**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**


(Mark
      One)





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





For
      the
      quarterly period ended July 2, 2006





OR





o  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: 0-20736




**Sport
        Chalet, Inc.**
 (Exact
        name of registrant as specified in its charter)


Delaware
            95-4390071(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer Identification No.)One
                Sport Chalet Drive, La Canada, CA
            91011(Address
                of principal executive offices)
            (Zip
                Code)(818)
                949-5300
              (Registrant’s
                telephone number, including area code)





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




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 file” in Rule 12b-2 of Exchange Act).




Large
      Accelerated Filer o Accelerated
      Filer o Non-Accelerated
      Filer x





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





At
      August
      4, 2006, there were 12,069,446 shares of Class A Common Stock outstanding and
      1,717,282 shares of Class B Common Stock outstanding.







**SPORT
      CHALET, INC.**





Table
      of
      Contents to Form 10-Q




PagePART
                I - FINANCIAL INFORMATIONItem
                1.
            Financial
                Statements
            3Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            11Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            22Item
                4.
            Controls
                and Procedures
            22PART
                II - OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            23Item
                1A.
            Risk
                Factors
            23Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            23Item
                3.
            Defaults
                Upon Senior Securities
            23Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            23Item
                5.
            Other
                Information
            23Item
                6.
            Exhibits
            24




2


**PART
      I - FINANCIAL INFORMATION**





**Item
      1.** **Financial
      Statements.**





**SPORT
      CHALET, INC.**





**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


**(UNAUDITED)**


Quarter
                  endedJuly
                  2, 2006
              
              June
                  30, 2005Net
                  sales
              
              $
              84,418,339
              
              $
              72,192,395Cost
                    of goods sold, buying and occupancy costs
              
              
              59,669,496
              
              
              50,888,759Gross
                  profit
              
              
              24,748,843
              
              
              21,303,636Selling,
                    general and administrative expenses
              
              
              23,828,887
              
              
              20,648,405Income
                  from operations
              
              
              919,956
              
              
              655,231Interest
                  expense
              
              
              38,520
              
              
              1,887Income
                  before taxes
              
              
              881,436
              
              
              653,344Income
                  tax provision
              
              
              351,025
              
              
              264,000Net
                  income
              
              $
              530,411
              
              $
              389,344Earnings
                  per share:Basic
              
              $
              0.04
              
              $
              0.03Diluted
              
              $
              0.04
              
              $
              0.03Weighted
                    average number of common shares outstanding:Basic
              
              
              13,773,398
              
              
              13,372,736Diluted
              
              
              14,191,130
              
              
              14,096,310





**See
      accompanying notes.**


3


**SPORT
      CHALET, INC.**





**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


July
                    2,2006
              
              March
                    31,2006(Unaudited)**Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              2,124,770
              
              $
              2,563,930Accounts
                    receivable, less allowance of $149,000 at July 2, 2006 and $130,000
                    at
                    March 31, 2006
              
              
              4,701,402
              
              
              2,479,386Merchandise
                  inventories
              
              
              75,686,126
              
              
              67,777,059Prepaid
                  expenses and other current assets
              
              
              3,838,782
              
              
              3,857,570Refundable
                  income taxes
              
              
              1,462,785
              
              
              -Deferred
                  income taxes
              
              
              2,454,177
              
              
              3,920,192Total
                  current assets
              
              
              90,268,042
              
              
              80,598,137Fixed
                  assets, net
              
              
              50,700,600
              
              
              48,365,653Deferred
                  income taxes
              
              
              3,746,191
              
              
              3,274,015Total
                  assets
              
              $
              144,714,833
              
              $
              132,237,805**Liabilities
                  and stockholders' equity**Current
                  liabilities:Accounts
                  payable
              
              $
              30,114,222
              
              $
              16,467,120Salaries
                  and wages payable
              
              
              3,871,094
              
              
              5,473,610Income
                  taxes payable
              
              
              -
              
              
              302,274Other
                  accrued expenses
              
              
              13,652,347
              
              
              14,909,439Total
                  current liabilities
              
              
              47,637,663
              
              
              37,152,443Deferred
                  rent
              
              
              18,749,529
              
              
              17,616,994Commitments
                  and contingenciesStockholders’
                  equity:Preferred
                  stock, $.01 par value:Authorized
                    shares - 2,000,000 Issued and outstanding shares -
                    none
              
              
              -
              
              
              -Class
                  A Common Stock, $.01 par value:Authorized
                    shares - 46,000,000 Issued and outstanding shares - 12,057,782
                    at July 2,
                    2006 and 11,927,146 at March 31, 2006
              
              
              120,578
              
              
              119,271Class
                  B Common Stock, $.01 par value:Authorized
                        shares - 2,000,000 Issued and outstanding shares - 1,715,616
                        at July 2,
                        2006 and 1,703,909 at March 31, 2006
              
              
              17,156
              
              
              17,039Additional
                  paid-in capital
              
              
              31,662,762
              
              
              31,335,324Retained
                  earnings
              
              
              46,527,145
              
              
              45,996,734Total
                  stockholders’ equity
              
              
              78,327,641
              
              
              77,468,368Total
                  liabilities and stockholders’ equity
              
              $
              144,714,833
              
              $
              132,237,805





**See
      accompanying notes.**


4


**SPORT
      CHALET, INC.**





**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**


Quarter
                  endedJuly
                  2, 2006
              
              June
                  30, 2005**Operating
                  activities**Net
                  income
              
              $
              530,411
              
              $
              389,344Adjustments
                    to reconcile net income to net cash provided by operating
                    activities:Depreciation
                  and amortization
              
              
              2,522,826
              
              
              2,193,861Loss
                  on disposal of fixed assets
              
              
              116,910
              
              
              188,806Deferred
                  income taxes
              
              
              993,839
              
              
              77,193Stock
                  option expense
              
              
              45,000
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (2,222,016
              )
              
              (421,664
              )Merchandise
                  inventories
              
              
              (7,909,067
              )
              
              (6,640,467
              )Prepaid
                  expenses and other current assets
              
              
              18,788
              
              
              (109,311
              )Accounts
                  payable
              
              
              13,647,102
              
              
              9,157,170Salaries
                  and wages payable
              
              
              (1,602,516
              )
              
              (629,487
              )Income
                  taxes refundable/payable
              
              
              (1,765,059
              )
              
              (828,859
              )Other
                  accrued expenses
              
              
              (1,257,092
              )
              
              498,911Deferred
                  rent
              
              
              1,132,535
              
              
              (199,768
              )Net
                  cash provided by operating activities
              
              
              4,251,661
              
              
              3,675,729**Investing
                  activities**Purchase
                  of fixed assets
              
              
              (4,974,732
              )
              
              (3,178,204
              )Proceeds
                  from sale of assets
              
              
              50
              
              
              -Other
                  assets
              
              
              -
              
              
              76,960Net
                  cash used in investing activities
              
              
              (4,974,682
              )
              
