**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 September 28, 2008
 
 OR
 
  ̈
              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  ̈
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        the definitions of “large accelerated filer,” “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act.:
 Large
                  accelerated filer
               ̈
              Accelerated
                  filer
              
               ̈Non-accelerated
                  filer
               ̈
              Smaller
                  reporting company
              
              x
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of Exchange Act). Yes  ̈ No x
 
 At
        November 12, 2008, there were 12,359,990 shares of Class A Common Stock
        outstanding and 1,763,321 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
              19Item
                  4T.
              Controls
                  and Procedures
              19PART
                  II – OTHER INFORMATIONItem
                  1.
              Legal
                  Proceedings
              22Item
                  1A.
              Risk
                  Factors
              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
              24Item
                  6.
              Exhibits
              25
  2
 
 **PART
        I – FINANCIAL INFORMATION**
 
 **Item
        1.** **Financial
        Statements.**
 
 **SPORT
        CHALET, INC.**
 
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**
 
 Three months ended
              
              Six
                  months endedSeptember 28, 2008
              
              September 30, 2007
              
              September 28, 2008
              
              September 30, 2007(in thousands, except per share amounts)Net
                  sales
              
              $
              96,457
              
              $
              97,669
              
              $
              183,577
              
              $
              189,223Cost
                  of goods sold, buying and occupancy costs
              
              
              70,861
              
              
              67,959
              
              
              135,273
              
              
              133,361Gross
                  profit
              
              
              25,596
              
              
              29,710
              
              
              48,304
              
              
              55,862Selling,
                  general and administrative expenses
              
              
              28,506
              
              
              24,778
              
              
              54,475
              
              
              48,522Depreciation
                  and amortization
              
              
              3,656
              
              
              3,325
              
              
              7,267
              
              
              6,488Income
                  (loss) from operations
              
              
              (6,566
              )
              
              1,607
              
              
              (13,438
              )
              
              852Interest
                  expense
              
              
              422
              
              
              357
              
              
              1,079
              
              
              716Income
                  (loss) before taxes
              
              
              (6,988
              )
              
              1,250
              
              
              (14,517
              )
              
              136Income
                  tax provision (benefit)
              
              
              (2,767
              )
              
              511
              
              
              (5,770
              )
              
              61Net
                  income (loss)
              
              $
              (4,221
              )
              $
              739
              
              $
              (8,747
              )
              $
              75Earnings
                  (loss) per share:Basic
              
              $
              (0.30
              )
              $
              0.05
              
              $
              (0.62
              )
              $
              0.01Diluted
              
              $
              (0.30
              )
              $
              0.05
              
              $
              (0.62
              )
              $
              0.01Weighted
                  average number of common shares outstanding:Basic
              
              
              14,123
              
              
              14,078
              
              
              14,123
              
              
              14,047Diluted
              
              
              14,123
              
              
              14,735
              
              
              14,123
              
              
              14,750
 
 **See
        accompanying notes.**
  3
  **SPORT
        CHALET, INC.**
 
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 
 September 28,
              
              March 30,2008
              
              2008(Unaudited)(in thousands, except share amounts)**Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              4,634
              
              $
              3,894Accounts
                  receivable, net
              
              
              4,824
              
              
              1,359Merchandise
                  inventories
              
              
              101,718
              
              
              86,145Prepaid
                  expenses and other current assets
              
              
              5,287
              
              
              6,170Income
                  tax receivable
              
              
              1,405
              
              
              1,405Deferred
                  income taxes
              
              
              3,354
              
              
              3,349Total
                  current assets
              
              
              121,222
              
              
              102,322Fixed
                  assets, net
              
              
              70,709
              
              
              66,619Deferred
                  income taxes
              
              
              8,149
              
              
              2,374Total
                  assets
              
              $
              200,080
              
              $
              171,315**Liabilities
                  and stockholders' equity**Current
                  liabilities:Accounts
                  payable
              
              $
              46,171
              
              $
              28,035Loan
                  payable to bank
              
              
              29,239
              
              
              17,216Salaries
                  and wages payable
              
              
              4,928
              
              
              4,620Other
                  accrued expenses
              
              
              18,319
              
              
              13,254Total
                  current liabilities
              
              
              98,657
              
              
              63,125Deferred
                  rent
              
              
              26,002
              
              
              24,221Commitments
                  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 – 12,359,990 at
                  September 28, 2008 and March 30, 2008
              
              
              124
              
              
              124Class
                  B Common Stock, $.01 par value: Authorized shares - 2,000,000 Issued
                  and
                  outstanding shares – 1,763,321 at September 28, 2008 and March 30,
                  2008
              
              
              18
              
              
              18Additional
                  paid-in capital
              
              
              34,293
              
              
              34,094Retained
                  earnings
              
              
              40,986
              
              
              49,733Total
                  stockholders’ equity
              
              
              75,421
              
              
              83,969Total
                  liabilities and stockholders’ equity
              
              $
              200,080
              
              $
              171,315
 
 **See
        accompanying notes.**
  4
  **SPORT
        CHALET, INC.**
 
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
 
 Six months endedSeptember 28, 2008
              
              September 30, 2007(in thousands)**Operating
                  activities**Net
                  (loss) income
              
              $
              (8,747
              )
              $
              75Adjustments
                  to reconcile net (loss) income to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              7,267
              
              
              6,488Loss
                  on disposal of equipment
              
              
              179
              
              
              6Share-based
                  compensation
              
              
              189
              
              
              144Deferred
                  income taxes
              
              
              (5,780
              )
              
              (945
              )Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (3,465
              )
              
              3,429Merchandise
                  inventories
              
              
              (15,573
              )
              
              (16,613
              )Prepaid
                  expenses and other current assets
              
              
              883
              
              
              (143
              )Income
                  tax receivable
              
              
              -
              
              
              742Accounts
                  payable
              
              
              18,136
              
              
              11,306Salaries
                  and wages payable
              
              
              308
              
              
              (817
              )Other
                  accrued expenses
              
              
              5,065
              
              
              (2,006
              )Deferred
                  rent
              
              
              1,781
              
              
              192Net
                  cash provided by operating activities
              
              
              243
              
              
              1,858**Investing
                  activities**Purchase
                  of fixed assets
              
