**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 SECURITIESEXCHANGE
                ACT OF 1934





For
      the
      quarterly period ended December 30, 2007





OR





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
                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
      February 12, 2007, there were 12,353,871 shares of Class A Common Stock
      outstanding and 1,755,471 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
            10Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            23Item
                4T.
            Controls
                and Procedures
            24PART
                II - OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            25Item
                1A.
            Risk
                Factors
            25Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            25Item
                3.
            Defaults
                Upon Senior Securities
            25Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            26Item
                5.
            Other
                Information
            26Item
                6.
            Exhibits
            27





2





**PART
      I - FINANCIAL INFORMATION**





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


**SPORT
        CHALET, INC.**
 
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**


Three months
                  ended
              
              Nine
                  months endedDecember
                  30, 2007
              
              December
                  31, 2006
              
              December
                  30, 2007
              
              December
                  31, 2006Net
                  sales
              
              $
              116,557,601
              
              $
              114,682,558
              
              $
              305,780,954
              
              $
              290,403,557Cost
                  of goods sold, buying and occupancy costs
              
              
              81,310,271
              
              
              77,451,480
              
              
              214,671,377
              
              
              199,063,241Gross
                  profit
              
              
              35,247,330
              
              
              37,231,078
              
              
              91,109,577
              
              
              91,340,316Selling,
                  general and administrative expenses
              
              
              30,545,942
              
              
              27,392,365
              
              
              79,068,444
              
              
              72,396,203Depreciation
                  and amortization
              
              
              3,278,658
              
              
              2,909,816
              
              
              9,766,560
              
              
              8,294,911Impairment
                  charge
              
              
              2,077,307
              
              
              -
              
              
              2,077,307
              
              
              -Income
                  (loss) from operations
              
              
              (654,577
              )
              
              6,928,897
              
              
              197,266
              
              
              10,649,202Interest
                  expense
              
              
              489,694
              
              
              291,336
              
              
              1,205,889
              
              
              352,523Income
                  (loss) before taxes
              
              
              (1,144,271
              )
              
              6,637,561
              
              
              (1,008,623
              )
              
              10,296,679Income
                  tax provision (benefit)
              
              
              (462,183
              )
              
              2,632,175
              
              
              (401,632
              )
              
              4,079,179Net
                  income (loss)
              
              $
              (682,088
              )
              $
              4,005,386
              
              $
              (606,991
              )
              $
              6,217,500Earnings
                  (loss) per share:Basic
              
              $
              (0.05
              )
              $
              0.29
              
              $
              (0.04
              )
              $
              0.45Diluted
              
              $
              (0.05
              )
              $
              0.28
              
              $
              (0.04
              )
              $
              0.43Weighted
                  average number of common shares outstanding:Basic
              
              
              14,086,791
              
              
              13,925,434
              
              
              14,059,951
              
              
              13,735,241Diluted
              
              
              14,086,791
              
              
              14,533,410
              
              
              14,059,951
              
              
              14,332,817


**See
        accompanying notes.**




3




**SPORT
      CHALET, INC.**





**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





December 30,
            
            April 1,2007
            
            2007(Unaudited)**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            7,634,771
            
            $
            3,840,757Accounts
                receivable, net
            
            
            3,526,542
            
            
            6,894,282Merchandise
                inventories
            
            
            106,142,989
            
            
            87,066,998Prepaid
                expenses and other current assets
            
            
            5,424,117
            
            
            4,827,232Prepaid
                income taxes
            
            
            3,857,242
            
            
            1,481,914Deferred
                income taxes
            
            
            4,012,064
            
            
            3,145,502Total
                current assets
            
            
            130,597,725
            
            
            107,256,685Fixed
                assets, net
            
            
            65,413,458
            
            
            59,487,415Deferred
                income taxes
            
            
            1,989,415
            
            
            4,504,986Total
                assets
            
            $
            198,000,598
            
            $
            171,249,086**Liabilities
                and stockholders' equity**Current
                liabilities:Accounts
                payable
            
            $
            38,807,739
            
            $
            29,407,673Loan
                payable to bank
            
            
            22,000,000
            
            
            11,776,278Salaries
                and wages payable
            
            
            3,635,282
            
            
            4,999,139Other
                accrued expenses
            
            
            22,740,515
            
            
            15,580,770Total
                current liabilities
            
            
            87,183,536
            
            
            61,763,860Deferred
                rent
            
            
            24,189,851
            
            
            23,059,084Commitments
                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 – 12,353,871 at December
                30, 2007 and 12,252,654 at April 1, 2007
            
            
            123,539
            
            
            122,527Class
                B Common Stock, $.01 par value:Authorized
                shares - 2,000,000 Issued and outstanding shares – 1,755,471 at December
                30, 2007 and 1,741,489 at April 1, 2007
            
            
            17,555
            
            
            17,415Additional
                paid-in capital
            
            
            33,997,660
            
            
            33,190,752Retained
                earnings
            
            
            52,488,457
            
            
            53,095,448Total
                stockholders’ equity
            
            
            86,627,211
            
            
            86,426,142Total
                liabilities and stockholders’ equity
            
            $
            198,000,598
            
            $
            171,249,086





**See
      accompanying notes.**




4


**SPORT
      CHALET, INC.**





**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**





Nine months endedDecember 30, 2007
            
            December 31, 2006**Operating
                activities**Net
                income (loss)
            
            $
            (606,991
            )
            $
            6,217,500Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            9,766,560
            
