UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

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(Mark One)


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

For the quarterly period ended September 30, 2006

OR



For the transition period from ________to _________

Commission file number 0-23669

Shoe Pavilion, Inc.(Exact name of Registrant as specified in its Charter)



|Delaware                                                       | 94-3289691                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

13245 Riverside Drive, Suite 450
Sherman Oaks, California      91423

(818) 907-9975

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 reports), and (2) has been subject to such filing
requirements for the past 90 days.  YES    x NO     ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer      ̈ Accelerated filer     ̈ Non-accelerated filer    x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (Check one):
YES     ̈ NO    x Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date.The number of shares of the registrant's Common Stock outstanding as of November 8, 2006 was 9,526,452.

Note:PDF provided as a courtesy
SHOE PAVILION, INC.
                                Table of Contents to Form 10-Q


PART I.   FINANCIAL INFORMATION

Page No.Item 1.  Financial Statements (Unaudited):Condensed Consolidated Balance Sheets

3Condensed Consolidated Statements of Operations

4Condensed Consolidated Statements of Cash Flows

5Notes to Condensed Consolidated Financial Statements

6Item 2. -  Management's Discussion and Analysis of Financial
                      Condition and Results of Operations

12Item 3. -  Quantitative and Qualitative Disclosures About Market Risk

16Item 4.  -  Controls and Procedures

16PART II.  OTHER INFORMATIONItem 1.  Legal Proceedings

18Item 1A.   Risk Factors

18Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

18Item 3.   Defaults Upon Senior Securities

19Item 4.   Submission of Matters to a Vote of Security Holders

19Item 5.   Other Information

19Item 6.  Exhibits

19Signatures

202
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited).



Shoe Pavilion, Inc.Condensed Consolidated Balance Sheets(Unaudited)(In thousands, except share data)September 30,


December 31,2006


2005ASSETSCURRENT ASSETS:Cash

$
572

$
494Receivables


2,590


1,091Inventories


67,680


41,097Deferred income taxes


1,003


1,003Prepaid expenses


3,497


161Total current assets


75,342


43,846Property and equipment, net


11,471


5,948Deferred income taxes and other assets


2,377


2,411TOTAL

$
89,190

$
52,205LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Accounts payable

$
22,120

$
7,481Accrued expenses


3,810


5,184Borrowings under credit agreement


14,134


7,803Current portion of capitalized lease obligations


58


57Total current liabilities


40,122


20,525Deferred rent


8,810


5,300Long-term portion of capitalized lease obligations


168


209Total liabilities


49,100


26,034Commitments and contingenciesSTOCKHOLDERS' EQUITY:Preferred stock- $.001 par value; 1,000,000 shares authorized;0 (2006) and 3,000 (2005) shares issued and outstanding


-


-Common stock- $.001 par value; 15,000,000 shares authorized;9,522,788 (2006) and 6,927,771 (2005) shares issuedand outstanding


9


7Additional paid-in capital


29,972


16,950Retained earnings


10,109


9,214Total stockholders' equity


40,090


26,171TOTAL

$
89,190

$
52,205See notes to condensed consolidated financial statements.

3
Shoe Pavilion, Inc.Condensed Consolidated Statements of Operations(Unaudited)(In thousands, except per share data)Thirteen weeks ended


Thirty-nine weeks endedSeptember 30,


October 1,


September 30,


October 1,2006


2005


2006


2005Net sales

$
31,778

$
24,820

$
90,470

$
73,048Cost of sales and related occupancy expenses


21,749


16,432


60,217


47,821Gross profit


10,029


8,388


30,253


25,227Selling, general and administrative expenses


10,376


7,762


28,284


22,539(Loss) income from operations


(347)


626


1,969


2,688Interest expense


(187)


(145)


(468)


(381)Other income


-


1


-


1(Loss) income before income taxes


(534)


482


1,501


2,308Income tax benefit (expense)


216


(189)


(606)


(905)Net (loss) income

$
(318)

$
293

$
895

$
1,403(Loss) earnings per share:Basic


(0.03)


0.04


0.10


0.21Diluted


(0.03)


0.04


0.10


0.20Weighted average shares outstanding:Basic


9,512


6,807


8,865


6,804Diluted


9,512


7,079


8,948


7,080See notes to condensed consolidated financial statements.

4
Shoe Pavilion, Inc.Condensed Consolidated Statements of Cash Flows(Unaudited)(In thousands)Thirty-nine weeks endedSeptember 30,


October 1,2006


2005Operating activities:Net income

$
895

$
1,403Adjustments to reconcile net income to net cashprovided by operating activitiesDepreciation and amortization


1,382


1,124Share-based compensation


193


-Cancellation of registration rights agreement


(70)


-Effect of changes in:Inventories


(26,583)


(6,262)Accounts receivable


(1,498)


(729)Prepaid expenses and other current assets


(3,336)


(1,185)Accounts payable


13,944


2,675Accrued expenses and deferred rent


2,264


1,438Net cash used in operating activities


(12,809)


(1,536)Investing activities:Purchase of property and equipment


(6,267)


(2,425)Other assets


34


-Net cash used in investing activities


(6,233)


(2,425)Financing activities:Proceeds from public offering of stock, net


12,769


-Borrowings on credit facility, net


6,331


3,961Exercise of stock options


24


28Tax benefit from exercise of stock options


36


-Principal payments on capital leases


(40)


(93)Net cash provided by financing activities


19,120


3,896Net increase (decrease) in cash


78


(65)Cash, beginning of period


494


1,179Cash, end of period

$
572

$
1,114Supplemental disclosures of cash flow information:Cash paid for interest

$
362

$
276Cash paid for income taxes


2,352


1,352Supplemental disclosure of non-cash investing andfinancing activities:Property and equipment in accrued expenses and accounts payable

$
637

$
773Capital lease obligations incurred


-


301Issuance of warrants in connection with stock offering


377


-See notes to condensed consolidated financial statements.