              (3,101,244
              )**Financing
                  activities**Proceeds
                  from bank borrowing
              
              
              5,778,063
              
              
              -Repayments
                  of bank borrowing
              
              
              (5,778,063
              )
              
              -Proceeds
                  from exercise of stock options
              
              
              351,880
              
              
              -Excess
                  tax benefits associated with share based compensation
              
              
              822,245
              
              
              15,665Optionee
                  withholding taxes from exercise of stock options
              
              
              (890,264
              )
              
              -Net
                  cash used by financing activities
              
              
              283,861
              
              
              15,665Increase
                  (decrease) in cash and cash equivalents
              
              
              (439,160
              )
              
              590,150Cash
                  and cash equivalents at beginning of period
              
              
              2,563,930
              
              
              6,176,689Cash
                  and cash equivalents at end of period
              
              $
              2,124,770
              
              $
              6,766,839**Supplemental
                  Disclosure of Cash Flow Information**Cash
                  paid during the period for:Income
                  taxes
              
              $
              250,000
              
              $
              1,000,000Interest
              
              
              19,534
              
              
              41,587





**See
      accompanying notes** **.**


5


**SPORT
      CHALET, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**




1.  Basis
      of
      Presentation





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      for interim financial information and with the instructions to Form 10-Q and
      Article 10 of Regulation S-X. Accordingly, they do not include all information
      and footnotes required by accounting principles generally accepted in the United
      States for complete financial statements. In the opinion of management, all
      adjustments, consisting of normal recurring accruals, considered necessary
      for a
      fair presentation of the results of operations for the periods presented have
      been included.





The
      accompanying condensed consolidated financial statements should be read in
      conjunction with the audited consolidated financial statements included in
      the
      Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
      Interim results are not necessarily indicative of results for the full
      year.





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States 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.





Beginning
      April 1, 2006 our fiscal year end has been changed from March 31 to the Sunday
      closest to March 31. Each fiscal year will consist of four 13 week quarters,
      with an extra week added onto the last quarter every five to seven years. This
      fiscal calendar is widely used in the retail industry. As a result the first
      quarter ended July 2, 2006 includes two additional days as compared to the
      first
      quarter of the prior year which ended on June 30, 2005.





2.  Earnings
      per Share





Earnings
      per share, basic, is computed based on the weighted average number of common
      shares outstanding for the period. Earnings per share, diluted, is computed
      based on the weighted average number of common and potentially dilutive common
      equivalent shares outstanding for the period.




6


A
      reconciliation of the numerators and denominators of the basic and diluted
      earnings per share computations are set forth below:


Quarter
                  endedJuly
                  2, 2006
              
              June
                  30, 2005Net
                  income
              
              $
              530,411
              
              $
              389,344Weighted
                  average number of common shares:Basic
              
              
              13,773,398
              
              
              13,372,736Effect
                    of dilutive securities-stock options
              
              
              417,732
              
              
              723,574Diluted
              
              $
              14,191,130
              
              $
              14,096,310Class
                    A and Class B earnings per share:Basic
              
              $
              0.04
              
              $
              0.03Effect
                    of dilutive securities-stock options
              
              
              -
              
              
              -Diluted
              
              $
              0.04
              
              $
              0.03




An
      aggregate of 159,000 options for the quarter ended July 2, 2006 were excluded
      from the computation of diluted earnings per share as their effect would have
      been anti-dilutive.





3.  Stock
      Compensation





Prior
      to
      the April 1, 2006 adoption of the Financial Accounting Standards Board (“FASB”)
      Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), the Company
      accounted for stock-based compensation using the intrinsic value method
      prescribed in Accounting Principles Board Opinion (“APB”) No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations. As
      permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS
      123”), stock-based compensation was included as a pro forma disclosure in the
      notes to the consolidated financial statements. Effective
      April 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 was recognized in the consolidated
      financial statements for granted, modified or settled stock options. The
      provisions of SFAS 123R apply to new stock options and stock options
      outstanding, but not yet vested, on the effective date of April 1, 2006. Results
      for prior periods have not been restated, as provided for under the
      modified-prospective transition method. Total stock-based compensation expense
      recognized for the quarter ended July 2, 2006 was $45,000 before income taxes,
      and the related tax benefit was $18,000.




7


Under
      the
      modified prospective application method, results for periods prior to April
      1,
      2006, have not been restated to reflect the effects of implementing SFAS 123R.
      The following pro forma information is presented for comparative purposes and
      illustrates the pro forma effect on net income and earnings per share for the
      quarter ended June 30, 2005, as if we had applied the fair value recognition
      provisions of SFAS No. 123 to the stock-based compensation for that
      period:




Quarter
                  endedJune
                  30, 2005Net
                  income as reported
              
              $
              389,344Add:Stock-based
                  compensation expense included in reported net income, net of related
                  tax
                  effects
              
              
              -Deduct:Sport
                  Chalet Option, LLC
              
              
              87,165Total
                  stock-based employee compensation expense determined under fair
                  market
                  value based method for all awards, net of related tax effects
              
              
              57,194Pro
                  forma net income
              
              $
              244,985Class
                  A and Class B earnings per shareAs
                  reported – basic
              
              $
              0.03As
                  reported – diluted
              
              $
              0.03Pro
                  forma – basic
              
              $
              0.02Pro
                  forma – diluted
              
              $
              0.02


The
      fair
      value of each option granted is estimated on the date of grant using the
      Black-Scholes option-pricing model. The Black-Scholes option valuation model
      was
      developed for use in estimating the fair value of traded options which have
      no
      vesting restrictions and are fully transferable. In addition, option valuation
      models require the input of highly subjective assumptions including the expected
      stock price volatility. We used the following weighted average assumptions
      to
      estimate the fair value for stock options granted in the quarters listed
      below:


Quarter
                  EndedJuly
                  2, 2006
              
              June
                  30, 2005Risk-free
                  interest rate
              
              
              5.0
              %
              
              4.0
              %Expected
                  volatility
              
              
              46.1
              %
              
              37.0
              %Expected
                  dividend yield
              
              
              0.0
              %
              
              0.0
              %Expected
                  life in years
              
              
              7.5
              
              
              5.0


8


Stock
      options generally vest over five years in 20% increments from the date of grant
      and expire 10 years from the date of grant. As of July 2, 2006, there were
      1,700,066 shares of common stock available for issuance pursuant to future
      stock
      option grants. The stock option activity during the 13 weeks ended July 2,
      2006 is presented in the following table:




Options
              
              Weighted
                  Average Exercise Price
              
              Weighted-Average
                  Remaining Contractual Term (Years)
              
              Aggregate
                  Intrinsic ValueOutstanding
                  as of March 31, 2006
              
              
              1,950,168
              
              $
              4.29Granted
              
              
              76,500
              
              
              7.94Exercised
              
              
              (141,343
              )
              
              2.42Forfeited
                  or expired
              
              
              (158,157
              )
              
              2.47Outstanding
                  as of July 2, 2006
              
              
              1,727,168
              
              $
              4.78
              
              
              6.1
              
              $
              5,855,194Exercisable
                  as of July 2, 2006
              
              
              1,565,690
              
              $
              4.54
              
              
              5.8
              
              $
              5,681,740


The
      aggregate intrinsic value in the table above is based on the Company’s closing
      stock price of $8.20 and $7.85 for Class A and Class B, respectively, as of
      the
      last trading day of the period ended July 2, 2006. The total intrinsic value
      for
      stock options exercised during the 13 weeks ended July 2, 2006 was
      $783,603. During the 13 weeks ended July 2, 2006 the total fair value of
      options vested was $12,221. The non-vested stock option activity during the
      13 weeks ended July 2, 2006 is presented in the following
      table:


.