              
              (11,536
              )
              
              (12,266
              )Net
                  cash used in investing activities
              
              
              (11,536
              )
              
              (12,266
              )**Financing
                  activities**Proceeds
                  from bank borrowing
              
              
              77,309
              
              
              49,675Repayments
                  of bank borrowing
              
              
              (65,286
              )
              
              (42,809
              )Proceeds
                  from exercise of stock options
              
              
              -
              
              
              202Tax
                  benefit on employee stock options
              
              
              10
              
              
              269Net
                  cash provided by financing activities
              
              
              12,033
              
              
              7,337Increase
                  (decrease) in cash and cash equivalents
              
              
              740
              
              
              (3,071
              )Cash
                  and cash equivalents at beginning of period
              
              
              3,894
              
              
              3,841Cash
                  and cash equivalents at end of period
              
              $
              4,634
              
              $
              770**Supplemental
                  Disclosure of Cash Flow Information**Cash
                  paid during the period for:Income
                  taxes
              
              $
              -
              
              $
              -Interest
              
              
              591
              
              
              637
 
 **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 March 30, 2008.
        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.
 
 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.  Change
        in
        Inventory Valuation Method
 
 In
        connection with the implementation of a new financial and merchandising system,
        effective March 31, 2008, we have changed the inventory valuation method
        from
        the first-in, first-out “FIFO” basis determined by the retail method of
        accounting to a weighted-average cost basis, using the retail method. We
        have
        accounted for the change in accounting principle prospectively, in accordance
        with Statement of Financial Accounting Standards (“SFAS”) No.154, *“Accounting
        Changes and Error Corrections.”* The
        cumulative effect of this change is not determinable as we do not have the
        ability to recalculate average cost for prior periods. We are beginning fiscal
        2009 with the FIFO costs as used for the ending fiscal 2008 inventory valuation;
        going forward these amounts will be updated as new purchases are made. We
        do not
        anticipate this change will have a material effect on our results of operations,
        and we chose this method based on our new system capabilities.
  6
  3.  Earnings
        (loss) per Share
 
 Earnings
        (loss) per share, basic, is computed based on the weighted average number
        of
        common shares outstanding for the period. Loss 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 of the numerators
        and denominators of the basic and diluted loss per share computations are
        set
        forth below:
 
 Three months ended
              
              Six
                  months endedSeptember 28, 2008
              
              September 30, 2007
              
              September 28, 2008
              
              September 30, 2007(in thousands, except per share data)Net
                  income (loss)
              
              $
              (4,221
              )
              $
              739
              
              $
              (8,747
              )
              $
              75Weighted
                  average number of common shares:Basic
              
              
              14,123
              
              
              14,078
              
              
              14,123
              
              
              14,047Effect
                  of dilutive securities-stock options
              
              
              -
              
              
              657
              
              
              -
              
              
              703Diluted
              
              
              14,123
              
              
              14,735
              
              
              14,123
              
              
              14,750Class
                  A and Class BEarnings
                  (loss) per share:Basic
              
              $
              (0.30
              )
              $
              0.05
              
              $
              (0.62
              )
              $
              0.01Effect
                  of dilutive securities-stock options
              
              
              -
              
              
              -
              
              
              -
              
              
              -Diluted
              
              $
              (0.30
              )
              $
              0.05
              
              $
              (0.62
              )
              $
              0.01
 
 An
        aggregate of 1,953,605 options for the three and six months ended September
        28,
        2008 and an aggregate of 160,300 and 146,000 options for the three and six
        months ended September 30, 2007, respectively, are excluded from the computation
        of diluted loss per share as their effect would have been
        anti-dilutive.
 
 4.  Loan
        Payable to Bank
 
 In
        June
        2008, we negotiated a new credit facility with our existing lender, Bank
        of
        America, N.A. (the “Lender”), which provides for advances up to $45.0 million,
        increasing to $70.0 million, for the period September 1, through December
        31,
        each year, up to a $10.0 million maximum in authorized letters of credit.
        The
        amount we may borrow under this credit facility is limited to a percentage
        of
        the value of eligible inventory, minus certain reserves. Interest accrues
        at the
        Lender’s prime rate plus an applicable margin up to 0.50% based on our fixed
        charge coverage ratio (5.00% at September 28, 2008) or at our option we can
        fix
        the rate for a period of time at LIBOR plus an applicable margin (1.50% up
        to
        2.50% based on our fixed charge coverage ratio). In addition, there is an
        unused
        commitment fee of 0.25% per year, based on a weighted average formula, a
        one-time, non-refundable commitment fee of $350,000 and an early termination
        fee
        of 1.50% in year one, 0.75% in year two and 0.25% in year three which is
        waived
        if the loan is refinanced by the Lender or any of its affiliates. This credit
        facility expires in June 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 should availability
        fall
        below certain prescribed limits we would be subject to a potentially restrictive
        covenant. This covenant requires that we maintain certain minimum cash flow
        coverage.
  7
  5. Share-based
        Compensation
 
 Total
        share-based compensation expense and the related income tax benefit recognized
        for the three and six months ended September 28, 2008 and September 30,
        2007:
 
 Three months ended
              
              Six
                  months endedSeptember 28, 2008
              
              September 30, 2007
              
              September 28, 2008
              
              September 30,  2007(in thousands)Compensation
                  expense
              
              $
              117
              
              $
              100
              
              $
              189
              
              $
              144Income
                  tax benefit
              
              $
              47
              
              $
              40
              
              $
              76
              
              $
              58
 
 
 The
        fair
        value of each option granted is estimated on the date of grant using the
        Black-Scholes option-valuation 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 ended September
        28,
        2008 and September 30, 2007 the following weighted average assumptions were
        used
        to estimate the fair value for stock options granted in that
        period:
 
 Three months endedSeptember 28, 2008
              
              September 30, 2007Risk-free
                  interest rate
              
              
              3.5
              %
              
              5.0
              %Expected
                  volatility
              
              
              38.4
              %
              
              36.6
              %Expected
                  dividend yield
              
              
              0.0
              %
              
              0.0
              %Expected
                  life in years
              
              
              7.5
              
              
              7.5
 
 
 The
        following table sets forth information concerning stock option activity for
        the
        six months ended September 28, 2008:
 
 Options
              
              Weighted
                Average
                Exercise Price
              
              Weighted-
                Average
                Remaining
                Contractual Term
                (Years)
              
              Aggregate
                Intrinsic Value
                (in
                  000's)Outstanding
                  as of March 30, 2008
              
              
              1,432,055
              
              $
              5.28Granted
              
              
              525,150
              
              
              4.82Exercised
              
              
              -Forfeited
                  or expired
              
              
              (3,600
              )
              
              5.92Outstanding
                  as of September 28, 2008
              
              
              1,953,605
              
              $
              5.14
              
              
              5.8
              
              $
              403,298
 
 The
        aggregate intrinsic value in the table above is based on the Company’s closing
        stock price of $3.20 and $3.15 for Class A and Class B, respectively, as
        of the
        last trading day of the period ended September 28, 2008.
 