            
            8,294,911Impairment
                charge
            
            
            2,077,307
            
            
            -Loss
                on disposal of equipment
            
            
            64,344
            
            
            158,300Share-based
                compensation
            
            
            188,372
            
            
            122,448Deferred
                income taxes
            
            
            1,649,009
            
            
            (729,085
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            3,367,740
            
            
            (2,070,402
            )Merchandise
                inventories
            
            
            (19,075,991
            )
            
            (33,969,570
            )Prepaid
                expenses and other current assets
            
            
            (596,885
            )
            
            (641,134
            )Prepaid
                income taxes
            
            
            (2,375,328
            )
            
            1,012,493Accounts
                payable
            
            
            9,400,066
            
            
            27,045,337Salaries
                and wages payable
            
            
            (1,363,857
            )
            
            (585,055
            )Other
                accrued expenses
            
            
            7,159,745
            
            
            7,561,153Deferred
                rent
            
            
            1,130,767
            
            
            2,640,136Net
                cash provided by operating activities
            
            
            10,784,858
            
            
            15,057,032**Investing
                activities**Purchase
                of fixed assets
            
            
            (17,834,254
            )
            
            (17,160,666
            )Net
                cash used in investing activities
            
            
            (17,834,254
            )
            
            (17,160,666
            )**Financing
                activities**Proceeds
                from bank borrowing
            
            
            91,221,358
            
            
            33,826,455Repayments
                of bank borrowing
            
            
            (80,997,636
            )
            
            (33,826,455
            )Proceeds
                from exercise of stock options
            
            
            319,920
            
            
            1,353,253Optionee
                withholding taxes from exercise of stock options
            
            
            
            
            
            (890,264
            )Tax
                benefit on employee stock options
            
            
            299,768
            
            
            1,175,773Net
                cash provided by financing activities
            
            
            10,843,410
            
            
            1,638,762Increase
                (decrease) in cash and cash equivalents
            
            
            3,794,014
            
            
            (464,872
            )Cash
                and cash equivalents at beginning of period
            
            
            3,840,757
            
            
            2,563,930Cash
                and cash equivalents at end of period
            
            $
            7,634,771
            
            $
            2,099,058**Supplemental
                Disclosure of Cash Flow Information**Cash
                paid during the period for:Income
                taxes
            
            $
            -
            
            $
            2,620,000Interest
            
            
            1,071,787
            
            
            210,136





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




5





**SPORT
      CHALET, INC.**





**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**





1.
            Basis
                of Presentation





The
      accompanying unaudited condensed 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 April 1, 2007.
      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 was 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 nine
      months ended December 31, 2006 includes two additional days, included in the
      first quarter, as compared to the nine months ended December 30,
      2007.





Certain
      reclassifications, primarily related to depreciation, were made to the prior
      year financial statements to conform to current year presentation with regard
      to
      the consolidated statement of operations and the consolidated statement of
      cash
      flows.








2.
            Earnings
                (loss) per Share





Earnings
      (loss) per share, basic, is computed based on the weighted average number of
      common shares outstanding for the period. Earnings (loss) 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 (loss) per share computations are set forth below:





Three months
                ended
            
            Nine
                months endedDecember
                30, 2007
            
            December
                31, 2006
            
            December
                30, 2007
            
            December
                31, 2006Net
                income (loss)
            
            $
            (682,088
            )
            $
            4,005,386
            
            $
            (606,991
            )
            $
            6,217,500Weighted
                average number of common shares:Basic
            
            
            14,086,791
            
            
            13,925,434
            
            
            14,059,951
            
            
            13,735,241Effect
                of dilutive securities-stock options
            
            
            -
            
            
            607,976
            
            
            -
            
            
            597,576Diluted
            
            $
            14,086,791
            
            $
            14,533,410
            
            $
            14,059,951
            
            $
            14,332,817Class
                A and Class B earnings (loss) per share:Basic
            
            $
            (0.05
            )
            $
            0.29
            
            $
            (0.04
            )
            $
            0.45Effect
                of dilutive securities-stock options
            
            
            -
            
            
            (0.01
            )
            
            -
            
            
            (0.02
            )Diluted
            
            $
            (0.05
            )
            $
            0.28
            
            $
            (0.04
            )
            $
            0.43





An
      aggregate of 943,404 and 729,975 options for the three and nine months ended
      December 30, 2007, respectively, and an aggregate of 101,500 and 88,000 options
      for the three and nine months ended December 31, 2006, are excluded from the
      computation of diluted earnings per share as their effect would have been
      anti-dilutive.





3.
            Share-based
                Compensation





Total
      share-based compensation expense and the related income tax benefit recognized
      for the three and nine months ended December 30, 2007 and December 31,
      2006:





Three
                months ended
            
            Nine
                months endedDecember
                30, 2007
            
            December
                31, 2006
            
            December
                30, 2007
            
            December
                31, 2006Compensation
                expense
            
            $
            44,129
            
            $
            21,736
            
            $
            188,372
            
            $
            122,448Income
                tax benefit
            
            $
            18,000
            
            $
            9,000
            
            $
            75,000
            
            $
            49,000





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. For the three months and nine months ended December
      30,
      2007 and December 31, 2006 the following weighted average assumptions were
      used
      to estimate the fair value for stock options granted in that
      period:





Three
                months ended
            
            Nine
                months endedDecember
                30, 2007
            
            December
                31, 2006
            
            December
                30, 2007
            
            December
                31, 2006Risk-free
                interest rate
            
            
            5.0
            %
            
            4.7
            %
            
            5.0
            %
            
            5.0
            %Expected
                volatility
            
            
            36.6
            %
            
            41.1
            %
            
            36.6
            %
            
            41.4
            %Expected
                dividend yield
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %Expected
                life in years
            
