**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





(Mark
      One)





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





For
      the
      quarterly period ended December 31, 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 o





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





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





At
      February 7, 2006, there were 11,890,201 shares of Class A Common Stock
      outstanding and 1,698,628 shares of Class B Common Stock
      outstanding.


1




**SPORT
      CHALET, INC.**





Table
      of
      Contents to Form 10-Q





PART
      I -
      FINANCIAL INFORMATION





PageItem
                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
            26Item
                4.
            Controls
                and Procedures
            26PART
                II - OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            27Item
                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
            28Item
                5.
            Other
                Information
            28Item
                6.
            Exhibits
            31











2





**PART
      I - FINANCIAL INFORMATION**





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





**SPORT
      CHALET, INC.**





**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


**(UNAUDITED)**


Three
                    months ended
                
                Nine
                    months endedDecember
                    31,
                
                December
                    31,2005
                
                2004
                
                2005
                
                2004Net
                    sales
                
                $
                99,664,450
                
                $
                96,123,947
                
                $
                253,541,108
                
                $
                230,270,247Cost
                    of goods sold, buying and occupancy costs
                
                
                67,921,588
                
                
                64,877,651
                
                
                174,536,379
                
                
                158,958,523Gross
                    profit
                
                
                31,742,862
                
                
                31,246,296
                
                
                79,004,729
                
                
                71,311,724Selling,
                    general and administrative expenses
                
                
                26,435,121
                
                
                24,905,999
                
                
                77,282,595
                
                
                61,982,732Income
                    from operations
                
                
                5,307,741
                
                
                6,340,297
                
                
                1,722,134
                
                
                9,328,992Interest
                    expense
                
                
                (174,392
                )
                
                (145,842
                )
                
                (189,428
                )
                
                (236,749
                )Income
                    before taxes
                
                
                5,133,349
                
                
                6,194,455
                
                
                1,532,706
                
                
                9,092,243Income
                    tax provision
                
                
                2,084,318
                
                
                2,475,795
                
                
                3,257,736
                
                
                3,642,912Net
                    income (loss)
                
                $
                3,049,031
                
                $
                3,718,660
                
                $
                (1,725,030
                )
                $
                5,449,331Class
                    A and Class B earnings (loss) per share:Basic
                
                $
                0.22
                
                $
                0.28
                
                $
                (0.13
                )
                $
                0.41Diluted
                
                $
                0.22
                
                $
                0.26
                
                $
                (0.13
                )
                $
                0.38Weighted
                    average number of Class A and Class B common shares
                    outstanding:Basic
                
                
                13,583,786
                
                
                13,351,068
                
                
                13,468,942
                
                
                13,359,262Diluted
                
                
                14,179,348
                
                
                14,452,714
                
                
                13,468,942
                
                
                14,424,068
 
 _________________
 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 selling, general and administrative expenses of
        $8.7
        million, primarily related to stock compensation, and a reduction to net
        income
        of $7.8 million for the nine month period ended December 31, 2005. 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**


December
                      31,
                  
                  March
                      31,2005
                  
                  2005(Unaudited)**Assets**Current
                      assets:Cash
                  
                  $
                  1,621,833
                  
                  $
                  6,176,689Accounts
                      receivable, less allowance of $190,000at
                      December 31, 2005 and $182,000 at March 31, 2005
                  
                  
                  3,983,134
                  
                  
                  1,462,042Merchandise
                      inventories
                  
                  
                  88,555,244
                  
                  
                  65,061,142Prepaid
                      expenses and other current assets
                  
                  
                  3,560,039
                  
                  
                  3,044,153Deferred
                      income taxes
                  
                  
                  4,234,735
                  
                  
                  3,915,079Total
                      current assets
                  
                  
                  101,954,985
                  
                  
                  79,659,105Furniture,
                      equipment and leasehold improvements – net
                  
                  
                  45,503,791
                  
                  
                  37,502,578Deferred
                      income taxes
                  
                  
                  2,868,017
                  
                  
                  1,550,753Other
                      assets
                  
                  
                  –
                  
                  
                  76,960Total
                      assets
                  
                  $
                  150,326,793
                  
                  $
                  118,789,396**Liabilities
                      and stockholders' equity**Current
                      liabilities:Accounts
                      payable
                  
