UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549 FORM 10-Q (Mark One) x     QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2005 OR o     TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE
TRANSITION PERIOD FROM ______ TO ______ Commission File Number: 0-20736 Sport Chalet, Inc.(Exact name of registrant as
  specified in its charter)Delaware
  
  95-4390071(State or other jurisdiction of
  incorporation or organization)
  
  (I.R.S. Employer Identification
  No.)One Sport Chalet Drive, La Canada, CA  91011(Address of principal executive
  offices)(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  xNo  o Indicate by
check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of Act).  YesoNo  x The number of
shares of the registrants Common Stock outstanding, as of August 10, 2005 was
6,698,368. 1    SPORT
CHALET, INC.

Table of Contents to Form 10-Q

PART I  FINANCIAL INFORMATIONPageItem
  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
  21Item
  4.
  Controls
  and Procedures
  21PART II  OTHER INFORMATIONItem
  1.
  Legal
  Proceedings
  22Item
  2.
  Unregistered
  Sales of Equity Securities and Use of Proceeds
  23Item
  3.
  Defaults
  Upon Senior Securities
  23Item
  4.
  Submission
  of Matters to a Vote of Security Holders
  23Item
  5.
  Other
  Information
  23Item
  6.
  Exhibits
  252

PART I 
FINANCIAL INFORMATION

Item
1. Financial Statements.

SPORT
CHALET, INC.

CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

Three months ended
  June 30,2005
  
  2004Net sales
  
  $
  72,192,395
  
  $
  61,621,119Cost of goods sold, buying and occupancy costs
  
  
  50,888,759
  
  
  43,852,789Gross profit
  
  
  21,303,636
  
  
  17,768,330Selling, general and administrative expenses
  
  
  20,648,405
  
  
  17,486,345Income from operations
  
  
  655,231
  
  
  281,985Interest expense
  
  
  (1,887
  )
  
  (43,291
  )Income before taxes
  
  
  653,344
  
  
  238,694Income tax provision
  
  
  264,000
  
  
  101,865Net income
  
  $
  389,344
  
  $
  136,829Earnings per share:Basic
  
  $
  0.06
  
  $
  0.02Diluted
  
  $
  0.06
  
  $
  0.02Weighted average number of common shares
  outstanding:Basic
  
  
  6,686,368
  
  
  6,673,534Diluted
  
  
  7,048,155
  
  
  7,190,852See
accompanying notes.

3

SPORT
CHALET, INC.

CONDENSED
CONSOLIDATED BALANCE SHEETS

June 30,
  2005
  
  March 31,
  2005(Unaudited)AssetsCurrent
  assets:Cash
  
  $
  6,766,839
  
  $
  6,176,689Accounts receivable, less allowance of
  $189,000 at June 30, 2005 and $182,000 at March 31, 2005
  
  
  1,883,706
  
  
  1,462,042Merchandise inventories
  
  
  71,701,609
  
  
  65,061,142Prepaid expenses and other current
assets
  
  
  3,153,464
  
  
  3,044,153Refundable income tax
  
  
  3,800
  
  
  Deferred income taxes
  
  
  3,410,792
  
  
  3,915,079Total current assets
  
  
  86,920,210
  
  
  79,659,105Furniture,
  equipment and leasehold improvements  net
  
  
  38,298,115
  
  
  37,502,578Deferred
  income taxes
  
  
  1,977,847
  
  
  1,550,753Other
  assets
  
  
  
  
  
  76,960Total assets
  
  $
  127,196,172
  
  $
  118,789,396Liabilities and stockholders equityCurrent
  liabilities:Accounts payable
  
  $
  30,041,143
  
  $
  20,883,973Salaries and wages payable
  
  
  4,450,833
  
  
  5,080,320Income taxes payable
  
  
  
  
  
  825,059Other accrued expenses
  
  
  10,252,486
  
  
  9,753,575Total current liabilities
  
  
  44,744,462
  
  
  36,542,927Deferred
  rent
  
  
  12,936,535
  
  
  13,136,303Stockholders
  equityPreferred stock, $.01 par value:Authorized shares - 2,000,000Issued and
  outstanding shares  none
  
  
  
  
  
  Common stock, $.01 par value:Authorized shares - 15,000,000 Issued and
  outstanding shares  6,686,368 at June 30, 2005 and at March 31, 2005
  
  
  66,864
  
  
  66,864Additional paid-in capital
  
  
  22,975,044
  
  
  22,959,379Retained earnings
  
  
  46,473,267
  
  
  46,083,923Total stockholders equity
  
  
  69,515,175
  
  
  69,110,166Total liabilities and stockholders
equity
  
  $
  127,196,172
  
  $
  118,789,396See accompanying notes.

4


SPORT
CHALET, INC.

CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Three months ended June 30,2005
  
  2004Operating activitiesNet
  income
  
  $
  389,344
  
  $
  136,829Adjustments to reconcile net income to net
  cash provided by operating activities:Depreciation and amortization
  
  
  2,193,861
  
  
  1,949,882Loss on disposal of furniture, equipment
  and leasehold improvements
  
  
  188,806
  
  
  Deferred income taxes
  
  
  77,193
  
  
  (570,760
  )Tax benefit on employee stock options
  
  
  15,665
  
  
  41,928Changes in operating assets and
  liabilities:Accounts receivable
  
  
  (421,664
  )
  
  143,156Merchandise inventories
  
  
  (6,640,467
  )
  
  (10,349,835
  )Prepaid expenses and other current
assets
  
  
  (109,311
  )
  
  (276,890
  )Refundable income taxes
  
  
  (3,800
  )
  
  Accounts payable
  
  
  9,157,170
  
  
  8,335,152Salaries and wages payable
  
  
  (629,487
  )
  
  (6,799
  )Income taxes payable
  
  
  (825,059
  )
  
  330,697Other accrued expenses
  
  
  498,911
  
  
  618,980Deferred rent
  
  
  (199,768
  )
  
  178,112Net
  cash provided by operating activities
  
  
  3,691,394
  
  
  530,452Investing activitiesPurchase
  of furniture, equipment and leasehold improvements
  
  
  (3,178,204
  )
  
  (2,079,179
  )Other
  assets
  
  
  76,960
  
  
  8,017Net
  cash used in investing activities
  
  
  (3,101,244
  )
  
  (2,071,162
  )Increase
  in cash and cash equivalents
  
  
  590,150
  
  
  (1,540,710
  )Cash
  and cash equivalents at beginning of period
  
  
  6,176,689
  
  
  3,071,648Cash
  and cash equivalents at end of period
  
  $
  6,766,839
  
  $
  1,530,938Supplemental Disclosure of Cash Flow InformationCash
  paid during the period for:Income taxes
  
  $
  1,000,000
  
  $
  300,000Interest
  
  
  41,587
  
  
  See accompanying notes.

