**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 (Mark
        One)
  x
        QUARTERLY REPORT
        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For
        the
        quarterly period ended September 30, 2005
 
 OR
 
 o
        TRANSITION REPORT
        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For
        the
        transition period from ______ to ______
 
 Commission
        File Number: 0-20736
 
 **Sport
                    Chalet, Inc.**(Exact
                    name of registrant as specified in its
                    charter)
  Delaware
                95-4390071(State
                    or other jurisdiction of
                  incorporation
                    or organization)
                (I.R.S.
                    Employer Identification No.)One
                    Sport Chalet Drive, La Canada, CA 91011
                  (Address
                    of principal executive offices) (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 an accelerated filer (as defined
        in Rule
        12b-2 of Exchange Act). Yes __ No 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 8, 2005, there were 11,873,869 shares of Class A Common Stock
        outstanding and 1,696,296 shares of Class B Common Stock
        outstanding.
 
 1
 **SPORT
        CHALET, INC.**
 
 Table
        of
        Contents to Form 10-Q
 PART
                    I - FINANCIAL INFORMATIONPageItem
                    1.
                Financial
                    Statements
                3Item
                    2.
                Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operations
                12Item
                    3.
                Quantitative
                    and Qualitative Disclosures About Market Risk
                27Item
                    4.
                Controls
                    and Procedures
                27PART
                    II - OTHER INFORMATIONItem
                    1.
                Legal
                    Proceedings
                28Item
                    2.
                Unregistered
                    Sales of Equity Securities and Use of Proceeds
                28Item
                    3.
                Defaults
                    Upon Senior Securities
                28Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders
                29Item
                    5.
                Other
                    Information
                30Item
                    6.
                Exhibits
                33
  2
  **PART
        I - FINANCIAL INFORMATION**
 
 **Item
        1.** **Financial
        Statements.**
 **SPORT
          CHALET, INC.**
 
 **CONDENSED
          CONSOLIDATED STATEMENTS OF INCOME**
 **(UNAUDITED)**
  Three
                    months ended
                
                Six
                    months endedSeptember
                    30,
                
                September
                    30,2005
                
                2004
                
                2005
                
                2004Net
                    sales
                
                $
                81,732,263
                
                $
                72,525,181
                
                $
                153,876,658
                
                $
                134,146,300Cost
                    of goods sold, buying andoccupancy
                    costs
                
                
                55,774,032
                
                
                50,228,083
                
                
                106,614,791
                
                
                94,080,872Gross
                    profit
                
                
                25,958,231
                
                
                22,297,098
                
                
                47,261,867
                
                
                40,065,428Selling,
                    general and administrativeexpenses
                
                
                30,199,069
                
                
                19,590,388
                
                
                50,847,474
                
                
                37,076,733Income
                    (loss) from operations
                
                
                (4,240,838
                )
                
                2,706,710
                
                
                (3,585,607
                )
                
                2,988,695Interest
                    expense
                
                
                (13,149
                )
                
                (47,616
                )
                
                (15,036
                )
                
                (90,907
                )Income
                    (loss) before taxes
                
                
                (4,253,987
                )
                
                2,659,094
                
                
                (3,600,643
                )
                
                2,897,788Income
                    tax provision
                
                
                909,418
                
                
                1,065,252
                
                
                1,173,418
                
                
                1,167,117Net
                    income (loss)
                
                $
                (5,163,405
                )
                $
                1,593,842
                
                $
                (4,774,061
                )
                $
                1,730,671Class
                    A and Class Bearnings
                    (loss) per share:Basic
                
                $
                (0.38
                )
                $
                0.12
                
                $
                (0.36
                )
                $
                0.13Diluted
                
                $
                (0.38
                )
                $
                0.11
                
                $
                (0.36
                )
                $
                0.12Weighted
                    average number ofClass
                    A and Class Bcommon
                    shares outstanding:Basic
                
                
                13,454,298
                
                
                13,359,180
                
                
                13,413,332
                
                
                13,357,262Diluted
                
                
                13,454,298
                
                
                14,434,942
                
                
                13,413,332
                
                
                14,405,304
  _________________
 The
        recapitalization plan approved by the Company’s stockholders included the
        transfer of stock from the Company’s founder to certain members of management
        with a resulting charge to the 2005 selling, general and administrative expenses
        of $8.6 million and $8.7 million, primarily related to stock compensation
        and a
        reduction to net income of $7.8 million for the three and six month periods,
        respectively. In addition, all share and per share information has been adjusted
        to reflect the reclassification and stock dividend as discussed in footnote
        1.
 
 
 **See
        accompanying notes.**
 3
  **SPORT
        CHALET, INC.**
 
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 September
                    30,
                
                March
                    31,2005
                
                2005(Unaudited)**Assets**Current
                    assets:Cash
                
                $
                523,825
                
                $
                6,176,689Accounts
                    receivable, less allowance of $172,000at
                    September 30, 2005 and $182,000 at March 31, 2005
                
                
                1,974,569
                
                
                1,462,042Merchandise
                    inventories
                
                
                78,704,657
                
                
                65,061,142Prepaid
                    expenses and other current assets
                
                
                3,131,458
                
                
                3,044,153Deferred
                    income taxes
                
                
                3,747,806
                
                
                3,915,079Total
                    current assets
                
                
                88,082,315
                
                
                79,659,105Furniture,
                    equipment and leasehold improvements – net
                
                
                40,964,038
                
                
                37,502,578Deferred
                    income taxes
                
                
                2,496,450
                
                
                1,550,753Other
                    assets
                
                
                -
                
                
                76,960Total
                    assets
                
                $
                131,542,803
                
                $
                118,789,396**Liabilities
                    and stockholders' equity**Current
                    liabilities:Accounts
                    payable
                
                $
                30,983,224
                
                $
                20,883,973Salaries
                    and wages payable
                
                
                3,631,190
                
                
                5,080,320Income
                    taxes payable
                
                
                403,011
                
                
                825,059Other
                    accrued expenses
                
                
                10,795,837
                
                
                9,753,575Total
                    current liabilities
                
                
                45,813,262
                
                
                36,542,927Deferred
                    rent
                
                
                12,943,268
                
                
                13,136,303Stockholders’
                    equityPreferred
                    stock, $.01 par value:Authorized
                    shares - 2,000,000Issued
                    and outstanding shares – none
                
                
                -
                
                
                -Class
                    A Common Stock, $.01 par value:Authorized
                    shares - 46,000,000Issued
                    and outstanding shares – 11,873,869at
                    September 30, 2005 and 11,700,794at
                    March 31, 2005
                
                
                118,739
                
                
                117,008Class
                    B Common Stock, $.01 par value:Authorized
                    shares - 2,000,000Issued
                    and outstanding shares – 1,696,296at
                    September 30, 2005 and 1,671,571at
                    March 31, 2005
                
                
                16,963
                
                
                16,716Additional
                    paid-in capital
                
                
                31,340,709
                
                
                22,892,519Retained
                    earnings
                
                
                41,309,862
                
                
                46,083,923Total
                    stockholders’ equity
                
                
                72,786,273
                
                
                69,110,166Total
                    liabilities and stockholders’ equity
                
                $
                131,542,803
                
                $
                118,789,396
 **___________________**
 The
        recapitalization plan approved by the Company’s stockholders included the
        transfer of stock from the Company’s founder to certain members of management
        with a resulting contribution to capital of approximately $8.2 million. In
        addition, all share and per share information has been adjusted to reflect
        the
        reclassification and stock dividend as discussed in footnote 1.
 
 **See
        accompanying notes.**
 4
  **SPORT
        CHALET, INC.**
 
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
  Six
                    months ended September 30,2005
                
                2004**Operating
                    activities**Net
                    income (loss)
                
                $
                (4,774,061
                )
                $
                1,730,671Adjustments
                    to reconcile net income (loss) to net cash providedby
                    operating activities:Stock
                    compensation
                
                
                8,221,826
                
                
                -Depreciation
                    and amortization
                
                
                4,584,301
                
                
                3,977,259Loss
                    on disposal of furniture, equipment and leasehold
                    improvements
                
                
                188,805
                
                
                -Deferred
                    income taxes
                
                
                (778,424
                )
                
                (409,016
                )Tax
                    benefit on employee stock options
                
                
                983,889
                
                
                61,923Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (512,527
                )
                
                (3,289,887
                )Merchandise
                    inventories
                
                
                (13,643,515
                )
                
                (22,452,960
                )Prepaid
                    expenses and other current assets
                
                
                (87,305
                )
                
                (241,162
                )Bank
                    overdraft
                
                
                -
                
                
                7,543,711Accounts
                    payable
                
                
                10,099,251
                
                
                18,219,551Salaries
                    and wages payable
                
                
                (1,449,130
                )
                
                (365,616
                )Income
                    taxes payable
                
                
                (422,048
                )
                
                538,881Other
                    accrued expenses
                
                
                1,042,262
                
                
                (1,048,996
                )Deferred
                    rent
                
                
                (193,035
                )
                
                3,162,222Net
                    cash provided by operating activities
                
                
                3,260,289
                
                
                7,426,581**Investing
                    activities**Purchase
                    of furniture, equipment and leasehold improvements
                
                
                (8,234,566
                )
                
                (9,181,045
                )Other
                    assets
                
                
                76,960
                
                
                13,633Net
                    cash used in investing activities
                
                
                (8,157,606
                )
                
                (9,167,412
                )**Financing
                    activities**Payment
                    of tax on shares exercised
                
                
                (815,672
                )
                
                -Proceeds
                    from exercise of stock options
                
                
                60,125
                
                
                40,398Net
                    cash provided (used) by financing activities
                
                
                (755,547
                )
                
                40,398Decrease
                    in cash and cash equivalents
                
                
                (5,652,864
                )
                
                (1,700,433
                )Cash
                    and cash equivalents at beginning of period
                
                
                6,176,689
                
                
                3,071,648Cash
                    and cash equivalents at end of period
                
                $
                523,825
                
                $
                1,371,215**Supplemental
                    Disclosure of Cash Flow Information**Cash
                    paid during the period for:Income
                    taxes
                
                $
                1,390,000
                
                $
                975,000Interest
                
                
                78,253
                
                
                -
  **See
        accompanying notes** **.**
 5
  **SPORT
        CHALET, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 1.  Basis
        of
        Presentation
 
 The
        accompanying unaudited consolidated financial statements have been prepared
        in
        accordance with accounting principles generally accepted in the United States
        for interim financial information and with the instructions to Form 10-Q
        and
        Article 10 of Regulation S-X. Accordingly, they do not include all information
        and footnotes required by accounting principles generally accepted in the
        United
        States for complete financial statements. In the opinion of management, all
        adjustments, consisting of normal recurring accruals, considered necessary
        for a
        fair presentation of the results of operations for the periods presented
        have
        been included.
 
 The
        financial data at March 31, 2005 is derived from audited financial statements
        which are included in the Company’s Annual Report on Form 10-K for the year
        ended March 31, 2005, and should be read in conjunction with the audited
        financial statements and notes thereto. Interim results are not necessarily
        indicative of results for the full year.
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make estimates
        and assumptions that affect the amounts reported in the financial statements
        and
        accompanying notes. Actual results could differ from those
        estimates.
 
 The
        Company’s Board of Directors approved a recapitalization plan designed to
        facilitate the orderly transition of control from the Company’s founder (the
“Founder”) to certain members of the Company’s management and to increase
        financial flexibility for the Company and its stockholders. The recapitalization
        plan transferred a portion of the Founder’s ownership to Craig L. Levra,
        Chairman and Chief Executive Officer, and Howard K. Kaminsky, Executive Vice
        President - Finance, Chief Financial Officer and Secretary, and allowed current
        stockholders to retain existing ownership and voting interests.
 
 The
        recapitalization established two classes of common stock and was effected
        through a reclassification of each outstanding share of Common Stock into
        0.25
        share of Class B Common Stock. The reclassification was followed by a
        non-taxable stock dividend of seven shares of Class A Common Stock for each
        one
        outstanding share of Class B Common Stock. Each share of Class B Common Stock
        entitles the holder to one vote, and each share of Class A Common Stock entitles
        the holder to 1/20th of one vote. To illustrate, a hypothetical Sport Chalet
        stockholder who owned 1,000 shares of Common Stock at the time of the
        recapitalization would currently own 250 shares of Class B Common Stock,
        each
        with one vote, and 1,750 shares of Class A Common Stock, each with 1/20th
        of one
        vote.
 