 8
 6.  Recently
        Issued Accounting Pronouncements
 
 In
        September 2006, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards (“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 November 15, 2007. Implementation of SFAS No. 157 as
        it relates to the fair value measurements of nonfinancial assets and
        nonfinancial liabilities, except for items that are recognized or disclosed
        at
        fair value in an entity's financial statements on a recurring basis, has
        been
        deferred to fiscal years beginning after November 15, 2008. The adoption of
        the applicable provisions of SFAS No. 157 at the beginning of fiscal 2009
        has not had a material impact on our financial condition. We do not expect
        the
        adoption of the remaining provisions of SFAS No. 157 to have a material impact
        on our results of operations, cash flows, 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. We have
        adopted SFAS No. 159 at the beginning of fiscal 2009 but elected not to
        apply the Fair Value Option of SFAS No. 159.
 
 In
        December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“FAS
        141(R)”), to replace FAS 141, Business Combinations. FAS 141(R) requires use of
        the acquisition method of accounting, defines the acquirer, establishes the
        acquisition date and broadens the scope to all transactions and other events
        in
        which one entity obtains control over one or more other businesses. This
        statement is effective for financial statements issued for fiscal years
        beginning on or after December 15, 2008 with earlier adoption prohibited.
        While
        the Company does not expect the adoption of FAS 141(R) to have a material
        impact
        to its consolidated financial statements for transactions completed prior
        to
        December 31, 2008, the impact of the accounting change could be material
        for
        business combinations which may be consummated subsequent thereto.
 
 In
        December 2007, the FASB issued SFAS No. 160, Non controlling Interests in
        Consolidated Financial Statements — an amendment of ARB No. 51, (“FAS 160”). FAS
        160 establishes accounting and reporting standards for the non controlling
        interest in a subsidiary and for the retained interest and gain or loss when
        a
        subsidiary is deconsolidated. This statement is effective for financial
        statements issued for fiscal years beginning on or after December 15, 2008
        with
        earlier adoption prohibited. The Company currently does not have any
        non-controlling interests or deconsolidated subsidiaries and therefore FAS
        160
        will not have any impact on its consolidated financial statements.
 
 In
        May
        2008, the FASB issued SFAS No. 162, Hierarchy of Generally Accepted Accounting
        Principles (“SFAS 162”). This statement is intended to improve financial
        reporting by identifying a consistent framework, or hierarchy, for selecting
        accounting principles to be used in preparing financial statements of
        nongovernmental entities that are presented in conformity with GAAP. This
        statement will be effective 60 days following the U.S. Securities and Exchange
        Commission’s approval of the Public Company Accounting Oversight Board amendment
        to AU Section 411, The Meaning of Present Fairly in Conformity with Generally
        Accepted Accounting Principles. We believe that FAS 162 will have no effect
        on
        our financial statements.
  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 54 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 and specialty services assortment. Our prototype
        store
        is 42,000 square feet in size and showcases every merchandise and service
        category with the feel of a specialty shop all contained under one roof.
 
 Our
        comparative store sales growth has been positive for the four fiscal years
        prior
        to fiscal 2008. Comparative store sales declined 4.5% for fiscal 2008. Same
        store sales were negative in the past four quarters as we continue to confront
        a
        difficult macro-economic environment, which began with weak housing trends
        and
        high gasoline prices in our core markets. As a result of the reduction in
        same
        store sales for the first half of fiscal 2009 and the opening of new stores
        which have not reached maturity, we incurred a net loss of $8.7 million,
        or
        $0.62 per diluted share, compared to a net income of $75,000, or $0.01 per
        diluted share, for first half of fiscal 2008. Same store sales for the past
        six
        quarters from the first quarter of fiscal 2008 to the second quarter of fiscal
        2009 are +1.3%, +2.2%, -6.9, -8.8%, -11.1% and -6.7%, respectively. More
        recently, for our third quarter through November 2, 2009 we have experienced
        a
        14% decline in same store sales. In the event this decline were to continue
        for
        an extended period of time, we may have insufficient working capital to continue
        to operate our business as it has been operated, or at all. See “Risk Factors - *A
        downturn in the economy has affected consumer purchases of discretionary
        items,
        reducing our net sales. If the decline were to continue, we may not have
        sufficient working capital to continue.* ”
in
        Item
        1A “Risk Factors.”
 
 10
 Our
        growth strategy had historically focused on Southern California; but, since
        2001
        we have expanded our scope to all of California, Nevada, Arizona and Utah
        as
        suitable locations are found. We opened seven stores in fiscal year 2008,
        seventeen stores in the last three years and twenty-five in the last five
        years.
        In light of current macro-economic circumstances we have lease commitments
        for,
        and currently anticipate opening, four new stores and relocating one store
        during fiscal 2009 and continue to look for additional opportunities in existing
        and new markets although we currently have no further new store commitments.
        We
        intend to continue adding new stores as broader economic trends improve.
        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 merchandise 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,
        which reduces the leverage available to offset direct and indirect store
        expenses. 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, the impact of competitors’ stores and changing economic conditions,
        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 have invested
        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.
 