5
Shoe Pavilion, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

1.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared from the records of Shoe Pavilion,
Inc. and subsidiary (the "Company"or "Shoe Pavilion, Inc.") in accordance with accounting principles generally
accepted in the United States of America for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do
not include all information and footnotes in conformity with accounting principles generally accepted in the United States of America for
complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes
contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2005 (the "2005 Annual
Report") as filed with the Securities and Exchange Commission ("SEC").  In the opinion of management, all
adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of
operations for the periods presented have been included in the interim report.  Interim results are not necessarily indicative of results for
the full year.  The financial data at December 31, 2005 presented herein is derived from the 2005 Annual Report.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes.  Actual results could differ from those estimates.

2.  Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") periodically issues Statements of Financial Accounting Standards
("SFAS"), some of which require implementation by a date falling within or after the close of the fiscal year.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.  This statement clarifies the definition
of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007.  The Company has not determined the effect, if any,
the adoption of this statement will have on its results of operations or financial position.In October 2005, the FASB issued FASB Staff Position No. 13-1, "Accounting for Rental Costs Incurred During a
Construction Period" ("FSP No. 13-1"), which requires rental costs associated with ground or building operating
leases that are incurred during a construction period to be recognized as rental expense.  FSP No. 13-1 is effective for periods
beginning after December 15, 2005.  The adoption of this pronouncement in the first quarter of 2006 did not have a material
impact on the Company.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - A Replacement of APB
Opinion No. 20 and FASB Statement No. 3" ("SFAS No. 154").  SFAS No. 154 changes the
requirements for the accounting for and reporting of accounting changes and error corrections.  SFAS No. 154 establishes retrospective
application as the required method for reporting a change in accounting principle and provides guidance for determining whether
retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application
is impracticable.  SFAS No. 154 also addresses the reporting of a correction of an error by restating previously issued financial
statements. SFAS No. 154 is effective for accounting changes and corrections of an error made in fiscal years beginning after
December 15, 2005. The adoption of this pronouncement in the first quarter of 2006 did not have a material impact on the
Company.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No.
123R"), which replaced SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."  SFAS No. 123R requires
a fair value measurement of all share-based payments to employees, including grants of employee stock options, and recognition of
those compensation expenses in the financial statements.  SFAS No. 123R establishes standards for the accounting for transactions in
which an entity exchanges its equity or liability instruments for goods and services6
and focuses on accounting for transactions in which
an entity obtains employee services in share-based payment transactions.  The share-based compensation expense is required to be
measured based on the fair value of the equity or liability instruments issued.  In addition, SFAS No. 123R requires the recognition of
compensation expense over the period during which an employee is required to provide service in exchange for an award.  Effective
the first quarter of 2006, the Company adopted SFAS 123R and recognized compensation expense related to share-based payment
transactions using the modified prospective method.  (See Note 4).

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"), which provides guidance on
the implementation of SFAS No. 123R.  In particular, SAB No. 107 provides key guidance related to valuation methods
(including assumptions such as expected volatility and expected term), the accounting for income tax effects of share-based payment
arrangements upon adoption of SFAS 123R, the modification of employee share options prior to the adoption of SFAS 123R, the
classification of compensation expense, capitalization of compensation costs related to share-based payment arrangements, first-time
adoption of SFAS 123R in an interim period and disclosures in Management's Discussion and Analysis subsequent to the adoption of
SFAS 123R.  SAB No. 107 became effective on March 29, 2005.  The Company has adopted SFAS 123R and it now
applies the principles of SAB No. 107.

In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of
FASB Statement No. 109" ("FIN 48").  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements in accordance with SFAS 109, "Accounting for Income Taxes".  FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.  FIN 48 is effective as of January 1, 2007.  The Company is currently evaluating the impact
of FIN 48 on its consolidated financial statements.

3.  Earnings Per Share

Basic earnings per share is computed as net income divided by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed as net income divided by the weighted average number of common shares
outstanding and potentially dilutive common equivalent shares outstanding for the period. The following table summarizes the
incremental shares from these potentially dilutive securities, calculated using the treasury stock method.

Thirteen weeks ended

Thirty-nine weeks endedSeptember 30,

October 1,

September 30,

October 1,2006

2005

2006

2005(in thousands)

(in thousands)Weighted average number of common shares:Basic
9,512

6,807

8,865

6,804Effect of dilutive securities-stock options
-

272

83

276Diluted
9,512

7,079

8,948

7,080An aggregate of 887,783 and 292,857 options and warrants for the thirteen and thirty-nine weeks
ended September 30, 2006, respectively, were excluded from the computation of diluted earnings per share because their effect would
have been anti-dilutive.

4.  Share-Based Compensation

The Company has two share-based compensation plans: the Amended and Restated 1998 Equity Incentive Plan and the Amended
and Restated Non-Employee Director Stock Option Plan.