                  $
                  32,974,917
                  
                  $
                  18,805,953Salaries
                      and wages payable
                  
                  
                  4,446,455
                  
                  
                  5,080,320Income
                      taxes payable
                  
                  
                  1,364,818
                  
                  
                  825,059Other
                      accrued expenses
                  
                  
                  20,333,089
                  
                  
                  11,831,595Total
                      current liabilities
                  
                  
                  59,119,279
                  
                  
                  36,542,927Deferred
                      rent
                  
                  
                  15,260,208
                  
                  
                  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 – 11,890,201at
                      December 31, 2005 and 11,700,794at
                      March 31, 2005
                  
                  
                  118,902
                  
                  
                  117,008Class
                      B Common Stock, $.01 par value:Authorized
                      shares – 2,000,000Issued
                      and outstanding shares – 1,698,628at
                      December 31, 2005 and 1,671,571at
                      March 31, 2005
                  
                  
                  16,986
                  
                  
                  16,716Additional
                      paid-in capital
                  
                  
                  31,452,525
                  
                  
                  22,892,519Retained
                      earnings
                  
                  
                  44,358,893
                  
                  
                  46,083,923Total
                      stockholders’ equity
                  
                  
                  75,947,306
                  
                  
                  69,110,166Total
                      liabilities and stockholders’ equity
                  
                  $
                  150,326,793
                  
                  $
                  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)**


Nine
                  months ended December 31,2005
              
              2004**Operating
                  activities**Net
                  income (loss)
              
              $
              (1,725,030
              )
              $
              5,449,330Adjustments
                  to reconcile net income (loss) to net cash providedby
                  operating activities:Stock
                  compensation
              
              
              8,221,826
              
              
              –Depreciation
                  and amortization
              
              
              6,961,020
              
              
              5,925,203(Gain)
                  loss on disposal of furniture, equipment and leasehold
                  improvements
              
              
              (203,064
              )
              
              205,094Deferred
                  income taxes
              
              
              (1,636,920
              )
              
              (226,121
              )Tax
                  benefit on employee stock options
              
              
              1,013,896
              
              
              69,244Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (2,521,092
              )
              
              (3,586,076
              )Merchandise
                  inventories
              
              
              (23,494,102
              )
              
              (21,235,867
              )Prepaid
                  expenses and other current assets
              
              
              (515,886
              )
              
              (978,925
              )Accounts
                  payable
              
              
              14,168,964
              
              
              20,546,140Salaries
                  and wages payable
              
              
              (633,865
              )
              
              502,409Income
                  taxes payable
              
              
              539,759
              
              
              1,801,459Other
                  accrued expenses
              
              
              8,501,494
              
              
              6,051,481Deferred
                  rent
              
              
              2,123,905
              
              
              3,396,570Net
                  cash provided by operating activities
              
              
              10,800,905
              
              
              17,919,941**Investing
                  activities**Purchase
                  of furniture, equipment and leasehold improvements
              
              
              (15,151,038
              )
              
              (14,165,533
              )Proceeds
                  from sale of assets
              
              
              391,869
              
              
              –Other
                  assets
              
              
              76,960
              
              
              19,256Net
                  cash used in investing activities
              
              
              (14,682,209
              )
              
              (14,146,277
              )**Financing
                  activities**Proceeds
                  from bank borrowing
              
              
              32,218,125
              
              
              10,700,000Repayments
                  of bank borrowing
              
              
              (32,218,125
              )
              
              (10,700,000
              )Proceeds
                  from exercise of stock options
              
              
              (673,552
              )
              
              49,273Net
                  cash provided (used) by financing activities
              
              
              (673,552
              )
              
              49,273Increase
                  (decrease) in cash and cash equivalents
              
              
              (4,554,856
              )
              
              3,822,937Cash
                  and cash equivalents at beginning of period
              
              
              6,176,689
              
              
              3,071,648Cash
                  and cash equivalents at end of period
              
              $
              1,621,833
              
              $
              6,894,585**Supplemental
                  Disclosure of Cash Flow Information**Cash
                  paid during the period for:Income
                  taxes
              
              $
              3,341,000
              
              $
              1,998,000Interest
              
              
              97,372
              
              
              101,512








**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.





In
      the
      second quarter of fiscal 2006, 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.