 We
        estimate the cash required to open an average new store is approximately
        $2.5
        million consisting primarily of the investment in inventory (net of average
        vendor payables), the cost of leasehold improvements (net of landlord
        reimbursement), fixtures and equipment and pre-opening expenses, which are
        primarily the costs associated with training employees and stocking the store.
        Cash requirements for opening costs of each new store varies significantly
        depending on how much the landlord has agreed to contribute to our required
        improvements. For fiscal 2009, we expect the average cash required for each
        new
        store to increase to $3.8 million as two of the four stores to be opened
        are in
        highly desirable locations.
 
 Aside
        from the recent negative macro-economic trends, we believe that the overall
        growth of our business should allow us to increase our operating margins
        over
        time. Our investments in infrastructure such as the distribution center,
        corporate facilities and computer systems, combined with increased merchandise
        volumes, should enable us to improve our purchasing leverage and achieve
        greater
        efficiencies throughout the supply chain. However, savings from improvements
        in
        merchandise procurement have been offset by increased expenses as a percent
        of
        sales primarily from new stores and more recently the decrease in same store
        sales.
 
 11
 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.
 
 **Results
        of Operations**
 
 ***Second
        Quarter 2009 Compared to Second Quarter 2008***
 
 The
        following table sets forth statements of operations data and relative
        percentages of net sales for the second quarter of fiscal 2009 and 2008 (dollar
        amounts in thousands, except per share amounts).
 
 Second fiscal quarter2009
              
              2008
              
              Dollar
                Change
              
              Percentage
                ChangeAmount
              
              Percent
              
              Amount
              
              PercentNet
                  sales
              
              $
              96,457
              
              
              100.0
              %
              $
              97,669
              
              
              100.0
              %
              $
              (1,212
              )
              
              (1.2
              )%Gross
                  profit
              
              
              25,596
              
              
              26.5
              %
              
              29,710
              
              
              30.4
              %
              
              (4,114
              )
              
              (13.8
              )%Selling,
                  general and administrative expenses
              
              
              28,506
              
              
              29.6
              %
              
              24,778
              
              
              25.4
              %
              
              3,728
              
              
              15.0
              %Depreciation
                  and amortization
              
              
              3,656
              
              
              3.8
              %
              
              3,325
              
              
              3.4
              %
              
              331
              
              
              10.0
              %Income
                  (loss) from operations
              
              
              (6,566
              )
              
              (6.8
              )%
              
              1,607
              
              
              1.6
              %
              
              (8,173
              )
              
              
              *Interest
                  expense
              
              
              422
              
              
              0.4
              %
              
              357
              
              
              0.4
              %
              
              65
              
              
              18.2
              %Income
                  (loss) before taxes
              
              
              (6,988
              )
              
              (7.2
              )%
              
              1,250
              
              
              1.3
              %
              
              (8,238
              )
              
              
              *Net
                  income (loss)
              
              
              (4,221
              )
              
              (4.4
              )%
              
              739
              
              
              0.8
              %
              
              (4,960
              )
              
              
              *Class
                  A and Class BNet
                  earnings (loss) per share:Basic
              
              $
              (0.30
              )
              
              
              
              $
              0.05
              
              
              
              
              $
              (0.35
              )
              
              
              *Diluted
              
              $
              (0.30
              )
              
              
              
              $
              0.05
              
              
              
              
              $
              (0.35
              )
              
              
              *
 *
          Percentage change not meaningful.
 Sales
        decreased $1.2 million, or 1.2%, to $96.5 million  for
        the
        second quarter 2009 from $97.7 million for the same period in fiscal 2008.
        Sales
        from seven new stores, not included in the same store sales calculation,
        resulted in a $6.4 million increase in sales, or 6.8%. This increase was
        offset
        by a same store sales decrease of $6.3 million, or 6.7%, and an increase
        in the
        use of our customer loyalty program, Action Pass, which requires sales be
        reduced as points are earned. The positive impact on sales of reducing prices
        on
        older inventory was offset by macro-economic conditions, which included weak
        housing trends and high gasoline prices in our core markets. In addition,
        but to
        a lesser degree, the opening of new stores by the Company and competitors
        contributed to the decline in same store sales.
 
 Gross
        profit decreased $4.1 million, or 13.8%, primarily as a result of an additional
        $1.0 million in markdowns primarily used to stimulate the demand for older
        inventory and a $2.0 million increase in rent from new stores. In addition,
        the
        additional points from our customer loyalty program, Action Pass, decreased
        sales by $726,000 for the three months ended September 28, 2008, over the
        same
        period last year. As a percent of sales, gross profit decreased 390 basis
        points
        to 26.5% from 30.4%. The decrease is primarily the result of increased
        markdowns, rent as a percent of sales in newer stores which take time to
        reach
        their desired operating efficiency and the increased use of Action Pass.
  Selling,
        general and administrative expenses increased $3.7 million, or 15.0%, primarily
        due to $2.1 million from expenses related to additional stores and $540,000
        for
        increased professional fees primarily related to new system implementation
        support and training as well as professional fees incurred in obtaining the
        Company’s new bank credit facility. As a percent of sales, SG&A increased to
        29.6% from 25.4% for the second quarter of fiscal 2008, primarily from the
        decrease in comparable store sales, the expenses associated with new stores
        which take time to reach their desired operating efficiency and professional
        fees.
 
 12
 Depreciation
        and amortization increased $331,000, or 10.0%, $353,000 from new stores and
        $252,000 primarily from new systems, offset by decreases in existing stores
        as
        some of their assets became fully depreciated.
 
 Primarily
        as a result of the reduction in same store sales and the opening of new stores,
        we incurred a net loss of $4.2 million, $0.30 per diluted share, compared
        to a
        net income of $739,000, $0.05 per diluted share, for the same period last
        year.
 
 ***Six
        Months Ended September 28, 2008 Compared to September 30,
        2007***
 
 The
        following table sets forth statements of operations data and relative
        percentages of net sales for the six months ended September 28, 2008 compared
        to
        six months ended September 30, 2007 (dollar amounts in thousands, except
        per
        share amounts).
 