            
            7.5
            
            
            7.51
            
            
            7.5
            
            
            7.51





7




The
      stock
      option activity during the nine months ended December 30, 2007 is presented
      in
      the following table:





Options
            
            Weighted
              Average
              Exercise
                Price
            
            Weighted-
              Average
              Remaining
              Contractual
              Term
                (Years)
            
            Aggregate
              Intrinsic
                ValueOutstanding
                as of April 1, 2007
            
            
            1,507,586
            
            $
            4.84Granted
            
            
            94,000
            
            
            10.15Exercised
            
            
            (115,199
            )
            
            3.17Forfeited
                or expired
            
            
            (7,834
            )
            
            2.78Outstanding
                as of December 30, 2007
            
            
            1,478,553
            
            $
            5.31
            
            
            5.2
            
            $
            3,226,139Exercisable
                as of December 30, 2007
            
            
            1,313,853
            
            $
            4.84
            
            
            4.7
            
            $
            3,226,139





The
      aggregate intrinsic value in the table above is based on the Company’s closing
      stock price of $7.16 and $6.70 for Class A and Class B, respectively, as of
      the
      last trading day of the period ended December 30, 2007.





4.
            Impairment
                of Long-Lived Assets





A
      non-cash impairment charge of $2.1 million was recorded in the three and nine
      months ended December 30, 2007 related to certain California stores which opened
      with significantly lower than expected sales volume and based on recent trends
      are not expected to obtain sufficient cash flow over their remaining lease
      terms
      to support the net book value of their leasehold improvements and fixtures.
      The
      existence of the impairment was assessed by calculating the net cash flow of
      the
      individual store on an undiscounted basis and comparing it to the net book
      value
      of the individual store. The actual impairment charge was measured
      by determining the fair value of the store's assets and comparing it to the
      book value.  Fair value for fixtures is based on
      the book value less the cost of moving those assets to another store,
      while the fair value of leasehold improvements is based on the discounted
      net cash flow of the store over the remaining term of the lease.





5.
            Income
                Taxes





We
      adopted the provisions of Financial Accounting Standards Board (“FASB”)
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN
      48”), an interpretation of FASB Statement No. 109 (“SFAS 109”), on April 2,
      2007. We have no unrecognized income tax benefits. When applicable, we recognize
      interest and penalties related to uncertain tax positions in income tax expense.
      The tax years ending March 31, 2004 to April 1, 2007 remain open to examination
      by the Internal Revenue Service and the year ended March 31, 2005 is currently
      under audit by the Internal Revenue Service. The tax years ending March 31,
      2003
      to April 1, 2007 remain open to examination by the state of California. The
      tax
      years ending March 31, 2006 to April 1, 2007 remain open to examination by
      the
      state of Arizona.





8


6.
            Recently
                Issued Accounting Pronouncements





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements”. SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles and expands
      disclosures about fair value measurements. SFAS No. 157 applies under other
      accounting pronouncements that require or permit fair value measurements, the
      FASB having previously concluded in those accounting pronouncements that fair
      value is the relevant measurement attribute. Accordingly, SFAS No. 157 does
      not require any new fair value measurements. SFAS No. 157 is effective for
      fiscal years beginning after December 15, 2007. The Company plans to adopt
      SFAS No. 157 beginning in the first quarter of fiscal 2009 and does not
      expect the adoption to have a material impact on net earnings or financial
      position.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities.” SFAS No. 159 permits
      companies to choose to measure many financial instruments and certain other
      items at fair value. The objective is to improve financial reporting by
      providing companies with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions. SFAS No. 159 is
      effective for fiscal years beginning after November 15, 2007. Companies are
      not allowed to adopt SFAS No. 159 on a retrospective basis unless they
      choose early adoption. The Company plans to adopt SFAS No. 159 at the
      beginning of fiscal 2009 and does not expect the adoption to have a material
      impact on net earnings or financial position.




9





**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 52 full service specialty sporting goods stores in
      California, Nevada, Arizona and Utah. In 1959, Norbert Olberz, our 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 new stores throughout California, Nevada, Arizona and Utah
      as
      suitable locations are found. We have opened seven stores during the nine months
      ended December 30, 2007, including our first Utah store, sixteen stores in
      the
      last three years and twenty-four in the last five years. 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 as a percent of sales in the early years of operation, due
      primarily to pre-opening and promotional costs and lower than average sales.
      As
      the store matures, sales tend to level off and expenses decline as a percent
      of
      sales. We believe our stores require three to four years to attract a stable,
      mature customer base, but because of our relatively low number of stores,
      reliable statistical trends are not available and there can be no assurance
      that
      our stores will mature at that rate. A slower rate of maturity would cause
      reduced profitability as a percent of sales. In addition, we continue to invest
      in infrastructure improvements to more efficiently manage the increasing store
      base. These improvements generally increase overhead expenses in the form of
      computer hardware and software maintenance and depreciation as well as staff
      to
      operate these systems. At some point, the growth in sales from new and mature
      stores is expected to exceed the growth in infrastructure costs, but there
      can
      be no assurance that this will occur.




