income tax expense                          11.9          7.9         3.7
Income tax expense                                         4.7          3.1         1.4
                                                        ------       ------      ------
Net income                                                 7.2%       4.8 %         2.3%
                                                        ======       ======      ======
Number of stores open at end of period                     272          209         182
</TABLE>


                                       13

<PAGE>   14

FISCAL 1997 COMPARED TO FISCAL 1996

Net Sales

         Net sales increased to $227.1 million in fiscal 1997 from $155.3
million in fiscal 1996, an increase of $71.8 million, or 46.2%. Of this $71.8
million increase, $21.0 million was attributable to a 15.1% increase in
comparable store net sales in fiscal 1997 compared to fiscal 1996, $25.7 million
was attributable to net sales generated by 52 new stores opened in fiscal 1997,
$15.5 million was attributable to net sales generated by stores opened prior to
fiscal 1997 and not yet included in the comparable store base, $6.2 million was
attributable to the expansion or relocation of 15 existing stores not yet
included in the comparable store base and $5.4 million was attributable to the
15 Good Vibrations stores acquired in fiscal 1997. Partially offsetting this
increase was a $2.0 million decrease in net sales attributable to the closing of
seven stores, three of which were closed in the fourth quarter of fiscal 1996
and four of which were closed during fiscal 1997. The increase in comparable
store net sales was primarily attributable to the addition of footwear and
juniors to certain of the Company's stores and, to a lesser extent, increases in
sales of young men's merchandise. In fiscal 1997, the Company significantly
expanded the number of stores offering footwear and juniors. Sales of this
merchandise represented approximately 23% of net sales in fiscal 1997 as
compared to approximately 12% of net sales in fiscal 1996. As a result of a
change in the mix of products sold, including the addition of footwear, an
increase in the sales of pants as a percentage of net sales and a decrease in
T-shirt sales as a percentage of net sales, the average retail price per unit
sold increased approximately 5% in fiscal 1997 compared to fiscal 1996.

Gross Margin

         Gross margin, after buying, distribution and occupancy costs, increased
to $76.9 million in fiscal 1997 from $49.1 million in fiscal 1996, an increase
of $27.8 million, or 56.6%. As a percentage of net sales, gross margin increased
to 33.9% from 31.6%. Of this 2.3% increase in gross margin as a percentage of
net sales, 1.4% was due to a decrease in occupancy costs as a percentage of net
sales which was primarily related to an increase in comparable store net sales.
In addition, merchandise margins increased .9% as a percentage of net sales in
fiscal 1997 compared to fiscal 1996, primarily due to an increase in initial
markup in both branded and private brand merchandise.

Selling, General and Administrative Expenses

         Selling, general and administrative expenses increased to $51.1 million
in fiscal 1997 from $37.1 million in fiscal 1996, an increase of $14.0 million,
or 37.7%. As a percentage of net sales, these expenses decreased to 22.5% from
23.9%. Of this 1.4% decrease as a percentage of net sales, .8% was attributable
to a decrease in store selling expenses as a percentage of net sales primarily
as a result of an increase in comparable store net sales, .5% was due to a
decrease in general and administrative expenses as a percentage of net sales as
a result of leveraging these expenses over higher net sales and .1% was due to a
reduction in store expansion and relocation and closing expenses as a percentage
of net sales.

Net Interest Income

         Net interest income was $1.2 million in fiscal 1997 compared to $.2
million in fiscal 1996, an increase of $1.0 million. This was a result of higher
cash, cash equivalents and short-term investments in fiscal 1997 compared to
fiscal 1996, primarily as a result of the net proceeds received from the
issuance of common stock in fiscal 1997.

Income Tax Expense

         Income tax expense was $10.7 million in fiscal 1997 compared to $4.8
million in fiscal 1996. The effective income tax rate in fiscal 1997 was 39.6%
compared to 39.5% in fiscal 1996.


                                       14

<PAGE>   15

FISCAL 1996 COMPARED TO FISCAL 1995

Net Sales

         Net sales increased to $155.3 million in fiscal 1996 from $112.9
million in fiscal 1995, an increase of $42.4 million, or 37.6%. Of this $42.4
million increase, $17.1 million was attributable to a 15.7% increase in
comparable store net sales in fiscal 1996 compared to the comparable fifty-two
week period ended February 4, 1996, $14.4 million was attributable to net sales
generated by 30 new stores opened in fiscal 1996, $11.1 million was attributable
to net sales generated by stores opened prior to fiscal 1996 and not yet
included in the comparable store base, and $.9 million was attributable to the
expansion or relocation of seven existing stores not yet included in the
comparable store base. Partially offsetting this increase was a $.9 million
decrease in net sales attributable to a one-week shift in the fiscal calendar,
which was caused by a change in the measurement period used for period-to-period
comparisons (fiscal 1996 was a 52-week period and fiscal 1995 was a 53-week
period) and a $.2 million decrease in net sales attributable to the closing of
three stores. The increase in comparable store net sales was primarily
attributable to the addition of footwear and juniors to certain of the Company's
stores and to a lesser extent, increases in sales of young men's merchandise. In
fiscal 1996, the Company significantly expanded the number of stores offering
footwear and juniors. Sales of this merchandise represented approximately 12% of
net sales in fiscal 1996 as compared to approximately 1% of net sales in fiscal
1995. As a result of a change in the mix of products sold, including the
addition of footwear, an increase in the sales of pants as a percentage of net
sales and a decrease in T-shirt sales as a percentage of net sales, the average
retail price per unit sold increased approximately 10% in fiscal 1996 compared
to fiscal 1995.

Gross Margin

         Gross margin, after buying, distribution and occupancy costs, increased
to $49.1 million in fiscal 1996 from $32.1 million in fiscal 1995, an increase
of $17.0 million, or 53.0%. As a percentage of net sales, gross margin increased
to 31.6% from 28.5%. Of this 3.1% increase in gross margin as a percentage of
net sales, 2.0% was due to a decrease in occupancy costs as a percentage of net
sales, which was primarily related to an increase in comparable store net sales.
In addition, merchandise margins increased 1.1% as a percentage of net sales in
fiscal 1996 compared to fiscal 1995, primarily due to an increase in sales of
higher margin private brand merchandise as a percentage of net sales and
improved sourcing of private brand merchandise, as well as a slight decrease in
the markdown rate.

Selling, General and Administrative Expenses

         Selling, general and administrative expenses increased to $37.1 million
in fiscal 1996 from $28.0 million in fiscal 1995, an increase of $9.1 million,
or 32.5%. As a percentage of net sales, these expenses decreased to 23.9% from
24.8%. Of this .9% decrease as a percentage of net sales, .9% was due to a
decrease in general and administrative expenses as a percentage of net sales as
a result of leveraging these expenses over higher net sales and .7% was
attributable to a decrease in store selling expenses as a percentage of net
sales primarily as a result of an increase in comparable store net sales.
Partially offsetting this decrease was an increase of .7% due to increased store
expansion and relocation and closing expenses as a percentage of net sales as a
result of increased write-offs of store leasehold improvements and furniture and
fixtures.