Prior to the January 1, 2006 adoption of SFAS 123R, the Company accounted for stock-based compensation using the intrinsic
value method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Because the stock option grant price equaled the market price on the date of grant, no compensation expense was recognized by the
Company for stock-based compensation.  As permitted by SFAS No. 123, stock-based compensation was included as a pro forma
disclosure in the notes to the consolidated financial statements.

7
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified
prospective transition method.  Under this transition method, stock-based compensation expense is recognized in the consolidated
financial statements for granted, modified or settled stock options.  Results for prior periods have not been restated, as provided for
under the modified prospective method.

Prior to the adoption of SFAS 123R, the Company presented all tax benefits resulting from the exercise of stock options as
operating cash inflows in the consolidated statements of cash flows, in accordance with the provisions of the Emerging Issues Task
Force ("EITF") Issue No. 00-15, "Classification in the Statement of Cash Flows of the Income Tax Benefit Received by
a Company upon Exercise of a Nonqualified Employee Stock Option."  SFAS 123R requires the benefits of tax deductions in
excess of the compensation cost recognized for those options to be classified as financing cash inflows rather than operating cash
inflows, on a prospective basis.  The impact of this change was not material to the Company.

The following table shows the effect on net income and earnings per share for the periods ended October 1, 2005, had
compensation cost been recognized based upon the estimated fair value on the grant date of stock options in accordance with SFAS
123, as amended by SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure":

Thirteen weeks ended


Thirty-nine weeks endedOctober 1, 2005


October 1, 2005Net income, as reported

$
293,000

$
1,403,000Deduct stock-based compensation determined underfair value method, net of related tax benefits


(18,578)


(71,110)Pro forma net income

$
274,422

$
1,331,890Net income per share:As reported:Basic

$
0.04

$
0.21Diluted

$
0.04

$
0.20Pro forma:Basic

$
0.04

$
0.20Diluted

$
0.04

$
0.19Disclosures for the periods ended September 30, 2006 are not presented because the amounts are recognized in the
consolidated financial statements.

The fair value of stock options granted subsequent to the adoption of SFAS 123R (January 1, 2006) is estimated using the binomial
lattice method of option valuation.  Assumptions relative to volatility, anticipated forfeitures and exercises are determined at the time of
grant and reflected in the lattice-based valuation.  Prior to the adoption of SFAS 123R, the fair value for stock awards was estimated at
the date of grant using the Black-Scholes-Merton ("BSM") option valuation model with the following weighted average
assumptions:

Thirty-nine weeks endedOctober 1, 2005Expected volatility

91.18%Expected dividends

NoneExpected term (in years)

8.5Risk-free interest rate

4.22%Assumptions relative to the binomial lattice method of option valuation include the expectation that non-executive grantees will
exercise all vested stock options once the market price exceeds 200% of the option's exercise price.  For executive grantees, it is
assumed that they will not exercise their options based on market price per share, but rather will hold the options until one year after
they are fully vested.  The Company has also assumed8
a forfeiture rate of 10% for non-executives and 0% for executives.  The
assumed volatility for valuing the options was 55%. The following table shows the assumptions used:


Thirteen weeks ended

Thirty-nine weeks endedSeptember 30, 2006

September 30, 2006Expected life in years

4

3 - 4Stock price volatility

55%

55%Risk free interest rate

5.31%

4.96%-5.31%Dividends during term

None

NoneThe expected term of the options represents the estimated period of time until exercise and is based on historical experience of
similar awards, giving consideration to the contractual terms, vesting schedules and
expectations of future employee behavior.  The
expected stock price volatility is based on historical volatility of the Company's stock for the related vesting periods.  The risk-free
interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term.  The
Company has not paid dividends in the past and does not plan to pay any dividends in the near future.

5.  Stock Option Plans

Stock options to purchase the Company's common stock are typically granted at prices equal to the fair market value on the date of
grant.  Employee stock options generally become exercisable in four equal installments beginning a year from the date of grant and
generally expire 10 years from the date of grant.  Options granted to non-employee directors generally vest over a one year
period. Outstanding stock options are a combination of incentive stock options and non-qualified stock options.


The fair value of each stock option granted prior to adoption of SFAS 123R was estimated on the date of grant using
the BSM option valuation model.  Subsequent to the adoption of SFAS 123R, the Company has used the binomial lattice
method of estimating the fair value of stock options.  The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and the Company's experience. Once the fair value of the
options is calculated, the resulting expense is recognized using the graded, or accelerated attribution method consistent with the
multiple option valuation approach.  Compensation expense is recognized only for those options expected to vest, with
forfeitures estimated at the date of grant based on the Company's historical experience and future expectations.  Prior to the
adoption of SFAS 123R, the effect of forfeitures on the pro forma expense amounts was recognized as the forfeitures occurred.A summary of the Company's stock option activity during the thirty-nine weeks ended September 30, 2006 is presented in
the following table:

Weighted-AverageWeighted-

Remaining

AggregateAverage

Contractual

IntrinsicExercise

Term

ValueOptions

Price

(years)

(000)Outstanding at January 1, 2006

440,500

$          3.52Granted

330,500

$          7.32Exercised

(29,500)

$          2.25Forfeited or expired

(159,406)

$          5.77Outstanding at September 30, 2006

582,094

$          5.12

7.55

$        1,269Exercisable at September 30, 2006

229,002

$          3.98

4.63

$           760The aggregate intrinsic value in the table above is before applicable income taxes and is based on the Company's closing stock
price of $7.30 as of the last trading day of the period ended September 30, 2006, which9
would have been received by the optionees
had all options been exercised on that date. As of September 30, 2006, total unrecognized stock-based compensation expense related
to nonvested stock options was approximately $997,000, which is expected to be recognized over a weighted average period of
approximately 2.4 years.
During the thirteen weeks ended September 30, 2006, the total intrinsic value of stock options exercised was $89,725.
During the thirty-nine weeks ended September 30, 2006, the total intrinsic value of stock options
exercised was $152,920.