10




The
      terms
      comparable store sales or same store sales are used interchangeably and are
      considered a key performance measurement. The sales of a store are first
      included in the comparable store sales calculation in the quarter following
      its
      twelfth full month of operation. Our comparable store sales growth has been
      positive for the last four fiscal years. However, for the nine months ended
      December 30, 2007 comparable store sales declined 3.0% due to, among other
      things, weak macroeconomic conditions and to a lesser extent the new store
      opens
      by the Company and its competitors. Many factors affect sales during a fiscal
      year, such as the overall economic conditions, unseasonable weather in our
      markets, the appeal of our merchandise assortments and marketing changes. In
      general, our mature stores have leveled off in their growth and although we
      are
      focused on constant improvement in all stores, we expect our comparable store
      sales growth to be driven by maturing stores, subject to the trends mentioned
      above.





We
      believe that the overall growth of our business should allow us to maintain
      or
      increase our operating margins over time. Increased merchandise volumes should
      enable us to improve our purchasing leverage and achieve greater efficiencies
      throughout the supply chain.  Gross profit, which includes occupancy costs,
      as a percent of sales has increased from 29.2% to 30.9% over the past five
      fiscal years. However, improvements in merchandise procurement have been offset
      by increased occupancy costs as a percent of sales from new stores. For the
      nine
      months ended December 30, 2007, gross profit margin was 29.8% compared to 31.5%
      for the same period of the prior year primarily as a result of increased
      occupancy costs from newer stores and to a lesser extent markdowns taken to
      stimulate demand in an effort to offset the weak macroeconomic conditions.
      Our
      overall growth should leverage our investments in infrastructure such as the
      distribution center, corporate facilities and computer systems. However, these
      increased efficiencies and improvements have been 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 23.8% to 24.8% over the past five fiscal years.
      For
      the nine months ended December 30, 2007, selling, general and administrative
      expenses were 25.9% of sales compared to 24.9% for the same period of the prior
      year primarily as a result of the operating costs of newer stores and the loss
      of leverage from the decrease in same store sales.





We
      are in
      the process of implementing Section 404 of the Sarbanes-Oxley Act of 2002 which
      requires an extensive review and remediation of our internal controls. To help
      meet the requirements of Section 404 and enhance the Company’s ability to grow,
      we are replacing our legacy merchandise and financial systems with mySAP2005
      ERP
      from SAP. Implementation of this system, 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 with Section
      404
      by the end of fiscal 2008.





11


**Results
      of Operations**





***Three
      months ended December 30, 2007 compared to three months ended December 31,
      2006***





The
      following table sets forth statements of operations data and relative
      percentages of net sales for the three months ended December 30, 2007 and the
      three months ended December 31, 2006 (dollar amounts in thousands, except per
      share amounts).





**Three
                months ended**December
                30, 2007
            
            December
                31, 2006
            
            Dollar
              Increase
            
            PercentageAmount
            
            Percent
            
            Amount
            
            Percent
            
            (Decrease)
            
            Increase (Decrease)Net
                sales
            
            $
            116,558
            
            
            100.0
            %
            $
            114,683
            
            
            100.0
            %
            $
            1,875
            
            
            1.6
            %Gross
                profit
            
            
            35,247
            
            
            30.2
            %
            
            37,231
            
            
            32.5
            %
            
            (1,984
            )
            
            (5.3
            )%Selling,
                general and administrative expenses
            
            
            30,546
            
            
            26.2
            %
            
            27,392
            
            
            23.9
            %
            
            3,154
            
            
            11.5
            %Depreciation
                and amortization
            
            
            3,279
            
            
            2.8
            %
            
            2,910
            
            
            2.5
            %
            
            369
            
            
            12.7
            %Impairment
                charge
            
            
            2,077
            
            
            1.8
            %
            
            -
            
            
            0.0
            %
            
            2,077Income
                (loss) from operations
            
            
            (655
            )
            
            (0.6
            )%
            
            6,929
            
            
            6.0
            %
            
            (7,584
            )
            
            (109.5
            )%Interest
                expense
            
            
            490
            
            
            0.4
            %
            
            291
            
            
            0.3
            %
            
            199
            
            
            68.4
            %Income
                (loss) before taxes
            
            
            (1,144
            )
            
            (1.0
            )%
            
            6,638
            
            
            5.8
            %
            
            (7,782
            )
            
            (117.2
            )%Income
                tax provision (benefit)
            
            
            (462
            )
            
            (0.4
            )%
            
            2,632
            
            
            2.3
            %
            
            (3,094
            )
            
            (117.6
            )%Net
                income (loss)
            
            
            (682
            )
            
            (0.6
            )%
            
            4,005
            
            
            3.5
            %
            
            (4,687
            )
            
            (117.0
            )%Earnings
                (loss) per share:Basic
            
            $
            (0.05
            )
            
            
            
            $
            0.29
            
            
            
            
            $
            (0.34
            )
            
            (116.8
            )%Diluted
            
            $
            (0.05
            )
            
            
            
            $
            0.28
            
            
            
            
            $
            (0.33
            )
            
            (117.4
            )%





Sales
      increased $1.9 million, or 1.6%, to $116.6 million for the three months ended
      December 30, 2007 from $114.7 million for three months ended December 31, 2006.
      The sales growth is due to ten new stores, not included in the same store sales
      calculation, which resulted in an $9.5 million increase in sales, or 8.3%,
      partially offset by a same store sales decrease of $7.6 million, or 6.9%. Same
      store sales were primarily impacted by weak macroeconomic conditions. In
      addition, warm weather and wildfires in our core Southern California market,
      as
      well as the opening of new stores by the Company and competitors, contributed
      to
      the decline in same store sales. Four new stores opened this quarter, one in
      the
      second quarter and two in the first quarter of this fiscal year and three in
      the
      third quarter of fiscal 2007. We believe the macroeconomic trends also
      negatively affected our new stores.