Income Tax Expense

         Income tax expense was $4.8 million in fiscal 1996 compared to $1.6
million in fiscal 1995. The effective income tax rate in fiscal 1996 was 39.5%
compared to 37.5% in fiscal 1995. The higher effective income tax rate in fiscal
1996 was primarily due to an increase in taxable interest income in fiscal 1996.
Interest income in fiscal 1995 was mostly non-taxable.


                                       15

<PAGE>   16

LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its operations from internally generated cash
flow, short-term borrowings and equity financing. The Company's primary capital
requirements have been for the construction of new stores, remodeling,
relocation or expansion of selected existing stores and financing of
inventories. In fiscal 1997, the Company used funds for the acquisition of the
Good Vibrations stores and the relocation of its corporate offices and
distribution facility.

         Net cash provided by operating activities for fiscal 1997, fiscal 1996
and fiscal 1995 was $18.2 million, $13.5 million and $4.7 million, respectively.
Working capital at the end of fiscal 1997, fiscal 1996 and fiscal 1995 was $48.1
million, $21.7 million and $14.8 million, respectively. Inventories at February
1, 1998 were $32.1 million compared to $19.8 million at February 2, 1997, an
increase of $12.3 million. The Company's average store inventories vary
throughout the year and increase in advance of the peak selling periods of
spring break, back-to-school and Christmas. The increase in inventories at
February 1, 1998 was primarily related to opening 52 new stores, the acquisition
of 15 Good Vibrations stores, relocating 15 stores with 50% larger average
square footage than existing stores, as well as the addition of juniors and
footwear to certain of the Company's existing stores. The increase in accounts
payable of $2.2 million at February 1, 1998 compared to February 2, 1997 was
primarily attributable to the increase in inventories at February 1, 1998.

         Net cash used in investing activities in fiscal 1997, fiscal 1996 and
fiscal 1995 was $44.2 million, $8.1 million and $2.3 million, respectively.
$27.6 million was attributable to the purchase of short-term investments in
fiscal 1997, offset by $14.8 million in short-term investment maturities in
fiscal 1997. Net cash used for investment in property and equipment in fiscal
1997, fiscal 1996 and fiscal 1995 was $21.0 million, $8.1 million and $9.8
million, respectively. These expenditures related primarily to the construction
of new stores, and to a lesser extent, remodeling, expansion and relocation
costs, as well as corporate relocation expenditures in fiscal 1997. In fiscal
1997, $11.9 million was used for 52 new stores opened, $2.0 million was used for
20 stores to be opened in fiscal 1998 and $4.1 million was used for the
relocation and expansion of 15 existing stores. In addition, $3.0 million was
used for: remodeling costs, store expansions/relocations planned for fiscal
1998, computer hardware and software costs, leasehold improvements, furniture
and fixtures and material handling equipment for the Company's new corporate
offices and distribution center. In fiscal 1997, the Company purchased the store
assets, leasehold improvements and lease rights for 15 Good Vibrations stores
for approximately $9.2 million in cash and purchased inventories for
approximately $1.2 million in cash at the closing. Of the $10.4 million purchase
price, $10.2 million was paid in fiscal 1997 and the balance of $.2 million was
paid in March 1998.

         Net cash provided by (used in) financing activities in fiscal 1997,
fiscal 1996 and fiscal 1995 was $30.8 million, $.3 million and $(.1) million,
respectively. In fiscal 1997 the Company received net proceeds of $30.1 million
from issuance of common stock. In fiscal 1997 and fiscal 1996, the Company
received proceeds of $.7 million and $1.1 million, respectively, from the
exercise of stock options.

         The Company has a credit facility with a bank, which expires in August
1999. The credit facility provides for a $15.0 million line of credit, which can
be used for cash advances, commercial letters of credit and shipside bonds.
Interest on cash advances under the line of credit facility is payable monthly
at the bank's prime rate (8.50% at February 1, 1998). At February 1, 1998, the
Company had $2.8 million in letters of credit outstanding and no cash advances
outstanding. The loan agreement subjects the Company to various restrictive
covenants, including maintenance of certain financial ratios and prohibits
payment of cash dividends on common stock. At February 1, 1998, the Company was
in compliance with all of its covenants.

         The Company has minimum annual rental commitments under existing store
leases and the lease for its corporate offices and distribution center of
approximately $22.7 million in fiscal 1998 and $24.2 million in fiscal 1999 and
similar amounts thereafter.

         In fiscal 1997, the Company's average cost to build a new store,
including leasehold improvements, furniture and fixtures and landlord
allowances, was approximately $241,000. In fiscal 1997, the average cost of
expanding or relocating stores was approximately $280,000. The average total
cost to build new stores and relocate or expand 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's average initial
inventory for new stores opened in fiscal 1997 was approximately $158,000. The
Company's initial inventory for new stores will vary in the future depending on
various factors, including store concept and square footage.


                                       16

<PAGE>   17

         During fiscal 1998, the Company plans to open approximately 60 stores
and expand or relocate 15 existing stores. The Company estimates that capital
expenditures in fiscal 1998 will total approximately $28 million.

         The Company reviews the operating performance of its stores on an
ongoing basis to determine which stores, if any, to expand, relocate or close.
The Company closed four stores in fiscal 1997 and anticipates closing three to
five stores in fiscal 1998.

         Management believes that the Company's working capital, bank loan
agreement and cash flow from operating activities will be sufficient to meet the
Company's operating and capital expenditure requirements through the end of
fiscal 1998.

NEW ACCOUNTING PRONOUNCEMENTS

         The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share," beginning with the Company's fourth quarter
of fiscal 1997. All prior period earnings per common share data have been
restated to conform to the provisions of this statement. Basic earnings per
common share is computed using the weighted average number of shares
outstanding. Diluted earnings per common share is computed using the weighted
average number of shares outstanding adjusted for the incremental shares
attributed to outstanding options to purchase common stock.

         In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income," which must be adopted by the
Company beginning with fiscal 1998 and will result in an additional statement
that reports comprehensive income.

INFLATION

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

SEASONALITY AND QUARTERLY RESULTS

         The Company's business is seasonal by nature, with the Christmas and
back-to-school periods historically accounting for the largest percentage of
annual net sales. The Company's first quarter historically accounts for the
smallest percentage of annual net sales. In fiscal 1997 and fiscal 1996,
excluding sales generated by new and relocated/expanded stores, the Christmas
and back-to-school periods together accounted for approximately 35% and 36%,
respectively, of the Company's annual net sales and a higher percentage of the
Company's operating income. In fiscal 1997, excluding net sales generated by new
and relocated/expanded stores, approximately 43% of the Company's annual net
sales occurred in the first half of the fiscal year and 57% in the second half.
The Company's quarterly results of operations may also fluctuate significantly
as a result of a variety of factors, including the timing of store openings; the
amount of revenue contributed by new stores; the timing and level of markdowns;
the timing of store closings, expansions and relocations; competitive factors;
and general economic conditions.

YEAR 2000 DATE CONVERSION

         The Company has conducted a review of its computer systems regarding
the year 2000 date conversion and has developed a plan and time line to address
the year 2000 conversion on a timely basis. The Company expects to complete the
year 2000 conversion for all its computer systems by the end of fiscal 1998. The
costs of this project are not expected to be material to the Company's financial
results.

         None of the Company's vendors accounted for more than 9% of the
Company's net sales for fiscal 1997. The Company does not expect any material
adverse impact on its business operations by the failure of any of its vendors
to complete any required changes related to the year 2000 date conversion.