A summary of the status of the Company's nonvested options as of January 1, 2006, and changes during the thirty-nine weeks
ended September 30, 2006, is presented below:


Weighted-AverageGrant-DateShares

Fair ValueNonvested at January 1, 2006

255,000

$            2.22Granted

-

$                -Vested

(52,084)

$            1.65Forfeited

(15,000)

$            1.66Nonvested at April 1, 2006

187,916

$            3.68Nonvested at April 1, 2006

187,916

$            3.68Granted

180,500

$            3.79Vested

(21,296)

$            3.81Forfeited

-

$                -Nonvested at July 1, 2006

347,120

$            3.08Nonvested at July 1, 2006

347,120

$            3.08Granted

150,000

$            3.71Vested

(12,122)

$            3.79Forfeited

(131,906)

$            3.52Nonvested at September 30, 2006

353,092

$            3.17During the thirteen and thirty-nine weeks ended September 30, 2006, the total fair value of options vested was $60,933 and
$193,370, respectively.

The Company issues new shares of common stock upon the exercise of stock options.

As of September 30, 2006, there were 360,635 shares of common stock available for issuance pursuant to future stock option
grants.

Additional information regarding options outstanding as of September 30, 2006, is as follows:

10
Options Outstanding

Options ExercisableWeighted-

Weighted-



Weighted-Average

Average



AverageContractual

Exercise



ExerciseRange of Exercise Prices

Number

Life (in years)

Price

Number

Price$       1.03
-
$       1.22

10,000

1.6

$       1.12

10,000

$       1.12$       1.28
-
$       1.28

100,000

7.4

$       1.28

50,000

$       1.28$       1.81
-
$       1.95

92,500

6.2

$       1.93

57,500

$       1.92$       2.25
-
$       7.00

97,666

3.4

$       6.25

93,916

$       6.32$       7.08
-
$       7.52

281,928

9.7

$       7.29

17,586

$       7.52$       1.03
-
$       7.52

582,094

7.6

$       5.12

229,002

$       3.986.  Legal Proceedings

The Company is involved in various routine legal proceedings incidental to the conduct of its normal business activities.
Management does not believe that any of these legal proceedings will have a material adverse impact on the business, financial
condition or results of operations, either due to the nature of the claims, or because management believes that such claims would not
exceed the limits of the Company's insurance coverage.

7.  Off-Balance Sheet Financing


The Company has obtained documentary and standby letters of credit from Wells Fargo Retail. These letters of credit are used
to guarantee payments to various third parties. The total of these letters of credit was $1,089,115 at September 30, 2006. When
the Company receives the related goods or services, the Company records the liability. When the liability is paid, the related
letters of credit are cancelled.11
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These
forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These
forward-looking statements include statements relating to trends in, or representing management's beliefs about, the Company's future
strategies, operations and financial results, as well as other statements including words such as "believe,"
"anticipate," "expect," "estimate," "predict," "intend," "plan,"
"project," "will," "could," "may," "might" or any variations of such words or
other words with similar meanings.   Forward-looking statements are made based upon management's current expectations and beliefs
concerning trends and future developments and their potential effects on the Company.  However, caution should be taken not to place
undue reliance on any such forward-looking statements because such statements speak only as of the date when made and may not
prove to be accurate. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.  These statements are not guarantees of future performance and involve risks and
uncertainties that are difficult to predict and could cause actual results to differ materially from the Company's historical experience and
its present expectations or projections.  These risks and uncertainties include, but are not limited to, competitive pressures in the
footwear industry, changes in the level of consumer spending on or preferences in footwear merchandise, economic and other factors
affecting retail market conditions, the Company's ability to purchase attractive name brand merchandise at reasonable discounts, the
availability of desirable store locations as well as management's ability to negotiate acceptable lease terms and maintain supplier and
business relationships and open new stores in a timely manner. Other risks and uncertainties include those described in this Report, in
Part II, "Item 1A. Risk Factors" and elsewhere in the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, and those described from time to time in its future reports filed with the SEC.

The following should be read in conjunction with the Company's financial statements and related notes thereto provided under
"Item 1-Financial Statements" above.
Overview

Shoe Pavilion, Inc., a Delaware corporation, is an independent off-price branded footwear retailer in the Western and Southwestern
United States.  As of September 30, 2006, the Company operated 100 stores located throughout California, Washington, Oregon,
Arizona, Nevada, Texas and New Mexico.  The Company was among the first footwear retailers on the West Coast to expand the off-price
concept into the branded footwear market.  The Company offers a broad selection of quality designer label and branded footwear,
typically at 20% to 60% below regular department store prices for the same shoes, in a convenient self-service format.