 5

SPORT CHALET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.
  Basis of
  PresentationThe
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X.
Accordingly, they do not include all information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements.  In the opinion of
management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation of the results of operations for
the periods presented have been included.

The
financial data at March 31, 2005 is derived from audited financial statements
which are included in the Companys Annual Report on Form 10-K for the year
ended March 31, 2005, and should be read in conjunction with the audited
financial statements and notes thereto.
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.

2.
  Gift
  Card/Certificate RedemptionThe
Company offers its customers the option of purchasing gift cards and, in the
past, gift certificates which may be used toward the future purchase of
products. Revenue from gift cards, gift certificates and store merchandise
credits (the Gift Cards) is recognized at the time of redemption.   The Gift Cards have no expiration dates.
The Company records unredeemed Gift Cards as a liability until the point of
redemption.

The
Companys historical experience indicates that not all issued Gift Cards are
redeemed (the Breakage).  Based upon
five years of redemption data, approximately 90% of Gift Cards are redeemed
within the year after issuance, and approximately 95% are redeemed within 36
months of the date of issuance, after which redemption activity is negligible.  Accordingly, the Company recognizes Breakage
as revenue by periodically decreasing the carrying value of the Gift Card
liability by approximately 5% of the aggregate amount.

During
the fiscal year ended March 31, 2005 and prior periods, the Company recognized
Breakage at the time of issuance of Gift Cards.  During the first quarter of fiscal 2006, the Company changed the
method of accounting to recognize Breakage at the time of redemption of Gift
Cards. The effect of the change in accounting to record Breakage at the time of
redemption is immaterial to the Companys financial position and results of
operations.  The revenue from Breakage
is included in the income statement line item net sales.

6


3.
  Insurance
  GainSelling,
general and administrative expenses have been reduced by $344,000 from an
insurance gain recognized for winter storm damage to one store.

4.
  Earnings per
  ShareEarnings
per share, basic, is computed based on the weighted average number of common
shares outstanding for the period.  The
computation of basic earnings per share excludes the effect of anti-dilutive
common share equivalents (primarily stock options outstanding), aggregating
77,500 for the three months ended June 30, 2005.  Earnings per share, diluted, is computed based on the weighted
average number of common and potentially dilutive common equivalent shares
outstanding for the period.  A
reconciliation is as follows:

Three months endedJune 30,2005
  
  2004Net income
  
  $
  389,344
  
  $
  136,829Weighted average number of common
  shares:Basic
  
  
  6,686,368
  
  
  6,673,534Effect of dilutive securities-stock
  options
  
  
  361,787
  
  
  517,318Diluted
  
  
  7,048,155
  
  
  7,190,852Earnings per share:Basic
  
  $
  0.06
  
  $
  0.02Effect of dilutive securities-stock
  options
  
  $
  0.00
  
  $
  0.00Diluted
  
  $
  0.06
  
  $
  0.02

5.
  Stock
  CompensationStatement
of Financial Accounting Standards (SFAS) No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in annual and
interim financial statements about the method of accounting for stock-based
compensation and its effects on reporting.
In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 123(R), Share-Based Payment. The standard requires all
entities to recognize compensation expense for all share-based payments granted
to employees in an amount equal to the fair value. The new standard is effective
as of the beginning of the next fiscal year after June 15, 2005, and allows two
different methods of transition. The Company continues to apply the principles
of APB Opinion No. 25 and related interpretations in accounting for its
stock-based compensation plans.
Accordingly, no compensation expense has been recorded in conjunction
with options issued to employees.  Had
compensation cost been determined based on the fair value of the options at the
grant date and amortized over the options vesting period, consistent with the
method prescribed by SFAS No. 123, the Companys net income would have been:

7


Three months ended
  June 30,2005
  
  2004Net income as reported
  
  $
  389,344
  
  $
  136,829Add:Stock-based compensation
  expense included in reported net income, net of related tax effects
  
  
  
  
  
  Deduct:Sport Chalet Option,
LLC
  
  $
  87,165
  
  $
  87,165Total stock-based employee
  compensation expense determined under fair market value based method for all
  awards, net of related tax effects
  
  $
  57,194
  
  $
  47,482Pro forma net income
  
  $
  244,985
  
  $
  2,182Earnings per share  basic and dilutedAs reported 
basic
  
  $
  0.06
  
  $
  0.02As reported 
diluted
  
  $
  0.06
  
  $
  0.02Pro forma  basic
  
  $
  0.04
  
  $
  0.00Pro forma  diluted
  
  $
  0.03
  
  $
  0.00The
fair value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in fiscal 2005: expected volatility of 37%; risk-free interest rate of
4.0%; expected lives of five years; and expected dividends of 0%. The Black-Scholes 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. Because
the Companys employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

6.
  New
  Accounting PronouncementsIn
December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. The
standard requires all entities to recognize compensation expense for all
share-based payments granted to employees in an amount equal to the fair value.
The new standard is effective as of the beginning of the next fiscal year after
June 15, 2005, and allows two different methods of transition. Note 3, Stock
Compensation, of the Notes to Consolidated Financial Statements of this
Quarterly Report on Form 10-Q, contains pro forma disclosures regarding the
effect on net earnings and earnings per share as if the Company had applied the
fair value method of accounting for stock-based compensation. Depending on the model used to calculate
stock-based compensation expense in the future and other requirements of SFAS
No. 123(R), the pro forma disclosure may not be indicative of the stock-based
compensation expense that will be recognized in the Companys future financial
statements. The Company expects to
implement the new standard in the first quarter ending June 30, 2006 and is
currently evaluating the new standard and models which may be used to calculate
future stock-based compensation expense.

8


7.
  LitigationA
former employee has brought a class action lawsuit alleging that hourly
employees were regularly denied their required meal periods and rest periods
and was not paid premiums for split shifts. They further allege that the Company requires its employees to wear
uniforms but did not pay for the uniforms. Plaintiffs seek a class action in
which they demand various wages, premiums, interest, and penalties for these
alleged violations. They also seek attorneys fees and an injunction.

The
parties reached a settlement which is subject to Court approval. The parties are drafting the
settlement
documents and will likely present them to the Court by August 15, 2005. Without admitting any liability,
the Company
has agreed to pay money to a class of hourly employees who allegedly were
denied their proper break periods or who were required to comply with the store
dress code. The Company has also agreed
to spend money to upgrade its labor software system, to provide shirts to its
employees, and to improve its lunch/break rooms. The maximum amount of the settlement is $2,250,000,
of which
$1,000,000 has been fully reserved as of June 30, 2005. Over the next six years, the remaining
$1,250,000 is designated for the software system, shirts, and lunch/break rooms
and will be expensed or capitalized as incurred following the Companys normal
accounting policies.