6





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 then owned. 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 nine months ended December 31, 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:


Nine
                  months endedDecember
                  31, 2005Compensation
                  expense
              
              $
              8,221,826Professional
                  fees
              
              
              471,3888,693,214Income
                  tax benefit
              
              
              (854,000
              )Effect
                  on net income
              
              $
              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 $120,000 and $210,000 for the three months ended December 31, 2005 and 2004,
      respectively, and $249,000 and $353,000 for the nine months ended December
      31,
      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
                  
                  Nine
                      months endedDecember
                      31,
                  
                  December
                      31,2005
                  
                  2004
                  
                  2005
                  
                  2004Net
                      income (loss)
                  
                  $
                  3,049,031
                  
                  $
                  3,718,660
                  
                  $
                  (1,725,030
                  )
                  $
                  5,449,331Weighted
                      average number of common shares:Basic
                  
                  
                  13,583,786
                  
                  
                  13,351,068
                  
                  
                  13,468,942
                  
                  
                  13,359,262Effect
                      of dilutive securities – stock options
                  
                  
                  595,562
                  
                  
                  1,101,646
                  
                  
                  –
                  
                  
                  1,064,806Diluted
                  
                  
                  14,179,348
                  
                  
                  14,452,714
                  
                  
                  13,468,942
                  
                  
                  14,424,068Class
                      A and Class B earnings (loss) per share:Basic
                  
                  $
                  0.22
                  
                  $
                  0.28
                  
                  $
                  (0.13
                  )
                  $
                  0.41Effect
                      of dilutive securities – stock options
                  
                  $
                  –
                  
                  $
                  0.02
                  
                  $
                  –
                  
                  $
                  0.03Diluted
                  
                  $
                  0.22
                  
                  $
                  0.26
                  
                  $
                  (0.13
                  )
                  $
                  0.38


_________________


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 selling, general and administrative expenses of
      $8.7
      million, primarily related to stock compensation, and a reduction to net income
      of $7.8 million for the nine month period ended December 31, 2005. 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 21,000 and 1,665,168 options for the three and nine months ended
      December 31, 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 ended
                December
                  31,
              
              Nine
                  months ended
                December
                  31,2005
              
              2004
              
              2005
              
              2004Net
                  income (loss) as reported
              
              $
              3,049,031
              
              $
              3,718,660
              
              $
              (1,725,030
              )
              $
              5,449,331Add:Stock-based
                  compensation expense included in reported net income, net of related
                  tax
                  effects
              
              
              –
              
              
              –
              
              
              7,541,662
              
              
              –Cancellation
                  of Sport Chalet Option, LLC
              
              
              –
              
              
              –
              
              
              747,351
              
              
              –Deduct:Sport
                  Chalet Option, LLC
              
              
              –
              
              
              87,164
              
              
              –
              
              
              261,495Stock-based
                  compensation expense from recapitalization
              
              
              –
              
              
              –
              
              
              (7,541,662
              )
              
              –Total
                  stock-based employee compensation expense determined under fair
                  market
                  value based method for all awards, net of related tax effects
              
              
              128,497
              
              
              60,130
              
              
              251,185
              
              
              147,542Pro
                  forma net income (loss)
              
              $
              2,920,534
              
              $
              3,571,366
              
              $
              (1,228,864
              )
              $
              5,040,294Class
                  A and Class B earnings (loss) per shareAs
                  reported – basic
              
              $
              0.22
              
              $
              0.28
              
              $
              (0.13
              )
              $
              0.41As
                  reported – diluted
              
              $
              0.22
              
              $
              0.26
              
              $
              (0.13
              )
              $
              0.38Pro
                  forma – basic
              
              $
              0.22
              
              $
              0.27
              
              $
              (0.09
              )
              $
              0.38Pro
                  forma – diluted
              