 6
 The
        recapitalization doubled the Company’s total number of shares outstanding and
        therefore, had the same impact on earnings per share as a 2-for-1 stock split.
        However, the establishment of dual classes of common stock did not affect
        the
        relative voting or equity interests of existing stockholders since the
        reclassification of Common Stock and issuance of a stock dividend affected
        each
        stockholder in proportion to the number of shares previously owned. The Class
        A
        Common Stock and the Class B Common Stock will generally vote on all matters
        as
        a single class. The holders of the Class A Common Stock and Class B Common
        Stock
        will vote as a separate class on any reverse stock split which results in
        holders of more than 5% of such class being converted into fractional shares.
        The holders of Class A Common Stock, voting as a separate class, are also
        entitled to elect one director, and the affirmative vote of the holders of
        a
        majority of the shares of Class A Common Stock, voting as a separate class,
        will
        be required to amend certain provisions of the Company's Certificate of
        Incorporation. The recapitalization plan also included certain protection
        features for holders of Class A Common Stock in an effort to ensure parity
        in
        the trading of the two classes of common stock.
 
 The
        Founder transferred 974,150 shares of Class B Common Stock to Craig L. Levra
        and
        Howard K. Kaminsky, which was intended to give them approximately 45% of
        the
        combined voting interests of Class B and Class A Common Stock when added
        to the
        shares of Sport Chalet they currently own. The shares of Class B Common Stock
        transferred by the Founder to certain members of management are treated as
        a
        contribution to the Company’s capital with the offsetting charge as compensation
        expense. For the three months ended September 30, 2005, the contribution
        to
        capital and related compensation expense was $8,221,826, the recapitalization
        plan expenses were $362,495 and the effect on net income was $7,773,321.
        For the
        six months ended September 30, 2005, the contribution to capital and related
        compensation expense was $8,221,826, the recapitalization plan expenses were
        $471,388 and the effect on net income was $7,839,214. The income tax savings
        related to the recapitalization plan was limited by Section 162(m) of the
        Internal Revenue Code. The effect on net income is as follows:
  Three
                    months ended
                
                Six
                    months endedSeptember
                    30, 2005
                
                September
                    30, 2005Compensation
                    expense
                
                $
                8,221,826
                
                $
                8,221,826Professional
                    fees
                
                
                362,495
                
                
                471,3888,584,321
                
                
                8,693,214Income
                    tax benefit
                
                
                (811,000
                )
                
                (854,000
                )Effect
                    on net income
                
                $
                7,773,321
                
                $
                7,839,214
  2.  Gift
        Card/Certificate Redemption
 
 The
        Company offers its customers the option of purchasing gift cards and, in
        the
        past, gift certificates which may be used toward the future purchase of
        products. Revenue from gift cards, gift certificates and store merchandise
        credits (the “Gift Cards”) is recognized at the time of redemption. The Gift
        Cards have no expiration dates. The Company records unredeemed Gift Cards
        as a
        liability until the point of redemption.
 
 The
        Company’s historical experience indicates that not all issued Gift Cards are
        redeemed (“Breakage”). Based upon five years of redemption data, approximately
        90% of Gift Cards are redeemed within the year after issuance, and approximately
        95% are redeemed within 36 months of the date of issuance, after which
        redemption activity is negligible.
 
 During
        the fiscal year ended March 31, 2005 and prior periods, the Company recognized
        Breakage at the time of issuance of Gift Cards. During the first quarter
        of
        fiscal 2006, the Company changed the method of accounting to recognize Breakage
        at the time of redemption of Gift Cards. Accordingly, the Company recognizes
        Breakage as revenue by periodically decreasing the carrying value of the
        Gift
        Card liability by approximately 5% of the aggregate amount. The effect of
        the
        change in accounting to record Breakage at the time of redemption is immaterial
        to the Company’s financial position and results of operations. The revenue from
        Breakage is included in the income statement line item “Net sales” and amounted
        to approximately $81,000 and $60,000 for the three months ended September
        30,
        2005 and 2004, respectively, and approximately $129,000 and $143,000 for
        the six
        months ended September 30, 2005 and 2004, respectively.
 
 7
 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. Earnings (loss) per share, diluted,
        is
        computed based on the weighted average number of common and potentially dilutive
        common equivalent shares outstanding for the period.
 
 A
        reconciliation is as follows:
 Three
                    months ended
                
                Six
                    months endedSeptember
                    30,
                
                September
                    30,2005
                
                2004
                
                2005
                
                2004Net
                    income (loss)
                
                $
                (5,163,405
                )
                $
                1,593,842
                
                $
                (4,774,061
                )
                $
                1,730,671Weighted
                    average number of common shares:Basic
                
                
                13,454,298
                
                
                13,359,180
                
                
                13,413,332
                
                
                13,357,262Effect
                    of dilutive securities-stock
                    options
                
                
                -
                
                
                1,075,762
                
                
                -
                
                
                1,048,042Diluted
                
                
                13,454,298
                
                
                14,434,942
                
                
                13,413,332
                
                
                14,405,304Class
                    A and Class Bearnings
                    (loss) per share:Basic
                
                $
                (0.38
                )
                $
                0.12
                
                $
                (0.36
                )
                $
                0.13Effect
                    of dilutive securities-stock
                    options
                
                $
                -
                
                $
                0.01
                
                $
                -
                
                $
                0.01Diluted
                
                $
                (0.38
                )
                $
                0.11
                
                $
                (0.36
                )
                $
                0.12
 _________________
 The
        recapitalization plan approved by the Company’s stockholders included the
        transfer of stock from the Company’s founder to certain members of management
        with a resulting charge to the 2005 selling, general and administrative expenses
        of $8.6 million and $8.7 million, primarily related to stock compensation
        and a
        reduction to net income of $7.8 million for the three and six month periods,
        respectively. In addition, all share and per share information has been adjusted
        to reflect the reclassification and stock dividend as discussed in footnote
        1.
 
 An
        aggregate of 1,812,000 and 1,734,500 options for the three months and six
        months
        ended September 30, 2005, respectively, were excluded from the computation
        of
        diluted earnings per share as their effect would have been
        anti-dilutive.
 
 4.  Stock
        Compensation
 
 Statement
        of Financial Accounting Standards (“SFAS”) No. 148 amends the disclosure
        requirements of SFAS No. 123 to require prominent disclosure in annual and
        interim financial statements about the method of accounting for stock-based
        compensation and its effects on reporting. In December 2004, the Financial
        Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based
        Payment.” The standard requires all entities to recognize compensation expense
        for all share-based payments granted to employees in an amount equal to the
        fair
        value. The new standard is effective as of the beginning of the first fiscal
        year beginning after June 15, 2005, and allows two different methods of
        transition. The Company continues to apply the principles of APB Opinion
        No. 25
        and related interpretations in accounting for its stock-based compensation
        plans. Accordingly, no compensation expense has been recorded in conjunction
        with options issued to employees.
  8
  Had
        compensation cost been determined based on the fair value of the options
        at the
        grant date and amortized over the option’s vesting period, consistent with the
        method prescribed by SFAS No. 123, the Company's net income would have
        been:
 Three
                    months endedSeptember
                    30,
                
                Six
                    months endedSeptember
                    30,2005
                
                2004
                
                2005
                
                2004Net
                    income (loss) as reported
                
                $
                (5,163,405
                )
                $
                1,593,842
                
                $
                (4,774,061
                )
                $
                1,730,671Add:Stock-based
                    compensation expense included in reported net income, net of
                    related tax
                    effects
                
                
                7,541,662
                
                
                -
                
                
                7,541,662
                
                
                -Deduct:Sport
                    Chalet Option, LLC
                
                
                (834,516
                )
                
                87,165
                
                
                (747,351
                )
                
                174,330Stock-based
                    compensation expense from recapitalization
                
                
                (7,541,662
                )
                
                
                
                
                (7,541,662
                )Total
                    stock-based employee compensation expense determined under fair
                    market
                    value based method for all awards, net of related tax effects
                
                
                65,494
                
                
                58,028
                
                
                122,688
                
                
                105,510Pro
                    forma net income (loss)
                
                $
                (4,394,383
                )
                $
                1,448,649
                
                $
                (4,149,398
                )
                $
                1,450,831Class
                    A and Class B earnings (loss) per shareAs
                    reported – basic
                
                $
                (0.38
                )
                $
                0.12
                
                $
                (0.36
                )
                $
                0.13As
                    reported – diluted
                
                $
                (0.38
                )
                $
                0.11
                
                $
                (0.36
                )
                $
                0.12Pro
                    forma – basic
                
                $
                (0.33
                )
                $
                0.11
                
                $
                (0.31
                )
                $
                0.11Pro
                    forma – diluted
                
                $
                (0.33
                )
                $
                0.10
                
                $
                (0.31
                )
                $
                0.11
 _________________
 The
        recapitalization plan approved by the Company’s stockholders included the
        transfer of stock from the Company’s founder to certain members of management
        with a resulting charge to the 2005 selling, general and administrative expenses
        of $8.6 million and $8.7 million, primarily related to stock compensation
        and a
        reduction to net income of $7.8 million for the three and six month periods,
        respectively. In addition, all share and per share information has been adjusted
        to reflect the reclassification and stock dividend as discussed in footnote
        1.
 
 The
        fair
        value of each option granted is estimated on the date of grant using the
        Black-Scholes option-pricing model with the following assumptions used for
        grants in fiscal 2005: expected volatility of 37%; risk-free interest rate
        of
        4.0%; expected lives of five years; and expected dividends of 0%. The
        Black-Scholes model was developed for use in estimating the fair value of
        traded
        options, which have no vesting restrictions and are fully transferable. In
        addition, option valuation models require the input of highly subjective
        assumptions including the expected stock price volatility. Because the Company's
        employee stock options have characteristics significantly different from
        those
        of traded options, and because changes in the subjective input assumptions
        can
        materially affect the fair value estimate, in management's opinion, the existing
        models do not necessarily provide a reliable single measure of the fair value
        of
        its employee stock options.
 
 The
        Company’s founder had granted an option to purchase all of the shares of the
        Company’s Common Stock held by his family trust to a limited liability company
        owned by certain members of the Company’s management. For financial accounting
        purposes, the grant of this option has been treated in a manner consistent
        with
        a grant of an option by the Company to employees. Because the option has
        been
        granted with an exercise price equal to the market price on the measurement
        date, under APB No. 25, the Company has not been required to recognize
        compensation expense in connection with the grant of the option. The fair
        value
        of the option is being recognized as compensation expense for purposes of
        calculating pro forma net income and pro forma earnings per share as required
        by
        FASB Statement No.123, “Accounting for Stock-Based Compensation.” This option
        was terminated concurrent with the effectiveness of the recapitalization
        plan.
 
 9
 5.  New
        Accounting Pronouncements
 
 In
        December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” The
        standard requires all entities to recognize compensation expense for all
        share-based payments granted to employees in an amount equal to the fair
        value.
        The new standard is effective with the Company’s first quarter ended June 30,
        2006, and allows two different methods of transition. Note 3, Stock
        Compensation, of the Notes to Consolidated Financial Statements of this
        Quarterly Report on Form 10-Q, contains pro forma disclosures regarding the
        effect on net earnings and earnings per share as if the Company had applied
        the
        fair value method of accounting for stock-based compensation.  Depending
        on
        the model used to calculate stock-based compensation expense in the future
        and
        other requirements of SFAS No. 123(R), the pro forma disclosure may not be
        indicative of the stock-based compensation expense that will be recognized
        in
        the Company’s future financial statements. The Company expects to implement the
        new standard in the first quarter ending June 30, 2006 and is currently
        evaluating the new standard and models which may be used to calculate future
        stock-based compensation expense.
 