On
July 22, 2005, a purported stockholder of the Company brought an action
captioned Miriam Gruber v. Sport Chalet,
Inc., Norbert Olberz, Irene Olberz, Craig L. Levra, Howard K. Kaminsky, Al D.
McCready, Eric S. Olberz, Frederick H. Schneider, John R. Attwood, Donald J.
Howard and Kenneth Olson, in the Court of Chancery of the State of
Delaware. The action, which is
purportedly brought individually, derivatively and as a class action on behalf
of the public stockholders of the Company, challenges the recapitalization and
the associated transactions described below in Managements Discussion and
Analysis of Financial Condition and Results of Operations  Overview. The complaint alleges that
defendants breached
their fiduciary duties to the Companys public stockholders by, among other
things, (i) diverting an opportunity of the Company to Messrs. Levra and
Kaminsky; (ii) failing to seek the best available transaction that would
maximize the benefits for the Company and all its stockholders; (iii) approving
transactions which are not entirely fair to the Company and its public
stockholders and (iv) attempting to entrench themselves in office. The complaint seeks, among other things,
(i)
a preliminary and permanent injunction against the recapitalization; (ii) a
declaration that the defendants have breached their fiduciary duties; (iii)
damages and (iv) an award of attorneys fees and expenses. The Company believes that the claims in the
action are without merit and intends to contest the action vigorously. See Item 5  Other
Information.

8.
  ReclassificationCertain
reclassifications were made to the prior year financial statements to conform
to current year presentation with regard to the consolidated statement of
income.

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

Sport
Chalet, Inc. is a leading operator of 36 full-service specialty sporting goods
stores in California and Nevada. In
1959, Norbert Olberz, the Companys Chairman Emeritus and principal stockholder
(the Principal Stockholder), purchased a small ski and tennis shop in La
Canada, California. A focus on
providing quality merchandise with outstanding customer service was the
foundation of Norberts vision. The
Company continues this tradition and is focused on growth through a number of
initiatives, including: continuing new store development; remodeling stores to
conform to the prototype; and improving information systems to increase product
flow-through, improve in-stock positions and optimize merchandise assortment.

The
Companys growth strategy had historically focused on Southern California, but
now includes opening new stores throughout California, Nevada and Arizona as
suitable locations are found. Over the
past three years, the Company has opened ten new stores and is currently
planning to open four stores during fiscal 2006, three of which will be the
Companys initial expansion into Arizona and one in Southern California. Future store openings are
subject to
availability of satisfactory store locations based on local competitive
conditions, site availability and cost and the ability to provide and maintain
high service levels and quality brand merchandising at competitive prices. Store openings are expected to
have a favorable
impact on sales volume, but will negatively affect profit in the short
term. New stores tend to have higher
costs in the early years of operation, due primarily to increased promotional
costs and lower sales on a per employee basis until the store matures. As the store matures, sales tend to
level
off and expenses decline as a percentage of sales. Stores generally require three to four years to attract
a stable,
mature customer base.

The
Companys prototype stores and over 70% of the total store base range in size
from 42,000 to 45,000 square feet and showcase each product category with the
feel of a specialty shop all contained

10


under one
roof. The full service approach to customer service and product knowledge is
enhanced by fixtures which feature specific categories, and give the customer
an enhanced shopping experience. Mature stores are evaluated for remodel based
on each stores age and competitive situation, as well as how much the landlord
will contribute to the required improvements. Future store remodeling plans
will depend upon several factors, including, but not limited to, general
economic conditions, competition trends and the availability of adequate
capital.

The
Company believes that the overall growth of its business will allow it to
maintain or increase its operating margins. Increased merchandise volumes
should enable the Company to improve its purchasing leverage and achieve
greater support throughout the supply chain. The Companys overall growth
should leverage its investments in infrastructure such as the distribution
center, integration of corporate facilities into a single location, E3
replenishment system, HighJump warehouse management software and Marketmax
planning and allocation technology. However, these increased efficiencies and
improvements in logistics are partially offset by the operating costs of new
and maturing stores.

The
Companys Board of Directors has approved a recapitalization plan designed to
facilitate the orderly transition of control from the Companys principal
stockholder (the Principal Stockholder) to the Companys management and to
increase financial flexibility for the Company and its stockholders. The
recapitalization plan includes transferring a portion of the Principal
Stockholders ownership to Craig L. Levra, Chairman and Chief Executive
Officer, and Howard K. Kaminsky, Executive Vice President - Finance, Chief
Financial Officer and Secretary, and allows current stockholders to retain
existing ownership and voting interests. The proposed recapitalization would
double the Companys total number of shares outstanding from approximately
6,686,368 to 13,372,736. Therefore, the recapitalization plan is expected to
have the same effect on earnings per share as a 2-for-1 stock split. Shares
transferred by the Principal Stockholder to management will be treated as a
contribution to the Companys capital with the offsetting charge as
compensation expense. As a result, the Company expects to record a one-time
charge which will be based on the stock price at the time of the transfer.
Based on the stock price as of August 10, 2005, the charge is expected to be
approximately $7.8 million after income taxes, or $1.17 per share on currently
outstanding shares or $0.59 per diluted share calculated on a post transaction
basis, in the second quarter of fiscal 2006. See Item 5  Other Information.

Results of Operations

Three Months Ended
June 30, 2005 Compared to Three Months Ended June 30, 2004.

The
following tables set forth statements of income data and relative percentages
of net sales for the three months ended June 30, 2005 and 2004 (dollar amounts
in thousands, except per share amounts).

2005
  
  2004
  
  Dollar
  Increase
  
  Percentage
  IncreaseAmount
  
  Percent
  
  Amount
  
  PercentNet sales
  
  $
  72,192
  
  
  100.0
  %
  $
  61,621
  
  
  100.0
  %
  $
  10,571
  
  
  17.2
  %Gross profit
  
  
  21,304
  
  
  29.5
  %
  
  17,768
  
  
  28.8
  %
  
  3,536
  
  
  19.9
  %Selling, general and administrative
  expenses
  
  
  20,648
  
  
  28.6
  %
  
  17,486
  
  
  28.4
  %
  
  3,162
  
  
  18.1
  %Income from operations
  
  
  655
  
  
  0.9
  %
  
  282
  
  
  0.5
  %
  
  373
  
  
  132.3
  %Interest expense
  
  
  (2
  )
  
  (0.0
  %)
  
  (43
  )
  
  (0.1
  %)
  
  41
  
  
  (95.3
  %)Income before taxes
  
  
  653
  
  
  0.9
  %
  
  239
  
  
  0.4
  %
  
  414
  
  
  173.2
  %Net income
  
  
  389
  
  
  0.5
  %
  
  137
  
  
  0.2
  %
  
  252
  
  
  183.9
  %Earnings per share:Basic
  
  $
  0.06
  
  
  
  
  $
  0.02
  
  
  
  
  $
  0.04
  
  
  200.0
  %Diluted
  
  $
  0.06
  
  
  
  
  $
  0.02
  
  
  
  
  $
  0.04
  
  
  200.0
  %11


Sales
increased $10.6 million, or 17.2%, from $61.6 million for the three months
ended June 30, 2004 to $72.2 million for the same period this year. The sales
growth is due to opening five new stores which resulted in a $7.4 million
increase in sales, or 10.2%, as well as a same store sales increase of 4.9%.
The increase in same store sales is primarily due to the strong performance in
the footwear category compared to the same period last year. Two new stores
were opened in the second quarter of fiscal 2005 and three new stores were
opened in the third quarter of fiscal 2005. Same store sales are based upon
stores opened throughout both periods presented and exclude team sales.