              $
              0.21
              
              $
              0.25
              
              $
              (0.09
              )
              $
              0.36


_________________


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 $8.7 million, primarily related to stock compensation, and a reduction to
      net
      income of $7.8 million for the nine month period. 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 Sport Chalet Option, LLC, 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 was 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


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





The
      parties reached a settlement which has been preliminarily approved by the
      Court.   Without admitting any liability, the Company has agreed to
      pay money to a class of hourly employees who allegedly were denied their
      proper break periods or who were required to comply with the store dress
      code.  The Company has also agreed to spend money to upgrade its labor
      software system, to provide shirts to its employees, and to improve its
      lunch/break rooms.   The maximum amount of the settlement is
      $2,250,000, of which $1,000,000 has been fully reserved as of June 30, 2005.
      Over the next six years, the remaining $1,250,000 is designated for the software
      system, shirts, and lunch/break rooms and will be expensed or capitalized as
      incurred following the Company’s normal accounting policies. See “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 was purportedly
      brought individually, derivatively and as a class action on behalf of the public
      stockholders of the Company, challenged the recapitalization and the associated
      transactions described below in “Item 5 - Other Information.” The complaint
      alleged 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 were entirely fair to the Company and its public
      stockholders and (iv) attempting to entrench themselves in office. The complaint
      sought, among other things, (i) a preliminary and permanent injunction against
      the recapitalization; (ii) a declaration that the defendants breached their
      fiduciary duties; (iii) damages and (iv) an award of attorneys' fees and
      expenses.


10





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 was subject to various conditions, including Court
      approval.





On
      November 29, 2005, the Court approved the Settlement at a hearing, and dismissed
      the action with prejudice. In addition, the Court awarded plaintiff's counsel
      attorneys' fees and expenses in an aggregate amount of $480,000. See “Item 1 -
      Legal Proceedings.”


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 39 full-service specialty sporting goods
      stores in California, Nevada and Arizona. 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
      eleven new stores, three of which were the Company’s initial expansion into
      Arizona. 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.




In
      the
      second quarter of fiscal 2006, 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 and 2006, as adjusted to reflect the
      recapitalization plan discussed above for the Class A and Class B Common Stock,
      were as follows:








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








Three
                months ended,Class
                A and Class B
            June
                30, 2005
            September
                30, 2005
            December
                31, 2005Earnings
                (loss) per share:Basic
            $0.03
            $(0.38)
            $0.22Diluted
            $0.03
            $(0.38)
            $0.22


13


**Results
      of Operations**





***Three
      Months Ended December 31, 2005 Compared to Three Months Ended December 31,
      2004.***





The
      following tables set forth statements of income data and relative percentages
      of
      net sales for the three months ended December 31, 2005 and 2004 (dollar amounts
      in thousands, except per share amounts).


**Three
                  months ended December 31,**2005
              
              2004
              
              Dollar
                Increase
              
              Percentage
                IncreaseAmount
              
              Percent
              
              Amount
              
              PercentNet
                  sales
              
              $
              99,664
              
              
              100.0%
              
              $
              96,124
              
              
              100.0%
              
              $
              3,540
              
              
              3.7%Gross
                  profit
              
              
              31,743
              
              
              31.9%
              
              
              31,246
              
              
              32.5%
              
              
              497
              
              
              1.6%Selling,
                  general and administrative expenses
              
              
              26,435
              
              
              26.5%
              
              
              24,906
              
              
              25.9%
              
              
              1,529
              
              
              6.1%Income
                  from operations
              
              
              5,308
              
              
              5.3%
              
              
              6,340
              
              
              6.6%
              
              
              (1,032
              )
              
              (16.3%
              )Interest
                  expense
              
              
              (174
              )
              
              (0.2%
              )
              
              (146
              )
              
              (0.2%
              )
              
              (28
              )
              
              19.2%Income
                  before taxes
              
              
              5,133
              
              
              5.2%
              
              
              6,194
              
              
              6.4%
              
              
              (1,061
              )
              
              (17.1%
              )Income
                  tax provision
              
              
              2,084
              
              
              2.1%
              
              
              2,476
              
              
              2.6%
              
              
              (392
              )
              