Gross
      profit decreased $2.0 million, or 5.3%, as gross profit from increased sales
      of
      approximately $800,000 was offset by increased rent of $1.7 million, primarily
      from new stores, and increased markdowns of $900,000 taken to stimulate demand.
      As a percent of sales, gross profit decreased 230 basis points to 30.2% from
      32.5%. The decrease is primarily the result of increased rent as a percent
      of
      sales in newer stores which take time to reach operating efficiency and
      increased markdowns taken to stimulate demand.





Selling,
      general and administrative expenses increased $3.2 million, or 11.5%, for the
      three months ended December 30, 2007 over the three months ended December 31,
      2006 primarily from approximately $3.1 million in expenses related to additional
      stores. As a percent of sales, these expenses increased to 26.2% from 23.9%.
      The
      increase as a percent of sales is associated with newer stores, which take
      time
      to reach operating efficiency in addition to the loss of leverage from the
      decrease in same store sales.




A
      non-cash impairment charge of $2.1 million was recorded in the three months
      ended December 30, 2007 related to certain California stores which opened with
      significantly lower than expected sales volume and based on recent trends are
      not expected to obtain sufficient cash flow over their remaining lease terms
      to
      support the net book value of their leasehold improvements and fixtures. The
      existence of the impairment was assessed by calculating the net cash flow of
      the
      individual store on an undiscounted basis and comparing it to the net book
      value
      of the individual store. The actual impairment charge was measured
      by determining the fair value of the store's assets and comparing it to the
      book value.  Fair value for fixtures is based on
      the book value less the cost of moving those assets to another store,
      while the fair value of leasehold improvements is based on the discounted
      net cash flow of the store over the remaining term of the lease.




12




As
      a
      result of the reduction in same store sales, the opening of new stores and
      the
      impairment loss we incurred a net loss of $682,000, $0.05 per diluted share,
      compared to net income of $4.0 million, $0.28 per diluted share, for the same
      period last year.





***Nine
      months ended December 30, 2007 compared to nine months ended December 31,
      2006***





The
      following table sets forth statements of operations data and relative
      percentages of net sales for the nine months ended December 30, 2007 and the
      nine months ended December 31, 2006 (dollar amounts in thousands, except per
      share amounts).





**Nine
                months ended**December
                30, 2007
            
            December
                31, 2006
            
            Dollar
              Increase
            
            PercentageAmount
            
            Percent
            
            Amount
            
            Percent
            
            (Decrease)
            
            Increase (Decrease)Net
                sales
            
            $
            305,781
            
            
            100.0
            %
            $
            290,404
            
            
            100.0
            %
            $
            15,377
            
            
            5.3
            %Gross
                profit
            
            
            91,110
            
            
            29.8
            %
            
            91,340
            
            
            31.5
            %
            
            (230
            )
            
            (0.3
            %)Selling,
                general and administrative expenses
            
            
            79,068
            
            
            25.9
            %
            
            72,396
            
            
            24.9
            %
            
            6,672
            
            
            9.2
            %Depreciation
                and amortization
            
            
            9,767
            
            
            3.2
            %
            
            8,295
            
            
            2.9
            %
            
            1,472
            
            
            17.7
            %Impairment
                charge
            
            
            2,077
            
            
            0.7
            %
            
            -
            
            
            0.0
            %
            
            2,077Income
                (loss) from operations
            
            
            197
            
            
            0.1
            %
            
            10,649
            
            
            3.7
            %
            
            (10,452
            )
            
            (98.2
            %)Interest
                expense
            
            
            1,206
            
            
            0.4
            %
            
            353
            
            
            0.1
            %
            
            853
            
            
            241.6
            %Income
                (loss) before taxes
            
            
            (1,009
            )
            
            (0.3
            )%
            
            10,297
            
            
            3.5
            %
            
            (11,306
            )
            
            (109.8
            )%Income
                tax provision (benefit)
            
            
            (402
            )
            
            (0.1
            )%
            
            4,079
            
            
            1.4
            %
            
            (4,481
            )
            
            (109.9
            )%Net
                income (loss)
            
            
            (607
            )
            
            (0.2
            )%
            
            6,218
            
            
            2.1
            %
            
            (6,825
            )
            
            (109.8
            )%Earnings
                (loss) per share:Basic
            
            $
            (0.04
            )
            
            
            
            $
            0.45
            
            
            
            
            $
            (0.49
            )
            
            (109.6
            )%Diluted
            
            $
            (0.04
            )
            
            
            
            $
            0.43
            
            
            
            
            $
            (0.47
            )
            
            (110.1
            )%





Sales
      increased $15.4 million, or 5.3%, to $305.8 million for the nine months ended
      December 30, 2007 from $290.4 million for nine months ended December 31, 2006.
      The sales growth is due to twelve new stores, not included in the same store
      sales calculation, which resulted in a $24.9 million increase in sales, or
      8.6%,
      partially offset by a same store sales decrease of $8.0 million, or 3.0%, and
      by
      $2.1 million, or 0.7%, from two additional days in the nine months ended
      December 31, 2006 as a result of our calendar change last year. Same store
      sales
      were primarily impacted by weak macroeconomic conditions. In addition, a late
      start to winter and wildfires in our core Southern California market, as well
      as
      the opening of new stores by the Company and competitors, contributed to the
      decline in same store sales. Seven new stores opened this fiscal year and five
      in fiscal 2007. We believe the macroeconomic trends also negatively affected
      our
      new stores.