Gross
profit increased $3.5 million, or 19.9%, primarily from increased sales. As a
percent of sales, gross profit increased from 28.9% for the three months ended
June 30, 2004 to 29.5% for the same period this year. The increase in gross
profit as a percent of sales is primarily due to the increase in same store
sales, which reduced the need for markdowns.

Selling,
general and administrative expenses increased $3.2 million, or 18.1%, $2.5
million from additional stores, $225,000 in increased litigation reserves,
$150,000 for the recapitalization plan and $150,000 for infrastructure
consulting partially offset by $344,000 from an insurance gain recognized for
winter storm damage to one store. As a percent of sales, these expenses
increased from 28.4% for the three months ended June 30, 2004 to 28.6% for the
same period this year. Efficiencies from the increase in same store sales and
the insurance gain were offset by maturing stores and the increase in
litigation reserves and infrastructure consulting fees.

The
effective income tax rate was 42.7% for the three months ended June 30, 2004
compared to 40.4% for the same period this year. These rates differ from the
statutory rate of 39.8% primarily as a result of permanent differences between
financial reporting and tax-basis income.

Net
income increased $252,000, or 183.9%, from $137,000, or $0.02 per diluted
share, for the three months ended June 30, 2004 to $389,000, or $0.06 per
diluted share, for the same period this year, primarily as a result of
increased sales and improved gross profit as a percent of sales.

Liquidity and Capital
Resources

The
Companys primary capital requirements are for inventory and store expansion,
relocation and remodeling. Historically, cash from operations, credit terms
from vendors and bank borrowing have met the Companys liquidity needs.
Management believes that these sources will be sufficient to fund currently
anticipated cash requirements for the foreseeable future.

Net
cash provided by operating activities is primarily the result of net income,
adjusted for depreciation and amortization, and increases in accounts payable
partially offset by inventory purchases. For the three months ended June 30,
2005, $3.7 million was generated by operating activities compared to $530,000
for the same period last year.

Inventories
increased by $6.6 million and $10.3 million for the three months ended June 30,
2005 and 2004, respectively, compared to the respective year-end balances primarily
due to the seasonal build-up of summer related inventory. The relative
difference between years is due to an increase in average store inventory of
3.9% at March 31, 2005 compared to March 31, 2004 as a higher level of spring
receipts was planned. At June 30, 2005 as compared to June 30, 2004 the average
inventory per store decreased 3.9%, primarily due to the continuing
improvements in inventory management.

Historically,
accounts payable has increased as inventory increases. In the three months
ended June 30, 2005, accounts payable increased by $8.9 million as compared to
an increase of $8.3 million for the

12


three months ended June 30, 2004.  The relative change as compared to inventory
levels is the result of the timing of vendor payments near the end of the
period.

Net
cash used in investing activities for the three months ended June 30, 2005 was $3.1
million compared to $2.1 million for the same period ended June 30, 2004.  For the three months ended June 30, 2005,
the Company completed one store remodel and started remodeling three stores.

The
Companys amended credit facility with Bank of America, N.A. (the Lender)
provides for advances up to $20 million, increasing to $35.0 million for the
period October 1, through December 31, each year, less the amount of any
outstanding draws, up to a $4.0 million maximum in authorized letters of
credit.  Interest accrues at the
Lenders prime rate plus 0.25% (6.25% at June 30, 2005) or can be fixed for a
period of time at the then current rate established under one of several
indices, all at the Companys option. 
In addition, there is an unused commitment fee of 0.20% per year, based
on a weighted average formula.  This
credit facility expires on September 30, 2005, and the Company expects to
renegotiate and extend the term of this agreement or obtain another form of
financing before that date.  The
Companys obligation to the Lender is presently secured by a first priority
lien on substantially all of the Companys non-real estate assets, and the
Company is subject to several restrictive covenants.  The principal operating covenants require the Company to maintain
certain minimum cash flow coverage and debt to equity ratios and restrict the
level of capital expenditures, calculated on a quarterly basis.  The Company currently is in compliance with
the covenants.  The Company believes its
credit line with the Lender is sufficient to fund capital expenditures for the
foreseeable future and to meet seasonal fluctuations in cash flow
requirements.  However, unexpected
conditions could require the Company to request additional borrowing capacity
from the Lender or alter its expansion plans or operations.

The
Companys primary contractual obligations and commitments as of June 30, 2005,
are its store leases with initial terms expiring from 2005 through 2020, which
typically provide for multiple five-year renewal options, and employment
contracts:



Payments
  due by period:
  
  Operating
  Leases
  
  Employment
  ContractsWithin 1 year
  
  $
  18,664,506
  
  $
  319,5002 - 3 years
  
  
  47,921,097
  
  
  639,0004 - 5 years
  
  
  43,373,537
  
  
  639,000After 5 years
  
  
  85,482,030
  
  
  1,278,000Total
  
  $
  195,441,170
  
  $
  2,875,500The
Company leases all of its existing store locations. The leases for most of the
existing stores are for approximately ten-year terms with multiple option
periods under non-cancelable operating leases with scheduled rent
increases.  The leases provide for
contingent rent based upon a percentage of sales in excess of specified
minimums. If there are any free rent periods, they are accounted for on a
straight line basis over the lease term, beginning on the date of initial
possession, which is generally when the Company enters the space and begins the
construction build-out. The amount of the excess of straight line rent expense
over scheduled payments is recorded as a deferred rent liability. Construction
allowances and other such lease incentives are recorded as deferred credits,
and are amortized on a straight line basis as a reduction of rent expense over
the lease term. Generally, our purchase obligations are cancelable 45 days
prior to shipment from our vendors. 
Letters of credit amounting to approximately $3.0 million relating to
purchase commitments were outstanding as of June 30, 2005 and expire within one
year.

13


No
cash dividends were declared on Common Stock in fiscal 2005.  The Company intends to retain earnings for
use in the operation and expansion of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.