Shares
              
              Weighted
                  Average Fair ValueNonvested,
                  March 31, 2006
              
              
              89,642
              
              $
              3.68Granted
              
              
              76,500
              
              
              7.94Vested
              
              
              (3,332
              )
              
              3.67Forfeited
              
              
              (1,332
              )
              
              3.56Nonvested,
                  July 2, 2006
              
              
              161,478
              
              $
              3.95


As
      of
      July 2, 2006, total unrecognized stock-based compensation expense related to
      non-vested stock options was approximately $515,655, which is expected to be
      recognized over a weighted average period of approximately
      4.0 years.





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


9


Additional
      information regarding options outstanding as of July 2, 2006, is as
      follows:


Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of Exercise Price
              
              Shares
              
              Weighted
                  average Remaing Contractual Life (Years)
              
              Weighted
                  Average Exercise Price
              
              Shares
              
              Weighted
                  Average Exercise PriceUnder
                  $3
              
              
              609,500
              
              
              2.97
              
              
              2.29
              
              
              609,500
              
              
              2.29$3.00
                  to $4.490
              
              
              406,750
              
              
              5.55
              
              
              4.12
              
              
              398,080
              
              
              4.13$4.50
                  to $5.99
              
              
              11,250
              
              
              5.06
              
              
              4.59
              
              
              11,250
              
              
              4.59$6.00
                  to $7.50
              
              
              459,168
              
              
              8.98
              
              
              6.93
              
              
              390,860
              
              
              7.00$7.51
                  to $10.00
              
              
              240,500
              
              
              9.34
              
              
              8.09
              
              
              156,000
              
              
              8.17$0.00
                  to $10.00
              
              
              1,727,168
              
              
              6.08
              
              
              4.78
              
              
              1,565,690
              
              
              4.54


4. Reclassifications





Beginning
      April 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS)
      No.
      123R, “Share-Based Payments” using the modified prospective method. SFAS 123R
      requires that the excess tax benefit associated with an individual share-based
      payment award be included in the statement of cash flows as a cash inflow from
      financing activities and a cash outflow from operating activities. The prior
      period amounts presented in the accompanying financial statements have been
      reclassified to conform to this presentation. These reclassifications had no
      impact on previously reported net income or stockholders’ equity.




10




**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, our 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. Prospective investors
      are cautioned that they should not place undue reliance on forward-looking
      statements as predictions of actual results. These statements are not guarantees
      of future performance and involve risks and uncertainties that are difficult
      to
      predict. Further, certain forward-looking statements are based upon assumptions
      as to future events that may not prove to be accurate. Actual results may differ
      materially from those suggested by forward-looking statements as a result of
      risks and uncertainties which are discussed in further detail under “- Factors
      That May Affect Future Results.” We do not assume, and specifically disclaim,
      any obligation to update any forward-looking statements, which speak only as
      of
      the date made.*





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**





We
      are a
      leading operator of 41 full-service specialty sporting goods stores in
      California, Nevada and Arizona. In 1959, Norbert Olberz, our Chairman Emeritus
      and founder (the “Founder”), purchased a small ski and tennis shop in La Cañada,
      California. A focus on providing quality merchandise with outstanding customer
      service was the foundation of Norbert’s vision. We continue this tradition and
      are focused on growth through a number of initiatives, including: continuing
      new
      store development; remodeling stores to conform to our prototype; and improving
      information systems to increase product flow-through, improve in-stock positions
      and optimize merchandise assortment.




Our
      growth strategy had historically focused on Southern California, but now
      includes opening stores throughout California, Nevada and Arizona as suitable
      locations are found. We have opened thirteen stores in the last three years
      and
      seventeen in the last five years. We currently plan on opening five stores
      this
      fiscal year. Future store openings are subject to availability of satisfactory
      store locations based on local competitive conditions, site availability and
      cost and our ability to provide and maintain high service levels and quality
      brand merchandising at competitive prices. Store openings are expected to have
      a
      favorable impact on sales volume, but will negatively affect profit in the
      short
      term. New stores tend to have higher costs in the early years of operation,
      due
      primarily to increased promotional costs and lower sales on a per employee
      basis
      until the store matures. As the store matures, sales tend to level off and
      expenses decline as a percentage of sales. Our stores generally require three
      to
      four years to attract a stable, mature customer base.




11


Our
      prototype store is 42,000 square feet and showcases each product category with
      the feel of a specialty shop all contained under one roof. The full service
      approach to customer service and product knowledge is enhanced by fixtures
      which
      feature specific categories, and give the customer an enhanced shopping
      experience. Mature stores are evaluated for remodel based on each store’s age
      and competitive situation, as well as how much the landlord will contribute
      to
      our required improvements. Since fiscal 2003 seven stores have been remodeled.
      Two major store remodels are planned for this fiscal year. 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.




We
      believe that the overall growth of our business will allow us to maintain or
      increase our operating margins. Increased merchandise volumes should enable
      us
      to improve our purchasing leverage and achieve greater support throughout the
      supply chain.  Gross profit as a percent of sales has increased from 28.6%
      to 30.9% over the past five years ending March 31, 2006. Our overall growth
      should leverage our investments in infrastructure such as the distribution
      center, integration of corporate facilities into a single location, E3
      replenishment system, HighJump warehouse management software and Marketmax
      planning and allocation technology. However, these increased efficiencies and
      improvements in logistics are partially offset by the operating costs of new
      and
      maturing stores. Selling, general and administrative expenses, excluding the
      cost of the recapitalization plan during fiscal 2006, as a percent of sales
      have
      increased from 25.3% to 27.1% over the past five years ending March 31,
      2006.





In
      September 2005, our stockholders approved a recapitalization plan designed
      to
      facilitate the orderly transition of control from our Founder to certain members
      of management and to increase financial flexibility for the Company and its
      stockholders. The recapitalization plan consisted of (1) the reclassification
      of
      each outstanding share of Common Stock as 0.25 share of Class B Common Stock,
      (2) the issuance of seven shares of Class A Common Stock for each outstanding
      share of Class B Common Stock and (3) the transfer of a portion of the Founder’s
      ownership to Craig Levra, Chairman and Chief Executive Officer, and Howard
      Kaminsky, Executive Vice President - Finance, Chief Financial Officer and
      Secretary. The recapitalization doubled our total number of shares outstanding.
      Therefore, the recapitalization plan had the same effect on earnings per share
      as a 2-for-1 stock split. Shares transferred by the Founder to Messrs. Levra
      and
      Kaminsky were treated as a contribution to the Company’s capital with the
      offsetting charge as compensation expense.