Gross
      profit decreased $230,000, or 0.3%, as gross profit from increased sales of
      approximately $6.0 million was offset by increased rent of $3.4 million,
      primarily from new stores, and increased markdowns of $2.8 million taken to
      stimulate demand. As a percent of sales, gross profit decreased 170 basis points
      to 29.8% from 31.5%. The decrease is primarily the result of increased rent
      as a
      percent of sales in newer stores which take time to reach operating efficiency.
      In addition, increased markdowns taken to stimulate demand more than offset
      gains obtained through continued improvements in merchandise procurement.




13




Selling,
      general and administrative expenses increased $6.7 million, or 9.2%, for the
      nine months ended December 30, 2007 over the nine months ended December 31,
      2006
      primarily from approximately $8.1 million in expenses related to additional
      stores. A focus on cost control helped save approximately $1.1 million in
      existing stores. As a percent of sales, selling, general and administrative
      expenses increased to 25.9% from 24.9%. The increase as a percent of sales
      is
      associated with newer stores, which take time to reach operating efficiency.
      Also as a percent of sales, cost savings from existing stores where offset
      by
      the loss of leverage from declining same store sales..





A
      non-cash impairment charge of $2.1 million was recorded in the nine months
      ended
      December 30, 2007 related to certain California stores which opened with
      significantly lower than expected sales volume and based on recent trends are
      not expected to obtain sufficient cash flow over their remaining lease terms
      to
      support the net book value of their leasehold improvements and fixtures. The
      existence of the impairment was assessed by calculating the net cash flow of
      the
      individual store on an undiscounted basis and comparing it to the net book
      value
      of the individual store. The actual impairment charge was measured
      by determining the fair value of the store's assets and comparing it to the
      book value.  Fair value for fixtures is based on
      the book value less the cost of moving those assets to another store,
      while the fair value of leasehold improvements is based on the discounted
      net cash flow of the store over the remaining term of the lease.





As
      a
      result of the reduction in same store sales, the costs associated with operating
      new stores and the impairment loss we incurred a net loss of $607,000, $0.04
      per
      diluted share, compared to net income of $6.2 million, $0.43 per diluted share,
      for the same period last year.





**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. For the many years we only borrowed
      on the bank facility for the seasonal build up of inventory in the third fiscal
      quarter. We believe that these sources will be sufficient to fund currently
      anticipated cash requirements for the foreseeable future, although there will
      be
      more reliance on borrowing than in the past.





Net
      cash
      provided by operating activities of $10.8 million and $15.1 million for the
      periods ended December 30, 2007 and December 31, 2006, respectively, is
      primarily the result of net income or loss, adjusted for depreciation and
      amortization and increases in accounts payable partially offset by inventory
      purchases.




Accounts
      receivable decreased by $3.4 million from its year-end balance primarily due
      to
      receipt of landlord reimbursements of leasehold improvement expenditures in
      fiscal 2007 related to new stores. The timing and amounts of such reimbursements
      vary significantly based on the terms of each new store lease.





Inventories
      increased by $19.1 million and $34.0 million for the periods ended December
      30,
      2007 and December 31, 2006, respectively, compared to the respective fiscal
      year-end balances primarily due to the build-up of seasonal merchandise and
      new
      stores. Fiscal 2008 purchases have been reduced relative to fiscal 2007 as
      inventory levels on a per store basis have been reduced. We ended fiscal 2007
      with 14.2% more average inventory per store than fiscal year end 2006 and we
      further reduced purchases during the nine months ended December 30, 2007 to
      lower our average inventory per store by 9.7% as compared to December 31, 2006.
      The increase at the end of fiscal 2007 was primarily from returning to a more
      normal historical pattern of carrying more winter related merchandise over
      the
      summer months this year than we did for the same period last year which was
      unusually low due to demand created by snowfall late in the season of the fiscal
      2006.




14




Deferred
      income taxes provided $1.6 million and prepaid income taxes used $2.4 million
      in
      cash for the period ended December 30, 2007. This is primarily due to a change
      of our asset lives for tax depreciation purposes which caused an increase in
      tax
      depreciation expense. The increased depreciation expense resulted in a $4.5
      million tax refund received in January 2008. The effect of this change on
      deferred income taxes was partially offset by the impairment loss which is
      a
      temporary difference realized for income taxes purposes over the tax lives
      of
      the assets impaired.




Historically,
      accounts payable has increased as inventory increases. Accounts payable
      increased by $9.4 million during the nine months ended December 30, 2007, as
      compared to an increase of $27.0 million for the nine months ended December
      31,
      2006. 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 $17.8 million and $17.2 million for
      the periods ended December 30, 2007 and December 31, 2006, respectively. We
      opened seven new stores in the period ended December 30, 2007 as compared to
      five in the same period last year. The costs to open new stores can vary
      significantly depending on the terms of the lease. As a result of our ongoing
      growth and strategic initiatives, forecasted capital expenditures for the
      remainder of fiscal 2008 are expected to be approximately $6 million, which
      will
      be funded by cash flow from operations and our bank credit line, as needed.
      The
      remaining capital expenditures are primarily for new stores to open in fiscal
      2009 and expenditures on the replacement of our legacy merchandise and financial
      systems.