              (15.8%
              )Net
                  income
              
              
              3,049
              
              
              3.1%
              
              
              3,718
              
              
              3.9%
              
              
              (669
              )
              
              (18.0%
              )Class
                  A and Class B earnings per share:Basic
              
              $
              0.22
              
              
              
              
              $
              0.28
              
              
              
              
              $
              (0.06
              )
              
              (21.4%
              )Diluted
              
              $
              0.22
              
              
              
              
              $
              0.26
              
              
              
              
              $
              (0.04
              )
              
              (13.7%
              )


Sales
      increased $3.5 million, or 3.7%, from $96.1 million for the three months ended
      December 31, 2004 to $99.7 million for the same period this year. The sales
      growth is due to six new stores which resulted in a $5.4 million increase in
      sales, or 5.5%, partially offset by a same store sales decrease of 1.8%. Three
      new stores were opened in the third quarter of fiscal 2005 and three new stores
      were opened in the third quarter of fiscal 2006. The same store sales decrease
      is due to colder weather early in the quarter last year that helped stimulate
      demand for winter apparel and equipment. Excluding sales of winter related
      merchandise, same store sales increased 3.0% for the three months ended December
      31, 2005 compared to the same period last year. Same store sales are based
      upon
      stores opened throughout both periods presented and exclude team sales.





Gross
      profit increased $497,000, or 1.6%, primarily from increased sales. As a percent
      of sales, gross profit decreased from 32.5% for the three months ended December
      31, 2004 to 31.9% for the same period this year. The decrease in gross profit
      as
      a percent of sales is primarily due to higher rent expense for the new stores.





Selling,
      general and administrative expenses increased $1.5 million, or 6.1%, primarily
      from expenses related to additional stores, such as labor and advertising.
      As a
      percent of sales, these expenses increased from 25.9% for the three months
      ended
      December 31, 2004 to 26.5% for the same period this year. The increase is
      primarily from $866,000 of increased advertising, partially for the holiday
      season and also to promote stores in the new Arizona market. Improvements
      obtained from mature stores are partially offset by new stores which take time
      to reach operating efficiency.





The
      effective income tax rate was 40.0% for the three months ended December 31,
      2004
      compared to 40.6% 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 $669,000, or 18.0%, from $3.7 million, or $0.26 per diluted
      share, for the three months ended December 31, 2004 to $3.0 million, or $0.22
      per diluted share, for the same period this year.


14


***Nine
      Months Ended December 31, 2005 Compared to Nine Months Ended December 31,
      2004.***





The
      following tables set forth statements of income data and relative percentages
      of
      net sales for the nine months ended December 31, 2005 and 2004 (dollar amounts
      in thousands, except per share amounts).


**Nine
                  months ended December 31,**GAAP
              
              2005
              
              2004
              
              Dollar
                Increase
              
              Percentage
                IncreaseAmount
              
              Percent
              
              Amount
              
              PercentNet
                  sales
              
              $
              253,541
              
              
              100.0%
              
              $
              230,270
              
              
              100.0%
              
              $
              23,271
              
              
              10.1%Gross
                  profit
              
              
              79,005
              
              
              31.2%
              
              
              71,312
              
              
              31.0%
              
              
              7,693
              
              
              10.8%Selling,
                  general and administrative expenses
              
              
              77,283
              
              
              30.5%
              
              
              61,983
              
              
              26.9%
              
              
              15,300
              
              
              24.7%Income
                  from operations
              
              
              1,722
              
              
              0.7%
              
              
              9,329
              
              
              4.1%
              
              
              (7,607
              )
              
              (81.5%
              )Interest
                  expense
              
              
              (189
              )
              
              (0.1%
              )
              
              (237
              )
              
              (0.1%
              )
              
              48
              
              
              (20.3%
              )Income
                  before taxes
              
              
              1,533
              
              
              0.6%
              
              
              9,092
              
              
              3.9%
              
              
              (7,559
              )
              
              (83.1%
              )Income
                  tax provision
              
              
              3,258
              
              
              1.3%
              
              
              3,643
              
              
              1.6%
              
              
              (385
              )
              