We
      are in
      the process of implementing Section 404 of the Sarbanes-Oxley Act of 2002 which
      requires an extensive review and likely remediation of our internal controls.
      To
      help meet the requirements of Section 404 and enhance the Company’s ability to
      grow, we are considering replacing our legacy merchandise and financial systems.
      Implementation of these new systems, as well as the other work required by
      Section 404, will be expensive, time-consuming and will require significant
      attention of management. Current rules require our compliance by March 31,
      2008.





Beginning
      April 1, 2006, our fiscal year end has been changed from March 31 to the Sunday
      closest to March 31. Each fiscal year will consist of four 13 week quarters,
      with an extra week added onto the last quarter every five to seven years. This
      fiscal calendar is widely used in the retail industry. As a result the first
      quarter ended July 2, 2006 includes two additional days as compared to the
      first
      quarter of the prior year which ended on June 30, 2005.




12


**Results
      of Operations**





***Quarter
      Ended July 2, 2006 Compared to Quarter Ended June 30,
      2005***





The
      following table sets forth statements of income data and relative percentages
      of
      net sales for the quarter ended July 2, 2006 and the quarter ended June 30,
      2005
      (dollar amounts in thousands, except per share amounts).


**Quarter
                  ended**July
                  2, 2006
              
              June
                  30, 2005
              
              Dollar
              
              PercentageAmount
              
              Percent
              
              Amount
              
              Percent
              
              Increase
              
              IncreaseNet
                  sales
              
              $
              84,418
              
              
              100.0
              %
              $
              72,192
              
              
              100.0
              %
              $
              12,226
              
              
              16.9
              %Gross
                  profit
              
              
              24,749
              
              
              29.3
              %
              
              21,304
              
              
              29.5
              %
              
              3,445
              
              
              16.2
              %Selling,
                  general and administrative expenses
              
              
              23,829
              
              
              28.2
              %
              
              20,648
              
              
              28.6
              %
              
              3,181
              
              
              15.4
              %Income
                  from operations
              
              
              920
              
              
              1.1
              %
              
              655
              
              
              0.9
              %
              
              265
              
              
              40.5
              %Interest
                  expense
              
              
              39
              
              
              0.0
              %
              
              2
              
              
              0.0
              %
              
              37
              
              
              1,850.0
              %Income
                  before taxes
              
              
              881
              
              
              1.0
              %
              
              653
              
              
              0.9
              %
              
              228
              
              
              34.9
              %Income
                  tax provision
              
              
              351
              
              
              0.4
              %
              
              264
              
              
              0.4
              %
              
              87
              
              
              33.0
              %Net
                  income
              
              
              530
              
              
              0.6
              %
              
              389
              
              
              0.5
              %
              
              141
              
              
              36.2
              %Earnings
                  per share:Basic
              
              $
              0.04
              
              
              
              
              $
              0.03
              
              
              
              
              $
              0.01
              
              
              33.3
              %Diluted
              
              $
              0.04
              
              
              
              
              $
              0.03
              
              
              
              
              $
              0.01
              
              
              33.3
              %


Sales
      increased $12.3 million, or 17.0%, to $84.4 million for the quarter ended July
      2, 2006 from $72.1 million for quarter ended June 30, 2005. The sales growth
      is
      due to five new stores which resulted in a $6.9 million increase in sales on
      a
      same day basis, or 9.6%, combined with a same store sales increase of $2.4
      million, or 3.3%, and $2.6 million, or 3.6% from the two additional days
      resulting from our calendar change. One new store was opened this quarter,
      one
      in our fourth quarter of fiscal 2006 and three in the third quarter of fiscal
      2006. The same store sales increase was due to unusually late snowfall in local
      resorts which drove demand for winter related items early in the quarter
      followed by unusually warm weather which drove summer merchandise sales late
      in
      the quarter. Same store sales are based upon stores open throughout both periods
      presented and exclude team sales.





Gross
      profit increased $3.4 million, or 16.2%, for the quarter ended July 2, 2006
      primarily from increased sales over the quarter ended June 30, 2005. As a
      percent of sales, gross profit decreased to 29.3% from 29.5% as the result
      of
      additional markdowns taken to stimulate sales of slow moving merchandise in
      select departments.





Selling,
      general and administrative expenses increased $3.2 million, or 15.4%, for the
      quarter ended July 2, 2006 over the quarter ended June 30, 2005 primarily from
      expenses directly from the additional stores partially offset by the benefits
      of
      our safety program which saved $245,000 in workers’ compensation insurance as
      well as not incurring $225,000 of litigation expenses accrued in this same
      period last year. As a percent of sales, these expenses decreased to 28.2%
      from
      28.6%. The decrease as a percent of sales is primarily from workers’
compensation and litigation as efficiencies being gained in mature stores are
      offset by new stores which take time to reach operating efficiency.





Net
      income increased $141,000, or 36.2%, to $530,000 for the quarter ended July
      2,
      2006 from $389,000 for the quarter ended June 30, 2005. Earnings per share
      increased $0.01, or 33.3%, to $0.04 for the quarter ended July 2, 2006 from
      $0.03 for the quarter ended June 30, 2005. The increase is primarily the result
      of increased sales.




13


**Liquidity
      and Capital Resources**





Our
      primary capital requirements are for inventory, store expansion, relocation
      and
      remodeling. Historically, cash from operations, credit terms from vendors and
      bank borrowing have met our liquidity needs. We believe that these sources
      will
      be sufficient to fund currently anticipated cash requirements for the
      foreseeable future.





Net
      cash
      provided by operating activities of $4.3 million and $3.7 million for the
      periods ended July 2, 2006 and June 30, 2005, respectively is primarily the
      result of net income, adjusted for depreciation and amortization, and increases
      in accounts payable partially offset by inventory purchases.




Inventories
      increased by $7.9 million and $6.6 million for the periods ended July 2, 2006
      and June 30, 2005, respectively, compared to the respective year-end balances
      primarily due to the build-up of seasonal inventory.





Historically,
      accounts payable has increased as inventory increases. Accounts payable
      increased by $13.6 million as compared to an increase of $9.2 million for the
      periods ended July 2, 2006 and June 30, 2005, respectively. The relative change
      as compared to inventory levels is the result of timing differences in the
      receipt of inventory during the respective quarter.