Our
      credit facility with Bank of America, N.A. (the “Lender”) provides for advances
      up to $30 million, increasing to $40 million for the period October 1, through
      December 31, each year, less the amount of any outstanding draws, up to a $10
      million maximum in authorized letters of credit. Interest accrues at the
      Lender’s prime rate less 0.25% (7.00% at December 30, 2007) or can be fixed for
      a period of time at LIBOR plus an applicable margin (1.00% or 1.25%), 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, 2012, and we expect to renegotiate and extend the term of this
      agreement or obtain another form of financing before that date. Our obligation
      to the Lender is presently secured by a first priority lien on substantially
      all
      of our non-real estate assets, and we are subject to several restrictive
      covenants. The principal operating covenants require we maintain certain minimum
      cash flow coverage and debt to equity ratios and restrict the level of capital
      expenditures, calculated on a quarterly basis. We currently are 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.





15




The
      Company’s primary contractual obligations and commitments as of September 30,
      2007 are its store leases with initial terms expiring from 2007 through 2025,
      which typically provide for multiple five-year renewal options, and employment
      contracts:





**Payments
                due by period:**
            
            **Operating**
              **Leases**
            
            **Employment**
              **Contracts**Within
                1 year
            
            $
            33,805,466
            
            $
            169,5002
                -
                3 years
            
            
            69,297,789
            
            
            339,0004
                -
                5 years
            
            
            63,149,962
            
            
            339,000After
                5 years
            
            
            118,869,338
            
            
            381,375Total
            
            $
            285,122,555
            
            $
            1,228,875




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 $2.1
      million relating to purchase commitments were outstanding as of December 30,
      2007 and expire within one year.





No
      cash
      dividends have been declared on Class A Common Stock and Class B Common Stock
      as
      we intend to retain earnings for use in the operation and expansion of our
      business, and we 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 April 1, 2007, 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.





**Factors
      That May Affect Future Results**





Our
      short-term 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 elsewhere 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.




16





**We
      are replacing our legacy merchandise and financial systems. Changes to our
      systems may disrupt our supply chain operations and have a material adverse
      impact on our business and results of operations.**




Our
      business operations are dependent on our logistical systems, which include
      our
      merchandise and financial systems. These systems affect our ability to manage
      the merchandise supply chain, sell products, accomplish payment functions and
      report financial data. We are in the process of replacing our legacy merchandise
      and financial systems with software from SAP. There are inherent costs and
      risks
      associated with transitioning to new systems, including supply chain and
      merchandising systems disruptions that affect our ability to get the correct
      products into the appropriate stores. We may also encounter application program
      bugs, system conflict crashes, user error, data integrity issues, and
      integration issues with our remaining systems. Implementing new data standards
      and converting existing data to accommodate a new system's requirements will
      also require a significant amount of capital expenditure and effort across
      our
      entire organization, which may divert the attention of management. These system
      disruptions could negatively impact our business and results of
      operations.




In
      addition, we are in the process of implementing Section 404 of the
      Sarbanes-Oxley Act of 2002. Beginning with our 2008 fiscal year, we will be
      required to perform an evaluation of our internal control over financial
      reporting, and beginning with our 2009 fiscal year our independent registered
      public accounting firm will have to test and evaluate the design and operating
      effectiveness of such internal controls and publicly attest to such evaluation.
      On February 1, 2008 the Securities Exchange Commission proposed a deferral
      for
      an additional year the deadline for an independent registered public accounting
      firm attestation. The risks associated with transitioning to these new systems
      may cause additional complications which may slow down the review process and
      delay our ability to complete our evaluation, and the auditors' ability to
      complete their attestation on time. See "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."




**Our
      ability to expand our business will be dependent upon our ability to meet
      challenges in new and existing 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




**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 is a
      non-accelerated filer and will be required, beginning in our 2008 fiscal year,
      to perform an evaluation of our internal control over financial reporting,
      and
      beginning in our 2009 fiscal year our independent registered public accounting
      firm will have to test and evaluate the design and operating effectiveness
      of
      such internal controls and publicly attest to such evaluation. On February
      1,
      2008 the Securities Exchange Commission proposed a deferral for an additional
      year the deadline for an independent registered public accounting firm
      attestation. 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.





Our
      status as a non-accelerated filer is based on the aggregate market value of
      Class A Common Stock and Class B Common Stock held by our non-affiliates as
      of
      the end of our second fiscal quarter, at September 30, 2007, which was
      approximately $41 million. Should the aggregate market value of Class A Common
      Stock and Class B Common Stock held by our non-affiliates exceed $75 million
      on
      September 30, 2008 we would become an accelerated filer as of the end of fiscal
      2009.





**A
      downturn in the economy may affect consumer purchases of discretionary items,
      which could 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, Arizona and Utah may make us more vulnerable to such
      uncertainties than other comparable retailers who may not have similar
      geographical concentration.




18





**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 remaining are
      located in Northern California, Central California, Nevada, Arizona and Utah.
      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.





**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.




19





**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.




**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, our third fiscal quarter, which includes the Holiday
      season, represented approximately 30% of our annual net sales. Winter-related
      products represent approximately 17% of our annual net sales and have ranged
      from 27% to 31% of our fourth fiscal quarter. We anticipate this seasonal trend
      in sales will continue. 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 early spring 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.




20




**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
      February 12, 2008, Norbert Olberz, the Company's founder, Craig Levra, the
      Company’s Chairman and Chief Executive Officer, and Howard Kaminsky, the
      Company’s Chief Financial Officer, owned approximately 21%, 34% and 12%,
      respectively, of the Company’s outstanding voting 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:





·
            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.