                                       17

<PAGE>   18

SAFE HARBOR STATEMENT

         The preceding "Business" and "Management Discussion and Analysis of
Financial Condition and Results of Operations" sections contain certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"), and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to the future
economic performance of the Company. The forward-looking statements and
associated risks set forth herein may include or relate to: (i) the planned
opening of approximately 60 stores and expansion or relocation of 15 stores in
fiscal 1998; (ii) the planned total of 15 stores operating as d.e.m.o.; (iii)
statements regarding increased sales per store and sales growth as a consequence
of adding new stores; (iv) the timely availability of branded and private brand
merchandise in sufficient quantities to satisfy customer demand; (v) the growth
in store operating and general and administrative expenses as a result of store
expansion; (vi) the relocation of the Company's distribution center in the
second quarter of fiscal 1998 and the sublease of the additional space in the
Company's new corporate office; (vii) sufficiency of the Company's working
capital, bank line of credit and cash flow from operating activities for the
Company's future operating and capital requirements and (viii) the Company's
plans to complete its year 2000 conversion on a timely basis and the ability of
the Company's vendors to resolve the year 2000 issues.

         The forward-looking statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements, including, without limitation, the following: (i)
the ability of the Company to gauge the fashion tastes of its customers and
provide merchandise that satisfies customer demand; (ii) the level of demand for
the merchandise offered by the Company; (iii) the ability of the Company to
locate and obtain favorable store sites, negotiate acceptable lease terms, and
hire and train employees; (iv) management's ability to manage the Company's
planned expansion; (v) the availability of merchandise from the Company's
vendors and private brand sources; (vi) the effect of economic conditions; (vii)
the effect of severe weather or natural disasters; (viii) the effect of
competitive pressures from other retailers, including those in the recently
introduced juniors and footwear categories, as well as cross-cultural brands
offered by d.e.m.o.; and (ix) foreign trade relationships, including any
disruptions of trade with the countries in which the Company's private brand
contract manufacturers are located. Results actually achieved thus may differ
materially from expected results in these statements. In addition, as disclosed
above, the business and operations of the Company are subject to substantial
risks which increase the uncertainty inherent in such forward-looking
statements. Any of the other factors disclosed above could cause the Company's
net income or growth in net income to differ materially from prior results.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Information with respect to this item is set forth in "Index to
Financial Statements."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
        FINANCIAL DISCLOSURE.

         None.


                                       18

<PAGE>   19

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Information with respect to this item is incorporated by reference from
the Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.

ITEM 11. EXECUTIVE COMPENSATION.

         Information with respect to this item is incorporated by reference from
the Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Information with respect to this item is incorporated by reference from
the Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information with respect to this item is incorporated by reference from
the Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)      1.       The financial statements listed in the "Index to Financial
                  Statements" at page F-1 are filed as a part of this report.

         2.       Financial statement schedules are omitted because they are not
                  applicable or the required information is shown in the
                  financial statements or notes thereto.

         3.       Exhibits included or incorporated herein: See Index to
                  Exhibits.

(b)               Reports on Form 8-K.

                  There were no reports on Form 8-K filed during the last
                  quarter of the fiscal year covered by this report.


                                       19

<PAGE>   20

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
March 26, 1998 on its behalf by the undersigned, thereunto duly authorized.

                                     PACIFIC SUNWEAR OF CALIFORNIA, INC.

                                     By:   /s/  GREG H. WEAVER
                                           -------------------------------------
                                           Greg H. Weaver
                                           Chairman of the Board and
                                           Chief Executive Officer

         Each person whose signature appears below hereby authorizes Greg H.
Weaver and Carl W. Womack or either of them, as attorneys-in-fact to sign on his
behalf, individually, and in each capacity stated below and to file all
amendments and/or supplements to the Annual Report on Form 10-K.

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
               SIGNATURE                                      TITLE                                   DATE
               ---------                                      -----                                   ----
<S>                                         <C>                                                  <C>
         /s/ GREG H. WEAVER                 Chairman of the Board                                April 9, 1998
----------------------------------------    and Chief Executive Officer

         /s/ CARL W. WOMACK                 Sr. Vice President and Chief Financial               April 9, 1998
----------------------------------------    Officer (Principal Financial and Accounting
                                            Officer)

         /s/ JULIUS JENSEN III              Director                                             April 9, 1998
---------------------------------------

         /s/ PEARSON C. CUMMIN III          Director                                             April 9, 1998
---------------------------------------

         /s/ PETER L. HARRIS                Director                                             April 9, 1998
---------------------------------------

         /s/ JAMES B. MCCURRY               Director                                             April 9, 1998
---------------------------------------

         /s/ SALLY FRAME KASAKS             Director                                             April 9, 1998
---------------------------------------
</TABLE>


                                       20

<PAGE>   21
                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                          INDEX TO FINANCIAL STATEMENTS


YEARS ENDED FEBRUARY 1, 1998, FEBRUARY 2, 1997 AND FEBRUARY 4, 1996:

FINANCIAL STATEMENTS:


<TABLE>
<S>                                                                                                            <C>
  Independent auditors' report                                                                                  F-2

  Balance sheets as of February 1, 1998 and February 2, 1997                                                    F-3

  Statements of operations for each of the three fiscal years in the period ended February 1, 1998              F-4

  Statements of shareholders' equity for each of three fiscal years in the period ended February 1, 1998        F-5

  Statements of cash flows for each of the three fiscal years in the period ended February 1, 1998              F-6

  Notes to financial statements                                                                                 F-7
</TABLE>


                                       F-1

<PAGE>   22
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Pacific Sunwear of California, Inc.
Anaheim, California

We have audited the accompanying balance sheets of Pacific Sunwear of
California, Inc. as of February 1, 1998 and February 2, 1997, and the related
statements of operations, shareholders' equity and cash flows for each of the
three fiscal years in the period ended February 1, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Pacific Sunwear of California, Inc. as of
February 1, 1998 and February 2, 1997 and the results of its operations and its
cash flows for each of the three fiscal years in the period ended February 1,
1998 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Costa Mesa, California
March 12, 1998


                                       F-2

<PAGE>   23

                       PACIFIC SUNWEAR OF CALIFORNIA, INC.
                                 BALANCE SHEETS
                                     ASSETS


<TABLE>
<CAPTION>
                                                                      FEBRUARY 1,        FEBRUARY 2,
CURRENT ASSETS:                                                          1998               1997
                                                                    --------------     --------------
<S>                                                                 <C>                <C>           
  Cash and cash equivalents (Note 1)                                $   14,781,566     $    9,962,626
  Short-term investments (Note 3)                                       12,742,666                 --
  Accounts receivable                                                    1,009,839            583,811
  Merchandise inventories                                               32,122,341         19,760,412
  Prepaid expenses, includes $2,832,739 and $1,910,681
      of prepaid rent, respectively                                      4,364,537          3,216,160
  Deferred taxes (Note 6)                                                1,916,935          1,358,733
                                                                    --------------     --------------
     Total current assets                                               66,937,884         34,881,742
PROPERTY AND EQUIPMENT (NOTE 1):
  Leasehold improvements                                                36,327,054         25,210,439
  Furniture, fixtures and equipment                                     29,416,189         20,244,954
                                                                    --------------     --------------
                                                                        65,743,243         45,455,393
  Less accumulated depreciation and amortization                       (20,342,749)       (15,952,174)
                                                                    --------------     --------------
     Net property and equipment                                         45,400,494         29,503,219
OTHER ASSETS:
  Goodwill (Note 1), net of accumulated amortization of
      $440,297 and $292,165, respectively                                7,923,446            796,578
  Deposits and other assets                                              1,404,234            523,018
                                                                    --------------     --------------
     Total other assets                                                  9,327,680          1,319,596
                                                                    --------------     --------------
              Total assets                                          $  121,666,058     $   65,704,557
                                                                    ==============     ==============