              (10.6%
              )Net
                  income (loss)
              
              
              (1,725
              )
              
              (0.7%
              )
              
              5,449
              
              
              2.4%
              
              
              (7,174
              )
              
              (131.7%
              )Class
                  A and Class B earnings (loss) per share:Basic
              
              $
              (0.13
              )
              
              
              
              $
              0.41
              
              
              
              
              $
              (0.54
              )
              
              (131.7%
              )Diluted
              
              $
              (0.13
              )
              
              
              
              $
              0.38
              
              
              
              
              $
              (0.51
              )
              
              (134.2%
              )




**Nine
                  months ended December 31,**Non-GAAP
              
              2005
              
              2004
              
              Dollar
                Increase
              
              Percentage
                IncreaseAmount
              
              Percent
              
              Amount
              
              PercentNet
                  sales
              
              $
              253,541
              
              
              100.0%
              
              $
              230,270
              
              
              100.0%
              
              $
              23,271
              
              
              10.1%Gross
                  profit
              
              
              79,005
              
              
              31.2%
              
              
              71,312
              
              
              31.0%
              
              
              7,693
              
              
              10.8%Selling,
                  general and administrative expenses
              
              
              68,589
              
              
              27.1%
              
              
              61,983
              
              
              26.9%
              
              
              6,606
              
              
              10.7%Income
                  from operations
              
              
              10,415
              
              
              4.1%
              
              
              9,329
              
              
              4.1%
              
              
              1,086
              
              
              11.6%Interest
                  expense
              
              
              (189
              )
              
              (0.1%
              )
              
              (237
              )
              
              (0.1%
              )
              
              48
              
              
              (20.3%
              )Income
                  before taxes
              
              
              10,225
              
              
              4.0%
              
              
              9,092
              
              
              3.9%
              
              
              1,133
              
              
              12.5%Income
                  tax provision
              
              
              4,111
              
              
              1.6%
              
              
              3,643
              
              
              1.6%
              
              
              468
              
              
              12.8%Net
                  income
              
              
              6,114
              
              
              2.4%
              
              
              5,449
              
              
              2.4%
              
              
              665
              
              
              12.2%Class
                  A and Class B earnings per share:Basic
              
              $
              0.45
              
              
              
              
              $
              0.41
              
              
              
              
              $
              0.04
              
              
              9.8%Diluted
              
              $
              0.44
              
              
              
              
              $
              0.38
              
              
              
              
              $
              0.06
              
              
              15.8%




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:


Nine
                  months ended December 31, 2005GAAP
              
              Adjustments
              
              Non-GAAPSelling,
                  general and administrative expenses
              
              $
              77,283
              
              $
              (8,693
              )
              $
              68,589Income
                  from operations
              
              
              1,722
              
              
              8,693
              
              
              10,415Income
                  before taxes
              
              
              1,533
              
              
              8,693
              
              
              10,225Income
                  tax provision
              
              
              3,258
              
              
              (854
              )
              
              4,111Net
                  income (loss)
              
              $
              (1,725
              )
              $
              7,839
              
              $
              6,114Class
                  A and Class B earning (loss) per share:Basic
              
              $
              (0.13
              )
              $
              0.58
              
              $
              0.45Diluted
              
              $
              (0.13
              )
              $
              0.56
              
              $
              0.44




15


Sales
      increased $23.3 million, or 10.1%, from $230.3 million for the nine months
      ended
      December 31, 2004 to $253.5 million for the same period this year. The sales
      growth is due to eight new stores which resulted in a $20.1 million increase
      in
      sales, or 8.1%, as well as a same store sales increase of 1.3%. Two new stores
      were opened in the second quarter of fiscal 2005, three new stores were opened
      in the third quarter of fiscal 2005 and three new stores were opened in the
      third quarter of fiscal 2006. Excluding sales of winter related merchandise,
      same store sales increased 3.5% for the nine months ended December 31, 2005
      compared to the same period last year. Same store sales are based upon stores
      opened throughout both periods presented and exclude team sales.





Gross
      profit increased $7.7 million, or 10.8%, primarily from increased sales. As
      a
      percent of sales, gross profit increased from 31.0% for the nine months ended
      December 31, 2004 to 31.2% 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, partially offset by higher rent
      expense for the new stores.