The Company is positioned in the market between discount stores and department stores.  Unlike
discount stores, it offers designer label and branded footwear that, in its opinion, has long-term customer appeal.  As a result, the
Company appeals to quality, style and designer label-oriented customers with relatively higher spending power. Unlike department
stores, the Company's prices are designed to appeal to value-oriented consumers seeking quality branded footwear typically found at
department stores or branded retail outlets at higher everyday prices.

The Company's stores are strategically located in strip malls, outlet centers, large format retail centers
and downtown locations, frequently in close proximity to other off-price apparel retailers that attract similar customers. On average, over
20,000 pairs of shoes representing over 100 brands are displayed on the selling floor of most of its stores, compared to a significantly
smaller product offering at typical department stores.  Mature stores are evaluated for remodeling based on each store's age and
competitive situation, as well as how much the landlord will contribute toward the required improvements.  Future store remodeling
plans will depend upon several factors, including, but not limited to, general economic conditions, competition trends and the availability
of adequate capital.

The Company's growth strategy had historically focused on the Western United States, but now includes opening new stores
throughout the Southwestern United States as suitable locations are found.  For fiscal 2006, the Company expects to open twenty-four
new stores, by adding stores in existing markets, expanding into new Texas markets and going into New Mexico for the first time.
Future store openings are subject to availability of satisfactory store locations based on local competitive conditions, site availability and
cost and quality brand merchandising at competitive prices.  Over the last several years, the Company has focused on closing its
smaller stores and replacing them with larger stores in more attractive locations.  The average square footage of these new12
stores has
been and is expected to continue to be approximately 18,000 to 20,000 square feet.  As a result, the Company expects the average
size of its stores to increase for the foreseeable future.

The Company plans to continue to strengthen its position as an independent off-price branded footwear retailer by pursuing the
following three primary strategies for growth in sales and profitability - continue to expand and improve its store base, leverage
its operating model and enhance merchandising.

Results of Operations

Thirteen Weeks Ended September 30, 2006 Compared to Thirteen Weeks Ended October 1, 2005.

The following tables set forth statements of income data and relative percentages of net sales for the thirteen weeks ended
September 30, 2006 and thirteen weeks ended October 1, 2005 (dollar amounts in thousands).

Thirteen weeks endedSeptember 30,

October 1,2006

2005

Dollar 
 Change
Percentage 
 ChangeAmount
Percent

Amount
PercentNet sales
$   31,778
100.0%

$   24,820
100.0%

$     6,958
28.0%Cost of sales and related occupancy expenses
21,749
68.4%

16,432
66.2%

5,317
32.4%Gross profit
10,029
31.6%

8,388
33.8%

1,641
19.6%Selling, general and administrative expenses
10,376
32.7%

7,762
31.3%

2,614
33.7%(Loss) income from operations
(347)
(1.1%)

626
2.5%

(973)
(155.4%)Interest expense
(187)
(0.6%)

(145)
(0.6%)

(42)
29.0%Other income
-
0.0%

1
0.0%

(1)
(100.0%)(Loss) income before income taxes
(534)
(1.7%)

482
1.9%

(1,016)
(210.8%)Income tax benefit (expense)
216
0.7%

(189)
(0.8%)

405
(214.3%)Net (loss) income
(318)
(1.0%)

293
1.2%

(611)
(208.5%)Net Sales.  Net sales for the thirteen week period ended September 30, 2006 increased by 28.0%, or $7.0
million, to $31.8 million from $24.8 million in the thirteen week period ended October 1, 2005.  The sales increase was due to the
addition of seven new stores and a comparable store sales increase of 3.7%.  Comparable store sales are based upon stores open at
least 13 consecutive months.

Gross Profit.  Cost of sales includes landed merchandise and occupancy expenses.  Gross profit for the
thirteen week period ended September 30, 2006 increased by 19.6%, or $1.6 million, to $10.0 million from $8.4 million in the thirteen
week period ended October 1, 2005, primarily as a result of increased sales.  As a percent of sales, gross profit decreased to 31.6% for
the thirteen week period ended September 30, 2006 from 33.8% in the thirteen week period ended October 1, 2005, due to higher
occupancy expenses of 2.1%, primarily related to new stores.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the thirteen week period
ended September 30, 2006 increased by 33.7%, or $2.6 million, to $10.4 million from $7.8 million in the thirteen week period ended
October 1, 2005.  The increase is primarily from expenses related to additional stores, which resulted in approximately $850,000 in
store salaries, $490,000 in advertising, $250,000 in utilities and $150,000 in freight expenses.  As a percent of sales, SG&A
expenses increased to 32.7% for the thirteen week period ended September 30, 2006 from 31.3% in the thirteen week period ended
October 1, 2005.  The increase as a percent of sales is primarily due to increases of 0.6% in advertising, 0.4% in utilities and 0.4% in
warehouse fees, partially offset by savings of 0.3% in corporate salaries.

Interest Expense.  Interest expense for the thirteen week period ended September 30, 2006 increased by 29.0%, or
$42,000, to $187,000 from $145,000 in the thirteen week period ended October 1, 2005, due to a higher average interest rate and
increased borrowings under the Company's Revolving Credit Facility during the thirteen week period ended September 30, 2006
compared to the thirteen week period ended October 1, 2005.

Income Tax Benefit.  The Company's effective income tax rate increased to 40.4% from 39.2%, due primarily to the effect
of incentive stock options that were issued in prior years.  Because the Company adopted SFAS 123R effective January 1, 2006, it
began recognizing compensation expense that corresponds to the vesting of stock options. Most of the options that are now vesting are
incentive stock options. The compensation expense recorded13
for the vesting of this type of option is not deductible for income tax
purposes. As a result, income tax as a percentage of taxable income increased.