                            LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                  $    8,916,915     $    6,686,561
  Accrued liabilities (Note 9)                                           8,834,161          6,035,689
  Income taxes payable                                                   1,068,276            469,258
                                                                    --------------     --------------
     Total current liabilities                                          18,819,352         13,191,508
DEFERRED COMPENSATION (Note 8)                                           1,114,374            371,057
DEFERRED RENT                                                            3,746,246          3,139,487
DEFERRED TAXES (Note 6)                                                  1,423,029          1,456,463
COMMITMENTS AND CONTINGENCIES (Note 7)

SHAREHOLDERS' EQUITY (Notes 5 and 8):
Preferred stock, par value $.01; authorized, 5,000,000;
  none issued and outstanding Common stock, par value $.01;
  authorized 33,750,000 shares; issued and
  outstanding, 13,744,891 and 12,138,161 shares, respectively              137,449            121,382
Additional paid-in capital                                              63,339,810         30,697,321
Retained earnings                                                       33,085,798         16,727,339
                                                                    --------------     --------------
     Total shareholders' equity                                         96,563,057         47,546,042
                                                                    --------------     --------------
                   Total liabilities and shareholders' equity       $  121,666,058     $   65,704,557
                                                                    ==============     ==============
</TABLE>


                        See notes to financial statements

                                       F-3

<PAGE>   24

                       PACIFIC SUNWEAR OF CALIFORNIA, INC.
                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                             FISCAL YEAR ENDED
                                                                --------------------------------------------
                                                                FEBRUARY 1,     FEBRUARY 2,     FEBRUARY 4,
                                                                   1998            1997            1996
                                                                ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>         
Net sales                                                       $227,129,848    $155,261,558    $112,921,005
Cost of goods sold, including buying,
  distribution and occupancy costs                               150,219,301     106,126,306      80,787,679
                                                                ------------    ------------    ------------
Gross margin                                                      76,910,547      49,135,252      32,133,326
Selling, general and administrative expenses                      51,093,091      37,126,318      27,996,316
                                                                ------------    ------------    ------------
Operating income                                                  25,817,456      12,008,934       4,137,010
Interest income                                                    1,248,003         236,889          62,681
                                                                ------------    ------------    ------------
Income before income tax expense                                  27,065,459      12,245,823       4,199,691
Income tax expense (Note 6)                                       10,707,000       4,834,000       1,576,000
                                                                ------------    ------------    ------------
Net income                                                      $ 16,358,459    $  7,411,823    $  2,623,691
                                                                ============    ============    ============
Net income per share, basic (Note 1)                            $       1.25    $       0.62    $       0.23
                                                                ============    ============    ============
Net income per share, diluted (Note 1)                          $       1.20    $       0.59    $       0.22
                                                                ============    ============    ============
Weighted average shares outstanding, basic (Note 1)               13,133,068      12,001,781      11,657,538
                                                                ============    ============    ============
Weighted average shares outstanding, diluted (Note 1)             13,619,726      12,454,617      12,034,511
                                                                ============    ============    ============
</TABLE>


                        See notes to financial statements

                                       F-4

<PAGE>   25

                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                       STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                          COMMON          COMMON       ADDITIONAL
                                                          STOCK           STOCK          PAID-IN         RETAINED
                                                          SHARES          AMOUNT         CAPITAL         EARNINGS          TOTAL
                                                       ------------    ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>             <C>         
BALANCE, JANUARY 29, 1995                                11,577,398    $    115,774    $ 28,611,988    $  6,691,825    $ 35,419,587
  Exercise of stock options and restricted stock
    grant (Note 8)                                          347,988           3,480         160,965              --         164,445
  Tax benefits related to exercise of stock
    options (Note 8)                                             --              --         101,664              --         101,664
  Net income                                                     --              --              --       2,623,691       2,623,691
                                                       ------------    ------------    ------------    ------------    ------------
BALANCE, FEBRUARY 4, 1996                                11,925,386         119,254      28,874,617       9,315,516      38,309,387
  Exercise of stock options and restricted stock
    grant (Note 8)                                          390,983           3,910       1,074,175              --       1,078,085
  Cancellation of restricted stock
    surrendered (Note 8)                                   (178,136)         (1,781)            593              --          (1,188)
  Cancellation of fractional shares due to                       --
    3-for-2 stock split (Note 1)                                (72)             (1)         (1,692)                         (1,693)
  Tax benefits related to exercise of stock
    options (Note 8)                                             --              --         749,628              --         749,628
  Net income                                                     --              --              --       7,411,823       7,411,823
                                                       ------------    ------------    ------------    ------------    ------------
BALANCE, FEBRUARY 2, 1997                                12,138,161         121,382      30,697,321      16,727,339      47,546,042
  Net proceeds from issuance of common
    stock                                                 1,307,250          13,073      30,072,000              --      30,085,073
  Exercise of stock options and restricted stock
    grant (Note 8)                                          299,533           2,995         685,487              --         688,482
  Cancellation of fractional shares due to
    3-for-2 stock split (Note 1)                                (53)             (1)         (2,186)             --          (2,187)
  Tax benefits related to exercise of stock
    options (Note 8)                                             --              --       1,887,188              --       1,887,188
  Net income                                                     --              --              --      16,358,459      16,358,459
                                                       ------------    ------------    ------------    ------------    ------------
BALANCE, FEBRUARY 1, 1998                                13,744,891    $    137,449    $ 63,339,810    $ 33,085,798    $ 96,563,057
                                                       ============    ============    ============    ============    ============
</TABLE>