 6.  Litigation
 
 On
        July
        22, 2005, a purported stockholder of the Company brought an action captioned *Miriam
        Gruber v. Sport Chalet, Inc., Norbert Olberz, Irene Olberz, Craig L. Levra,
        Howard K. Kaminsky, Al D. McCready, Eric S. Olberz, Frederick H. Schneider,
        John
        R. Attwood, Donald J. Howard and Kenneth Olson* ,
        in the
        Court of Chancery of the State of Delaware. The action, which is purportedly
        brought individually, derivatively and as a class action on behalf of the
        public
        stockholders of the Company, challenges the recapitalization and the associated
        transactions described below in “Item 5 - Other Information.” The complaint
        alleges that defendants breached their fiduciary duties to the Company's
        public
        stockholders by, among other things, (i) diverting an opportunity of the
        Company
        to Messrs. Levra and Kaminsky, the Chief Executive Officer and Chief Financial
        Officer, respectively; (ii) failing to seek the best available transaction
        that
        would maximize the benefits for the Company and all its stockholders; (iii)
        approving transactions which are not entirely fair to the Company and its
        public
        stockholders and (iv) attempting to entrench themselves in office. The complaint
        seeks, among other things, (i) a preliminary and permanent injunction against
        the recapitalization; (ii) a declaration that the defendants have breached
        their
        fiduciary duties; (iii) damages and (iv) an award of attorneys' fees and
        expenses. On August 26, 2005, the parties executed a Memorandum of Understanding
        (the "MOU") memorializing their agreement in principle to settle the Action
        (the
        "Settlement"). An amended preliminary proxy statement, reflecting the proposed
        settlement and the comments of plaintiff's counsel, was filed with the
        Securities and Exchange Commission on August 30, 2005. The definitive proxy
        statement (the "Proxy Statement") was filed with the Securities and Exchange
        Commission on September 1, 2005.
  On
        September 27, 2005, a Stipulation and Agreement of Compromise, Settlement
        and
        Release (the "Stipulation") was executed by the parties through their respective
        counsel. The Settlement is subject to various conditions, including Court
        approval. The Court will consider whether or not to approve the Settlement
        at a
        hearing on November 29, 2005. In connection with the Settlement, plaintiff's
        counsel intend to petition the Court for an award of attorneys' fees and
        expenses in an aggregate amount not to exceed $480,000. Defendants have agreed
        that they will not object to such an application by plaintiff's counsel for
        an
        award in or below the amount of $480,000. See “Item 1 - Legal
        Proceedings.”
  10
  7.  Reclassification
 
 Certain
        reclassifications were made to the prior year financial statements to conform
        to
        current year presentation. These reclassifications had no impact on previously
        reported net income or earnings per share amounts.
  11
  **Item
        2.**  **Management’s
        Discussion and Analysis of Financial Condition and** **Results
        of Operations.**
 
 *This
        Quarterly Report on Form 10-Q contains statements that constitute
        forward-looking statements within the meaning of Section 27A of the Securities
        Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
        1934,
        as amended. These forward-looking statements are made pursuant to the safe
        harbor provisions of the Private Securities Litigation Reform Act of 1995.
        These
        forward-looking statements include statements relating to trends in, or
        representing management’s beliefs about, our future strategies, operations and
        financial results, as well as other statements including words such as
“believe,”“anticipate,”“expect,”“estimate,”“predict,”“intend,”“plan,”“project,”“will,”“could,”“may,”“might”
        or any variations of such words or other words with similar meanings.
        Forward-looking statements are made based upon management’s current expectations
        and beliefs concerning trends and future developments and their potential
        effects on the Company. Prospective investors are cautioned that they should
        not
        place undue reliance on forward-looking statements as predictions of actual
        results. These statements are not guarantees of future performance and involve
        risks and uncertainties that are difficult to predict. Further, certain
        forward-looking statements are based upon assumptions as to future events
        that
        may not prove to be accurate. Actual results may differ materially from those
        suggested by forward-looking statements as a result of risks and uncertainties
        which are discussed in further detail under “- Factors That May Affect Future
        Results.” We do not assume, and specifically disclaim, any obligation to update
        any forward-looking statements, which speak only as of the date
        made.*
 
 The
        following should be read in conjunction with the Company’s financial statements
        and related notes thereto provided under “Item 1-Financial Statements”
        above.
 
 **Overview**
 
 Sport
        Chalet, Inc. is a leading operator of 36 full-service specialty sporting
        goods
        stores in California and Nevada. In 1959, Norbert Olberz, the Company’s Chairman
        Emeritus and founder (the “Founder”), purchased a small ski and tennis shop in
        La Canada, California. A focus on providing quality merchandise with outstanding
        customer service was the foundation of Norbert’s vision. The Company continues
        this tradition and is focused on growth through a number of initiatives,
        including: continuing new store development; remodeling stores to conform
        to the
        prototype; and improving information systems to increase product flow-through,
        improve in-stock positions and optimize merchandise assortment.
  The
        Company’s growth strategy had historically focused on Southern California, but
        now includes opening new stores throughout California, Nevada and Arizona
        as
        suitable locations are found. Over the past three years, the Company has
        opened
        ten new stores and is currently planning to open four stores during fiscal
        2006,
        three of which will be the Company’s initial expansion into Arizona and one in
        Southern California. For fiscal 2007 the Company expects to open four to
        eight
        new stores. Future store openings are subject to availability of satisfactory
        store locations based on local competitive conditions, site availability
        and
        cost and the ability to provide and maintain high service levels and quality
        brand merchandising at competitive prices. Store openings are expected to
        have a
        favorable impact on sales volume, but will negatively affect profit in the
        short
        term. New stores tend to have higher costs in the early years of operation,
        due
        primarily to increased promotional costs and lower sales on a per employee
        basis
        until the store matures. As the store matures, sales tend to level off and
        expenses decline as a percentage of sales. Stores have generally required
        three
        to four years to attract a stable, mature customer base.
 
 12
 The
        Company’s prototype stores and over 70% of the total store base range in size
        from 42,000 to 45,000 square feet and showcase each product category with
        the
        feel of a specialty shop all contained under one roof. The full service approach
        to customer service and product knowledge is enhanced by fixtures which feature
        specific categories, and give the customer an enhanced shopping experience.
        Mature stores are evaluated for remodel based on each store’s age and
        competitive situation, as well as how much the landlord will contribute to
        the
        required improvements. Future store remodeling plans will depend upon several
        factors, including, but not limited to, general economic conditions, competition
        trends and the availability of adequate capital.
  The
        Company believes that the overall growth of its business will allow it to
        maintain or increase its operating margins. Increased merchandise volumes
        should
        enable the Company to improve its purchasing leverage and achieve greater
        support throughout the supply chain.  The Company’s overall growth should
        leverage its investments in infrastructure such as the distribution center,
        integration of corporate facilities into a single location, E3 replenishment
        system, HighJump warehouse management software and Marketmax planning and
        allocation technology. However, these increased efficiencies and improvements
        in
        logistics are partially offset by the operating costs of new and maturing
        stores.
  The
        Company’s Board of Directors approved a recapitalization plan designed to
        facilitate the orderly transition of control from the Company’s Founder to
        certain members of the Company’s management and to increase financial
        flexibility for the Company and its stockholders. The recapitalization plan
        transferred a portion of the Founder’s ownership to Craig L. Levra, Chairman and
        Chief Executive Officer, and Howard K. Kaminsky, Executive Vice President
        -
        Finance, Chief Financial Officer and Secretary, and allowed current stockholders
        to retain existing ownership and voting interests. The recapitalization doubled
        the Company’s total number of shares outstanding. Therefore, the
        recapitalization plan had the same effect on earnings per share as a 2-for-1
        stock split. Shares transferred by the Founder to certain members of management
        were treated as a contribution to the Company’s capital with the offsetting
        charge as compensation expense. As a result, the Company recorded a one-time
        charge based on the stock price at the time of the transfer of approximately
        $8.6 million. See “Item 5 - Other Information.”
 
 Quarterly
        results of operations for fiscal 2005 as adjusted to reflect the
        recapitalization plan discussed above for the Class A and Class B Common
        Stock:
 
 Three
                  months ended,Class
                  A and Class B
              June
                  30, 2004
              September
                  30, 2004
              December
                  31, 2004
              March
                  31, 2005Earnings
                  per share:Basic
              $0.01
              $0.12
              $0.28
              $0.06Diluted
              $0.01
              $0.11
              $0.26
              $0.05
  13
  **Results
        of Operations**
 
 ***Three
        Months Ended September 30, 2005 Compared to Three Months Ended September
        30,
        2004.***
 
 The
        following tables set forth statements of income data and relative percentages
        of
        net sales for the three months ended September 30, 2005 and 2004 (dollar
        amounts
        in thousands, except per share amounts).
 **Three
                    months ended September 30,**GAAP
                
                2005
                
                2004
                
                Dollar
                
                PercentageAmount
                
                Percent
                
                Amount
                
                Percent
                
                Increase
                
                IncreaseNet
                    sales
                
                $
                81,732
                
                
                100.0
                %
                $
                72,525
                
                
                100.0
                %
                $
                9,207
                
                
                12.7
                %Gross
                    profit
                
                
                25,958
                
                
                31.8
                %
                
                22,297
                
                
                30.7
                %
                
                3,661
                
                
                16.4
                %Selling,
                    general and administrative expenses
                
                
                30,199
                
                
                36.9
                %
                
                19,590
                
                
                27.0
                %
                
                10,609
                
                
                54.2
                %Income
                    (loss) from operations
                
                
                (4,241
                )
                
                (5.2
                %)
                
                2,707
                
                
                3.7
                %
                
                (6,948
                )
                
                (256.7
                %)Interest
                    expense
                
                
                (13
                )
                
                (0.0
                %)
                
                (48
                )
                
                (0.1
                %)
                
                35
                
                
                (72.9
                %)Income
                    (loss) before taxes
                
                
                (4,254
                )
                
                (5.2
                %)
                
                2,659
                
                
                3.7
                %
                
                (6,913
                )
                
                (260.0
                %)Income
                    tax provision
                
                
                909
                
                
                1.1
                %
                
                1,065
                
                
                1.5
                %
                
                (156
                )
                
                (14.6
                %)Net
                    income (loss)
                
                
                (5,163
                )
                
                (6.3
                %)
                
                1,594
                
                
                2.2
                %
                
                (6,757
                )
                
                (423.9
                %)Class
                    A and Class B earnings (loss) per share:Basic
                
                $
                (0.38
                )
                
                
                
                $
                0.12
                
                
                
                
                $
                (0.50
                )
                
                (416.7
                %)Diluted
                
                $
                (0.38
                )
                
                
                
                $
                0.11
                
                
                
                
                $
                (0.49
                )
                
                (445.5
                %)
 **Three
                    months ended September 30,**Non-GAAP
                
                2005
                
                2004
                
                Dollar
                
                PercentageAmount
                
                Percent
                
                Amount
                
                Percent
                
                Increase
                
                IncreaseNet
                    sales
                
                $
                81,732
                
                
                100.0
                %
                $
                72,525
                
                
                100.0
                %
                $
                9,207
                
                
                12.7
                %Gross
                    profit
                
                
                25,958
                
                
                31.8
                %
                
                22,297
                
                
                30.7
                %
                
                3,661
                
                
                16.4
                %Selling,
                    general and administrative expenses
                
                
                21,615
                
                
                26.4
                %
                
                19,590
                
                
                27.0
                %
                
                2,025
                
                
                10.3
                %Income
                    from operations
                
                
                4,343
                
                
                5.3
                %
                
                2,707
                
                
                3.7
                %
                
                1,636
                
                
                60.4
                %Interest
                    expense
                
                
                (13
                )
                
                (0.0
                %)
                
                (48
                )
                
                (0.1
                %)
                
                35
                
                
                (72.9
                %)Income
                    before taxes
                
                
                4,330
                
                
                5.3
                %
                
                2,659
                
                
                3.7
                %
                
                1,671
                
                
                62.8
                %Income
                    tax provision
                
                
                1,720
                
                
                2.1
                %
                
                1,065
                
                
                1.5
                %
                
                655
                
                
                61.5
                %Net
                    income
                
                
                2,610
                
                
                3.2
                %
                
                1,594
                
                
                2.2
                %
                
                1,016
                
                
                63.7
                %Class
                    A and Class B earnings per share:Basic
                
                $
                0.19
                
                
                
                
                $
                0.12
                
                
                
                
                $
                0.07
                
                
                58.3
                %Diluted
                
                $
                0.19
                
                
                
                
                $
                0.11
                
                
                
                
                $
                0.08
                
                
                72.7
                %
  The
        following table sets fourth reconciliations of non-GAAP results of operations
        measures to the nearest comparable GAAP measures. Compensation and other
        expenses related to the recapitalization plan are not expected to reoccur
        and
        their exclusion provides a consistent comparison to past results:
 Three
                    months ended September 30, 2005GAAP
                
                Adjustments
                
                Non-GAAPSelling,
                    general and administrative expenses
                
                $
                30,199
                
                $
                (8,584
                )
                $
                21,615Income
                    (loss) from operations
                
                
                (4,241
                )
                
                8,584
                
                
                4,343Income
                    (loss) before taxes
                
                
                (4,254
                )
                
                8,584
                
                
                4,330Income
                    tax provision
                
                
                909
                
                
                (811
                )
                
                1,720Net
                    Income (loss)
                
                $
                (5,163
                )
                $
                7,773
                
                $
                2,610Class
                    A and Class Bearning
                    (loss) per share:Basic
                
                $
                (0.38
                )
                $
                0.58
                
                $
                0.19Diluted
                
                $
                (0.38
                )
                $
                0.55
                
                $
                0.19
 14
 
 Sales
        increased $9.2 million, or 12.7%, from $72.5 million for the three months
        ended
        September 30, 2004 to $81.7 million for the same period this year. The sales
        growth is due to five new stores which resulted in a $6.9 million increase
        in
        sales, or 10.7%, as well as a same store sales increase of 2.7%. Two new
        stores
        were opened in the second quarter of fiscal 2005 and three new stores were
        opened in the third quarter of fiscal 2005. Same store sales are based upon
        stores opened throughout both periods presented and exclude team
        sales.
 