Thirty-nine Weeks Ended September 30, 2006 Compared to Thirty-nine Weeks Ended October 1, 2005.

The following tables set forth statements of income data and relative percentages of net sales for the thirty-nine weeks ended
September 30, 2006 and thirty-nine weeks ended October 1, 2005 (dollar amounts in thousands).

Thirty-nine weeks endedSeptember 30,

October 1,2006

2005

Dollar 
Change
Percentage 
ChangeAmount
Percent

Amount
PercentNet sales
$   90,470
100.0%

$   73,048
100.0%

$   17,422
23.9%Cost of sales and related occupancy expenses
60,217
66.6%

47,821
65.5%

12,396
25.9%Gross profit
30,253
33.4%

25,227
34.5%

5,026
19.9%Selling, general and administrative expenses
28,284
31.3%

22,539
30.9%

5,745
25.5%Income from operations
1,969
2.2%

2,688
3.7%

(719)
(26.7%)Interest expense
(468)
(0.5%)

(381)
(0.5%)

(87)
22.8%Other income
-


1
0.0%

(1)
(100.0%)Income before income taxes
1,501
1.7%

2,308
3.2%

(807)
(35.0%)Income tax expense
(606)
(0.7%)

(905)
(1.2%)

299
(33.0%)Net income
895
1.0%

1,403
1.9%

(508)
(36.2%)Net Sales.  Net sales for the thirty-nine week period ended September 30, 2006 increased by 23.9%, or
$17.4 million, to $90.5 million from $73.0 million in the thirty-nine week period ended October 1, 2005.  The sales increase was due to
the addition of 15 new stores and a comparable store sales increase of 2.0%.  Comparable store sales are based upon stores open at
least 13 consecutive months.

Gross Profit.  Cost of sales includes landed merchandise and occupancy expenses.  Gross profit for the
thirty-nine week period ended September 30, 2006 increased by 19.9%, or $5.0 million, to $30.3 million from $25.2 million in the
thirty-nine week period ended October 1, 2005, primarily as a result of increased sales.  As a percent of sales, gross profit decreased to
33.4% for the thirty-nine week period ended September 30, 2006 from 34.5% in the thirty-nine week period ended October 1, 2005, due
to higher occupancy expenses of 2.1%, primarily related to new stores, partially offset by improved selling margins of 1.0%.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the thirty-nine week period
ended September 30, 2006 increased by 25.5%, or $5.7 million, to $28.3 million from $22.5 million in the thirty-nine week period ended
October 1, 2005.  The increase is primarily from expenses related to additional stores, which resulted in approximately $2.2 million in
store salaries, $610,000 in advertising and $500,000 in utilities.  The Company also incurred $194,000 in legal fees related to the
defense and settlement of a lawsuit.  As a percent of sales, SG&A expenses increased to 31.3% for the thirty-nine week period
ended September 30, 2006 from 30.9% in the thirty-nine week period ended October 1, 2005.  The increase as a percent of sales is
primarily due to increases of 0.3% in contract warehouse fees, 0.2% in store salaries and 0.2% in utilities, partially offset by savings of
0.2% in advertising.

Interest Expense.  Interest expense for the thirty-nine week period ended September 30, 2006 increased by 22.8%, or
$87,000, to $468,000 from $381,000 in the thirty-nine week period ended October 1, 2005, due to a higher average interest rate and
increased borrowings under the Company's Revolving Credit Facility during the thirty-nine week period ended September 30, 2006
compared to the thirty-nine week period ended October 1, 2005.

Income Tax Expense.  The Company's effective income tax rate increased to 40.4% from 39.2%, due primarily to the effect
of incentive stock options that were issued in prior years. Because the Company adopted SFAS 123R effective January 1, 2006, it
began recognizing compensation expense that corresponds to the vesting of stock options. Most of the options that are now vesting are
incentive stock options. The compensation expense recorded for the vesting of this type of option is not deductible for income tax
purposes. As a result, income tax as a percentage of taxable income increased.

14
Liquidity and Capital Resources

The Company's primary capital requirements are for inventory and store expansion, relocation and remodeling.  Historically, cash
flows from operations and available borrowings under the Company's Revolving Credit Facility have met the Company's liquidity needs.
Management believes that these sources will be sufficient to fund currently anticipated cash requirements for the foreseeable
future.

During the thirty-nine week period ended September 30, 2006, the Company opened seven stores in Texas, five stores in
California, one store in Washington, one store in Oregon and one store in New Mexico.  Additionally, the Company introduced new
brands and key product lines such as men's and women's casual and active shoes, as well as men's and women's sandals.  To open
the stores and supplement existing footwear offerings required an increase in overall inventory of $26.6 million.  The increase also
reflects the build-up of seasonal inventory.  Additional costs of opening the stores included investing $6.3 million in fixed assets such as
signage, racks for shoes, sales counters, point-of-sale computers and software and other tenant improvements.

The activities described above resulted in a net use of cash in operating activities of $12.8 million for the thirty-nine week period
ended September 30, 2006, compared to $1.5 million for the thirty-nine week period ended October 1, 2005. Furthermore, the
additional purchase of fixed assets, primarily for capital expenditures, resulted in cash used in investing activities of $6.2 million for the thirty-nine week period ended
September 30, 2006, compared to $2.4 million for the thirty-nine week period ended October 1, 2005.  The Company opened fifteen
stores and closed four stores for the thirty-nine week period ended September 30, 2006 compared to nine stores opened and six stores
closed for the thirty-nine week period ended October 1, 2005.