                        See notes to financial statements

                                       F-5

<PAGE>   26
                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                  FISCAL YEAR ENDED
                                                                     ----------------------------------------------
                                                                     FEBRUARY 1,      FEBRUARY 2,      FEBRUARY 4,
                                                                         1998             1997             1996
                                                                     ------------     ------------     ------------
<S>                                                                  <C>              <C>              <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                         $ 16,358,459     $  7,411,823     $  2,623,691
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation and amortization                                       6,891,981        5,273,060        4,304,693
    Change in operating assets and liabilities, net
    of effect of acquisition:
     Accounts receivable                                                 (426,028)        (260,512)         (50,559)
     Merchandise inventories                                          (11,087,295)      (4,351,568)      (4,292,654)
     Prepaid expenses                                                  (1,133,377)        (764,990)        (610,925)
     Deposits and other assets                                           (652,050)        (158,279)        (316,211)
     Accounts payable                                                   2,230,354        1,418,065          625,717
     Accrued liabilities                                                2,798,472        3,288,275          952,836
     Income taxes and deferred taxes                                    1,894,569        1,022,326          598,787
     Deferred rent                                                        606,759          415,106          866,596
     Deferred compensation                                                743,317          185,709           (8,781)
                                                                     ------------     ------------     ------------
       Net cash provided by operating activities                       18,225,161       13,479,015        4,693,190
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of short-term investments                                 (27,590,049)              --               --
  Short-term investment maturities                                     14,847,383               --        7,501,282
  Acquisition, net of cash acquired                                   (10,414,634)              --               --
  Investment in property and equipment                                (21,020,289)      (8,126,185)      (9,760,700)
                                                                     ------------     ------------     ------------
       Net cash used in investing activities                          (44,177,589)      (8,126,185)      (2,259,418)
CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments under loan agreement and
    capital lease obligations                                                  --         (781,250)        (382,274)
  Cash paid in lieu of fractional shares due to
    3-for-2 stock split                                                    (2,187)          (1,693)              --
  Proceeds from exercise of stock options                                 688,482        1,076,897          266,109
  Net proceeds from issuance of common stock                           30,085,073               --               --
                                                                     ------------     ------------     ------------
        Net cash provided by (used in) financing activities            30,771,368          293,954         (116,165)
NET INCREASE IN CASH AND CASH EQUIVALENTS:                              4,818,940        5,646,784        2,317,607
CASH AND CASH EQUIVALENTS, BEGINNING OF FISCAL YEAR                     9,962,626        4,315,842        1,998,235
                                                                     ------------     ------------     ------------
CASH AND CASH EQUIVALENTS, END OF FISCAL YEAR                        $ 14,781,566     $  9,962,626     $  4,315,842
                                                                     ============     ============     ============
   SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
      Cash paid during the period for:
         Interest                                                    $      2,381     $     11,752     $    145,698
         Income taxes                                                $  8,812,430     $  3,811,674     $    875,549
</TABLE>

--------------------------------------------------------------------------------

Noncash transaction: During the fiscal years ended February 1, 1998, February 2,
1997 and February 4, 1996, the Company recorded an increase to additional
paid-in capital of $1,887,188, $749,628 and $101,664, respectively, related to
tax benefits associated with the exercise of nonqualified stock options.


                        See notes to financial statements

                                       F-6

<PAGE>   27

                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                          NOTES TO FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
                     FEBRUARY 2, 1997 AND FEBRUARY 4, 1996

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nature of Business --Pacific Sunwear of California, Inc. (the "Company")
operates a nationwide mall-based retail chain of stores specializing in casual
apparel, footwear and related accessories catering to teenagers and young
adults.

     The Company's fiscal year is a 52- or 53-week period ending near January
31. Fiscal 1997 was a 52-week period ended February 1, 1998. Fiscal 1996 was a
52-week period ended February 2, 1997. Fiscal 1995 was a 53-week period ended
February 4, 1996.

     Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported expenses during the reported period.
Actual results could differ from these estimates.

     Fair Value of Financial Instruments -- Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial
Instruments" requires management to disclose the estimated fair value of certain
assets and liabilities defined by SFAS No. 107 as financial instruments.
Financial instruments are generally defined by SFAS No. 107 as cash, evidence of
ownership interest in an entity, or a contractual obligation that both conveys
to one entity a right to receive cash or other financial instruments from
another entity and imposes on the other entity the obligation to deliver cash or
other financial instruments to the first entity. At February 1, 1998, management
believes that the carrying amounts of cash, receivables and payables approximate
fair value because of the short maturity of these financial instruments.

     Merchandise Inventories -- Merchandise inventories are stated at the lower
of cost (first-in, first-out method) or market.

     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 life of the lease (generally 10
years). Depreciation on furniture, fixtures and equipment is computed on the
straight-line method over five years.

     Intangible Assets -- The intangible assets consist of the excess of cost
over net assets acquired (goodwill), of $1.1 million, which arose from the
acquisition of four stores in 1986 and is being amortized on a straight-line
method over 40 years. In addition, in fiscal 1997 the Company acquired 15 retail
stores (see Note 2) which resulted in the recording of $7.3 million of goodwill
and $.3 million for non-competition agreements, which are being amortized over
25 years and 5 years, respectively.

     The Company evaluates the recoverability of its goodwill at each balance
sheet date. The recoverability of goodwill is determined by comparing the
carrying value of the goodwill to the estimated operating income of the related
entity on an undiscounted cash flow basis. Any impairment is recorded at the
date of determination.

     Income Taxes -- The Company accounts for income taxes under the provisions
of SFAS No.109, "Accounting for Income Taxes." Deferred taxes on income result
from temporary differences between the reporting of income for financial
statements and tax reporting purposes.

     Deferred Rent -- The Company's policy is to average any defined rental
escalations over the term of the related lease in order to provide level
recognition of rent expense.

     Statements of Cash Flows -- For purposes of the statements of cash flows,
the Company considers all highly-liquid debt instruments, if any, purchased with
a maturity of three months or less to be cash equivalents.

     Stock Split -- On October 9, 1997, the Company effected a three-for-two
stock split. Shareholders' equity has been restated to give retroactive
recognition to the stock split in prior periods by reclassifying the par value
($40,461) of the additional shares arising from the split from additional
paid-in capital to common stock.


                                       F-7

<PAGE>   28

     Net Income per Share - The Company adopted SFAS No. 128, "Earnings Per
Share," beginning with the Company's fourth quarter of fiscal 1997. All prior
period earnings per common share data have been restated to conform to the
provisions of this statement. Basic earnings per common share is computed using
the weighted average number of shares outstanding. Diluted earnings per common
share is computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding options to
purchase common stock. Incremental shares of 486,658, 452,836 and 376,973 in
fiscal 1997, fiscal 1996 and fiscal 1995, respectively, were used in the
calculation of diluted earnings per common share. Options to purchase 89,816,
40,515 and 89,945 shares of common stock in fiscal 1997, fiscal 1996 and fiscal
1995, 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.

     Stock-Based Compensation -- The Company accounts for stock-based
compensation in accordance with Accounting Principles Board ("APB") Opinion No.
25. See Note 8 for disclosure of the proforma effect on net income and earnings
per share.

     Comprehensive Income -- In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which must
be adopted by the Company beginning in fiscal 1998 and will result in an
additional statement that reports comprehensive income.

     Merchandise Risk -- The Company's success is largely dependent upon its
ability to gauge the fashion tastes of its customers and provide merchandise
that satisfies customer demand. Any inability to provide appropriate merchandise
in sufficient quantities in a timely manner could have a material adverse effect
on the Company's business, operating results and financial condition.

2.   ACQUISITION

     In September 1997, the Company acquired from Good Vibrations, Inc. the
store assets, including inventory, leasehold improvements and lease rights
pertaining to 15 retail stores. The purchase price aggregated $10.4 million and
resulted in the Company recording goodwill of $7.3 million. The pro forma
results of operations, computed as if these stores had been acquired as of
February 3, 1997, would not be materially different from actual reported results
of operations.