 Gross
        profit increased $3.7 million, or 16.4%, primarily from increased sales.
        As a
        percent of sales, gross profit increased from 30.7% for the three months
        ended
        September 30, 2004 to 31.8% for the same period this year. The increase in
        gross
        profit as a percent of sales is primarily due to better inventory assortments
        as
        well as an improvement in inventory shrinkage.
 
 Selling,
        general and administrative expenses increased $10.6 million, or 54.2%, primarily
        from the recapitalization plan. The $8.6 million in expenses related to the
        recapitalization plan were approximately $8.2 million from the compensation
        charge and $362,000 in professional fees. As a percent of sales, these expenses
        increased from 27.0% for the three months ended September 30, 2004 to 36.9%
        for
        the same period this year.
 
 Excluding
        the effect of the recapitalization plan, selling, general and administrative
        expenses increased $2.0 million, or 10.3%, primarily from operating expenses
        of
        additional stores, such as labor, maintenance and supplies. As a percent
        of
        sales, these expenses decreased from 27.0% for the three months ended September
        30, 2004 to 26.4% for the same period this year as $100,000 for infrastructure
        consulting and $160,000 for a Red Cross donation for Hurricane Katrina incurred
        in the three months ended September 30, 2005 were offset by the additional
        labor
        and advertising expense required to open new stores in 2004.
 
 The
        tax
        savings related to the recapitalization plan was limited to $811,000 by Section
        162(m) of the Internal Revenue Code. The effective income tax rate was 40.1%
        for
        the three months ended September 30, 2004 compared to 39.7% excluding the
        effect
        of the recapitalization plan for the same period this year. These rates differ
        from the statutory rate of 39.8% primarily as a result of permanent differences
        between financial reporting and tax-basis income.
 
 Net
        income decreased $6.8 million, or 423.9%, from $1.6 million, or $0.11 per
        diluted share, for the three months ended September 30, 2004 to a loss of
        $5.2
        million, or a loss of $0.38 per diluted share, for the same period this year,
        primarily as a result of the recapitalization plan.
 
 Excluding
        the effect of the recapitalization plan, net income increased $1.0 million,
        or
        63.7%, from $1.6 million, or $0.11 per diluted share, for the three months
        ended
        September 30, 2004 to $2.6 million, or $0.19 per diluted share, for the same
        period this year.
 
 ***Six
        Months Ended September 30, 2005 Compared to Six Months Ended September 30,
        2004.***
 
 The
        following tables set forth statements of income data and relative percentages
        of
        net sales for the six months ended September 30, 2005 and 2004 (dollar amounts
        in thousands, except per share amounts).
 
 15
  **Six
                    months ended September 30,**GAAP
                
                2005
                
                2004
                
                Dollar
                
                PercentageAmount
                
                Percent
                
                Amount
                
                Percent
                
                Increase
                
                IncreaseNet
                    sales
                
                $
                153,877
                
                
                100.0
                %
                $
                134,146
                
                
                100.0
                %
                $
                19,731
                
                
                14.7
                %Gross
                    profit
                
                
                47,262
                
                
                30.7
                %
                
                40,065
                
                
                29.9
                %
                
                7,197
                
                
                18.0
                %Selling,
                    general and administrative expenses
                
                
                50,847
                
                
                33.0
                %
                
                37,077
                
                
                27.6
                %
                
                13,770
                
                
                37.1
                %Income
                    (loss) from operations
                
                
                (3,586
                )
                
                (2.3
                %)
                
                2,989
                
                
                2.2
                %
                
                (6,575
                )
                
                (220.0
                %)Interest
                    expense
                
                
                (15
                )
                
                (0.0
                %)
                
                (91
                )
                
                (0.1
                %)
                
                76
                
                
                (83.5
                %)Income
                    (loss) before taxes
                
                
                (3,601
                )
                
                (2.3
                %)
                
                2,898
                
                
                2.2
                %
                
                (6,499
                )
                
                (224.3
                %)Income
                    tax provision
                
                
                1,173
                
                
                0.8
                %
                
                1,167
                
                
                0.9
                %
                
                6
                
                
                0.5
                %Net
                    income (loss)
                
                
                (4,774
                )
                
                (3.1
                %)
                
                1,731
                
                
                1.3
                %
                
                (6,505
                )
                
                (375.8
                %)Class
                    A and Class B earnings (loss) per share:Basic
                
                $
                (0.36
                )
                
                
                
                $
                0.13
                
                
                
                
                $
                (0.49
                )
                
                (376.9
                %)Diluted
                
                $
                (0.36
                )
                
                
                
                $
                0.12
                
                
                
                
                $
                (0.48
                )
                
                (400.0
                %)
 **Six
                    months ended September 30,**Non-GAAP
                
                2005
                
                2004
                
                Dollar
                
                PercentageAmount
                
                Percent
                
                Amount
                
                Percent
                
                Increase
                
                IncreaseNet
                    sales
                
                $
                153,877
                
                
                100.0
                %
                $
                134,146
                
                
                100.0
                %
                $
                19,731
                
                
                14.7
                %Gross
                    profit
                
                
                47,262
                
                
                30.7
                %
                
                40,065
                
                
                29.9
                %
                
                7,197
                
                
                18.0
                %Selling,
                    general and administrative expenses
                
                
                42,154
                
                
                27.4
                %
                
                37,077
                
                
                27.6
                %
                
                5,077
                
                
                13.7
                %Income
                    from operations
                
                
                5,107
                
                
                3.3
                %
                
                2,989
                
                
                2.2
                %
                
                2,118
                
                
                70.9
                %Interest
                    expense
                
                
                (15
                )
                
                (0.0
                %)
                
                (91
                )
                
                (0.1
                %)
                
                76
                
                
                (83.5
                %)Income
                    before taxes
                
                
                5,092
                
                
                3.3
                %
                
                2,898
                
                
                2.2
                %
                
                2,194
                
                
                75.7
                %Income
                    tax provision
                
                
                2,027
                
                
                1.3
                %
                
                1,167
                
                
                0.9
                %
                
                860
                
                
                73.7
                %Net
                    income
                
                
                3,065
                
                
                2.0
                %
                
                1,731
                
                
                1.3
                %
                
                1,334
                
                
                77.1
                %Class
                    A and Class B earnings per share:Basic
                
                $
                0.23
                
                
                
                
                $
                0.13
                
                
                
                
                $
                0.10
                
                
                76.9
                %Diluted
                
                $
                0.22
                
                
                
                
                $
                0.12
                
                
                
                
                $
                0.10
                
                
                83.3
                %
  The
        following table sets fourth reconciliations of non-GAAP results of operations
        measures to the nearest comparable GAAP measures. Compensation and other
        expenses related to the recapitalization plan are not expected to reoccur
        and
        their exclusion provides a consistent comparison to past results:
 
 Six
                  months ended September 30, 2005GAAP
              
              Adjustments
              
              Non-GAAPSelling,
                  general and administrative expenses
              
              $
              50,847
              
              $
              (8,693
              )
              $
              42,154Income
                  (loss) from operations
              
              
              (3,586
              )
              
              8,693
              
              
              5,107Income
                  (loss) before taxes
              
              
              (3,601
              )
              
              8,693
              
              
              5,092Income
                  tax provision
              
              
              1,173
              
              
              (854
              )
              
              2,027Net
                  Income (loss)
              
              $
              (4,774
              )
              $
              7,839
              
              $
              3,065Class
                  A and Class Bearning
                  (loss) per share:Basic
              
              $
              (0.36
              )
              $
              0.58
              
              $
              0.23Diluted
              
              $
              (0.36
              )
              $
              0.56
              
              $
              0.22




Sales
        increased $19.7 million, or 14.7%, from $134.1 million for the six months
        ended
        September 30, 2004 to $153.9 million for the same period this year. The sales
        growth is due to five new stores which resulted in a $14.3 million increase
        in
        sales, or 10.6%, as well as a same store sales increase of 3.7%. Two new
        stores
        were opened in the second quarter of fiscal 2005 and three new stores were
        opened in the third quarter of fiscal 2005. Same store sales are based upon
        stores opened throughout both periods presented and exclude team
        sales.
 
 Gross
        profit increased $7.2 million, or 18.0%, primarily from increased sales.
        As a
        percent of sales, gross profit increased from 29.9% for the six months ended
        September 30, 2004 to 30.7% for the same period this year. The increase in
        gross
        profit as a percent of sales is primarily due to better inventory assortments
        and an improvement in inventory shrinkage.
 
 16
 Selling,
        general and administrative expenses increased $13.8 million, or 37.1%, primarily
        from the recapitalization plan. The $8.7 million in expenses related to the
        recapitalization plan were approximately $8.2 million from the compensation
        charge and $471,000 in professional fees. As a percent of sales, these expenses
        increased from 27.6% for the six months ended September 30, 2004 to 33.0%
        for
        the same period this year.
 
 Excluding
        the effect of the recapitalization plan, selling, general and administrative
        expenses increased $5.1 million, or 13.7%, primarily from operating expenses
        of
        additional stores, such as labor, maintenance and supplies, as well as $225,000
        in increased litigation reserves, $250,000 for infrastructure consulting
        and
        $160,000 for a Red Cross donation for Hurricane Katrina partially offset
        by
        $344,000 from an insurance gain recognized for winter storm damage to one
        store.
        As a percent of sales, these expenses decreased from 27.6% for the six months
        ended September 30, 2004 to 27.4% for the same period this year primarily
        due to
        additional labor and advertising expense required to open new stores in 2004
        partially offset by the increased litigation reserves, infrastructure consulting
        and Red Cross donation less the insurance gain.
 
 The
        tax
        savings related to the recapitalization plan was limited to $854,000 by Section
        162(m) of the Internal Revenue Code. The effective income tax rate was 40.3%
        for
        the six months ended September 30, 2004 compared to 39.8% excluding the effect
        of the recapitalization plan for the same period this year. These rates differ
        from the statutory rate of 39.8% primarily as a result of permanent differences
        between financial reporting and tax-basis income.
 
 Net
        income decreased $6.5 million, or 375.8%, from $1.7 million, or $0.12 per
        diluted share, for the six months ended September 30, 2004 to a loss of $4.8
        million, or a loss of $0.36 per diluted share, for the same period this year,
        primarily as a result of the recapitalization plan.
 
 Excluding
        the effect of the recapitalization plan, net income increased $1.3 million,
        or
        77.1%, from $1.7 million, or $0.12 per diluted share, for the six months
        ended
        September 30, 2004 to $3.1 million, or $0.22 per diluted share, for the same
        period this year.
 
 **Liquidity
        and Capital Resources**
 
 The
        Company’s primary capital requirements are for inventory and store expansion,
        relocation and remodeling. Historically, cash from operations, credit terms
        from
        vendors and bank borrowing have met the Company’s liquidity needs. Management
        believes that these sources will be sufficient to fund currently anticipated
        cash requirements for the foreseeable future.
 