On March 29, 2006, the Company completed a public offering of 2 million shares of its common stock.  The net proceeds to the
Company from this sale were $12.8 million and were used to finance the opening of new stores and the purchasing of inventory.

On March 15, 2006, the Company and Wells Fargo Retail Finance LLC ("Lender") amended and extended the
Company's Revolving Credit Facility to allow for maximum borrowing of $20 million, which the Company has the option to increase to
$30 million.  On October 11, 2006, the Company partially exercised the option and increased the Revolving Credit Facility to $25
million. The new amendment expires April 18, 2011. At September 30, 2006, the Company had in excess of $4.7 million available under
the amended Revolving Credit Facility.  The Company currently is in compliance with the covenants of the Revolving Credit Facility.
The Company believes its credit line with the Lender is sufficient to fund capital expenditures for the foreseeable future and to meet
seasonal fluctuations in cash flow requirements.  However, unexpected conditions could require the Company to request additional
borrowing capacity from the Lender or alter its expansion plans or operations.

Seasonality and Quarterly Results

The Company's business, measured in terms of net sales, is subject to seasonal fluctuations and trends.  Historically, a higher
amount of the Company's net sales were, and may continue to be realized during the fourth quarter of the Company's fiscal year, which
includes the winter holiday season.  In addition, quarterly results are affected by the timing of the opening of new stores, and the
Company's rapid growth may conceal the impact of other seasonal influences.  Because of the seasonality of the Company's business,
results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

Critical Accounting PoliciesThe preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires the appropriate application of certain accounting policies, many of which require the Company to
make estimates and assumptions about future events and their impact on amounts reported in the Company's financial statements and
related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from the
Company's estimates. Such differences could be material to the Company's financial statements.

The Company believes that its application of accounting policies, and the estimates inherently required therein, are reasonable.
The Company constantly reevaluates these accounting policies and estimates, and adjustments are made when facts and
circumstances dictate a change. Historically, the Company has found its15
application of accounting policies to be appropriate, and its
actual results have not differed materially from those determined by using necessary estimates.  The Company believes that the
following summarizes critical accounting policies which require significant judgments and estimates in the preparation of its
consolidated financial statements.

Revenue Recognition.  The Company recognizes revenue at the time products are received by its customers in
accordance with the provisions of Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements" as amended by SAB No. 104, "Revenue Recognition".  Revenue is recognized for store sales at the point
at which the customer receives and pays for the merchandise at the register with either cash or credit card.  For online sales, revenue is
recognized at the time the customer receives the product.  Customers typically receive goods within several days of shipment.
Amounts related to shipping costs billed to customers are reflected in net sales and the related costs are reflected in costs of sales.

Discounts offered to customers consist primarily of point of sale markdowns and are recorded at the time of the related sale as a
reduction of revenue. Gift certificates are carried as a liability when sold and revenue is recognized when the gift certificate is redeemed
or when redemption becomes remote.  Similarly, customers may receive a store credit in exchange for returned goods.  Store credits
are carried as a liability until redeemed.

Inventory Valuation.  Merchandise inventories are stated at the lower of average cost or market, after recognition of shrinkage allowance.  The Company
adjusts inventory based on historical experience and current information in order to assure that inventory is recorded properly at the
lower of cost or market. The factors the Company considers include current sell through, seasonality and length of time held in
inventory. The amount ultimately realized from the sale of the Company's inventory could differ materially from its estimates.

Long-lived Assets.  In evaluating the fair value and future benefits of property and equipment, the Company performs an
analysis of the anticipated undiscounted future net cash flows associated with stores and reduces their carrying value by the excess, if
any, of the result of such calculation. The Company believes at this time that the carrying values and useful lives of its property and
equipment continue to be appropriate.

Self-insurance.  The Company records an estimated liability for the self-insured portion of the workers' compensation
claims based on historical experience and an evaluation of outstanding claims.

Cost of Sales.  Cost of sales includes product costs, inbound freight, inventory shrinkage and store
occupancy costs.  It does not include purchasing, warehousing, distribution costs and inter-store freight transportation, which are
included in selling, general and administrative expenses. The Company's gross margin may not be comparable to other retailers as
some of these entities include purchasing, warehousing, distribution and inter-store freight transportation expenses in cost of sales.
Income Taxes.  The Company provides a valuation allowance when it is more likely than not that some or a portion or the
entire deferred tax asset will not be realized. Based upon the Company's history of earnings, it believes that the realization of its
deferred tax asset is more likely than not and therefore the Company has not provided a valuation allowance for its deferred tax asset.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk



There have been no material changes from the information reported in the Company's Form 10-K for the year ended December 31,
2005.

Item 4.  Controls and Procedures

The Company maintains a system of disclosure controls and procedures designed to provide reasonable assurance that
information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the
"Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and
forms.

Evaluation of Disclosure Controls and Procedures
During the preparation of its Quarterly Report on Form 10-Q for the thirteen weeks ended September 30, 2006, the Company
evaluated the design and operating effectiveness of its disclosure controls and procedures as of the end of the period covered by this
Report, under the supervision and with the participation of its management,16
pursuant to Rule 13a-15(e) of the Exchange Act.  Based on
this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this Report.