21


**Failure
      to protect the integrity and security of our customers’ information could expose
      us to litigation and materially damage our standing with our
      customers.**




The
      increasing costs associated with information security — such as increased
      investment in technology, the costs of compliance with consumer protection
      laws
      and costs resulting from consumer fraud — could cause our business and
      results of operations to suffer materially. While we are taking significant
      steps to protect customer and confidential information, there can be no
      assurance that advances in computer capabilities or other developments will
      prevent the compromise of our customer transaction processing capabilities
      and
      personal data. If any such compromise of our information security were to occur,
      it could have a material adverse effect on our reputation, business, operating
      results and financial condition and may increase the costs we incur to protect
      against such information security breaches.





**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 on an individual market
      basis. 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
      February 12, 2008, Norbert Olberz, the Company's founder, Craig Levra, the
      Company’s Chairman and Chief Executive Officer, and Howard Kaminsky, the
      Company’s Chief Financial Officer, owned approximately 21%, 34% and 12%,
      respectively, of the Company’s outstanding voting 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.




22




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.





**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.




23


**Item
      4T.** **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 not effective in identifying to
      them material information relating to the Company (including its consolidated
      subsidiaries) required to be included in this report as a result of the material
      weakness described below.




In
      October 2006, we selected an enterprise resource management system (the "ERP
      System") from SAP to replace our existing merchandise and financial information
      systems. Over the past sixteen months, we have been in the process of
      implementing this system, including testing the system in a controlled
      environment, training our personnel in the use of the system and documenting
      and
      testing the control environment in preparation for compliance with Section
      404
      of the Sarbanes-Oxley Act of 2002. Our planned “go-live” date for the new system
      was October 1, 2007. However, we encountered delays in, among other things,
      integrating the ERP System with our existing "best of breed" merchandise
      planning system. As a result, implementation of the new system has been moved
      forward on a month-by-month basis. We believe that we have resolved the issues
      regarding the integration of the ERP System with the merchandise planning
      system and all other material implementation issues. As of February 4, 2008,
      we
      have elected to postpone implementation of the ERP System until after the end
      of the fiscal year ended March 30, 2008 as we do not believe it would be
      prudent to implement the new system so close to our fiscal year-end. We
      currently anticipate that we will implement the ERP System before the end of
      the
      first quarter of fiscal 2009 ending June 29, 2008.




Pursuant
      to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required
      to
      assess the effectiveness of our internal control over financial reporting as
      of
      the end of each fiscal year beginning with fiscal 2008. We have made a
      substantial investment to ensure that the ERP System will provide effective
      internal control over financial reporting, and we have evaluated our controls
      that are not intended to change with the implementation of the ERP System.
      Because we initially anticipated that the “go-live” date of the ERP System would
      be prior to March 30, 2008, we did not, however, fully evaluate the
      effectiveness of the existing controls that were to be replaced by the ERP
      System. As of February 4, 2008, we do not believe we have sufficient time to
      fully document, test and remediate (where applicable) those controls that we
      previously planned to replace prior to March 30, 2008. As a result, we believe
      our inability to fully test the existing system as required by Section 404
      results in a material weakness in our internal control over financial reporting
      and results in an ineffective assessment of our control environment.




We
      have
      assessed the risk of financial misstatements in this Quarterly Report on Form
      10-Q that might result from the existing information system, including a review
      of compensating controls. Based on our review, we believe that the information
      contained in this periodic report fairly presents, in all material respects,
      the
      financial condition and results of operations of the Company as of, and for,
      the
      periods presented in such report.




24




Notwithstanding
      the foregoing, there can be no assurance that we will be successful in
      implementing the ERP System before the end of the first quarter of fiscal 2009
      ending June 29, 2008 or at all, that we will not discover material weaknesses
      in
      our internal control over financial reporting, or that we will be able to
      remediate any such weakness. Furthermore, if we discover 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, and
      harm its stock price, especially if a restatement of financial statements for
      past periods were to be necessary. See "Management's Discussion and Analysis
      of
      Financial Condition and Results of Operations - Risk Factors - We are replacing
      our legacy merchandise and financial systems. Changes to our systems may disrupt
      our supply chain operations and have a material adverse impact on our business
      and results of operations." and "- 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."




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.




**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 April 1, 2007. 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.





25


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





Not
      Applicable.





**Item
      5.**  **** **Other
      Information.**





**Stockholder
      Proposals**





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 2008 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 2007 annual meeting in a form that complies with applicable
      regulations. The date of the Company’s proxy statement for the 2007 annual
      meeting was July 16, 2007. If the date of the 2008 annual meeting is advanced
      or
      delayed more than 30 days from the date of the 2007 annual meeting, stockholder
      proposals intended to be included in the proxy statement for the 2008 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 2008 annual
      meeting.





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 2007 annual meeting, the proxies solicited by the Board for the 2008
      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 2008 annual meeting of stockholders without any discussion
      of the proposal in the proxy statement for such meeting. If the date of the
      2008
      annual meeting is advanced or delayed more than 30 days from the date of the
      2007 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 2008 annual meeting.





The
      2008
      annual meeting of stockholders is presently expected to be held on or about
      August 4, 2008. Upon no determination that the date of the 2008 annual meeting
      will be advanced or delayed from this date, the Company will disclose the change
      in the earliest practical Quarterly Report on Form 10-Q.





26


**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. amended as of November 5, 2007 (incorporated
                by
                reference to Exhibit 3.2 of the Company’s Form 10-Q filed on November 9,
                2007)




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




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**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:      
                  February
                  12, 2008
              By:
              /s/
                Howard K. KaminskyHoward
                  K. KaminskyExecutive
                  Vice President-Finance,Chief
                  Financial Officer and Secretary(On
                  behalf of the Registrant and asPrincipal
                  Financial and Accounting
                  Officer)




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