 Six months endedSeptember 28, 2008
              
              September 30, 2007
              
              Dollar
                Change
              
              Percentage
                ChangeAmount
              
              Percent
              
              Amount
              
              PercentNet
                  sales
              
              $
              183,577
              
              
              100.0
              %
              $
              189,223
              
              
              100.0
              %
              $
              (5,646
              )
              
              (3.0
              )%Gross
                  profit
              
              
              48,304
              
              
              26.3
              %
              
              55,862
              
              
              29.5
              %
              
              (7,558
              )
              
              (13.5
              )%Selling,
                  general and administrative expenses
              
              
              54,475
              
              
              29.7
              %
              
              48,522
              
              
              25.6
              %
              
              5,953
              
              
              12.3
              %Depreciation
                  and amortization
              
              
              7,267
              
              
              4.0
              %
              
              6,488
              
              
              3.4
              %
              
              779
              
              
              12.0
              %Income
                  (loss) from operations
              
              
              (13,438
              )
              
              (7.3
              )%
              
              852
              
              
              0.5
              %
              
              (14,290
              )
              
              
              *Interest
                  expense
              
              
              1,079
              
              
              0.6
              %
              
              716
              
              
              0.4
              %
              
              363
              
              
              50.7
              %Income
                  (loss) before taxes
              
              
              (14,517
              )
              
              (7.9
              )%
              
              136
              
              
              0.1
              %
              
              (14,653
              )
              
              
              *Net
                  income (loss)
              
              
              (8,747
              )
              
              (4.8
              )%
              
              75
              
              
              0.0
              %
              
              (8,822
              )
              
              
              *Class
                  A and Class BNet
                  earnings (loss) per share:Basic
              
              $
              (0.62
              )
              
              
              
              $
              0.01
              
              
              
              
              $
              (0.63
              )
              
              
              *Diluted
              
              $
              (0.62
              )
              
              
              
              $
              0.01
              
              
              
              
              $
              (0.63
              )
              
              
              *
 
 *
        Percentage change not meaningful.
 
 Sales
        decreased $5.6 million, or 3.0%, to $183.6 million  for
        the
        six months ended September 28, 2008 from $189.2 million for the same period
        in
        fiscal 2008. Sales from nine new stores, not included in the same store sales
        calculation, resulted in an $11.8 million increase in sales, or 6.2%. This
        increase was offset by a same store sales decrease of $15.8 million, or 8.9%,
        and an increase in the use of our customer loyalty program, Action Pass,
        which
        requires sales be reduced as points are earned. The positive impact on sales
        of
        reducing prices on older inventory was offset by macro-economic conditions,
        which included weak housing trends and high gasoline prices in our core markets.
        In addition, but to a lesser degree, the opening of new stores by the Company
        and competitors contributed to the decline in same store sales.
 
 Gross
        profit decreased $7.6 million, or 13.5%, primarily as a result the sales
        decrease, an additional $1.0 million in markdowns primarily used to stimulate
        the demand for older inventory and a $3.6 million increase in rent from new
        stores. In addition, the additional points from our customer loyalty program,
        Action Pass, decreased sales by $725,000 for the six months ended September
        28,
        2008 over the same period last year. As a percent of sales, gross profit
        decreased 320 basis points to 26.3% from 29.5%. The decrease is primarily
        the
        result of increased markdowns, rent as a percent of sales in newer stores
        which
        take time to reach their desired operating efficiency and the increased use
        of
        Action Pass.
  13
 Selling,
        general and administrative expenses increased $6.0 million, or 12.3%, primarily
        due to $3.2 million from expenses related to additional stores and $1.0 million
        for increased professional fees primarily related to new system implementation
        support and training as well as professional fees incurred in obtaining the
        Company’s new bank credit facility. As a percent of sales, SG&A increased to
        29.7% from 25.6% for the six months ended September 30, 2007, primarily from
        the
        decrease in comparable store sales, the expenses associated with new stores
        which take time to reach their desired operating efficiency and professional
        fees.
 
 Depreciation
        and amortization increased $779,000, or 12.0%, primarily due to $732,000
        from
        new stores and $477,000 coming in large part from new systems, which was
        offset
        by decreases as some of the assets in existing stores became fully
        depreciated.
 
 Interest
        expense increased $383,000 primarily due to a $350,000 closing fee for the
        amended and restated bank credit facility, partially offset by lower interest
        rates on higher average outstanding debt.
 
 Primarily
        as a result of the reduction in same store sales and the opening of new stores,
        we incurred a net loss of $8.7 million, $0.62 per diluted share, compared
        to a
        net income of $75,000, $0.01 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. Same store sales for the past
        six
        quarters from the first quarter of fiscal 2008 to the second quarter of fiscal
        2009 are +1.3%, +2.2%, -6.9, -8.8%, -11.1% and -6.7%, respectively. More
        recently, for our third quarter through November 2, 2009 we have experienced
        a
        14% decline in same store sales. In the event this decline were to continue
        for
        an extended period of time, we may have insufficient working capital to continue
        to operate our business as it has been operated, or at all. See “Risk Factors - *A
        downturn in the economy has affected consumer purchases of discretionary
        items,
        reducing our net sales. If the decline were to continue, we may not have
        sufficient working capital to continue.* ”
in
        Item
        1A “Risk Factors.”
 
 Net
        cash
        provided by operating activities has generally been the result of net income
        or
        loss, adjusted for depreciation and amortization, and changes in inventory
        along
        with related accounts payable. The following table shows the more significant
        items from the six months ended September 28, 2008 and September 30, 2007,
        in
        thousands:
 
 **Six months ended****September 28, 2008**
              
              **September 30, 2007**Net
                  income (loss)
              
              $
              (8,747
              )
              $
              75Depreciation
                  and amortization
              
              
              7,267
              
              
              6,488Merchandise
                  inventories
              
              
              (15,573
              )
              
              (16,613
              )Accounts
                  payable
              
              
              18,136
              
              
              11,306Accounts
                  receivable
              
              
              (3,465
              )
              
              3,429Deferred
                  income taxes
              
              
              (5,780
              )
              
              (945
              )Other
                  accrued expenses
              
              
              5,065
              
              
              (2,006
              )Deferred
                  rent
              
              
              1,781
              
              
              192Other
              
              
              1,559
              
              
              (68
              )Net
                  cash provided by operating activities
              
              $
              243
              
              $
              1,858
 
 14
 Typically,
        inventory levels increase from year to year due to the addition of new stores,
        while improvements in inventory management decrease inventory required for
        each
        store. Average inventory per store decreased 13.6% to $1.9 million from $2.2
        million at the end of the second quarter of 2009 and 2008, respectively.
        The
        increase of $15.6 million in the six months ended September 28, 2008 and
        the
        $16.6 million increase in the six months ended September 30, 2007 was primarily
        due to the seasonal build up of inventory and the addition of two new stores
        and
        three new stores, respectively.
 