Critical Accounting Policies and Use of Estimates

The
Companys significant accounting policies are described in Note 2 of the
Companys Annual Report on Form 10-K for the year ended March 31, 2005, which
have been prepared in accordance with accounting principles generally accepted
in the United States. In preparing the financial statements, the Company is
required to make estimates and judgments which affect the results of its
operations and the reported value of assets and liabilities. Actual results may
differ from these estimates. The Company believes that the following summarizes
critical accounting policies which require significant judgments and estimates
in the preparation of its consolidated financial statements.

Inventory
Valuation.   Merchandise inventories
are stated at the lower of cost (first-in, first-out determined by the retail
method of accounting) or market.  The
Company considers cost to include direct cost of merchandise, plus internal
costs associated with merchandise procurement, storage and handling.  The Company regularly reviews aged and
excess inventories to determine if the carrying value of such inventories
exceeds market value.  A reserve is
recorded to reduce the carrying value to market value as necessary.  A determination of market value requires
estimates and judgment based on the Companys historical markdown experience
and anticipated markdowns based on future merchandising and advertising plans,
seasonal considerations, expected business trends and other factors.

Revenue
Recognition.  Sales are recognized upon the
purchase by customers at the Companys retail store locations, less merchandise
returned by customers. Revenue from gift cards, gift certificates and store
merchandise credits is recognized at the time of redemption. The Company
generally accepts returns up to 30 days from the date of purchase with a
sales receipt or proof of purchase. Typically refunds are in the same form of
payment originally received from the customer. 
The Company accommodates customers who do not have a receipt or proof of
purchase by offering an exchange or store credit.  The Company tracks the original sale date with returns and
provides a reserve for projected merchandise returns based on this historical
experience.  As the reserve for
merchandise returns is based on estimates, the actual returns could differ from
the reserve, which could impact sales.

Gift
Card/Certificate Redemption.The
Company offers its customers the option of purchasing gift cards and, in the past,
gift certificates which may be used toward the future purchase of products.
Revenue from gift cards, gift certificates and store merchandise credits (the
Gift Cards) is recognized at the time of redemption.   The Gift Cards have no expiration dates. The
Company records unredeemed Gift Cards as a liability until the point of
redemption.

The
Companys historical experience indicates that not all issued Gift Cards are
redeemed (the Breakage).  Based upon
five years of redemption data, approximately 90% of Gift Cards are redeemed
within the year after issuance, and approximately 95% are redeemed within 36
months of the date of issuance, after which redemption activity is
negligible.  Accordingly, the Company
recognizes Breakage as revenue by periodically decreasing the carrying value of
the Gift Card liability by approximately 5% of the aggregate amount.

During the
fiscal year ended March 31, 2005 and prior periods, the Company recognized
Breakage at the time of issuance of Gift Cards.  During the first quarter of fiscal 2006, the Company changed the
method of accounting to recognize Breakage at the time of redemption of Gift
Cards. The effect of the change in accounting to record Breakage at the time of
redemption is immaterial to the Companys


14

financial position and results of operations.  The revenue from Breakage is included in the
income statement line item net sales and amounted to approximately $48,000 and
$83,000 for the quarters ended June 30, 2005 and 2004, respectively.

Self-insurance.  Property, general liability
and workers
compensation insurance coverage is self-insured for various levels.  Self-insurance accruals include claims
filed, as well as estimates of claims incurred but not yet reported based on
historical trends.  Projections of
future loss are inherently uncertain because of the random nature of insurance
claim occurrences and could be significantly affected if future occurrences and
claims differ from historical trends.

Impairment
of Long-Lived Assets.The Company accounts for
long-lived assets in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.  The Company
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of assets
to be held and used is determined by a comparison of the carrying amount of an
asset to future undiscounted net cash flows expected to be generated by the
asset.  If such assets are considered
impaired, the impairment recognized is measured by comparing projected
individual store discounted cash flow to the asset carrying values.  Declines in projected store cash flow could
result in the impairment of assets.

Accounting
for Income Taxes.  As part of the process of preparing
the financial statements, income taxes are estimated for each of the
jurisdictions in which the Company operates. This process involves estimating
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting
purposes.  These differences result in
deferred tax assets and liabilities, which are included within the balance
sheet.  The likelihood that deferred tax
assets will be recovered from future taxable income is assessed, recognizing
that future taxable income may give rise to new deferred tax assets.   To the extent that future recovery is not
likely, a valuation allowance would be established. To the extent that a
valuation allowance is established or increased, an expense will be included
within the tax provision in the income statement.

Significant
management judgment is required in determining the provision for income taxes,
deferred tax assets and liabilities and any valuation allowance recorded
against net deferred tax assets.  Based
on the Companys history of operating earnings, no valuation allowance has been
recorded as of June 30, 2005.  In the
event that actual results differ from these estimates, or these estimates are
adjusted in future periods, a valuation allowance may need to be established,
which could impact the Companys financial position and results of operations.

Provisions
for income taxes are based on numerous factors that are subject to audit by the
Internal Revenue Service and the tax authorities in the various jurisdictions
in which the Company does business.

Factors That May Affect
Future Results

The
Companys short- and long-term success is subject to many factors that are
beyond the Companys control. 
Stockholders and prospective stockholders in the Company should consider
carefully the following risk factors, in addition to other information contained
in this report. This Report on Form l0-Q contains forward-looking statements,
which are subject to a variety of risks and uncertainties. The Companys actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors including those set forth below.

15


Implementing
Section 404 of the Sarbanes-Oxley Act of 2002 and the associated
compliance risks.The
implementation process of Section 404 of the Sarbanes-Oxley Act of 2002 will be
expensive, time consuming and will require significant attention of the
Companys management.  The Company
cannot assure that it will not discover material weaknesses in its internal
controls.  The Company also cannot
assure that it will complete the process of its evaluation and the auditors
attestation on time.  If the Company
discovers a material weakness, corrective action may be time consuming, costly
and further divert the attention of management.  The disclosure of a material weakness, even if quickly remedied,
could reduce the markets confidence in the Companys financial statements,
cause the delisting of its Common Stock from Nasdaq and harm its stock price,
especially if a restatement of financial statements for past periods were to be
necessary.

A
downturn in the economy may affect consumer purchases of discretionary items,
which would reduce the Companys net sales.  The retail industry historically has been
subject to substantial cyclical variations. 
The merchandise sold by the Company is generally a discretionary expense
for its customers.  A recession in the
general economy or uncertainties regarding future economic prospects that
affect consumer spending habits has had, and may do so in the future have, a
materially adverse effect on the Companys results of operations.