3.   SHORT-TERM INVESTMENTS

     The carrying value and market value of the Company's fixed maturity
short-term investments are as follows:


<TABLE>
<CAPTION>
                                                                    Gross               Gross
                                              Carrying            Unrealized          Unrealized             Market
                                               Value                Gains               Losses               Value
                                           --------------      ---------------      ---------------      --------------
<S>                                        <C>                  <C>                  <C>                 <C>           
February 1, 1998
(State and Municipal Obligations)          $   12,742,666       $      315,324       $            0      $   13,057,990
</TABLE>

4.   CREDIT FACILITY

     The Company has a credit facility with a bank, which expires in August
1999. The credit facility provides for a $15.0 million line of credit, which can
be used for cash advances, commercial letters of credit and shipside bonds.
Interest on cash advances under the line of credit facility is payable monthly
at the bank's prime rate (8.50 % at February 1, 1998). At February 1, 1998, the
Company had $2.8 million in letters of credit outstanding and no cash advances
outstanding. The loan agreement subjects the Company to various restrictive
covenants, including maintenance of certain financial ratios and prohibits
payment of cash dividends on common stock. At February 1, 1998 the Company was
in compliance with all of its covenants.


                                       F-8

<PAGE>   29

                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
                     FEBRUARY 2, 1997 AND FEBRUARY 4, 1996

5.   COMMON STOCK

     Sale of Common Stock - During fiscal 1997 the Company issued an aggregate
of 1,307,250 shares of its common stock in a follow-on stock offering. The sale
of shares yielded net proceeds to the Company, after deducting expenses
associated with the offering, of $30.1 million.

     Stock Splits - During each of the fiscal years ended February 2, 1997 and
February 1, 1998 the Company effected a three-for-two stock split. Shareholders'
equity has been restated to give retroactive recognition to the stock splits in
prior periods by reclassifying the par value of the additional shares arising
from the split from additional paid-in capital to common stock. Additionally,
all share and per share amounts have been restated to give effect to the stock
splits.

6.   INCOME TAXES

     The components of the income tax expense are as follows:

<TABLE>
<CAPTION>
                                                                FISCAL YEAR ENDED
                                                  ----------------------------------------------
                                                   FEBRUARY 1,      FEBRUARY 2,     FEBRUARY 4,
                                                      1998             1997             1996
                                                  ------------     ------------     ------------
        <S>                                       <C>              <C>              <C>         
        Current income taxes:
        Federal                                   $  9,082,864     $  3,602,278     $  1,323,047
        State                                        2,215,772          959,621          374,676
                                                  ------------     ------------     ------------
                                                    11,298,636        4,561,899        1,697,723
        Deferred income taxes:
        Federal                                       (586,544)         272,196          (97,707)
        State                                           (5,092)             (95)         (24,016)
                                                  ------------     ------------     ------------
                                                      (591,636)         272,101         (121,723)
                                                  ------------     ------------     ------------
                                                  $ 10,707,000     $  4,834,000     $  1,576,000
                                                  ============     ============     ============
</TABLE>

     A reconciliation of the income tax expense to the amount of income tax
     expense that would result from applying the federal statutory rate to
     income before income taxes is as follows:

<TABLE>
<CAPTION>
                                                                                      FISCAL YEAR ENDED
                                                                        ----------------------------------------------
                                                                        FEBRUARY 1,      FEBRUARY 2,      FEBRUARY 4,
                                                                            1998             1997             1996
                                                                        ------------     ------------     ------------
        <S>                                                             <C>              <C>              <C>
        Provision for income taxes at statutory rate                    $  9,473,000     $  4,286,000     $  1,470,000
        State income taxes, net of federal income tax benefit              1,437,000          624,000          228,000
        Tax-exempt interest income                                                --               --          (50,000)
        Other                                                               (203,000)         (76,000)         (72,000)
                                                                        ------------     ------------     ------------
                                                                        $ 10,707,000     $  4,834,000     $  1,576,000
                                                                        ============     ============     ============
</TABLE>


                                       F-9

<PAGE>   30

     At February 1, 1998 and February 2, 1997, the Company's current net
deferred tax asset was $1,916,935 and $1,358,733, respectively, and long-term
net deferred tax liability was $1,423,029 and $1,456,463, respectively. The
major components of the Company's net deferred tax asset of $493,906 and net
deferred tax liability of $97,730 at February 1, 1998 and February 2, 1997,
respectively, are as follows:

<TABLE>
<CAPTION>
                                                                         FEBRUARY 1,     FEBRUARY 2,
                                                                            1998             1997
                                                                        ------------     ------------
        <S>                                                             <C>              <C>
        Depreciation                                                    $ (3,623,347)    $ (2,991,412)
        Alternative minimum tax carryforwards                                 49,615          147,902
        Deferred rent                                                      1,616,131        1,311,678
        Reserve for store expansion/relocation and closing costs             931,834          595,079
        State income taxes                                                   196,813          113,932
        Inventory cost capitalization                                        589,329          354,998
        Deferred compensation                                                480,741          155,028
        Other                                                                252,790          215,065
                                                                        ------------     ------------
                                                                        $    493,906     $    (97,730)
                                                                        ============     ============
</TABLE>

     At February 1, 1998, the Company had, for state franchise tax purposes,
alternative minimum tax credit carryforwards of approximately $50,000, which
have no expiration date.

7.   COMMITMENTS AND CONTINGENCIES

     Operating Leases -- The Company leases its retail stores, corporate offices
and distribution facilities and certain equipment under operating lease
agreements expiring at various dates through 2012. Substantially all of the
leases require the Company to pay maintenance, insurance, property taxes and
percentage rent ranging from 5% to 7% based on sales volumes over certain
minimum sales levels.

   Minimum future annual rental commitments under noncancelable leases are as
follows:


<TABLE>
 <S>                                                        <C>
 Fiscal year ending:
        January 31. 1999                                    $ 22,736,491
        January 30, 2000                                      24,199,143
        January 28, 2001                                      23,783,125
        February 3, 2002                                      23,262,491
        February 2, 2003                                      22,948,886
        Thereafter                                            91,892,166
                                                            ------------
                                                            $208,822,302
                                                            ============
</TABLE>

     Rental expense, including common area maintenance, was $27,533,077,
$20,783,388 and $17,010,342 of which $377,895, $280,002 and $118,507 was paid as
percentage rent based on sales volume for the fiscal years ended February 1,
1998, February 2, 1997 and February 4, 1996, respectively.

     Letters of Credit - The Company was contingently liable for $2.8 million in
open letters of credit with foreign suppliers at February 1, 1998.

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


                                      F-10

<PAGE>   31
                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
                     FEBRUARY 2, 1997 AND FEBRUARY 4, 1996


8.   STOCK OPTION AND RETIREMENT PLANS

     Under the Company's stock option plans, incentive and nonqualified options
have been granted to employees, directors and consultants to purchase common
stock at prices equal to the fair value of the Company's shares at the grant
dates.

     At February 1, 1998, outstanding incentive and nonqualified options had
exercise prices ranging from $.26 to $32.56 per share, with an average exercise
price of $12.84, and generally begin vesting one year after the grant date. On
the initial vesting date, 25% of the options vest and, thereafter, options
generally continue to vest at 2.08% each calendar month. The options generally
expire ten years from the date of grant or 90 days after employment or services
are terminated.