Net
      cash
      used for the purchase of fixed assets was $5.0 million compared to $3.2 million
      for the periods ended July 2, 2006 and June 30, 2005, respectively. The relative
      increase is due to one new store opening during the period ended July 2, 2006
      while no new stores were opened in the period ended June 30, 2005. As a result
      of our ongoing growth and strategic initiatives, forecasted capital expenditures
      for fiscal 2007 are expected to be approximately $19.0 million, which will
      be
      funded by cash flow from operations and our bank credit line, as needed.
      Approximately $4.8 million of this amount will be used to open five new stores.
      In addition, two stores are planned to be remodeled for approximately $2.3
      million. The remainder is primarily for expenditures on information systems
      the
      most significant portion of which is for the replacement of our legacy
      merchandise and financial systems.





The
      Company’s credit facility with Bank of America, N.A. (the “Lender”) provides for
      advances up to $20 million, increasing to $35.0 million for the period October
      1, through December 31, each year, less the amount of any outstanding draws,
      up
      to a $4.0 million maximum in authorized letters of credit. Interest accrues
      at
      the Lender’s prime rate (8.0% at July 2, 2006) or can be fixed for a period of
      time at the then current rate established under one of several indices, all
      at
      the Company’s option. In addition, there is an unused commitment fee of 0.20%
      per year, based on a weighted average formula. This credit facility expires
      on
      September 30, 2007, and the Company expects to renegotiate and extend the term
      of this agreement or obtain another form of financing before that date. The
      Company’s obligation to the Lender is presently secured by a first priority lien
      on substantially all of the Company’s non-real estate assets, and the Company is
      subject to several restrictive covenants. The principal operating covenants
      require the Company to maintain certain minimum cash flow coverage and debt
      to
      equity ratios and restrict the level of capital expenditures, calculated on
      a
      quarterly basis. The Company currently is in compliance with the covenants.
      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.





14


The
      Company’s primary contractual obligations and commitments as of July 2, 2006 are
      its store leases with initial terms expiring from 2007 through 2020, which
      typically provide for multiple five-year renewal options, and employment
      contracts:





**Payments
                due by period:**
            
            **Operating**
              **Leases**
            
            **Employment****Contracts**Within
                1 year
            
            $
            27,282,661
            
            $
            169,5002
                -
                3 years
            
            
            55,662,258
            
            
            339,0004
                -
                5 years
            
            
            51,102,955
            
            
            339,000After
                5 years
            
            
            94,903,632
            
            
            635,625Total
            
            $
            228,951,506
            
            $
            1,483,125




The
      Company leases all of its existing store locations. The leases for most of
      the
      existing stores are for approximately ten-year terms with multiple option
      periods under non-cancelable operating leases with scheduled rent increases.
      The
      leases provide for contingent rent based upon a percentage of sales in excess
      of
      specified minimums. If there are any free rent periods, they are accounted
      for
      on a straight line basis over the lease term, beginning on the date of initial
      possession, which is generally when the Company enters the space and begins
      the
      construction build-out. The amount of the excess of straight line rent expense
      over scheduled payments is recorded as a deferred rent liability. Construction
      allowances and other such lease incentives are recorded as deferred credits,
      and
      are amortized on a straight line basis as a reduction of rent expense over
      the
      lease term. Generally, our purchase obligations are cancelable 45 days prior
      to
      shipment from our vendors. Letters of credit amounting to approximately $3.0
      million relating to purchase commitments were outstanding as of July 2, 2006
      and
      expire within one year.





No
      cash
      dividends have been declared on Class A Common Stock and Class B Common Stock
      in
      fiscal 2006. We intend to retain earnings for use in the operation and expansion
      of our business and, therefore, do not anticipate paying any cash dividends
      in
      the foreseeable future.





**Critical
      Accounting Policies and Use of Estimates**





In
      preparing our consolidated financial statements we are required to make
      estimates and judgments which affect the results of our operations and the
      reported value of assets and liabilities. Actual results may differ from these
      estimates. As discussed in Item 7, “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations” section of the Company’s Annual
      Report on Form 10-K for the fiscal year ended March 31, 2006, we consider our
      policies on inventory valuation, revenue recognition, gift card redemption,
      self
      insurance reserves, impairment of long-lived assets, accounting for income
      taxes
      and stock-based compensation to be the most critical in understanding the
      significant estimates and judgments that are involved in preparing our
      consolidated financial statements.





**Stock-Based
      Compensation**





As
      of
      April 1, 2006, we account for stock-based compensation in accordance with the
      fair value recognition provisions of SFAS 123R applying the “modified
      prospective method.” Under SFAS 123R, we are required to select a valuation
      technique or option-pricing model that meets the criteria as stated in the
      standard, which includes a binomial model and the Black-Scholes model. At the
      present time, the Company is continuing to use the Black-Scholes model,
      consistent with prior period valuations under SFAS123. The Black-Scholes
      option-pricing model requires the input of assumptions. These assumptions
      include estimating the length of time employees will retain their vested stock
      options before exercising them (“expected term”), the estimated volatility of
      the Company’s common stock price over the expected term and the number of
      options that will ultimately not complete their vesting requirements
      (“forfeitures”). Changes in the assumptions can materially affect the estimate
      of fair value of stock-based compensation and consequently, the related amount
      recognized on the consolidated statements of income. On March 31, 2006 we
      accelerated the vesting of options to purchase an aggregate of 209,514 shares
      of
      Class A Common Stock and 29,931 shares of Class B Common Stock. The purpose
      of
      accelerating the vesting of the options was to reduce the non-cash compensation
      expense that we otherwise would be required to recognize. Total stock-based
      compensation expense recognized for the quarter ended July 2, 2006 was $45,000
      before income taxes, and the related tax benefit was $18,000. As of July 2,
      2006, total unrecognized stock-based compensation expense related to non-vested
      stock options was approximately $515,655, which is expected to be recognized
      over a weighted average period of approximately 4.0 years.


15




**Factors
      That May Affect Future Results**





Our
      short- and long-term success is subject to many factors that are beyond our
      control. Stockholders and prospective stockholders in the Company should
      consider carefully the following risk factors, in addition to the information
      contained in this report. This Report on Form 10-Q contains forward-looking
      statements, which are subject to a variety of risks and uncertainties. Our
      actual results could differ materially from those anticipated in these
      forward-looking statements as a result of various factors including those set
      forth below.





**Implementing
      Section 404 of the Sarbanes-Oxley Act of 2002 will be expensive,
      time-consuming and require significant management attention, and may not be
      successful.**





**** Pursuant
      to Section 404 of the Sarbanes-Oxley Act of 2002, the Company will be required,
      beginning in its fiscal year 2008, to perform an evaluation of its internal
      control over financial reporting and have its independent registered public
      accounting firm test and evaluate the design and operating effectiveness of
      such
      internal controls and publicly attest to such evaluation. The implementation
      process of Section 404 of the Sarbanes-Oxley Act of 2002 will be expensive,
      time-consuming and will require significant attention of the Company’s
      management. The Company cannot assure that it will not discover material
      weaknesses in its internal controls. The Company also cannot assure that it
      will
      complete the process of its evaluation and the auditors' attestation on time.
      If
      the Company discovers a material weakness, corrective action may be
      time-consuming, costly and further divert the attention of management. The
      disclosure of a material weakness, even if quickly remedied, could reduce the
      market's confidence in the Company’s financial statements, cause the delisting
      of its Common Stock from Nasdaq and harm its stock price, especially if a
      restatement of financial statements for past periods were to be necessary.