Terrorist
attacks or acts of war may seriously harm the Companys business.  Terrorist attacks may cause damage or
disruption to the Companys employees, facilities, information systems, vendors
and customers, which could significantly impact net sales, costs and expenses
and financial condition. The potential for future terrorist attacks, the
national and international responses to terrorist attacks, and other acts of
war or hostility may cause greater uncertainty and cause the Company to suffer
in ways that the Company currently cannot predict. The Companys geographical
focus in California and Nevada may make the Company more vulnerable to such
uncertainties than other comparable retailers who may not have similar
geographical concentration.

Intense
competition in the sporting goods industry could limit the Companys growth and
reduce its profitability. 
The sporting goods business and the retail environment are highly
competitive, and the Company competes 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 the Companys competitors are
larger and have greater resources than the Company.

Because
the Companys stores are concentrated in the western portion of the United
States, it is subject to regional risks.Currently, most of the Companys stores are located in
Southern California and the balance is located in Northern California, Central
California and the Las Vegas area of Nevada. 
Accordingly, the Company is 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 Southern California residents 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 the Companys sales and profitability and this could
also affect the Companys ability to implement its planned growth.  In addition, many of the Companys vendors
rely on the Ports of Los Angeles and Long Beach to process the Companys
shipments.  Any disruption or congestion
at the ports could impair the Companys ability to adequately stock its stores.
Several of the Companys competitors operate stores across the United States
and, thus, are not as vulnerable as the Company to such regional risks.

The
Company relies on one distribution center and any disruption could reduce its
sales.  The Company
currently relies 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

16


a significant portion of the Companys inventory and
could materially impair both the Companys ability to adequately stock its
stores and the Companys net sales and profitability.

The
Companys ability to expand its business will be dependent upon the Companys
ability to meet challenges in new markets. The Companys
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;
  the Company may not be able to negotiate acceptable
  lease terms;
  the Company might not be able to hire and retain
  qualified store personnel; and
  the Company might not have the financial resources
  necessary to fund its expansion plans.In
addition, the Companys 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
the Companys stores, added strain on the Companys distribution center,
additional information to be processed by the Companys information systems and
diversion of management attention from ongoing operations.  The Companys faces additional challenges in
entering new markets, including consumers lack of awareness of the Company,
difficulties in hiring personnel and problems due to the Companys
unfamiliarity with local real estate markets and demographics. New markets may
also have different competitive conditions, consumer tastes and discretionary
spending patterns than the Companys existing markets. To the extent that the Company
is not able to meet these new challenges, sales could decrease and operating
costs could increase. Furthermore, a decline in the Companys overall financial
performance, increased rents or any other adverse effects arising from the
commercial real estate market in the Companys markets may adversely affect the
Companys current growth plan.  There
can be no assurance that the Company will possess sufficient funds to finance
the expenditures related to its 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.

The
Company may pursue strategic acquisitions, which could have an adverse impact
on its business.The
Company 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 the Companys capital and attention from other
business issues and opportunities. The Company may not be able to successfully
integrate operations that it acquires, including personnel, financial systems,
distribution, operations and general store operating procedures. If the Company
fails to successfully integrate acquisitions, the Companys business could
suffer. In addition, the integration of any acquired business, and their
financial results, into the Companys may adversely affect the Companys
operating results. The Company currently does not have any agreements with
respect to any such acquisitions.

The
Companys future growth will be dependent on the availability of additional
financing.The
Company may not be able to fund its future growth or react to competitive
pressures if it lacks sufficient funds. 
Unexpected conditions could cause the Company to be in violation of its
Lenders operating covenants. 
Currently, the Company feels it has sufficient cash available through
its bank credit facilities and cash from operations to fund existing operations
for the foreseeable future. The Company cannot be certain that additional
financing will be available in the future if necessary.

If
the Company is unable to successfully implement its controlled growth strategy
or manage its growing business, the Companys future operating results could
suffer.  Since its
inception, the Company has experienced periods of rapid growth.  No assurance can be given that the Company
will be

17


successful in maintaining or increasing its sales in
the future.  Any future growth in sales
will require additional working capital and may place a significant strain on
the Companys management, information systems, inventory management and
distribution facilities.  Any failure to
timely enhance the Companys operating systems, or unexpected difficulties in
implementing such enhancements, could have a material adverse effect on the
Companys results of operations.

If
the Company loses key management or is unable to attract and retain talent, its
operating results could suffer.  The Company depends on the continued service of its senior
management.  The loss of the services of
any key employee could hurt the Companys business.  Also, the future success of the Company depends on its 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 the Companys annual
operating results to suffer. 
The Companys sales volume increases significantly during the Holiday
season as is typical with other sporting goods retailers.  In addition, the Companys product mix has
historically emphasized cold weather sporting goods increasing the seasonality
of the Companys business.  In recent
years, the months of November, December and January represented between 30% and
35% of the Companys total net sales, while winter-related products ranged from
15% to 20% of total net sales. The operating results historically have been
influenced by the amount and timing of snowfall at the resorts frequented by
the Companys 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 the Company to make
commitments for purchases of apparel and equipment by April for fall delivery,
and only limited quantities of merchandise can be reordered during the
fall.  Consequently, the Company places
its 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, the Company may be required to mark down its winter apparel and
equipment.

The
Companys quarterly operating results may fluctuate substantially, which may
adversely affect its business.The
Company has experienced, and expects to continue to experience, a substantial
variation in its net sales and operating results from quarter to quarter.  The Company believes 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 the Companys introduction of new products, the level of consumer
acceptance of each new product, the seasonality of the markets in which the
Company participates, the weather and actions of competitors.  Accordingly, a comparison of the Companys
results of operations from period to period is not necessarily meaningful, and
the Companys results of operations for any period are not necessarily
indicative of future performance.

The
Company is controlled by its founder, whose interests may differ from other
stockholders.At July
26, 2005, Norbert Olberz, the Companys founder, Chairman Emeritus, director
and principal stockholder, owned approximately 65% of the Companys outstanding
Common Stock.  Mr. Olberz effectively
has 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.

Problems
with the Companys information systems could disrupt its operations and
negatively impact its financial results.  The Companys success, in particular the
Companys ability to successfully manage inventory levels and its centralized
distribution system, largely depends upon the efficient operation of the
Companys computer hardware and software systems.  The Company uses

18


information systems to track inventory information at
the store level, replenish inventory from the Companys warehouse, and
aggregate daily sales information among other things. These systems and the
Companys 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.The
Company seeks to minimize these risks by the use of backup facilities and
redundant systems.  Nevertheless any
failure that causes an interruption in the Companys operations or a decrease
in inventory tracking could result in reduced net sales.