Selling,
      general and administrative expenses increased $15.3 million, or 24.7%, 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 26.9% for the nine months ended December 31, 2004 to 30.5% for
      the same period this year.





Excluding
      the effect of the recapitalization plan, selling, general and administrative
      expenses increased $6.6 million, or 10.7%, primarily from expenses related
      to
      additional stores, such as labor and advertising. As a percent of sales, these
      expenses increased from 26.9% for the nine months ended December 31, 2004 to
      27.1% for the same period this year. Improvements obtained from mature stores
      are partially offset by new stores which take time to reach operating
      efficiency.





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 40.1%
      for
      the nine months ended December 31, 2004 compared to 40.2% 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 $7.2 million, or 131.7%, from $5.4 million, or $0.38 per
      diluted share, for the nine months ended December 31, 2004 to a loss of $1.7
      million, or a loss of $0.13 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 $665,000, or
      12.2%, from $5.4 million, or $0.38 per diluted share, for the nine months ended
      December 31, 2004 to $6.1 million, or $0.44 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 nine months ended December 31, 2005,
      $10.8 million was provided by operating activities compared to $17.9 million
      for
      the same period last year.


16




Inventories
      increased by $23.5 million and $21.2 million for the nine months ended December
      31, 2005 and 2004, respectively, compared to the respective year-end balances
      primarily due to the build-up of seasonal inventory. The Company began the
      current fiscal year with relatively more inventory than the prior fiscal year
      as
      average inventory per store increased 3.4% at March 31, 2005 compared to March
      31, 2004, which was due to the planned early arrival of spring merchandise.
      Average inventory per store increased 8.4% at December 31, 2005 compared to
      December 31, 2004, primarily due to the investment in merchandise that exhibited
      exceptional sales growth combined with other areas where sales did not meet
      expectations. The merchandise related to the areas that did not meet sales
      expectations is generally not seasonal or fashion oriented and the Company
      expects to sell these products down to historical levels over the next two
      quarters.





Historically,
      accounts payable has increased as inventory increases. In the nine months ended
      December 31, 2005, accounts payable increased by $14.2 million as compared
      to an
      increase of $20.5 million for the nine months ended December 31, 2004. The
      relative change as compared to inventory levels is the result of the payment
      of
      additional merchandise received in October as compared to the same period last
      year.





Net
      cash
      used in investing activities for the nine months ended December 31, 2005 was
      $14.7 million compared to $14.1 million for the same period ended December
      31,
      2004. For the nine months ended December 31, 2005, the Company completed four
      store remodels, opened three new stores, incurred expenditures for a new store
      opening in the fourth quarter of fiscal 2006 and commenced implementation of
      the
      Marketmax merchandise planning software project. For the nine months ended
      December 31, 2004 the Company completed two store remodels and opened five
      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 (7.0% at December 31, 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 December 31,
      2005 are its store leases with initial terms expiring from 2006 through 2020,
      which typically provide for multiple five-year renewal options, and employment
      contracts:


17




**Payments
                due by period:**
            
            **Operating**
              **Leases**
            
            **Employment**
              **Contracts**Within
                1 year
            
            $
            25,064,659
            
            $
            169,5002
                -
                3 years
            
            
            48,874,982
            
            
            339,0004
                -
                5 years
            
            
            44,505,010
            
            
            339,000After
                5 years
            
            
            80,660,134
            
            
            678,000Total
            
            $
            199,104,785
            
            $
            1,525,500




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 December 31,
      2005 and expire within one year.





No
      cash
      dividends were declared on the capital stock in the first three quarters of
      fiscal 2006. The Company intends to retain earnings for use in the operation
      and
      expansion of its business and, therefore, does not anticipate paying any cash
      dividends in the foreseeable future.





**Critical
      Accounting Policies and Use of Estimates**





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





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





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


18





**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 $120,000 and $210,000 for the three months ended December 31,
      2005
      and 2004, respectively, and approximately $249,000 and $353,000 for the nine
      months ended December 31, 2005 and 2004, respectively.