 Net
        cash
        provided by operating activities is primarily the result of net income, adjusted
        for depreciation and amortization, and increases in accounts payable partially
        offset by inventory purchases. For the six months ended September 30, 2005,
        $3.3
        million was used in operating activities compared to $7.4 million generated
        by
        operating activities for the same period last year.
  Inventories
        increased by $13.6 million and $22.5 million for the six months ended September
        30, 2005 and 2004, respectively, compared to the respective year-end balances
        primarily due to the build-up of seasonal inventory. The relative difference
        between the years is primarily due to the new stores opened in 2004. In
        addition, the Company began the current fiscal year with relatively more
        inventory than the prior fiscal year and reduced average inventory per store
        by
        3.0% at September 30, 2005 compared to September 30, 2004. The average inventory
        per store increased 3.9% at March 31, 2005 which was due to the planned early
        arrival of spring merchandise compared to March 31, 2004. The reduction in
        average inventory per store at September 30, 2005 is primarily due to the
        delayed arrival of winter related merchandise.
 
 17
 Historically,
        accounts payable has increased as inventory increases. In the six months
        ended
        September 30, 2005, accounts payable increased by $10.1 million as compared
        to
        an increase of $18.2 million for the six months ended September 30, 2004.
        The
        relative change as compared to inventory levels is the result of the timing
        of
        vendor payments near the end of the period.
 
 Net
        cash
        used in investing activities for the six months ended September 30, 2005
        was
        $8.2 million compared to $9.2 million for the same period ended September
        30,
        2004. For the six months ended September 30, 2005, the Company completed
        four
        store remodels, incurred expenditures for new stores opening in the Fall
        of 2005
        and commenced implementation of the Marketmax merchandise planning software
        project. For the six months ended September 30, 2004 the Company incurred
        expenditures to open three new stores.
 
 The
        Company’s credit facility with Bank of America, N.A. (the “Lender”) provides for
        advances up to $20 million, increasing to $35.0 million for the period October
        1, through December 31, each year, less the amount of any outstanding draws,
        up
        to a $4.0 million maximum in authorized letters of credit. Interest accrues
        at
        the Lender’s prime rate (6.50% at September 30, 2005) or can be fixed for a
        period of time at the then current rate established under one of several
        indices, all at the Company’s option. In addition, there is an unused commitment
        fee of 0.20% per year, based on a weighted average formula. This credit facility
        expires on September 30, 2007, and the Company expects to renegotiate and
        extend
        the term of this agreement or obtain another form of financing before that
        date.
        The Company’s obligation to the Lender is presently secured by a first priority
        lien on substantially all of the Company’s non-real estate assets, and the
        Company is subject to several restrictive covenants. The principal operating
        covenants require the Company to maintain certain minimum cash flow coverage
        and
        debt to equity ratios and restrict the level of capital expenditures, calculated
        on a quarterly basis. The Company currently is in compliance with the covenants.
        The Company believes its credit line with the Lender is sufficient to fund
        capital expenditures for the foreseeable future and to meet seasonal
        fluctuations in cash flow requirements. However, unexpected conditions could
        require the Company to request additional borrowing capacity from the Lender
        or
        alter its expansion plans or operations.
 
 The
        Company’s primary contractual obligations and commitments as of September 30,
        2005, are its store leases with initial terms expiring from 2005 through
        2020,
        which typically provide for multiple five-year renewal options, and employment
        contracts:
 
 **Payments
                  due by period:**
              
              **Operating**
                **Leases**
              
              **Employment****Contracts**Within
                  1 year
              
              $
              23,676,206
              
              $
              94,5002
                  -
                  3 years
              
              
              47,468,956
              
              
              339,0004
                  -
                  5 years
              
              
              42,973,862
              
              
              339,000After
                  5 years
              
              
              81,072,281
              
              
              678,000Total
              
              $
              195,191,305
              
              $
              1,450,500
  The
        Company leases all of its existing store locations. The leases for most of
        the
        existing stores are for approximately ten-year terms with multiple option
        periods under non-cancelable operating leases with scheduled rent increases.
        The
        leases provide for contingent rent based upon a percentage of sales in excess
        of
        specified minimums. If there are any free rent periods, they are accounted
        for
        on a straight line basis over the lease term, beginning on the date of initial
        possession, which is generally when the Company enters the space and begins
        the
        construction build-out. The amount of the excess of straight line rent expense
        over scheduled payments is recorded as a deferred rent liability. Construction
        allowances and other such lease incentives are recorded as deferred credits,
        and
        are amortized on a straight line basis as a reduction of rent expense over
        the
        lease term. Generally, our purchase obligations are cancelable 45 days prior
        to
        shipment from our vendors. Letters of credit amounting to approximately $3.0
        million relating to purchase commitments were outstanding as of September
        30,
        2005 and expire within one year.
 
 18
 No
        cash
        dividends were declared on Common Stock in fiscal 2005. The Company intends
        to
        retain earnings for use in the operation and expansion of its business and,
        therefore, does not anticipate paying any cash dividends in the foreseeable
        future.
 
 **Critical
        Accounting Policies and Use of Estimates**
 
 The
        Company's significant accounting policies are described in Note 2 of the
        Company’s Annual Report on Form 10-K for the year ended March 31, 2005, which
        have been prepared in accordance with accounting principles generally accepted
        in the United States. In preparing the financial statements, the Company
        is
        required to make estimates and judgments which affect the results of its
        operations and the reported value of assets and liabilities. Actual results
        may
        differ from these estimates. The Company believes that the following summarizes
        critical accounting policies which require significant judgments and estimates
        in the preparation of its consolidated financial statements.
  19
  **Inventory
        Valuation.** Merchandise inventories are stated at the lower of cost (first-in, first-out
        determined by the retail method of accounting) or market. The Company considers
        cost to include direct cost of merchandise, plus internal costs associated
        with
        merchandise procurement, storage and handling. The Company regularly reviews
        aged and excess inventories to determine if the carrying value of such
        inventories exceeds market value. A reserve is recorded to reduce the carrying
        value to market value as necessary. A determination of market value requires
        estimates and judgment based on the Company's historical markdown experience
        and
        anticipated markdowns based on future merchandising and advertising plans,
        seasonal considerations, expected business trends and other factors.
 
 **Revenue
        Recognition.**  Sales
        are
        recognized upon the purchase by customers at the Company’s retail store
        locations, less merchandise returned by customers. Revenue from gift cards,
        gift
        certificates and store merchandise credits is recognized at the time of
        redemption. The Company generally accepts returns up to 30 days from
        the
        date of purchase with a sales receipt or proof of purchase. Typically, refunds
        are in the same form of payment originally received from the customer. The
        Company accommodates customers who do not have a receipt or proof of purchase
        by
        offering an exchange or store credit. The Company tracks the original sale
        date
        with returns and provides a reserve for projected merchandise returns based
        on
        this historical experience. As the reserve for merchandise returns is based
        on
        estimates, the actual returns could differ from the reserve, which could
        impact
        sales.
 
 **Gift
        Card/Certificate Redemption.** The
        Company offers its customers the option of purchasing gift cards and, in
        the
        past, gift certificates which may be used toward the future purchase of
        products. Revenue from gift cards, gift certificates and store merchandise
        credits (the “Gift Cards”) is recognized at the time of redemption. The Gift
        Cards have no expiration dates. The Company records unredeemed Gift Cards
        as a
        liability until the point of redemption.
  The
        Company’s historical experience indicates that not all issued Gift Cards are
        redeemed (the “Breakage”). Based upon five years of redemption data,
        approximately 90% of Gift Cards are redeemed within the year after issuance,
        and
        approximately 95% are redeemed within 36 months of the date of issuance,
        after
        which redemption activity is negligible. Accordingly, the Company recognizes
        Breakage as revenue by periodically decreasing the carrying value of the
        Gift
        Card liability by approximately 5% of the aggregate amount.
  During
        the fiscal year ended March 31, 2005 and prior periods, the Company recognized
        Breakage at the time of issuance of Gift Cards. During the first quarter
        of
        fiscal 2006, the Company changed the method of accounting to recognize Breakage
        at the time of redemption of Gift Cards. The effect of the change in accounting
        to record Breakage at the time of redemption is immaterial to the Company’s
        financial position and results of operations. The revenue from Breakage is
        included in the income statement line item net sales and amounted to
        approximately $81,000 and $60,000 for the three months ended September 30,
        2005
        and 2004, respectively, and approximately $129,000 and $143,000 for the six
        months ended September 30, 2005 and 2004, respectively.
 
 **Self-insurance.** Property, general liability and workers' compensation insurance coverage
        is
        self-insured for various levels. Self-insurance accruals include claims filed,
        as well as estimates of claims incurred but not yet reported based on historical
        trends. Projections of future loss are inherently uncertain because of the
        random nature of insurance claim occurrences and could be significantly affected
        if future occurrences and claims differ from historical trends.
  20
  **Impairment
        of Long-Lived Assets.** **** The
        Company accounts for long-lived assets in accordance with the provisions
        of
        Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for
        the Impairment or Disposal of Long-Lived Assets.” The Company reviews long-lived
        assets for impairment whenever events or changes in circumstances indicate
        that
        the carrying amount of an asset may not be recoverable. Recoverability of
        assets
        to be held and used is determined by a comparison of the carrying amount
        of an
        asset to future undiscounted net cash flows expected to be generated by the
        asset. If such assets are considered impaired, the impairment recognized
        is
        measured by comparing projected individual store discounted cash flow to
        the
        asset carrying values. Declines in projected store cash flow could result
        in the
        impairment of assets.
 
 **Accounting
        for Income Taxes.**  As
        part
        of the process of preparing the financial statements, income taxes are estimated
        for each of the jurisdictions in which the Company operates. This process
        involves estimating actual current tax exposure together with assessing
        temporary differences resulting from differing treatment of items for tax
        and
        accounting purposes. These differences result in deferred tax assets and
        liabilities, which are included within the balance sheet. The likelihood
        that
        deferred tax assets will be recovered from future taxable income is assessed,
        recognizing that future taxable income may give rise to new deferred tax
        assets.
        To the extent that future recovery is not likely, a valuation allowance would
        be
        established. To the extent that a valuation allowance is established or
        increased, an expense will be included within the tax provision in the income
        statement.
 
 Significant
        management judgment is required in determining the provision for income taxes,
        deferred tax assets and liabilities and any valuation allowance recorded
        against
        net deferred tax assets. Based on the Company’s history of operating earnings,
        no valuation allowance has been recorded as of September 30, 2005. In the
        event
        that actual results differ from these estimates, or these estimates are adjusted
        in future periods, a valuation allowance may need to be established, which
        could
        impact the Company’s financial position and results of operations.
 
 Provisions
        for income taxes are based on numerous factors that are subject to audit
        by the
        Internal Revenue Service and the tax authorities in the various jurisdictions
        in
        which the Company does business.
 
 **Factors
        That May Affect Future Results**
 
 The
        Company's short- and long-term success is subject to many factors that are
        beyond the Company's control. Stockholders and prospective stockholders in
        the
        Company should consider carefully the following risk factors, in addition
        to
        other information contained in this report. This Report on Form l0-Q contains
        forward-looking statements, which are subject to a variety of risks and
        uncertainties. The Company's actual results could differ materially from
        those
        anticipated in these forward-looking statements as a result of various factors
        including those set forth below.
 