If
the Company is unable to predict or react to changes in consumer demand, it may
lose customers and its sales may decline.  If the Company fails to anticipate changes
in consumer preferences, it 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.  The Companys
success depends upon the ability to anticipate and respond in a timely manner
to trends in sporting goods merchandise and consumers participation in sports.
Failure to identify and respond to these changes may cause net sales to
decline. In addition, because the Company generally makes 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 the Companys Common Stock may be volatile.The Companys Common Stock is thinly traded
making it difficult to sell large amounts. 
The market price of the Companys Common Stock is likely to be volatile
and could be subject to significant fluctuations in response to factors such as
quarterly variations in operating results, operating results which vary from
the expectations of securities analysts and investors, changes in financial
estimates, changes in market valuations of competitors, announcements by the
Company or its competitors of a material nature, additions or departures of key
personnel, future sales of Common Stock and stock volume fluctuations.  Also, general political and economic
conditions such as a recession or interest rate fluctuations may adversely
affect the market price of the Companys Common Stock.

The
Company may be subject to product liability claims and its insurance may not be
sufficient to cover damages related to those claims.The Company may be subject to lawsuits
resulting from injuries associated with the use of sporting goods equipment
that it sells. The Company may incur losses relating to these claims or the
defense of these claims. There is a risk that claims or liabilities will exceed
the Companys insurance coverage. In addition, the Company may be unable to
retain adequate liability insurance in the future.  The Company is subject to regulation by the Consumer Product
Safety Commission and similar state regulatory agencies.  If the Company fails to comply with government
and industry safety standards, the Company may be subject to claims, lawsuits,
fines and adverse publicity that could have a material adverse effect on its
business, results of operations and financial condition.

19


The
Companys same store sales will fluctuate and may not be a meaningful indicator
of future performance.Changes
in the Companys same store sales results could affect the price of its Common
Stock. A number of factors have historically affected, and will continue to
affect, the Companys same store sales results, including: competition, the
Companys new store openings and remodeling, general regional and national
economic conditions, actions taken by the Companys competitors, consumer
trends and preferences, changes in other tenants in the shopping centers in
which the Company is located, new product introductions and changes in the
Companys 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.  The Companys
same store sales may vary from quarter to quarter, and an unanticipated decline
in revenues or same store sales may cause the price of the Companys Common
Stock to fluctuate significantly.

20


Item 3. Quantitative and
Qualitative Disclosures About
Market Risk.

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

Item 4. Controls and
Procedures.

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

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

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

21


Part II
 OTHER INFORMATION

Item
1.     Legal
Proceedings.

Kenneth
Henderson on behalf of himself and other similarly situated Plaintiffs v. Sport
Chaletfiled July 6, 2004 in the Los Angeles Superior Court, Case No. BC
318081.

Former employee Kenneth Henderson brought
this class action on behalf of himself and other similarly situated employees,
alleging causes of action for (1) failure to provide required meal periods, (2)
failure to authorize or permit rest periods, (3) failure to provide
compensation for split shifts, (4) failure to reimburse employees for uniforms,
(5) failure to maintain required records, (6) penalties for terminated
employees who were not fully compensated, (7) penalties for failure to pay
employees all wages at least twice a month, and (8) violation of Business and
Professions Code §l7200.

Plaintiffs
basically allege that hourly employees were regularly denied their required
meal periods and rest periods and were not paid premiums for split shifts. They further allege that we require our
employees to wear uniforms but did not pay for the uniforms. Plaintiffs seek a
class action in which they demand various wages, premiums, interest, and
penalties for these alleged violations. They also seek attorneys fees and an
injunction.

We
answered the complaint, denying the material allegations and asserting numerous
affirmative defenses. The parties have engaged in significant discovery and
Plaintiffs have filed a Motion for Class Certification which was heard on July
13, 2005. We have opposed the Motion
for Class Certification. No trial date has been set. The parties reached a settlement which is subject to Court
approval.   The parties are drafting the settlement documents and
will likely present them to the Court by August 15, 2005.  Without
admitting any liability, we have agreed to pay money to a class of hourly
employees who allegedly were denied their proper break periods or who were
required to comply with the store dress code.  We have also agreed to
spend money to upgrade our labor software system, to provide shirts to our
employees, and to improve our lunch/break rooms.  The maximum
amount of the settlement is $2,250,000, of which $1,000,000 has been fully
reserved as of June 30, 2005. Over the
next six years, the remaining $1,250,000 is designated for the software system,
shirts, and lunch/break rooms and will be expensed or capitalized as incurred
following the Companys normal accounting policies.

On
July 22, 2005, a purported stockholder of the Company brought an action
captioned Miriam
Gruber v. Sport Chalet, Inc., Norbert Olberz, Irene Olberz, Craig L. Levra,
Howard K. Kaminsky, Al D. McCready, Eric S. Olberz, Frederick H. Schneider,
John R. Attwood, Donald J. Howard and Kenneth Olson, in the Court of
Chancery of the State of Delaware. The
action, which is purportedly brought individually, derivatively and as a class
action on behalf of the public stockholders of the Company, challenges the
recapitalization and the associated transactions described above in Managements
Discussion and Analysis of Financial Condition and Results of Operations  Overview. The complaint alleges that
defendants
breached their fiduciary duties to the Companys public stockholders by, among
other things, (i) diverting an opportunity of the Company to Messrs. Levra and
Kaminsky; (ii) failing to seek the best available transaction that would
maximize the benefits for the Company and all its stockholders; (iii) approving
transactions which are not entirely fair to the Company and its public
stockholders and (iv) attempting to entrench themselves in office. The complaint seeks, among other things, (i)
a preliminary and permanent injunction against the recapitalization; (ii) a
declaration that the defendants have breached their fiduciary duties; (iii)
damages and (iv) an award of attorneys fees and expenses. The Company believes that the claims in the
action are without merit and intends to contest the action vigorously. See Item 5  Other
Information.

22


In
addition, we are involved in various routine legal proceedings incidental to
the conduct of our 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, either due to the nature of the
claims, or because management believes that such claims should not exceed the
limits of our insurance coverage.

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

Not
Applicable.

Item 3. Defaults Upon Senior
Securities.

Not
Applicable.

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

Not
Applicable.

Item 5. Other
Information.

Stockholder
Proposals

The
proxy materials for the 2005 annual meeting of the stockholders tentatively to
be held on September 20, 2005 will be mailed to stockholders of the Company on
or about August 19, 2005. Stockholder
proposals intended to be included in the proxy statement for the 2005 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 2005 annual
meeting. If the Company does not
receive notice on the stockholder proposal within a reasonable time before the
Company mails the proxy statement for the 2005 annual meeting, proxies
solicited by the Board of Directors for the 2005 annual meeting of the
stockholders will confer authority on the holders of the proxy to vote the
shares in accordance with the recommendations of the Board of Directors if the
proposal is presented at the 2005 annual meeting of stockholders without any
discussion of the proposal in the proxy statement for such meeting.