**A
      downturn in the economy may affect consumer purchases of discretionary items,
      which would reduce our net sales.**




The
      retail industry historically has been subject to substantial cyclical
      variations. The merchandise sold by us is generally a discretionary expense
      for
      our customers. A recession in the general economy or uncertainties regarding
      future economic prospects that affect consumer spending habits has had, and
      in
      the future may have, a materially adverse effect on our results of operations.





**Terrorist
      attacks or acts of war may harm our business.**





Terrorist
      attacks may cause damage or disruption to our 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 us to
      suffer in ways that we currently cannot predict. Our geographical focus in
      California, Nevada and Arizona may make us more vulnerable to such uncertainties
      than other comparable retailers who may not have similar geographical
      concentration.


16




**Intense
      competition in the sporting goods industry could limit our growth and reduce
      our
      profitability.**





The
      sporting goods business and the retail environment are highly competitive,
      and
      we compete with national, regional and local full-line sporting goods chains,
      specialty stores, supplier owned stores, discount and department stores, and
      internet retailers. A number of our competitors are larger and have greater
      resources.





**Because
      our stores are concentrated in the western portion of the United States, we
      are
      subject to regional risks.**





Currently,
      most of our stores are located in Southern California and the balance is located
      in Northern California, Central California, Nevada and Arizona. Accordingly,
      we
      are subject to regional risks, such as the economy, weather conditions, natural
      disasters and government regulations. For example, warm winter weather in the
      resorts frequented by our customers has affected sales in the past. When the
      region suffers an economic downturn or when other adverse events occur,
      historically there has been an adverse effect on our sales and profitability
      and
      this could also affect our ability to implement our planned growth. In addition,
      many of our vendors rely on the Ports of Los Angeles and Long Beach to process
      our shipments. Any disruption or congestion at the ports could impair our
      ability to adequately stock our stores. Several of our competitors operate
      stores across the United States and, thus, are not as vulnerable to such
      regional risks.




**We
      rely on one distribution center and any disruption could reduce our
      sales.**





We
      currently rely on a single distribution center in Ontario, California. Any
      natural disaster or other serious disruption to this distribution center due
      to
      fire, earthquake or any other cause could damage a significant portion of our
      inventory and could materially impair both our ability to adequately stock
      our
      stores and our sales and profitability.





**Our
      ability to expand our business will be dependent upon our ability to meet
      challenges in new markets.**





Our
      continued growth depends on a strategy of opening new, profitable stores in
      existing markets and in new regional markets. The ability to successfully
      implement this growth strategy could be negatively affected by any of the
      following:





·
            suitable
                sites may not be available for leasing;




·
            we
                may not be able to negotiate acceptable lease terms;




·
            we
                might not be able to hire and retain qualified store personnel; and




·
            we
                might not have the financial resources necessary to fund our expansion
                plans.







In
      addition, our expansion in new and existing markets may present competitive,
      distribution and merchandising challenges that differ from the current
      challenges. These potential new challenges include competition among our stores,
      added strain on our distribution center, additional information to be processed
      by our management information systems and diversion of management attention
      from
      ongoing operations. We face additional challenges in entering new markets,
      including consumers’ lack of awareness of the Company, difficulties in hiring
      personnel and problems due to our unfamiliarity with local real estate markets
      and demographics. New markets may also have different competitive conditions,
      consumer tastes and discretionary spending patterns than our existing markets.
      To the extent that we are not able to meet these new challenges, sales could
      decrease and operating costs could increase. Furthermore, a decline in our
      overall financial performance, increased rents or any other adverse effects
      arising from the commercial real estate market in our geographical markets
      may
      adversely affect our current growth plan. There can be no assurance that we
      will
      possess sufficient funds to finance the expenditures related to our planned
      growth, that new stores can be opened on a timely basis, that such new stores
      can be operated on a profitable basis, or that such growth will be
      manageable.


17




**We
      may pursue strategic acquisitions, which could have an adverse impact on our
      business.**





We
      may
      from time to time acquire complementary companies or businesses. Acquisitions
      may result in difficulties in assimilating acquired companies, and may result
      in
      the diversion of our capital and our management’s attention from other business
      issues and opportunities. We may not be able to successfully integrate
      operations that we acquire, including their personnel, financial systems,
      distribution, operations and general store operating procedures. If we fail
      to
      successfully integrate acquisitions, our business could suffer. In addition,
      the
      integration of any acquired business, and their financial results, into ours
      may
      adversely affect our operating results. We currently do not have any agreements
      with respect to any such acquisitions.





**Our
      future growth will be dependent on the availability of additional
      financing.**





We
      may
      not be able to fund our future growth or react to competitive pressures if
      we
      lack sufficient funds. Unexpected conditions could cause us to be in violation
      of our lender’s operating covenants. Currently, we believe we have sufficient
      cash available through our bank credit facilities and cash from operations
      to
      fund existing operations for the foreseeable future. We cannot be certain that
      additional financing will be available in the future if necessary.




**If
      we are unable to successfully implement our controlled growth strategy or manage
      our growing business, our future operating results could
      suffer.**





Since
      our
      inception, we have experienced periods of rapid growth. No assurance can be
      given that we will be successful in maintaining or increasing our sales in
      the
      future. Any future growth in sales will require additional working capital
      and
      may place a significant strain on our management, management information
      systems, inventory management, distribution facilities and receivables
      management. Any failure to timely enhance our operating systems, or unexpected
      difficulties in implementing such enhancements, could have a material adverse
      effect on our results of operations.





**If
      we lose key management or are unable to attract and retain talent, our operating
      results could suffer.**





We
      depend
      on the continued service of our senior management. The loss of the services
      of
      any key employee could hurt our business. Also, our future success depends
      on
      our ability to identify, attract, hire, train and motivate other highly skilled
      personnel. Failure to do so may adversely affect future
      results.


18


**Seasonal
      fluctuations in the sales of sporting goods could cause our annual operating
      results to suffer.**





Our
      sales
      volume increases significantly during the Holiday season as is typical with
      other sporting goods retailers. In addition, our product mix has historically
      emphasized cold weather sporting goods increasing the seasonality of our
      business. In recent years, the months of November, December and January
      represented between 30% and 34% of our total net sales, while winter-related
      products ranged from 15% to 19% of total net sales. The operating results
      historically have been influenced by the amount and timing of snowfall at the
      resorts frequented by our customers. An early snowfall often has influenced
      sales because it generally extends the demand for winter apparel and equipment,
      while a late snowfall may have the opposite effect. Suppliers in the ski and
      snowboard industry require us to make commitments for purchases of apparel
      and
      equipment by April for fall delivery, and only limited quantities of merchandise
      can be reordered during the fall. Consequently, we place our orders in the
      spring anticipating snowfall in the winter. If the snowfall does not at least
      provide an adequate base or occurs late in the season, or if sales do not meet
      projections, we may be required to mark down our winter apparel and equipment.