 **Implementing
        Section 404 of the Sarbanes-Oxley Act of 2002 and the associated compliance
        risks.** **** Pursuant
        to Section 404 of the Sarbanes-Oxley Act of 2002, the Company will be required,
        beginning in its fiscal year 2008, to perform an evaluation of its internal
        control over financial reporting and have its independent registered public
        accounting firm test and evaluate the design and operating effectiveness
        of such
        internal controls and publicly attest to such evaluation. The implementation
        process of Section 404 of the Sarbanes-Oxley Act of 2002 will be expensive,
        time
        consuming and will require significant attention of the Company’s management.
        The Company cannot assure that it will not discover material weaknesses in
        its
        internal controls. The Company also cannot assure that it will complete the
        process of its evaluation and the auditors' attestation on time. If the Company
        discovers a material weakness, corrective action may be time consuming, costly
        and further divert the attention of management. The disclosure of a material
        weakness, even if quickly remedied, could reduce the market's confidence
        in the
        Company’s financial statements, cause the delisting of its Common Stock from
        Nasdaq and harm its stock price, especially if a restatement of financial
        statements for past periods were to be necessary.
  21
 **A
        downturn in the economy may affect consumer purchases of discretionary items,
        which would reduce the Company’s net sales** .
        The
        retail industry historically has been subject to substantial cyclical
        variations. The merchandise sold by the Company is generally a discretionary
        expense for its customers. A recession in the general economy or uncertainties
        regarding future economic prospects that affect consumer spending habits
        has
        had, and may do so in the future have, a materially adverse effect on the
        Company’s results of operations.
  **Terrorist
        attacks or acts of war may seriously harm the Company’s
        business** .
        Terrorist attacks may cause damage or disruption to the Company’s employees,
        facilities, information systems, vendors and customers, which could
        significantly impact net sales, costs and expenses and financial condition.
        The
        potential for future terrorist attacks, the national and international responses
        to terrorist attacks, and other acts of war or hostility may cause greater
        uncertainty and cause the Company to suffer in ways that the Company currently
        cannot predict. Such terrorist attacks could cause ports to or through which
        the
        Company or its vendors ship, such as the Ports of Los Angeles and Long Beach,
        to
        be shut down, thereby preventing the delivery of products to the Company’s
        stores. The Company’s geographical focus in California and Nevada may make the
        Company more vulnerable to such uncertainties than other comparable retailers
        who may not have similar geographical concentration.
  **Intense
        competition in the sporting goods industry could limit the Company’s growth and
        reduce its profitability** .
        The
        sporting goods business and the retail environment are highly competitive,
        and
        the Company competes with national, regional and local full-line sporting
        goods
        chains, specialty stores, supplier owned stores, discount and department
        stores,
        and internet retailers. A number of the Company’s competitors are larger and
        have greater resources than the Company.
  **Because
        the Company’s stores are concentrated in the western portion of the United
        States, it is subject to regional risks.** Currently,
        most of the Company’s stores are located in Southern California and the balance
        is located in Northern California, Central California and the Las Vegas area
        of
        Nevada. Accordingly, the Company is subject to regional risks, such as the
        economy, weather conditions, natural disasters and government regulations.
        For
        example, warm winter weather in the resorts frequented by Southern California
        residents has affected sales in the past. When the region suffers an economic
        downturn or when other adverse events occur, historically there has been
        an
        adverse effect on the Company’s sales and profitability and this could also
        affect the Company’s ability to implement its planned growth. In addition, many
        of the Company’s vendors rely on the Ports of Los Angeles and Long Beach to
        process the Company’s shipments. Any disruption or congestion at the ports could
        impair the Company’s ability to adequately stock its stores. Several of the
        Company’s competitors operate stores across the United States and, thus, are not
        as vulnerable as the Company to such regional risks.
  **The
        Company relies on one distribution center and any disruption could reduce
        its
        sales** .
        The
        Company currently relies on a single distribution center in Ontario, California.
        Any natural disaster or other serious disruption to this distribution center
        due
        to fire, earthquake or any other cause could damage a significant portion
        of the
        Company’s inventory and could materially impair both the Company’s ability to
        adequately stock its stores and the Company’s net sales and profitability.
  22
  **The
        Company’s ability to expand its business will be dependent upon the Company’s
        ability to meet challenges in new markets.** The
        Company’s continued growth depends on a strategy of opening new, profitable
        stores in existing markets and in new regional markets. The ability to
        successfully implement this growth strategy could be negatively affected
        by any
        of the following:
 
 ·
              suitable
                  sites may not be available for leasing;
 ·
              the
                  Company may not be able to negotiate acceptable lease terms;
 ·
              the
                  Company might not be able to hire and retain qualified store personnel;
                  and
 ·
              the
                  Company might not have the financial resources necessary to fund
                  its
                  expansion plans.
 
 In
        addition, the Company’s expansion in new and existing markets may present
        competitive, distribution and merchandising challenges that differ from the
        current challenges. These potential new challenges include competition among
        the
        Company’s stores, added strain on the Company’s distribution center, additional
        information to be processed by the Company’s information systems and diversion
        of management attention from ongoing operations. The Company’s faces additional
        challenges in entering new markets, including consumers’ lack of awareness of
        the Company, difficulties in hiring personnel and problems due to the Company’s
        unfamiliarity with local real estate markets and demographics. New markets
        may
        also have different competitive conditions, consumer tastes and discretionary
        spending patterns than the Company’s existing markets. To the extent that the
        Company is not able to meet these new challenges, sales could decrease and
        operating costs could increase. Furthermore, a decline in the Company’s overall
        financial performance, increased rents or any other adverse effects arising
        from
        the commercial real estate market in the Company’s markets may adversely affect
        the Company’s current growth plan. There can be no assurance that the Company
        will possess sufficient funds to finance the expenditures related to its
        planned
        growth, that new stores can be opened on a timely basis, that such new stores
        can be operated on a profitable basis, or that such growth will be
        manageable.
 
 **The
        Company may pursue strategic acquisitions, which could have an adverse impact
        on
        its business.** The
        Company may from time to time acquire complementary companies or businesses.
        Acquisitions may result in difficulties in assimilating acquired companies,
        and
        may result in the diversion of the Company’s capital and attention from other
        business issues and opportunities. The Company may not be able to successfully
        integrate operations that it acquires, including personnel, financial systems,
        distribution, operations and general store operating procedures. If the Company
        fails to successfully integrate acquisitions, the Company’s business could
        suffer. In addition, the integration of any acquired business, and their
        financial results, into the Company’s may adversely affect the Company’s
        operating results. The Company currently does not have any agreements with
        respect to any such acquisitions.
  **The
        Company’s future growth will be dependent on the availability of additional
        financing.** The
        Company may not be able to fund its future growth or react to competitive
        pressures if it lacks sufficient funds. Unexpected conditions could cause
        the
        Company to be in violation of its Lender’s operating covenants. Currently, the
        Company feels it has sufficient cash available through its bank credit
        facilities and cash from operations to fund existing operations for the
        foreseeable future. The Company cannot be certain that additional financing
        will
        be available in the future if necessary.
  23
 **If
        the Company is unable to successfully implement its controlled growth strategy
        or manage its growing business, the Company’s future operating results could
        suffer** .
        Since
        its inception, the Company has experienced periods of rapid growth. No assurance
        can be given that the Company will be successful in maintaining or increasing
        its sales in the future. Any future growth in sales will require additional
        working capital and may place a significant strain on the Company’s management,
        information systems, and inventory management and distribution facilities.
        Any
        failure to timely enhance the Company’s operating systems, or unexpected
        difficulties in implementing such enhancements, could have a material adverse
        effect on the Company’s results of operations.
  **If
        the Company loses key management or is unable to attract and retain talent,
        its
        operating results could suffer** .
        The
        Company depends on the continued service of its senior management. The loss
        of
        the services of any key employee could hurt the Company’s business. Also, the
        future success of the Company depends on its ability to identify, attract,
        hire,
        train and motivate other highly skilled personnel. Failure to do so may
        adversely affect future results.
  **Seasonal
        fluctuations in the sales of sporting goods could cause the Company’s annual
        operating results to suffer** .
        The
        Company’s sales volume increases significantly during the Holiday season as is
        typical with other sporting goods retailers. In addition, the Company’s product
        mix has historically emphasized cold weather sporting goods increasing the
        seasonality of the Company’s business. In recent years, the months of November,
        December and January represented between 30% and 35% of the Company’s total net
        sales, while winter-related products ranged from 15% to 20% of total net
        sales.
        The operating results historically have been influenced by the amount and
        timing
        of snowfall at the resorts frequented by the Company’s customers. An early
        snowfall often has influenced sales because it generally extends the demand
        for
        winter apparel and equipment, while a late snowfall may have the opposite
        effect. Suppliers in the ski and snowboard industry require the Company to
        make
        commitments for purchases of apparel and equipment by April for fall delivery,
        and only limited quantities of merchandise can be reordered during the fall.
        Consequently, the Company places its orders in the spring anticipating snowfall
        in the winter. If the snowfall does not at least provide an adequate base
        or
        occurs late in the season, or if sales do not meet projections, the Company
        may
        be required to mark down its winter apparel and equipment.
  **The
        Company’s quarterly operating results may fluctuate substantially, which may
        adversely affect its business.** The
        Company has experienced, and expects to continue to experience, a substantial
        variation in its net sales and operating results from quarter to quarter.
        The
        Company believes that the factors which influence this variability of quarterly
        results include general economic and industry conditions that affect consumer
        spending, changing consumer demands, the timing of the Company's introduction
        of
        new products, the level of consumer acceptance of each new product, the
        seasonality of the markets in which the Company participates, the weather
        and
        actions of competitors. Accordingly, a comparison of the Company's results
        of
        operations from period to period is not necessarily meaningful, and the
        Company's results of operations for any period are not necessarily indicative
        of
        future performance.
  **The
        Company is controlled by its Founder and management, whose interests may
        differ
        from other stockholders.** At
        November 7, 2005, Norbert Olberz, the Company's Chairman Emeritus, director
        and
        founder, Craig Levra, the Company’s Chairman and Chief Executive Officer, and
        Howard Kaminsky, the Company’s Chief Financial Officer, collectively owned
        approximately 67% of the Company’s outstanding Class A and Class B Common Stock.
        Messrs. Olberz, Levra and Kaminsky effectively have the ability to control
        the
        outcome on all matters requiring stockholder approval, including, but not
        limited to, the election and removal of directors, and any merger, consolidation
        or sale of all or substantially all of the Company’s assets, and to control the
        Company’s management and affairs. Transactions may be pursued that could enhance
        Messrs. Olberz, Levra and Kaminsky’s interests in the Company while involving
        risks to the interests of the Company’s other stockholders, and there is no
        assurance that their interests will not conflict with the interests of the
        Company’s other stockholders.
  24
  **Problems
        with the Company’s information systems could disrupt its operations and
        negatively impact its financial results** .
        The
        Company's success, in particular the Company's ability to successfully manage
        inventory levels and its centralized distribution system, largely depends
        upon
        the efficient operation of the Company's computer hardware and software systems.
        The Company uses information systems to track inventory information at the
        store
        level, replenish inventory from the Company's warehouse, and aggregate daily
        sales information among other things. These systems and the Company's operations
        are vulnerable to damage or interruption from:
 
 ·
              earthquake,
                  fire, flood and other natural disasters;
 ·
              power
                  loss, computer systems failures, internet and telecommunications
                  or data
                  network failure, operator negligence, improper operation by or
                  supervision
                  of employees, physical and electronic loss of data and similar
                  events; and
 ·
              computer
                  viruses, penetration by hackers seeking to disrupt operations or
                  misappropriate information and other breaches of security.
 
 The
        Company seeks to minimize these risks by the use of backup facilities and
        redundant systems. Nevertheless any failure that causes an interruption in
        the
        Company's operations or a decrease in inventory tracking could result in
        reduced
        net sales.
 
 **If
        the Company is unable to predict or react to changes in consumer demand,
        it may
        lose customers and its sales may decline** .
        If the
        Company fails to anticipate changes in consumer preferences, it may experience
        lower net sales, higher inventory markdowns and lower margins. Products must
        appeal to a broad range of consumers whose preferences cannot be predicted
        with
        certainty. These preferences are also subject to change. Sporting goods are
        often subject to short-lived trends, such as the short-lived popularity of
        in-line scooters. Outdoor wear is significantly influenced by fashion. The
        Company’s success depends upon the ability to anticipate and respond in a timely
        manner to trends in sporting goods merchandise and consumers’ participation in
        sports. Failure to identify and respond to these changes may cause net sales
        to
        decline. In addition, because the Company generally makes commitments to
        purchase products from vendors up to nine months in advance of the proposed
        delivery, misjudging the market may over-stock unpopular products and force
        inventory markdowns that could have a negative impact on profitability, or
        have
        insufficient inventory of a popular item that can be sold at full markup.
  **The
        price of the Company’s Common Stock may be volatile.** The
        Company’s Class A and Class B Common Stock are thinly traded making it difficult
        to sell large amounts. The market price of the Company's Class A and Class
        B
        Common Stock is likely to be volatile and could be subject to significant
        fluctuations in response to factors such as quarterly variations in operating
        results, operating results which vary from the expectations of securities
        analysts and investors, changes in financial estimates, changes in market
        valuations of competitors, announcements by the Company or its competitors
        of a
        material nature, additions or departures of key personnel, future sales of
        Class
        A and Class B Common Stock and stock volume fluctuations. Also, general
        political and economic conditions such as a recession or interest rate
        fluctuations may adversely affect the market price of the Company's Class
        A and
        Class B Common Stock.
 