Under
certain circumstances, stockholders are entitled to present proposals at
stockholder meetings. Any such proposal
to be included in the proxy statement for the Companys 2006 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 2005 annual meeting in a form that complies
with applicable regulations. If the
date of the 2006 annual meeting is advanced or delayed more than 30 days from
the date of the 2005 annual meeting, stockholder proposals intended to be
included in the proxy statement for the 2006 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 2006 annual meeting. Upon any determination that the date of the 2006 annual meeting
will be advanced or delayed by more than 30 days from the date of the 2005
annual meeting, the Company will disclose the change in the earliest
practicable Quarterly Report on Form 10-Q.

In
the event a stockholder proposal is not submitted to the Company at least 45
days before the date on which the Company first mailed its proxy material for
the 2005 annual meeting, the proxies solicited by the Board of Directors for
the 2006 annual meeting of the stockholders will confer authority on the
holders of the proxy to vote the shares in accordance with the recommendations
of the Board of

23


Directors if the proposal is
presented at the 2006 annual meeting of stockholders without any discussion of
the proposal in the proxy statement for such meeting.

Changes
in Registrants Independent Registered Public Accounting Firm

(a)          On
November 15, 2004, the Company dismissed Ernst & Young LLP as the Companys
independent registered public accounting firm.
Ernst & Young LLP had served as the Companys independent registered
public accounting firm since 1983. The
decision to dismiss Ernst & Young LLP was made by the Audit Committee of
the Board of Directors of the Company and, upon recommendation by that
committee, was approved by the full Board of Directors.

The
reports of Ernst & Young LLP on the Companys financial statements for each
of fiscal years 2003 and 2004 contained no adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.

During
fiscal years 2003 and 2004 and the subsequent interim period through the date
of the dismissal, the Company had no disagreement with Ernst & Young LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of Ernst & Young LLP, would have caused them to make
reference to such disagreement in connection with their reports for such
periods.

During
fiscal years 2003 and 2004 and the subsequent interim period through the date
of the dismissal, there have been no reportable events (as defined in
Regulation S-K, Item 304(a)(1)(v)).

The
Company provided Ernst & Young LLP with a copy of the above disclosures and
requested that they furnish us with a letter addressed to the Securities and
Exchange Commission stating whether they agree with the above statements and,
if not, stating the respects in which they do not agree. A copy of the letter from Ernst & Young
LLP is incorporated by reference to Exhibit 16.1 to the Companys Form 8-K
(File No. 000-20736) filed on November 18, 2004.

(b)          On
November 15, 2004, the Company engaged Moss Adams LLP as the independent
registered public accounting firm to audit the Companys financial statements
for the fiscal year ending March 31, 2005. The engagement of Moss Adams LLP was made by the Audit Committee
of the Board of Directors of the Company and, upon recommendation by that
committee, was approved by the full Board of Directors.

During
fiscal years 2003 and 2004 and the subsequent interim period prior to engaging
Moss Adams LLP, neither the Company, nor anyone on its behalf, has consulted
with Moss Adams LLP regarding any of the matters set forth in Item
304(a)(2)(i)-(ii) of Regulation S-K.

Recapitalization
Proposal

The
Companys Board of Directors has approved a recapitalization plan designed to
facilitate the orderly transition of control from the Companys Principal
Stockholder to the Companys management and to increase financial flexibility
for the Company and its stockholders.
The recapitalization plan includes transferring a portion of the
Principal Stockholders ownership to Craig L. Levra, Chairman and Chief
Executive Officer, and Howard K. Kaminsky, Executive Vice President - Finance,
Chief Financial Officer and Secretary, and allows current stockholders to
retain existing ownership and voting interests.

The
proposed recapitalization would establish two classes of Common Stock and would
be effected through a 4-for-1 reverse stock split of the outstanding Common
Stock and the reclassification of

24


each
post-split share of Common Stock into a new share of Class B Common Stock.  The reclassification would be followed by a
non-taxable stock dividend of seven shares of Class A Common Stock for each one
outstanding share of Class B Common Stock.
Each share of Class B Common Stock would entitle the holder to one vote
and each share of Class A Common Stock would entitle the holder to 1/20th of
one vote. To illustrate, a hypothetical Sport Chalet stockholder who currently
owns 1,000 shares, after the recapitalization would own 250 shares of Class B
Common Stock, each with one vote, and 1,750 shares of Class A Common Stock,
each with 1/20th of one vote.

The
proposed recapitalization plan would double the Companys total number of
shares outstanding from approximately 6,686,368 to 13,372,736.  Therefore, the recapitalization plan is
expected to have the same impact on earnings per share as a 2-for-1 stock
split.  However, the establishment of
dual classes of Common Stock would not affect the relative voting or equity
interests of existing stockholders since the reclassification of Common Stock
and issuance of a stock dividend will affect each stockholder in proportion to
the number of shares currently owned.
The Class A Common Stock and the Class B Common Stock would vote on all
matters as a single class.  The
recapitalization plan also includes certain protection features for holders of
Class A shares in an effort to ensure parity in the trading of the two classes
of Common Stock.

The
Principal Stockholder has advised the Company that he plans to transfer
approximately 973,000 shares of Class B Common Stock to Craig L. Levra and
Howard K. Kaminsky, which is intended to give them approximately 45% of the
combined voting interests of Class B and Class A Common Stock when added to the
shares of Sport Chalet they currently own.

Additionally,
shares of Class B Common Stock transferred by the Principal Stockholder to
management will be treated as a contribution to the Companys capital with the
offsetting charge as compensation expense.
As a result, the Company expects to record a one-time charge which will
be based on the stock price at the time of the transfer. Based on the stock
price as of August 10, 2005, the charge is expected to be approximately $7.8
million after income taxes, or $1.17 per share on currently outstanding shares
or $0.59 per diluted share calculated on a post transaction basis, in the
second quarter of fiscal 2006.  For a
description of certain litigation relating to the recapitalization plan, see
Item 1  Legal Proceedings.

Item
6.            Exhibits.

Exhibits:3.1
  Amended and
  Restated Certificate of Incorporation (incorporated by reference to Exhibit
  3.1 of the Companys Registration Statement on Form S-1 (File No. 33-53120))3.2
  Bylaws of
  Sport Chalet, Inc. as amended (incorporated by reference to Exhibit 3.2 of
  the Companys Registration Statement on Form S-8 (File No. 333-107683))4.1
  Form of
  Certificate for Common Stock (incorporated by reference to Exhibit 4.1 of the
  Companys Registration Statement on Form S-1 (File No. 33-53120))31.1
  Certification
  Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
  Certification
  Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
  Certification
  Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 200225


SIGNATURE

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

SPORT
  CHALET, INC.DATE:
  August 11,
  2005
  By:  /s/
  HOWARD K. KAMINSKYHoward K.
  Kaminsky
  Executive Vice President-Finance,
  Chief Financial Officer and Secretary
  (On behalf of the Registrant and as
  Principal Financial and Accounting Officer)26