**Our
      quarterly operating results may fluctuate substantially, which may adversely
      affect our business.**





We
      have
      experienced, and expect to continue to experience, a substantial variation
      in
      our net sales and operating results from quarter to quarter. We believe that
      the
      factors which influence this variability of quarterly results include general
      economic and industry conditions that affect consumer spending, changing
      consumer demands, the timing of our introduction of new products, the level
      of
      consumer acceptance of each new product, the seasonality of the markets in
      which
      we participate, the weather and actions of competitors. Accordingly, a
      comparison of our results of operations from period to period is not necessarily
      meaningful, and our results of operations for any period are not necessarily
      indicative of future performance.




**We
      are controlled by our Founder and management, whose interests may differ from
      other stockholders.**





At
      August
      4, 2006, Norbert Olberz, the Company's Chairman Emeritus, director and founder,
      Craig Levra, the Company’s Chairman and Chief Executive Officer, and Howard
      Kaminsky, the Company’s Chief Financial Officer, collectively owned
      approximately 67% of the Company’s outstanding Class A and Class B Common Stock.
      Messrs. Olberz, Levra and Kaminsky effectively have the ability to control
      the
      outcome on all matters requiring stockholder approval, including, but not
      limited to, the election and removal of directors, and any merger, consolidation
      or sale of all or substantially all of the Company’s assets, and to control the
      Company’s management and affairs. Transactions may be pursued that could enhance
      Messrs. Olberz, Levra and Kaminsky’s interests in the Company while involving
      risks to the interests of the Company’s other stockholders, and there is no
      assurance that their interests will not conflict with the interests of the
      Company’s other stockholders.





**Problems
      with our information systems could disrupt our operations and negatively impact
      our financial results.**





Our
      success, in particular our ability to successfully manage inventory levels
      and
      our centralized distribution system, largely depends upon the efficient
      operation of our computer hardware and software systems. We use management
      information systems to track inventory information at the store level, replenish
      inventory from our warehouse, and aggregate daily sales information among other
      things. These systems and our operations are vulnerable to damage or
      interruption from:


19




·
            earthquake,
                fire, flood and other natural disasters;




·
            power
                loss, computer systems failures, internet and telecommunications
                or data
                network failure, operator negligence, improper operation by or supervision
                of employees, physical and electronic loss of data and similar events;
                and




·
            computer
                viruses, penetration by hackers seeking to disrupt operations or
                misappropriate information and other breaches of security.





We
      seek
      to minimize these risks by the use of backup facilities and redundant systems.
      Nevertheless any failure that causes an interruption in our operations or a
      decrease in inventory tracking could result in reduced net sales.





**If
      we are unable to predict or react to changes in consumer demand, we may lose
      customers and our sales may decline.**





If
      we
      fail to anticipate changes in consumer preferences, we may experience lower
      net
      sales, higher inventory markdowns and lower margins. Products must appeal to
      a
      broad range of consumers whose preferences cannot be predicted with certainty.
      These preferences are also subject to change. Sporting goods are often subject
      to short-lived trends, such as the short-lived popularity of in-line scooters.
      Outdoor wear is significantly influenced by fashion. Our success depends upon
      the ability to anticipate and respond in a timely manner to trends in sporting
      goods merchandise and consumers’ participation in sports. Failure to identify
      and respond to these changes may cause net sales to decline. In addition,
      because we generally make commitments to purchase products from vendors up
      to
      nine months in advance of the proposed delivery, misjudging the market may
      over-stock unpopular products and force inventory markdowns that could have
      a
      negative impact on profitability, or have insufficient inventory of a popular
      item that can be sold at full markup.





**The
      price of our Class A Common Stock and Class B Common Stock may be volatile.**





Our
      Class
      A Common Stock and Class B Common Stock are thinly traded making it difficult
      to
      sell large amounts. The market prices of our Class A Common Stock and Class
      B
      Common Stock are 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 us or our competitors of a material
      nature, additions or departures of key personnel, future sales of Class A Common
      Stock and Class B 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 our Class A Common Stock
      and Class B Common Stock.





**Provisions
      in the Company's charter documents could discourage a takeover that stockholders
      may consider favorable.**





At
      August
      4, 2006, Norbert Olberz, the Company's Chairman Emeritus, director and founder,
      Craig Levra, the Company's Chairman and Chief Executive Officer, and Howard
      Kaminsky, the Company's Chief Financial Officer, collectively owned
      approximately 67% of the Company's outstanding Class A and Class B Common Stock.
      The holder of a share of Class B Common Stock is entitled to one vote on each
      matter presented to the stockholders whereas the holder of a share of Class
      A
      Common Stock has 1/20th of one vote on each matter presented to the
      stockholders. Subject to the Class A protection provisions described below,
      Messrs. Olberz, Levra and Kaminsky will be able to sell shares of Class A Common
      Stock and use the proceeds to purchase additional shares of Class B Common
      Stock, thereby increasing their collective voting power. Subject to the
      prohibition on the grant, issuance, sale or transfer of Class B Common Stock
      to
      Messrs. Levra and Kaminsky, the Company will also be able to issue Class B
      Common Stock (subject to the applicable rules of the NASD and the availability
      of authorized and unissued shares of Class B Common Stock) to persons deemed
      by
      the Board of Directors to be preferable to a potential acquirer, thereby
      diluting the voting power of that potential acquirer. The Class A protection
      provisions in the Company's Certificate of Incorporation could also make
      acquisition of voting control more expensive by requiring an acquirer of 10%
      or
      more of the outstanding shares of Class B Common Stock to purchase a
      corresponding proportion of Class A Common Stock.


20




The
      Company's Certificate of Incorporation contains certain other provisions that
      may have an "anti-takeover" effect. The Company's Certificate of Incorporation
      does not provide for cumulative voting and, accordingly, a significant minority
      stockholder could not necessarily elect any designee to the Board of Directors.
      The Company's Certificate of Incorporation also provides that the Board of
      Directors shall be divided into three classes, as nearly equal in number as
      possible, which are elected for staggered three-year terms and, accordingly,
      it
      could take at least two annual meetings to change a majority of the Board of
      Directors. As a result of these provisions in the Company's Certificate of
      Incorporation, stockholders of the Company may be deprived of an opportunity
      to
      sell their shares at a premium over prevailing market prices and it would be
      more difficult to replace the directors and management of the Company.




**We
      may be subject to product liability claims and our insurance may not be
      sufficient to cover damages related to those claims.**





We
      may be
      subject to lawsuits resulting from injuries associated with the use of sporting
      goods equipment that we sell. We may incur losses relating to these claims
      or
      the defense of these claims. There is a risk that claims or liabilities will
      exceed our insurance coverage. In addition, we may be unable to retain adequate
      liability insurance in the future. In addition, we are subject to regulation
      by
      the Consumer Product Safety Commission and similar state regulatory agencies.
      If
      we fail to comply with government and industry safety standards, we may be
      subject to claims, lawsuits, fines and adverse publicity that could have a
      material adverse effect on our business, results of operations and financial
      condition.