 **Provisions
        in the Company's charter documents could discourage a takeover that stockholders
        may consider favorable.** At
        November 8, 2005, Norbert Olberz, the Company's Chairman Emeritus, director
        and
        founder, Craig Levra, the Company's Chairman and Chief Executive Officer,
        and
        Howard Kaminsky, the Company's Chief Financial Officer, collectively owned
        approximately 67% of the Company's outstanding Class A and Class B Common
        Stock.
        The holder of a share of Class B Common Stock is entitled to one vote on
        each
        matter presented to the stockholders whereas the holder of a share of Class
        A
        Common Stock has 1/20th of one vote on each matter presented to the
        stockholders. Subject to the Class A protection provisions described below,
        Messrs. Olberz, Levra and Kaminsky will be able to sell shares of Class A
        Common
        Stock and use the proceeds to purchase additional shares of Class B Common
        Stock, thereby increasing their collective voting power. Subject to the
        prohibition on the grant, issuance, sale or transfer of Class B Common Stock
        to
        Messrs. Levra and Kaminsky, the Company will also be able to issue Class
        B
        Common Stock (subject to the applicable rules of the NASD and the availability
        of authorized and unissued shares of Class B Common Stock) to persons deemed
        by
        the Board to be preferable to a potential acquiror, thereby diluting the
        voting
        power of that potential acquiror. The Class A protection provisions in the
        Company's Certificate of Incorporation could also make acquisition of voting
        control more expensive by requiring an acquiror of 10% or more of the
        outstanding shares of Class B Common Stock to purchase a corresponding
        proportion of Class A Common Stock.
 
 25
 The
        Company's Certificate of Incorporation contains certain other provisions
        that
        may have an "anti-takeover" effect. The Company's Certificate of Incorporation
        does not provide for cumulative voting and, accordingly, a significant minority
        stockholder could not necessarily elect any designee to the Board. The Company's
        Certificate of Incorporation also provides that the Board shall be divided
        into
        three classes, as nearly equal in number as possible, which are elected for
        staggered three-year terms and, accordingly, it would take at least two annual
        meetings to change a majority of the Board. As a result of these provisions
        in
        the Company's Certificate of Incorporation, stockholders of the Company may
        be
        deprived of an opportunity to sell their shares at a premium over prevailing
        market prices and it would be more difficult to replace the directors and
        management of the Company.
  **The
        Company may be subject to product liability claims and its insurance may
        not be
        sufficient to cover damages related to those claims.** The
        Company may be subject to lawsuits resulting from injuries associated with
        the
        use of sporting goods equipment that it sells. The Company may incur losses
        relating to these claims or the defense of these claims. There is a risk
        that
        claims or liabilities will exceed the Company’s insurance coverage. In addition,
        the Company may be unable to retain adequate liability insurance in the future.
        The Company is subject to regulation by the Consumer Product Safety Commission
        and similar state regulatory agencies. If the Company fails to comply with
        government and industry safety standards, the Company may be subject to claims,
        lawsuits, fines and adverse publicity that could have a material adverse
        effect
        on its business, results of operations and financial condition.
 
 **The
        Company’s same store sales will fluctuate and may not be a meaningful indicator
        of future performance.** Changes
        in the Company’s same store sales results could affect the price of its Class A
        and Class B Common Stock. A number of factors have historically affected,
        and
        will continue to affect, the Company’s same store sales results, including:
        competition, the Company’s new store openings and remodeling, general regional
        and national economic conditions, actions taken by the Company’s competitors,
        consumer trends and preferences, changes in other tenants in the shopping
        centers in which the Company is located, new product introductions and changes
        in the Company’s product mix, timing and effectiveness of promotional events,
        lack of new product introductions to spur growth in the sale of various kinds
        of
        sports equipment, and weather. The Company’s same store sales may vary from
        quarter to quarter, and an unanticipated decline in revenues or same store
        sales
        may cause the price of the Company’s Class A and Class B Common Stock to
        fluctuate significantly.
  26
  **Item
        3.** **Quantitative
        and Qualitative Disclosures About Market Risk.**
 
 The
        Company’s exposure to interest rate risk consists primarily of borrowings under
        its credit facility, which bears interest at floating rates. The impact on
        earnings or cash flow during the next fiscal year from a change of 100 basis
        points in the interest rate would not be significant.
 
 **Item
        4.** **Controls
        and Procedures.**
 
 The
        Company’s Chief Executive Officer, Craig Levra, and Chief Financial Officer,
        Howard Kaminsky, with the participation of the Company’s management, carried out
        an evaluation of the effectiveness of the Company’s disclosure controls and
        procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that
        evaluation, the Chief Executive Officer and the Chief Financial Officer
        concluded that, as of the end of the period covered by this report, the
        Company’s disclosure controls and procedures are effective at the “reasonable
        assurance” level in identifying to them material information relating to the
        Company (including its consolidated subsidiaries) required to be included
        in
        this report.
  Disclosure
        controls and procedures, no matter how well designed and implemented, can
        provide only reasonable assurance of achieving an entity's disclosure
        objectives. The likelihood of achieving such objectives is affected by
        limitations inherent in disclosure controls and procedures. These include
        the
        fact that human judgment in decision-making can be faulty and that breakdowns
        in
        internal control can occur because of human failures such as simple errors
        or
        mistakes or intentional circumvention of the established process.
  There
        were no changes in the Company's internal controls over financial reporting,
        identified by the Chief Executive Officer or the Chief Financial Officer
        that
        occurred during the period covered by this report that have materially affected,
        or are reasonably likely to materially affect, the Company’s internal control
        over financial reporting.
  27
 
 **Part
        II - OTHER INFORMATION**
 
 **Item
        1.**  **** **Legal
        Proceedings.**
 
 On
        July
        22, 2005, a purported stockholder of the Company brought an action captioned *Miriam
        Gruber v. Sport Chalet, Inc., Norbert Olberz, Irene Olberz, Craig L. Levra,
        Howard K. Kaminsky, Al D. McCready, Eric S. Olberz, Frederick H. Schneider,
        John
        R. Attwood, Donald J. Howard and Kenneth Olson,* in the
        Court of Chancery of the State of Delaware. The action, which is purportedly
        brought individually, derivatively and as a class action on behalf of the
        public
        stockholders of the Company, challenges the recapitalization and the associated
        transactions described above in “Management’s Discussion and Analysis of
        Financial Condition and Results of Operations - Overview.” The complaint alleges
        that defendants breached their fiduciary duties to the Company's public
        stockholders by, among other things, (i) diverting an opportunity of the
        Company
        to Messrs. Levra and Kaminsky; (ii) failing to seek the best available
        transaction that would maximize the benefits for the Company and all its
        stockholders; (iii) approving transactions which are not entirely fair to
        the
        Company and its public stockholders and (iv) attempting to entrench themselves
        in office. The complaint seeks, among other things, (i) a preliminary and
        permanent injunction against the recapitalization; (ii) a declaration that
        the
        defendants have breached their fiduciary duties; (iii) damages and (iv) an
        award
        of attorneys' fees and expenses.
 
 On
        August
        26, 2005, the parties executed a Memorandum of Understanding (the "MOU")
        memorializing their agreement in principle to settle the Action (the
        "Settlement"). An amended preliminary proxy statement, reflecting the proposed
        settlement and the comments of plaintiff's counsel, was filed with the
        Securities and Exchange Commission on August 30, 2005. The definitive proxy
        statement (the "Proxy Statement") was filed with the Securities and Exchange
        Commission on September 1, 2005.
  On
        September 27, 2005, a Stipulation and Agreement of Compromise, Settlement
        and
        Release (the "Stipulation") was executed by the parties through their respective
        counsel. The Settlement is subject to various conditions, including Court
        approval. The Court will consider whether or not to approve the Settlement
        at a
        hearing on November 29, 2005. In connection with the Settlement, plaintiff's
        counsel intend to petition the Court for an award of attorneys' fees and
        expenses in an aggregate amount not to exceed $480,000. Defendants have agreed
        that they will not object to such an application by plaintiff's counsel for
        an
        award in or below the amount of $480,000.
  In
        addition, we are involved in various routine legal proceedings incidental
        to the
        conduct of our business. Management does not believe that any of these legal
        proceedings will have a material adverse impact on the business, financial
        condition or results of operations, either due to the nature of the claims,
        or
        because management believes that such claims should not exceed the limits
        of our
        insurance coverage.
 
 **Item
        2.**  **** **Unregistered
        Sales of Equity Securities and Use of Proceeds.**
 
 Not
        Applicable.
 
 **Item
        3.**  **** **Defaults
        Upon Senior Securities.**
 
 Not
        Applicable.
  28
  **Item
        4.**   **Submission
        of Matters to a Vote of Security Holders.**
 
 On
        September 20, 2005, we held our 2005 annual meeting of stockholders. At the
        annual meeting, there were 6,696,368 shares entitled to vote, and 5,552,654
        shares were represented at the meeting in person or by proxy.
 
 The
        following summarizes the results for those matters submitted to our stockholders
        for action at the annual meeting:
 
 1.
                  ***Election
                      of Directors*****.**To
                      elect three Class 1 directors to hold office until the annual
                      meeting of
                      stockholders to be held in 2008, or until their respective
                      successors have
                      been elected and qualified.
  **Director**
                
                **For**
                
                **Withheld**Al
                    McCready
                
                5,271,954
                
                280,700Eric
                    Olberz
                
                5,289,350
                
                263,304Frederick
                    Schneider
                
                5,316,350
                
                236,304
 2.
                  ***Approval
                      of Amendment of the Certificate of
                      Incorporation.***To
                      approve a proposed amendment of the Company's Amended and Restated
                      Certificate of Incorporation that would (i) increase
                      the authorized
                      number of shares of all classes of capital stock from 17,000,000
                      to
                      50,000,000, consisting of 46,000,000 shares of Class A
                      Common Stock,
                      2,000,000 shares of Class B Common Stock and 2,000,000
                      shares of
                      preferred stock, (ii) establish the rights, preferences
                      and
                      privileges of, and the restrictions on, the Class A
                      Common Stock and
                      the Class B Common Stock, and (iii) reclassify
                      each outstanding
                      share of Common Stock as 0.25 share of Class B Common
                      Stock.
 
 **For**
                
                **Against**
                
                **Abstain**5,265,604
                
                257,550
                
                29,500
 3.
              ***Approval
                  of Transfer****.*To
                  approve a proposed transfer (the "Transfer") of shares of Class B
                  Common Stock by the Olberz Family Trust to Craig L. Levra, the
                  Chairman of
                  the Board and the Chief Executive Officer of the Company, and Howard
                  K.
                  Kaminsky, the Chief Financial Officer of the
                  Company.
 **For**
                  
                  **Against**
                  
                  **Abstain**5,479,358
                  
                  42,246
                  
                  31,050
 4.
              ***Approval
                  of Amendments of the Incentive Plans.***To
                  approve proposed amendments of the Company's 1992 Incentive Award
                  Plan and
                  2004 Equity Incentive Plan to conform to the proposed changes in
                  the
                  capital stock of the Company.
 **For**
                  
                  **Against**
                  
                  **Abstain**5,277,104
                  
                  246,050
                  
                  29,500
 5.
              ***Ratification
                  of Appointment of Independent Auditors.***To
                  ratify the appointment of Moss Adams LLP as the Company's independent
                  registered public accounting firm for the fiscal year ending
                  March 31, 2006.
 **For**
                  
                  **Against**
                  
                  **Abstain**5,542,804
                  
                  6,000
                  
                  3,850
 29
  **Item
        5.**  **** **Other
        Information.**
 
 **Stockholder
        Proposals**
 
 The
        proxy
        materials for the 2005 annual meeting of the stockholders held on September
        20,
        2005 were mailed to stockholders of the Company on September 6, 2005.
 
 Under
        certain circumstances, stockholders are entitled to present proposals at
        stockholder meetings. SEC rules provide that any such proposal to be included
        in
        the proxy statement for the Company’s 2006 annual meeting of stockholders must
        be received by the Secretary of the Company at the Company’s office at One Sport
        Chalet Drive, La Canada, California 91011 not less than 120 calendar days
        before
        the date of the Company’s proxy statement released to stockholders in connection
        with the 2005 annual meeting in a form that complies with applicable
        regulations. If the date of the 2006 annual meeting is advanced or delayed
        more
        than 30 days from the date of the 2005 annual meeting, stockholder proposals
        intended to be included in the proxy statement for the 2006 annual meeting
        must
        be received by the Company within a reasonable time before the Company begins
        to
        print and mail the proxy statement for the 2006 annual meeting.
 