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of
achieving an entity's disclosure objectives.  The likelihood of achieving such objectives is affected by limitations inherent in disclosure
controls and procedures.  These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established
process.

Quarterly Evaluation of Changes in Internal Controls over Financial Reporting

The Chief Executive Officer and the Chief Financial Officer of the Company, with the participation of the Company's
management, also conducted an evaluation of the Company's internal controls over financial reporting to determine whether any
change occurred during the third quarter of 2006 that has materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.  Based on that evaluation, the Company's management concluded that there was a material
change during the third quarter.

In the course of evaluating the design and operating effectiveness of the Company's disclosure controls and procedures
during the first quarter, management identified the following deficiencies that increased the likelihood of potential material errors in the
Company's financial reporting: (i) an insufficient number of accounting and finance personnel with the appropriate depth of experience,
and (ii) a need for a more formalized process to identify, analyze and record significant financial information and transactions in
conformity with current accounting literature.

In remediation of these deficiencies, during the second quarter, the Company increased its accounting staff by hiring a
Financial Reporting Manager who is responsible for analyzing, developing and formalizing accounting policies and practices and an
Accounting Manager who is experienced in retail accounting. The Company has also established formal procedures that require the
analysis and documentation of all new significant accounting policies to assure that such policies comply with the appropriate
accounting literature.

Changes in Internal Control over Financial Reporting

Except as discussed above, there were no changes made in the Company's internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act, during the period covered by this Report that have materially
affected, or are likely to materially affect, these controls subsequent to the date of their last evaluation.

17
PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

The Company is involved in various routine legal proceedings incidental to the conduct of its normal business activities.
Management does not believe that any of these legal proceedings will have a material adverse impact on the business, financial
condition or results of operations, either due to the nature of the claims, or because management believes that such claims would not
exceed the limits of the Company's insurance coverage.

Item 1A.  Risk Factors

The Company's Annual Report on Form 10-K for the year ended December 31, 2005 includes a detailed discussion of risk
factors.  The information presented below updates and should be read in conjunction with the risk factors and information disclosed in
that Form 10-K.
Terrorist attacks or acts of war may seriously harm the Company's business.  Terrorist attacks may cause damage or
disruption to the Company's employees, facilities, information systems, vendors and customers, which could significantly impact net
sales, costs and expenses and financial condition. The potential for future terrorist attacks, the national and international responses to
terrorist attacks, and other acts of war or hostility may cause greater uncertainty and cause the Company to suffer in ways that the
Company currently cannot predict. Such terrorist attacks could cause ports to or through which the Company or its vendors ship, such
as the Ports of Los Angeles and Long Beach, to be shut down, thereby preventing the delivery of products to the Company's stores.
The Company's geographical focus in the Western and Southwestern United States may make the Company more vulnerable to such
uncertainties than other comparable retailers who may not have similar geographical concentration.
Because the Company's stores are concentrated in the western part of the United States, it is subject to regional risks.
Currently, most of the Company's stores are located in California and the balance are located in Washington, Oregon, Arizona, Nevada,
New Mexico and Texas.   Accordingly, the Company is subject to regional risks, such as the economy, weather conditions, natural
disasters and government regulations.  When the region suffers an economic downturn or when other adverse events occur, historically
there has been an adverse effect on the Company's sales and profitability and this could also affect the Company's ability to implement
its planned growth.  In addition, many of the Company's vendors rely on the Ports of Los Angeles and Long Beach to process the
Company's shipments.  Any disruption or congestion at the ports could impair the Company's ability to adequately stock its stores.
Several of the Company's competitors operate stores across the United States and, thus, are not as vulnerable as the Company to
such regional risks.

If the Company is unable to successfully implement its controlled growth strategy or manage its growing business, the
Company's future operating results could be negatively impacted.  No assurance can be given that the Company will be successful
in maintaining or increasing its sales in the future.  Any future growth in sales will require additional working capital and may place a
significant strain on the Company's management, information systems, inventory management and distribution facilities.  Any failure to
timely enhance the Company's operating systems, or unexpected difficulties in implementing such enhancements, could have a
material adverse effect on the Company's results of operations.
The price of the Company's common stock may be volatile.  The Company's common stock is thinly traded making it difficult to
sell large amounts.  The market price of the Company's common stock is likely to be volatile and could be subject to significant
fluctuations in response to factors such as quarterly variations in operating results, operating results which vary from the expectations of
securities analysts and investors, changes in financial estimates, changes in market valuations of competitors, announcements by the
Company or its competitors of a material nature, additions or departures of key personnel, future sales common stock and stock volume
fluctuations.  Also, general political and economic conditions such as a recession or interest rate fluctuations may adversely affect the
market price of the Company's common stock.
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Not Applicable.

18
Item 3.  Defaults Upon Senior Securities.

Not Applicable.
Item 4.  Submission of Matters to a Vote of Security Holders.

Not Applicable.
Item 5.  Other Information.

Not Applicable.


Item 6.  Exhibits



Exhibits:

10.1 Employment agreement between Shoe Pavilion, Inc. and Bruce Ross dated July 7, 2006.
    PDF

31.1 Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.     PDF

31.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
of 2002.     PDF

32.1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.     PDF19
SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized on November 9, 2006.SHOE PAVILION, INC., as Registrant

/s/ BRUCE ROSS
Bruce Ross
   Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)20