**Our
      comparable store sales will fluctuate and may not be a meaningful indicator
      of
      future performance.**





Changes
      in our comparable store sales results could affect the price of our Class A
      Common Stock and Class B Common Stock. A number of factors have historically
      affected, and will continue to affect, our comparable store sales results,
      including: competition, our new store openings and remodeling, general regional
      and national economic conditions, actions taken by our competitors, consumer
      trends and preferences, changes in the shopping centers in which we are located,
      new product introductions and changes in our product mix, timing and
      effectiveness of promotional events, lack of new product introductions to spur
      growth in the sale of various kinds of sports equipment, and weather. Our
      comparable store sales may vary from quarter to quarter, and an unanticipated
      decline in revenues or comparable store sales may cause the price of our Class
      A
      Common Stock and Class B Common Stock to fluctuate significantly.




21


**Item
      3.** **Quantitative
      and Qualitative Disclosures About Market Risk.**





The
      Company’s exposure to interest rate risk consists primarily of borrowings under
      its credit facility, which bears interest at floating rates. The impact on
      earnings or cash flow during the next fiscal year from a change of 100 basis
      points in the interest rate would not be significant.





**Item
      4.** **Controls
      and Procedures.**





The
      Company’s Chief Executive Officer, Craig Levra, and Chief Financial Officer,
      Howard Kaminsky, with the participation of the Company’s management, carried out
      an evaluation of the effectiveness of the Company’s disclosure controls and
      procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that
      evaluation, the Chief Executive Officer and the Chief Financial Officer
      concluded that, as of the end of the period covered by this report, the
      Company’s disclosure controls and procedures are effective at the “reasonable
      assurance” level in identifying to them material information relating to the
      Company (including its consolidated subsidiaries) required to be included in
      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.




There
      were no changes in the Company's internal controls over financial reporting,
      identified by the Chief Executive Officer or the Chief Financial Officer that
      occurred during the period covered by this report that have materially affected,
      or are reasonably likely to materially affect, the Company’s internal control
      over financial reporting.




22


**Part
      II - OTHER INFORMATION**





**Item
      1.**  **** **Legal
      Proceedings.**





The
      Company is involved in various routine legal proceedings incidental to the
      conduct of its business. 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 of the Company, either due to the nature
      of
      the claims, or because management believes that such claims should not exceed
      the limits of the Company’s insurance coverage.





**Item
      1A.** **Risk
      Factors.**





There
      were no material changes to the risk factors from those disclosed in our Annual
      Report on Form 10-K for the year ended March 31, 2006. Our short- and long-term
      success is subject to many factors that are beyond our control. Stockholders
      and
      prospective stockholders in the Company should consider carefully the risk
      factors set forth in Part I, “Item 2. Management’s Discussion and
      Analysis of Financial Condition and Results of Operations - Factors That May
      Affect Future Results.”




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





Not
      Applicable.





**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.**





**Stockholder
      Proposals**





The
      proxy
      materials for the 2006 annual meeting of the stockholders to be held on August
      8, 2006 were mailed to stockholders of the Company on June 21, 2006.





Under
      certain circumstances, stockholders are entitled to present proposals at
      stockholder meetings. SEC rules provide that any such proposal to be included
      in
      the proxy statement for the Company’s 2007 annual meeting of stockholders must
      be received by the Secretary of the Company at the Company’s office at One Sport
      Chalet Drive, La Canada, California 91011 not less than 120 calendar days before
      the date of the Company’s proxy statement released to stockholders in connection
      with the 2006 annual meeting in a form that complies with applicable
      regulations. The date of the Company’s proxy statement for the 2006 annual
      meeting was June 21, 2006. If the date of the 2007 annual meeting is advanced
      or
      delayed more than 30 days from the date of the 2006 annual meeting, stockholder
      proposals intended to be included in the proxy statement for the 2007 annual
      meeting must be received by the Company within a reasonable time before the
      Company begins to print and mail the proxy statement for the 2007 annual
      meeting.


23





SEC
      rules
      also govern a company's ability to use discretionary proxy authority with
      respect to stockholder proposals that were not submitted by the stockholders
      in
      time to be included in the proxy statement. SEC rules provide that if a
      stockholder proposal is not submitted to the Company at least 45 calendar days
      before the date on which the Company first mailed the Company’s proxy statement
      for the 2006 annual meeting, the proxies solicited by the Board for the 2007
      annual meeting of stockholders will confer authority on the proxyholders to
      vote
      the shares in accordance with the recommendations of the Board if the proposal
      is presented at the 2007 annual meeting of stockholders without any discussion
      of the proposal in the proxy statement for such meeting. If the date of the
      2007
      annual meeting is advanced or delayed more than 30 days from the date of the
      2006 annual meeting, then the stockholder proposal must not have been submitted
      to the Company within a reasonable time before the Company mails the proxy
      statement for the 2007 annual meeting.





The
      2007
      annual meeting of stockholders is presently expected to be held on or about
      August 7, 2007. Upon any determination that the date of the 2007 annual meeting
      will be advanced or delayed from this date, the Company will disclose the change
      in the earliest practicable Quarterly Report on Form 10-Q.





**Item
      6.**  **** **Exhibits.**





Exhibits:





3.1
            Amended
                and Restated Certificate of Incorporation (incorporated by reference
                to
                Exhibit 3.1 of the Company’s Registration Statement on Form S-1, File No.
                33-53120)




3.2
            Bylaws
                of Sport Chalet, Inc. as amended (incorporated by reference to Exhibit
                3.2
                of the Company’s Registration Statement on Form S-8, File No.
                333-107683)




3.3
            Certificate
                of Amendment to the Amended and Restated Certificate of Incorporation
                of
                Sport Chalet, Inc. (incorporated by reference to Exhibit 3.1 of the
                Company’s Form 8-K filed on September 22,
                2005)




4.1
            Form
                of Certificate for Class A Common Stock, par value $0.01 per share
                (incorporated by reference to Exhibit 4.1 to the Company's Form 8-A
                filed
                on September 29, 2005)




4.2
            Form
                of Certificate for Class B Common Stock, par value $0.01 per share
                (incorporated by reference to Exhibit 4.2 to the Company's Form 8-A
                filed
                on September 29, 2005)




31.1
            Certification
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002




31.2
            Certification
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002




32.1
            Certification
                Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002




24


**SIGNATURE**





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.


**SPORT
              CHALET, INC.**DATE:August
              4, 2006
            By:
            /s/
              HOWARDK.
              KAMINSKYHoward
                K. Kaminsky
              Executive
                Vice President-Finance,
              Chief
                Financial Officer and Secretary
              (On
                behalf of the Registrant and as
              Principal
                Financial and Accounting
                Officer)


25