     At February 1, 1998, incentive and nonqualified options to purchase
1,416,900 shares were outstanding. At February 1, 1998, 115,816 shares were
available for future grant under the Company's stock option plans. During the
years ended February 1, 1998 and February 2, 1997, the Company recognized tax
benefits of $1,887,188 and $749,628, respectively, resulting from the exercise
of certain nonqualified stock options. Stock option (incentive and nonqualified)
activity for the three years ended February 1, 1998 was as follows:

<TABLE>
<CAPTION>
                                                             STOCK OPTIONS
                                               --------------------------------------------
                                               NUMBER OF SHARES       PRICE RANGE PER SHARE
                                               ----------------       ---------------------
        <S>                                    <C>                    <C>
        Balance at January 29, 1995               1,034,747              $ 0.26 to $ 7.73
          Options Granted                           149,625                2.89 to   6.11
          Options Canceled                          (32,910)               1.03 to   6.67
          Options Exercised                        (145,488)               0.26 to   3.55
                                                 ----------
        Balance at February 4, 1996               1,005,974                0.26 to   7.73
          Options Granted                           735,750                3.39 to  15.59
          Options Canceled                         (131,408)               0.81 to   6.67
          Options Exercised                        (390,983)               0.26 to   7.45
                                                 ----------
        Balance at February 2, 1997               1,219,333                0.26 to  15.59
          Options Granted                           478,498               17.50 to  32.56
          Options Canceled                          (65,764)               2.89 to  30.42
          Options Exercised                        (215,167)               0.26 to  13.92
                                                 ----------
        Balance at February 1, 1998               1,416,900              $ 0.26 to $32.56
                                                 ==========
</TABLE>

     The following is a summary of the weighted average exercise prices for
activity during the year ended February 1, 1998:


                                      F-11

<PAGE>   32

<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                                                     AVERAGE
                                                    SHARES        EXERCISE PRICE
                                                  ----------      --------------
<S>                                               <C>             <C>     
        Beginning Outstanding                      1,219,333         $   6.23
                Options Granted                      478,498            25.12
                Options Exercised                   (215,167)            3.20
                Options Canceled                     (65,764)           11.16
                                                  ----------                 
        Ending Outstanding                         1,416,900         $  12.84
                                                  ==========                 
        Exercisable as of February 1, 1998           474,724         $   5.56
</TABLE>

     Additional information regarding options outstanding as of February 1, 1998
is as follows:

<TABLE>
<CAPTION>
                                   OPTIONS OUTSTANDING                                OPTIONS EXERCISABLE
                         ----------------------------------------     ----------------------------------------------------
                              NUMBER                WEIGHTED                                 NUMBER
                           OUTSTANDING              AVERAGE              WEIGHTED         EXERCISABLE          WEIGHTED
      RANGE OF                AS OF                REMAINING             AVERAGE             AS OF              AVERAGE
  EXERCISE PRICES          FEB. 1, 1998         CONTRACTUAL LIFE      EXERCISE PRICE      FEB. 1, 1998      EXERCISE PRICE
--------------------     ----------------     -------------------     --------------      ------------      --------------
<S>                      <C>                  <C>                     <C>                 <C>               <C>   
    $0.26 - $3.67             158,212                 5.95                $ 2.86              132,334            $ 2.75
     3.78 -  3.89             379,536                 7.91                  3.88              190,942              3.88
     4.00 - 13.92             376,652                 8.21                 10.67              139,776              9.71
    14.17 - 25.83             180,750                 9.16                 20.26               11,672             15.45
    26.38 - 32.56             321,750                 9.74                 26.67                   --                --
                            ---------                 ----                ------              -------            ------
   $ 0.26 -$32.56           1,416,900                 8.35                $12.84              474,724            $ 5.56
</TABLE>

     In January 1996, the Company's previous Chief Executive Officer resigned
effective March 1996, and surrendered 178,136 unvested shares of restricted
stock to the Company which were subsequently canceled.

     During the year ended February 1, 1998, the Company granted a restricted
stock award of 84,375 shares with a purchase price of $.01 per share to its
Chief Executive Officer. The 84,375 share award begins vesting on March 31,
1999, with 25% of the shares vested, and thereafter will vest at 25% on each of
March 31, 2000, 2001 and 2002, if, at the time of the vesting date, certain
cumulative earnings per share growth targets have been satisfied. During the
year ended February 1, 1998, the Company recorded $160,293 of deferred
compensation expense associated with this award.

     The Company accounts for its stock-based awards using the intrinsic value
method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements.

     SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No.
123, the fair value of stock-based awards to employees is calculated through the
use of option-pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes
option-pricing model with the following weighted average assumptions: expected
life, 5 years following vesting; stock volatility, 60.6% in fiscal 1997, 80.3%
in fiscal 1996 and 92.2% in fiscal 1995; risk-free interest rates, 6.1% in
fiscal 1997, 6.6% in fiscal 1996 and 6.2% in fiscal 1995; and no dividends
during the expected term. The Company's calculations are based on a
multiple-option valuation approach and forfeitures are recognized as they occur.
If the computed fair values of the fiscal 1997, fiscal 1996 and fiscal 1995
awards had been amortized to expense over the vesting period of the awards, pro
forma net income and earnings per share would have been reduced to the pro forma
amounts indicated below:


                                      F-12

<PAGE>   33
                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998,
                     FEBRUARY 2, 1997 AND FEBRUARY 4, 1996

<TABLE>
<CAPTION>
                                                               FISCAL           FISCAL         FISCAL
                                                                1997             1996          1995
                                                             ------------     ----------     ----------
<S>                                                          <C>              <C>            <C>       
     Net Income
                                        As reported          $16,358,459      $7,411,823     $2,632,691
                                        Pro forma            $15,320,101      $7,056,742     $2,592,916
     Net Income Per Share, Basic
                                        As reported             $1.25            $0.62          $0.23
                                        Pro forma               $1.17            $0.59          $0.22
     Net Income Per Share, Diluted
                                        As reported             $1.20            $0.59          $0.22
                                        Pro forma               $1.14            $0.58          $0.22
</TABLE>

     The impact of outstanding nonvested stock options granted prior to fiscal
1995 has been excluded from the pro forma calculation; accordingly, the fiscal
1995, fiscal 1996 and fiscal 1997 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
stock options granted after fiscal 1994.

     In fiscal 1997, the Company established, subject to shareholder approval,
the Pacific Sunwear of California, Inc. Employee Stock Purchase Plan (the
"ESPP"), which provides a method for employees of the Company whereby they may
voluntarily purchase common stock at a favorable price and upon favorable terms.
The ESPP covers substantially all employees, except officers, who have three
months of service with the Company. The ESPP is intended to constitute an
"employee stock purchase plan" within the meaning of Section 423 of the Internal
Revenue Code of 1986, as amended, and therefore the Company does not recognize
compensation expense related to the ESPP. The ESPP will be submitted to a vote
of the Company shareholders at the 1998 annual shareholders' meeting.

     In fiscal 1995, the Company established the Pacific Sunwear of California,
Inc. Executive Deferred Compensation Plan (the "Executive Plan"). The Executive
Plan covers officers of the Company, and is funded by participant contributions
and periodic discretionary contributions from the Company. For each of the three
fiscal years in the period ended February 1, 1998, the Company made
contributions of $58,854, $34,900 and $13,545, respectively, to the Executive
Plan.