 Historically,
        accounts payable increases as inventory increases. However, the timing of
        vendor
        payments or receipt of merchandise near the end of the period does influence
        this relationship.
 
 Significant
        changes in accounts receivable are from the timing of payments due from
        landlords for tenant improvements. For the six months ended September 28,
        2008,
        the amount due is $1.8 million which is also the reason for the increase
        in
        deferred rent.
 
 The
        loss
        for the six months ended September 28, 2008 is expected to be recovered in
        future years and is reflected in deferred income taxes. The loss in fiscal
        2008
        combined with a change of asset lives for tax depreciation purposes for fiscal
        2007 used the available carry-back.
 
 Other
        accrued expenses provided $5.1 million in cash for the six months ended
        September 28, 2008 from an acceleration of payments made at the end of fiscal
        2008, an early use of cash in the prior fiscal year, to ease the conversion
        of
        data to a new computer system implemented on March 31, 2008.
 
 Net
        cash
        used in investing activities is primarily for capital expenditures as shown
        below, in thousands:
  **Six months ended****September 28, 2008**
              
              **September 30, 2007**New
                  stores
              
              $
              7,069
              
              $
              5,911Remodels/Relocations
              
              
              2,860
              
              
              1,682Existing
                  stores
              
              
              376
              
              
              698Information
                  systems
              
              
              1,020
              
              
              3,677Other
              
              
              211
              
              
              298Total
              
              $
              11,536
              
              $
              12,266
 
 We
        opened
        two new stores and relocated one store in the six months ended September
        28,
        2008 compared to three new stores in the same period last year. The costs
        to
        open new stores can vary significantly depending on the terms of the lease.
        One
        of the stores opened in fiscal 2009 was significantly more expensive to open
        than our historical average as it is in a highly desirable location.
 
 As
        a
        result of our ongoing growth and strategic initiatives, forecasted capital
        expenditures for the remainder of fiscal 2009 are expected to be approximately
        $6.0 million, which will be funded by cash flow from operations and our bank
        credit line, as needed. Approximately $3.3 million of this amount will be
        used
        to open two additional new stores. These planned store openings are dependant
        on
        our landlords completing our buildings and surrounding retail centers on
        time.
        In addition to the normal expenditures for existing stores, the remainder
        is
        primarily for expenditures on information systems.
 
 15
 Net
        cash
        provided by financing activities reflects advances and repayments of borrowings
        under our revolving credit facility. The outstanding balance as of September
        28,
        2008 is $29.2 million compared to $17.2 million at the end of fiscal 2008.
        The
        increase is primarily the result of funding new and relocated stores in excess
        of cash generated from operations.
 
 In
        June
        2008, we negotiated a new credit facility with our existing lender, Bank
        of
        America, N.A. (the “Lender”), which provides for advances up to $45.0 million,
        increasing to $70.0 million, for the period September 1, through December
        31,
        each year, up to a $10.0 million maximum in authorized letters of credit.
        The
        amount we may borrow under this credit facility is limited to a percentage
        of
        the value of eligible inventory, minus certain reserves. Interest accrues
        at the
        Lender’s prime rate plus an applicable margin up to 0.50% based on our fixed
        charge coverage ratio (5.00% at September 28, 2008) or at our option we can
        fix
        the rate for a period of time at LIBOR plus an applicable margin (1.50% up
        to
        2.50% based on our fixed charge coverage ratio). In addition, there is an
        unused
        commitment fee of 0.25% per year, based on a weighted average formula, a
        one-time, non-refundable commitment fee of $350,000 and an early termination
        fee
        of 1.50% in year one, 0.75% in year two and 0.25% in year three which is
        waived
        if the loan is refinanced by the Lender or any of its affiliates. This credit
        facility expires in June 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 should availability
        fall
        below certain prescribed limits we would be subject to a potentially restrictive
        covenant. This covenant requires that we maintain certain minimum cash flow
        coverage.
 
 The
        amount we can borrow under the credit facility with the Lender is determined
        based on a defined borrowing base formula related to eligible inventory.
        A
        significant decrease in eligible inventory due to the aging of inventory,
        or
        other factors, could have an adverse effect on our borrowing capabilities
        under
        our credit facility, which may adversely affect the adequacy of our working
        capital.
 
 Our
        off-balance sheet contractual obligations and commitments relate to operating
        lease obligations, employment contracts and letters of credit which are excluded
        from the balance sheet in accordance with generally accepted accounting
        principles.
 
 The
        following table summarizes such obligations as of September 28, 2008:
 
 **Contractual Obligations****(in 000s)**
              
              **Payment due by period****Total**
              
              **Less than 1**
                **year**
              
              **2-3 years**
              
              **4-5 years**
              
              **More than 5**
                **years**Operating
                  Leases(a)
              
              $
              283,162
              
              $
              38,059
              
              $
              71,932
              
              $
              64,595
              
              $
              108,576Employment
                  Contracts
              
              
              848
              
              
              170
              
              
              339
              
              
              339
              
              
              -Total
                  Contractual Obligations
              
              $
              284,010
              
              $
              38,229
              
              $
              72,271
              
              $
              64,934
              
              $
              108,576
 
 (a)
        Amounts include the direct lease obligations. Other obligations required
        by the
        lease agreements such as contingent rent based on sales, common area
        maintenance, property taxes and insurance are not fixed amounts and are
        therefore not included. The amount of the excluded expenses are; $9.6 million,
        $8.5 million and $7,2 million for the fiscal years 2008, 2007 and 2006,
        respectively.
 
 We
        lease
        all of our 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 we enter the space and begin 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.
 
 16
 Generally,
        our purchase obligations are cancelable 45 days prior to shipment from our
        vendors. Letters of credit amounting to approximately $1.8 million relating
        to
        workers’ compensation insurance were outstanding as of September 28, 2008 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, therefore, do not anticipate paying any cash dividends in the
        foreseeable future.
 