 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 2005 annual meeting, the proxies solicited by the Board for the 2006
        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 2006 annual meeting of stockholders without any discussion
        of the proposal in the proxy statement for such meeting. If the date of the
        2006
        annual meeting is advanced or delayed more than 30 days from the date of
        the
        2005 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 2006 annual meeting.
 
 The
        2006
        annual meeting of stockholders is presently expected to be held on or about
        August 1, 2006. Upon any determination that the date of the 2006 annual meeting
        will be advanced or delayed from this date, the Company will disclose the
        change
        in the earliest practicable Quarterly Report on Form 10-Q.
 
 **Changes
        in Registrant's Independent Registered Public Accounting
        Firm**
  (a)  On
        November 15, 2004, the Company dismissed Ernst & Young LLP as the Company's
        independent registered public accounting firm. Ernst & Young LLP had served
        as the Company's independent registered public accounting firm since 1983.
        The
        decision to dismiss Ernst & Young LLP was made by the Audit Committee of the
        Board of Directors of the Company and, upon recommendation by that committee,
        was approved by the full Board of Directors.
  The
        reports of Ernst & Young LLP on the Company's financial statements for each
        of fiscal years 2003 and 2004 contained no adverse opinion or disclaimer
        of
        opinion, nor were they qualified or modified as to uncertainty, audit scope,
        or
        accounting principles.
  During
        fiscal years 2003 and 2004 and the subsequent interim period through the
        date of
        the dismissal, the Company had no disagreement with Ernst & Young LLP on any
        matter of accounting principles or practices, financial statement disclosure,
        or
        auditing scope or procedure, which disagreement, if not resolved to the
        satisfaction of Ernst & Young LLP, would have caused them to make reference
        to such disagreement in connection with their reports for such
        periods.
  30
 During
        fiscal years 2003 and 2004 and the subsequent interim period through the
        date of
        the dismissal, there have been no reportable events (as defined in Regulation
        S-K, Item 304(a)(1)(v)).
  The
        Company provided Ernst & Young LLP with a copy of the above disclosures and
        requested that they furnish us with a letter addressed to the Securities
        and
        Exchange Commission stating whether they agree with the above statements
        and, if
        not, stating the respects in which they do not agree. A copy of the letter
        from
        Ernst & Young LLP is incorporated by reference to Exhibit 16.1 to the
        Company’s Form 8-K (File No. 000-20736) filed on November 18, 2004.
  (b)  On
        November 15, 2004, the Company engaged Moss Adams LLP as the independent
        registered public accounting firm to audit the Company's financial statements
        for the fiscal year ending March 31, 2005. The engagement of Moss
        Adams LLP
        was made by the Audit Committee of the Board of Directors of the Company
        and,
        upon recommendation by that committee, was approved by the full Board of
        Directors.
  During
        fiscal years 2003 and 2004 and the subsequent interim period prior to engaging
        Moss Adams LLP, neither the Company, nor anyone on its behalf, has consulted
        with Moss Adams LLP regarding any of the matters set forth in Item
        304(a)(2)(i)-(ii) of Regulation S-K.
  (c)  The
        Company received notification on September 20, 2005 in a letter dated September
        13, 2005 that the independent accounting firm Holthouse Carlin & Van Trigt
        LLP (the “HCVT”), which audited the Company’s Employee Retirement Savings Plan’s
        (the “Plan”) financial statements, withdrew from the Public Company Accounting
        Oversight Board (the “PCAOB”).
  While
        HCVT did not formally resign or decline to stand for re-appointment as the
        Plan's auditor, HCVT indicated that as a result of its withdrawal from the
        PCAOB, it would not be permitted to continue as the Plan's auditor. HCVT
        had
        served as the Plan’s auditor since 2003.
  The
        reports of HCVT on the Plan's financial statements for each of the last two
        completed fiscal years contained no adverse opinion or disclaimer of opinion,
        nor were they qualified or modified as to uncertainty, audit scope, or
        accounting principles.
  During
        the two most recent fiscal years and the subsequent interim period through
        September 20, 2005, the Company had no disagreement with HCVT on any matter
        of
        accounting principles or practices, financial statement disclosure, or auditing
        scope or procedure, which disagreement, if not resolved to the satisfaction
        of
        HCVT, would have caused them to make reference to such disagreement in
        connection with their reports for such periods.
  During
        the two most recent fiscal years and the subsequent interim period through
        September 20, 2005, there have been no reportable events (as defined in
        Regulation S-K, Item 304(a)(1)(v)).
  The
        Company provided HCVT with a copy of the above disclosures and requested
        that
        they furnish the Company with a letter addressed to the Securities and Exchange
        Commission stating whether they agree with the above statements and, if not,
        stating the respects in which they do not agree. A copy of the letter from
        HCVT
        is incorporated by reference to Exhibit 16.1 to the Company’s Form 8-K/A (File
        No. 000-20736) filed on October 6, 2005.
  31
 (d)  On
        September 20, 2005, the Company engaged Moss Adams LLP as the independent
        registered public accounting firm to audit the Plan for the year ending
        December 31, 2005. The engagement of Moss Adams LLP was made by the
        Audit
        Committee of the Board of Directors of the Company and, upon recommendation
        by
        that committee, was approved by the full Board of Directors.
  During
        the two most recent fiscal years of the Plan and the subsequent interim period
        prior to engaging Moss Adams LLP, neither the Company, nor anyone on its
        behalf,
        has consulted with Moss Adams LLP regarding any of the matters regarding
        the
        Plan set forth in Item 304(a)(2)(i)-(ii) of Regulation S-K.
  **Recapitalization
        Plan**
 
 The
        Company’s Board of Directors approved a recapitalization plan designed to
        facilitate the orderly transition of control from the Company’s founder (the
“Founder”) to certain members of the Company’s management and to increase
        financial flexibility for the Company and its stockholders. The recapitalization
        plan transferred a portion of the Founder’s ownership to Craig L. Levra,
        Chairman and Chief Executive Officer, and Howard K. Kaminsky, Executive Vice
        President - Finance, Chief Financial Officer and Secretary, and allowed current
        stockholders to retain existing ownership and voting interests.
 
 The
        recapitalization established two classes of common stock and was effected
        through a reclassification of each outstanding share of Common Stock into
        0.25
        share of Class B Common Stock. The reclassification was followed by a
        non-taxable stock dividend of seven shares of Class A Common Stock for each
        one
        outstanding share of Class B Common Stock. Each share of Class B Common Stock
        entitles the holder to one vote, and each share of Class A Common Stock entitles
        the holder to 1/20th of one vote. To illustrate, a hypothetical Sport Chalet
        stockholder who owned 1,000 shares of Common Stock at the time of the
        recapitalization would currently own 250 shares of Class B Common Stock,
        each
        with one vote, and 1,750 shares of Class A Common Stock, each with 1/20th
        of one
        vote.
 
 The
        recapitalization doubled the Company’s total number of shares outstanding and,
        therefore, had the same impact on earnings per share as a 2-for-1 stock split.
        However, the establishment of dual classes of common stock did not affect
        the
        relative voting or equity interests of existing stockholders since the
        reclassification of Common Stock and issuance of a stock dividend affected
        each
        stockholder in proportion to the number of shares previously owned. The Class
        A
        Common Stock and the Class B Common Stock will generally vote on all matters
        as
        a single class. The holders of the Class A Common Stock and Class B Common
        Stock
        will vote as a separate class on any reverse stock split which results in
        holders of more than 5% of such class being converted into fractional shares.
        The holders of Class A Common Stock, voting as a separate class, are also
        entitled to elect one director, and the affirmative vote of the holders of
        a
        majority of the shares of Class A Common Stock, voting as a separate class,
        will
        be required to amend certain provisions of the Company's Certificate of
        Incorporation. The recapitalization plan also included certain protection
        features for holders of Class A Common Stock in an effort to ensure parity
        in
        the trading of the two classes of common stock.
 
 The
        Founder transferred 974,150 shares of Class B Common Stock to Craig L. Levra
        and
        Howard K. Kaminsky, which was intended to give them approximately 45% of
        the
        combined voting interests of Class B and Class A Common Stock when added
        to the
        shares of Sport Chalet they currently own. These shares of Class B Common
        Stock
        transferred by the Founder to certain members of management are treated as
        a
        contribution to the Company’s capital with the offsetting charge as compensation
        expense. As a result, the Company recorded a one-time charge based on the
        stock
        price at the time of the transfer of approximately $8.6 million. For a
        description of certain litigation relating to the recapitalization plan,
        see
“Item 1 - Legal Proceedings.”
 
 32
 On
        December 20, 2002, Norbert Olberz and Irene Olberz, as co-trustee
        of The
        Olberz Family Trust (the "Trust"), granted to SC Option, LLC, a newly formed
        California limited liability company (the "LLC"), an option (the "Option")
        to
        purchase, under certain circumstances, all of the shares of the Company's
        common
        stock held by the Trust. The LLC and the Trust entered into the Option to
        provide for an orderly transition of control of the Company upon the death
        of
        Norbert Olberz. On September 30, 2005, the LLC and the Trust terminated
        the
        Option. For a more complete description of the Option, see the Company's
        Current
        Report on Form 8-K filed with the SEC on December 23,
        2002.
  **Item
        6.**  **** **Exhibits.**
 Exhibits:3.1
                Amended
                    and Restated Certificate of Incorporation (incorporated by reference
                    to
                    Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (File No.
                    33-53120))3.2
                Bylaws
                    of Sport Chalet, Inc. as amended (incorporated by reference to
                    Exhibit 3.2
                    of the Company’s Registration Statement on Form S-8 (File No.
                    333-107683))3.3
                Certificate
                    of Amendment to the Amended and Restated Certificate of Incorporation
                    of
                    Sport Chalet, Inc. (incorporated by reference to Exhibit 3.1
                    of the
                    Company’s Form 8-K filed on September 22, 2005.4.1
                Form
                    of Certificate for Class A Common Stock, par value $0.01 per
                    share
                    (incorporated by reference to Exhibit 4.1 to the Company's Form
                    8-A filed
                    on September 29, 2005).4.2
                Form
                    of Certificate for Class B Common Stock, par value $0.01 per
                    share
                    (incorporated by reference to Exhibit 4.2 to the Company's Form
                    8-A filed
                    on September 29, 2005).10.1
                Tax
                    Indemnification Agreement dated as of September 30, 2005,
                    among Sport
                    Chalet, Inc., Norbert Olberz and Irene Olberz, both individually
                    and as
                    trustees of The Olberz Family Trust, Craig L. Levra and Howard
                    K. Kaminsky
                    (incorporated by reference to Exhibit 99.1 of the Company's Form
                    8-K filed
                    on October 3, 2005).10.2
                Stock
                    Pledge Agreement dated as of September 30, 2005, among
                    Sport Chalet,
                    Inc., Norbert Olberz and Irene Olberz, both individually and
                    as trustees
                    of The Olberz Family Trust, Craig L. Levra and Howard K. Kaminsky
                    (incorporated by reference to Exhibit 99.2 of the Company's Form
                    8-K filed
                    on October 3, 2005).10.3
                Termination
                    of Option Agreement dated as of September 30, 2005, between
                    SC
                    Option, LLC and Norbert Olberz and Irene Olberz as co-Trustees
                    of The
                    Olberz Family Trust (incorporated by reference to Exhibit 99.4
                    of the
                    Company's Form 8-K filed on October 3, 2005).31.1
                Certification
                    Pursuant to Section 302 of the Sarbanes-Oxley Act of
                    200231.2
                Certification
                    Pursuant to Section 302 of the Sarbanes-Oxley Act of
                    200232.1
                Certification
                    Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
                    906 of
                    the Sarbanes-Oxley Act of
                    2002
  33
 **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
        8, 2005    By: /s /
        Howard K.
        Kaminsky
 Howard
        K.
        Kaminsky
 Executive
        Vice President-Finance,
 Chief
        Financial Officer and Secretary
 (On
        behalf of the Registrant and as
 Principal
        Financial and Accounting Officer)
  34