     In fiscal 1992, the Company established the Pacific Sunwear of California,
Inc. Employee Savings Plan ("the 401(k) Plan"). The 401(k) Plan is a defined
contribution plan (401(k)) covering substantially all employees who have reached
age 21 and have one year of service with the Company. The 401(k) Plan is funded
by employee contributions and periodic discretionary contributions from the
Company, which are subject to approval by the Company's Board of Directors. For
each of the three fiscal years in the period ended February 1, 1998, the Company
made contributions, net of forfeitures, of $64,400, $66,750 and $59,100,
respectively, to the 401(k) Plan.

9.   ACCRUED LIABILITIES

     Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                      FEBRUARY 1,     FEBRUARY 2,
                                                                         1998            1997
                                                                      ----------      ----------
        <S>                                                           <C>             <C>
        Accrued compensation and benefits                             $4,185,159      $2,939,217
        Reserve for store expansion/relocation and closing costs         954,823       1,424,315
        Accrued costs related to corporate relocation                  1,205,202              --
        Sales tax payable                                                568,931         401,181
        Gift certificates and store merchandise credits                  778,390         439,994
        Other                                                          1,141,656         830,982
                                                                      ----------      ----------
                                                                      $8,834,161      $6,035,689
                                                                      ==========      ==========
</TABLE>


                                      F-13

<PAGE>   34

10.  QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                   FIRST            SECOND          THIRD         FOURTH
                                                                   QUARTER          QUARTER        QUARTER        QUARTER
                                                                 ------------     -----------    -----------    -----------
<S>                                                              <C>              <C>            <C>            <C>        
        Fiscal year ended February 1, 1998:
        Net sales                                                $ 38,933,000     $48,326,000    $65,312,000    $74,559,000
        Gross margin                                               11,707,000      15,849,000     23,671,000     25,683,000
        Operating income                                            1,765,000       4,470,000      9,134,000     10,449,000
        Net income                                                  1,124,000       2,880,000      5,804,000      6,551,000
                                                                 ------------     -----------    -----------    -----------
        Net income per share, basic                              $        .09     $       .22    $       .42    $       .48
        Net income per share, diluted                            $        .09     $       .21    $       .41    $       .46
        Weighted average shares outstanding, basic (Note 1)        12,177,375      12,972,081     13,659,989     13,722,531
        Weighted average shares outstanding, diluted (Note 1)      12,664,187      13,440,845     14,156,319     14,226,446

        Fiscal year ended February 2, 1997:
        Net sales                                                $ 27,641,000     $34,567,000    $43,247,000    $49,807,000
        Gross margin                                                7,278,000      10,818,000     14,287,000     16,752,000
        Operating income                                             (298,000)      2,426,000      4,450,000      5,431,000
        Net income                                                   (170,000)      1,485,000      2,739,000      3,357,000
                                                                 ------------     -----------    -----------    -----------
        Net income  per share, basic                             $      (0.01)    $      0.12    $      0.23    $      0.28
        Net income per share, diluted                            $      (0.01)    $      0.12    $      0.22    $      0.27
        Weighted average shares outstanding, basic (Note 1)        11,835,866      11,973,785     12,073,862     12,123,534
        Weighted average shares outstanding, diluted (Note 1)      11,835,866      12,428,253     12,513,122     12,592,232
</TABLE>

Earnings per basic and diluted shares outstanding are computed independently for
each of the quarters presented and therefore may not sum to the totals for the
year.


                                      F-14

<PAGE>   35

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit 
 Number                            Description of Exhibit
--------      ------------------------------------------------------------------
<S>           <C>
(1) 3.1       Third Amended and Restated Articles of Incorporation of the
              Company

(5) 3.2       Certificate of Amendment of Third Amended and Restated Articles of
              Incorporation of the Company

    3.2       Certificate of Amendment of Third Amended and Restated Articles of
              Incorporation of the Company

(1) 3.4       Second Amended and Restated Bylaws of the Company

(1) 4.1       Specimen stock certificate

(1)10.1       Form of Indemnity Agreement between the Company and each of its
              executive officers and directors

(1)10.2       1986-87 Stock Option Plan dated as of December 11, 1986, as
              amended (the "Option Plan") 

(1)10.3       Form of Incentive Stock Option under the Option Plan

(1)10.4       Form of Nonstatutory Stock Option under the Option Plan

(3)10.5       Second Amended and Restated 1992 Stock Award Plan dated June 8,
              1994 (the "Award Plan") 

(2)10.6       Form of Nonqualified Stock Option Agreement under the Award Plan

(2)10.7       Form of Incentive Stock Option Agreement under the Award Plan

(2)10.8       Form of Restricted Stock Award Agreement under the Award Plan

(1)10.9       Registration Rights Agreement dated November 25, 1986, as amended,
              by and among the Company and certain holders of the Preferred
              Stock of the Company

   10.11      Standard Industrial Lease - Net, dated September 30, 1997 between
              the Company and Bank of America National Trust and Savings
              Association, as amended, and Standard Industrial Lease - Net,
              dated January 12, 1998 between the Company and The Realty
              Associates Fund IV, L.P., a Delaware limited partnership, as
              amended for the Company's corporate headquarters and distribution
              center located in Anaheim, California

(4)10.12      Pacific Sunwear of California, Inc. Executive Deferred
              Compensation Plan and Trust Agreement

(6)10.13      Pacific Sunwear of California, Inc. Employee Stock Purchase Plan

(7)10.14      Employment Agreement, dated November 3, 1997, by and between
              Pacific Sunwear of California, Inc. and Greg H. Weaver

   10.15      Severance Agreements, dated October 27, 1997 and November 6, 1996,
              by and between Pacific Sunwear of California, Inc. and Timothy M.
              Harmon and Carl W. Womack, respectively

(8)10.16      Asset Purchase Agreement dated August 4, 1997 by and among the
              Company, Good Vibrations Inc. and certain other parties

   23.1       Consent of Deloitte & Touche LLP

   27         Financial Data Schedule
</TABLE>


                                      F-15

<PAGE>   36


-------------------

(1)         Incorporated by reference from the Company's Form S-1 Registration
            Statement (No. 33-57860) as filed with the Securities and Exchange
            Commission on February 4, 1993.

(2)         Incorporated by reference from the Company's Annual Report on Form
            10-K as filed with the Securities and Exchange Commission on 
            April 8, 1994.

(3)         Incorporated by reference from the Company's Form S-8 Registration
            Statement as filed with the Securities and Exchange Commission on
            September 28, 1995.

(4)         Incorporated by reference from the Company's Annual Report on Form
            10-K as filed with the Securities and Exchange Commission on 
            March 17, 1995.

(5)         Incorporated by reference from the Company's Annual Report on Form
            10-K as filed with the Securities and Exchange Commission on 
            April 4, 1997.

(6)         Incorporated by reference from the Company's Registration Statement
            on Form S-8 as filed with the Securities and Exchange Commission on
            November 20, 1997.

(7)         Incorporated by reference from the Company's Annual Report on Form
            10-Q as filed with the Securities and Exchange Commission on
            December 16, 1997.

(8)         Incorporated by reference from the Company's Annual Report on Form
            8-K as Filed with the Securities and Exchange Commission on
            September 16, 1997.

                                      F-16