 **Critical
        Accounting Policies and Use of Estimates**
 
 In
        preparing our consolidated financial statements we are required to make
        estimates and judgments which affect the results of our operations and the
        reported value of assets and liabilities. Actual results may differ from
        these
        estimates. As discussed in “Item 7 - Management’s Discussion and Analysis
        of Financial Condition and Results of Operations” section of the Company’s
        Annual Report on Form 10-K for the fiscal year ended March 30, 2008, 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.
 
 In
        connection with the implementation of a new financial and merchandising system,
        effective March 31, 2008, we have changed the inventory valuation method
        from
        the first-in, first-out “FIFO” basis determined by the retail method of
        accounting to a weighted-average cost basis, using the retail method. We
        have
        accounted for the change in accounting principle prospectively, in accordance
        with Statement of Financial Accounting Standards (“SFAS”) No.154, “Accounting
        Changes and Error Corrections.” The cumulative effect of this change is not
        determinable as we do not have the ability to recalculate average cost for
        prior
        periods. We are beginning fiscal 2009 with the FIFO costs as used for the
        ending
        fiscal 2008 inventory valuation; going forward these amounts will be updated
        as
        new purchases are made. We do not anticipate this change will have a material
        effect on our results of operations, and we chose this method based on our
        new
        system capabilities.
 
 **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.
 
 For
        more
        detailed discussion of these factors, see the “Risk Factors” discussion in Item
        1A of the Company’s most recent Annual Report on Form 10-K. The forward-looking
        statements included in this Quarterly Report on Form 10-Q are made only as
        of
        the date of this report, and the Company undertakes no obligation to update
        the
        forward-looking statements to reflect subsequent events or circumstances.
 
 17
 Risks
        Related To Our Business:
 
 ·
            A
                downturn in the economy has affected consumer purchases of discretionary
                items, reducing our net sales. 
 ·
            Intense
                competition in the sporting goods industry could limit our growth
                and
                reduce our profitability.  ·
            Our
                future growth will be dependent on the availability of additional
                financing. 
 ·
            Because
                our stores are concentrated in the western portion of the United
                States,
                we are subject to regional risks.  ·
            If
                we are unable to predict or react to changes in consumer demand,
                we may
                lose customers and our sales may decline. 
 ·
            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. 
 ·
            Failure
                to protect the integrity and security of our customers’ information could
                expose us to litigation and materially damage our standing with our
                customers. 
 ·
            If
                we are unable to successfully implement our controlled growth strategy
                or
                manage our growing business, our future operating results could suffer. 
 ·
            Our
                ability to expand our business will be dependent upon our ability
                to meet
                challenges in new and existing markets. 
 ·
            Failure
                to maintain an online presence that mirrors our customers’ in-store
                experience could adversely impact net sales.  ·
              If
                    we lose key management or are unable to attract and retain talent,
                    our
                    operating results could suffer.
 
 ·
            Seasonal
                fluctuations in the sales of sporting goods could cause our annual
                operating results to suffer. 
 ·
            Our
                quarterly operating results may fluctuate substantially, which may
                adversely affect our business. 
 ·
            Declines
                in the effectiveness of marketing could cause our operating results
                to
                suffer. 
 ·
            Problems
                with our information systems could disrupt our operations and negatively
                impact our financial results. 
 18
 ·
            We
                are controlled by our Founder and management, whose interests may
                differ
                from other stockholders. 
 ·
            The
                price of our Class A Common Stock and Class B Common Stock may be
                volatile.  ·
            Provisions
                in the Company's charter documents could discourage a takeover that
                stockholders may consider favorable. 
 ·
            We
                may be subject toperiodic
                litigation that may adversely affect our business and financial
                performance. 
 ·
            Changes
                in accounting standards and subjective assumptions, estimates and
                judgments related to complex accounting matters could significantly
                affect
                our financial results. 
 ·
            Terrorist
                attacks or acts of war may harm our business. 
 ·
            We
                rely on one distribution center and any disruption could reduce our
                sales. 
 ·
            We
                may pursue strategic acquisitions, which could have an adverse impact
                on
                our business. 
 ·
            Our
                comparable store sales will fluctuate and may not be a meaningful
                indicator of future performance. 
 ·
            Global
                warming could cause erosion of both our winter and summer seasonal
                businesses over a long-term basis. 
 **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
        4T.** **Controls
        and Procedures.**
 
 **Disclosure
        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 pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation,
        the Chief Executive Officer and the Chief Financial Officer concluded that,
        as a
        result of the material weakness described below, the Company’s disclosure
        controls and procedures are not effective, as of the end of the period covered
        by this report, to provide reasonable assurance that information required
        to be
        disclosed in this report is:
  19
  ·
            recorded,
                processed, summarized and reported within the time period specified
                in the
                Securities and Exchange Commission’s rules and forms; and  ·
            accumulated
                and communicated to our management, including our principal executive
                and
                principal financial officer, to allow timely decisions regarding
                required
                disclosure.  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,
        mistakes or intentional circumvention of the established processes.
  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 next eighteen months, we were 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 of such delays we elected to postpone implementation of the ERP System
        until after the end of the fiscal year ended March 30, 2008 as we did not
        believe it would be prudent to implement the new system so close to our fiscal
        year-end. We implemented the ERP System on March 31, 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. With the delay in implementing the ERP System, we did not 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 legacy system or the ERP
        System as required by Section 404 results in a material weakness in our internal
        control over financial reporting.
  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.
  Since
        implementing our ERP System, we have substantially completed documenting
        our
        internal controls and are testing the effectiveness of these controls. To
        date,
        we have not found any material weakness. However, we are unable to conclude
        at
        this time whether or not these controls are effective at preventing or detecting
        a material misstatement in our financial reporting.
  20
 Notwithstanding
        the foregoing, there can be no assurance that we will be successful in
        documenting, testing or remediating (where applicable) the ERP System before
        the
        end of fiscal 2009 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 "Item 2. Factors That May Affect Future
        Results - 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."
  **Changes
        in Internal Control Over Financial Reporting**
 
 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.**
 
 On
        April 10, 2008, we were served with a complaint filed in the California
        Superior Court in the County of San Diego, entitled *Cole
        v. Sport Chalet, Inc.* ,
        Case
        No. 37-2008-00081675-CU-BT-CTL, alleging violations of the California Civil
        Code and Business & Professions Code, as well as invasion of
        privacy.   This complaint was brought as a purported class action on
        behalf of persons who made purchases at our stores in California using credit
        cards and were requested to provide their zip codes. The plaintiff alleges,
        among other things, that customers making purchases with credit cards at
        our
        stores in California were improperly requested to provide their zip code
        at the
        time of such purchases. The plaintiff seeks, on behalf of the class members,
        statutory penalties, actual damages, punitive damages, disgorgement of
        profits, injunctive relief to require us to discontinue the allegedly
        improper conduct, and attorneys’ fees and costs. We intend to defend
        the suit vigorously.  We are not able to evaluate the likelihood of an
        unfavorable outcome or to estimate a range of potential loss in the event
        of an
        unfavorable outcome at the present time. If resolved unfavorably to us, this
        litigation could have a material adverse effect on our financial condition,
        and
        any required change in our business practices, as well as the costs of defending
        this litigation, could have a negative impact on our results of
        operations.
 
 By
        letter
        dated May 14, 2008, an attorney for a former employee has asserted claims
        for sexual harassment by a former supervisor during the former employee’s one
        year of employment. The former employee alleges being subjected to verbal
        and
        physical harassment. The former employee is seeking compensatory damages
        and
        punitive damages, attorneys' fees and costs. We have just begun a review
        of the
        allegations, and we are not able to evaluate the likelihood of an unfavorable
        outcome nor can we estimate a range of potential loss in the event of an
        unfavorable outcome at the present time. If resolved unfavorably to us, this
        litigation could have a material adverse effect on our financial
        condition.
 
 From
        time
        to time, 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
        have been material changes to the risk factors disclosed in our Annual Report
        on
        Form 10-K for the year ended March 30, 2008 (the “Annual Report”). 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 below, as well as the risk factors set
        forth in the Annual Report. Additional risks and uncertainties not currently
        known to us or that we currently deem to be immaterial also may materially
        adversely affect our business, financial condition and/or operating results.
 
 **A
        downturn in the economy has affected consumer purchases of discretionary
        items,
        reducing our net sales. If this decline were to continue, we may not have
        sufficient working capital to continue.**
 
 22
 The
        retail industry historically has been subject to substantial cyclical
        variations. The merchandise sold by us is generally a discretionary expense
        for
        our customers. The current downturn in the general economy and uncertainties
        regarding future economic prospects that affect consumer spending habits
        are
        having, and are likely to continue for some time to have, a materially adverse
        effect on our results of operations. Same store sales for the past six quarters
        from the first quarter of fiscal 2008 to the second quarter of fiscal 2009
        are
        +1.3%, +2.2%, -6.9, -8.8%, -11.1% and -6.7%, respectively. More recently,
        for
        our third quarter through November 2, 2009 we have experienced a 14% decline
        in
        same store sales. In the event this decline were to continue for an extended
        period of time, we may not have sufficient working capital to continue to
        operate our business as it has been operated, or at all.
  **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.**
 
 On
        August
        5, 2008, we held our 2008 annual meeting of stockholders. At the annual meeting,
        there were 12,359,990 shares of Class A Common Stock and 1,763,292 shares
        of
        Class B Common Stock entitled to vote. 10,793,640 shares of Class A Common
        Stock
        and 1,468,409 shares of Class B Common Stock were represented at the meeting
        in
        person or by proxy. Each stockholder is entitled to 1/20 th of one
        vote for each share of Class A Common Stock and one vote for each share of
        Class
        B Common Stock.
 
 The
        following summarizes the votes for those matters submitted to our stockholders
        for action at the annual meeting:
  ***1.***
            ***Election
                of Directors*****.**The election of three Class 1 directors to hold office until the
                annual
                meeting of stockholders to be held in 2011, or their successors has
                been
                elected and qualified. The Board of Directors nominated Al D. McCready,
                Eric S. Olberz and Frederick H. Schneider for election as Class 1
                Directors.  **Director**
              
              **For**
              
              **Withheld**Al
                  D. McCready
              
              
              1,993,411
              
              
              14,680Eric
                  S. Olberz
              
              
              1,989,713
              
              
              18,378Frederick
                  H. Schneider
              
              
              2,002,053
              
              
              6,038
  ***2.***
            ***Ratification
                of Appointment of Independent Auditors.***The
                ratification of the appointment of Moss Adams LLP as the Company's
                independent registered public accounting firm for the fiscal year
                ending
                March 29, 2009.  **For**
              
              **Against**
              
              **Abstain**
              
              **Non-Votes**2,006,198
              
              1,806
              
              88
              
              -
  23
  **Item
        5.**  **** **Other
        Information.**
 
 **Stockholder
        Proposals**
 
 Under
        certain circumstances, stockholders are entitled to present proposals at
        stockholder meetings. Securities and Exchange Commission (“SEC”) rules provide
        that any such proposal to be included in the proxy statement for the Company’s
        2009 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 2008 annual meeting
        in
        a form that complies with applicable regulations. The date of the Company’s
        proxy statement for the 2008 annual meeting was July 1, 2008. If the date
        of the
        2009 annual meeting is advanced or delayed more than 30 days from the date
        of
        the 2008 annual meeting, then the deadline for stockholder proposals intended
        to
        be included in the proxy statement for the 2009 annual meeting is a reasonable
        time before the Company begins to print and mail the proxy statement for
        the
        2009 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 2008 annual meeting, the proxies solicited by the Board for the 2009
        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 2009 annual meeting of stockholders without any discussion
        of the proposal in the proxy statement for such meeting. The Company first
        mailed the proxy statement for the 2008 annual meeting to stockholders on
        July
        1, 2008. If the date of the 2009 annual meeting is advanced or delayed more
        than
        30 days from the date of the 2008 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 2009 annual meeting.
 
 The
        2009
        annual meeting of stockholders is presently expected to be held on or about
        August 4, 2009. Upon any determination that the date of the 2009 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.
  24
  **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
  25
  **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:
              November
                  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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