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





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





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


19





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 December 31, 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.





**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, Nevada and Arizona may
      make the Company more vulnerable to such uncertainties than other comparable
      retailers who may not have similar geographical concentration.


20





**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 (28) and the
      balance is located in Northern California (5), Central California (1), the
      Las
      Vegas area of Nevada (2) and the Phoenix area of Arizona (3). 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.





**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.


21





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





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





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


22


**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
      February 7, 2006, Norbert Olberz, the Company's Chairman Emeritus, director
      and
      founder, Craig Levra, the Company’s Chairman and Chief Executive Officer, and
      Howard Kaminsky, the Company’s Chief Financial Officer, collectively owned
      approximately 66% of the Company’s outstanding Class A and Class B Common Stock.
      Messrs. Olberz, Levra and Kaminsky effectively have the ability to control
      the
      outcome on all matters requiring stockholder approval, including, but not
      limited to, the election and removal of directors, and any merger, consolidation
      or sale of all or substantially all of the Company’s assets, and to control the
      Company’s management and affairs. Transactions may be pursued that could enhance
      Messrs. Olberz, Levra and Kaminsky’s interests in the Company while involving
      risks to the interests of the Company’s other stockholders, and there is no
      assurance that their interests will not conflict with the interests of the
      Company’s other stockholders.





**Problems
      with 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.


23





**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
      February 7, 2006, Norbert Olberz, the Company's Chairman Emeritus, director
      and
      founder, Craig Levra, the Company's Chairman and Chief Executive Officer, and
      Howard Kaminsky, the Company's Chief Financial Officer, collectively owned
      approximately 66% 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 acquirer, thereby diluting the voting
      power of that potential acquirer. The Class A protection provisions in the
      Company's Certificate of Incorporation could also make acquisition of voting
      control more expensive by requiring an acquirer of 10% or more of the
      outstanding shares of Class B Common Stock to purchase a corresponding
      proportion of Class A Common Stock.





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 could 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.


24




**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.


25


**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.







26


**Part
      II - OTHER INFORMATION**





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





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





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





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





We
      answered the complaint, denying the material allegations and asserting numerous
      affirmative defenses. The parties then engaged in significant discovery and
      Plaintiffs filed a Motion for Class Certification. We opposed the Motion for
      Class Certification. The parties then reached a settlement which has been
      preliminarily approved by the Court.  In mid-2006, the parties will
      seek final approval of the settlement. Without admitting any liability, we
      have
      agreed to pay money to a class of hourly employees who allegedly were
      denied their proper break periods or who were required to comply with the store
      dress code.  We have also agreed to spend money to upgrade our labor
      software system, to provide shirts to our employees, and to improve our
      lunch/break rooms.   The maximum amount of the settlement is
      $2,250,000, of which $1,000,000 has been fully reserved as of June 30, 2005.
      Over the next six years, the remaining $1,250,000 is designated for the software
      system, shirts, and lunch/break rooms and will be expensed or capitalized as
      incurred following the Company’s normal accounting policies.





On
      July
      22, 2005, a purported stockholder of the Company brought an action captioned *Miriam
      Gruber v. Sport Chalet, Inc., Norbert Olberz, Irene Olberz, Craig L. Levra,
      Howard K. Kaminsky, Al D. McCready, Eric S. Olberz, Frederick H. Schneider,
      John
      R. Attwood, Donald J. Howard and Kenneth Olson,* in the
      Court of Chancery of the State of Delaware. The action, which was purportedly
      brought individually, derivatively and as a class action on behalf of the public
      stockholders of the Company, challenged the recapitalization and the associated
      transactions described above in “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations - Overview.” The complaint alleged
      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 were not entirely fair to
      the
      Company and its public stockholders and (iv) attempting to entrench themselves
      in office. The complaint sought, among other things, (i) a preliminary and
      permanent injunction against the recapitalization; (ii) a declaration that
      the
      defendants 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.


27




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 was subject to various conditions, including Court
      approval.




On
      November 29, 2005, the Court approved the Settlement at a hearing, and dismissed
      the action with prejudice. In addition, the Court awarded plaintiff's counsel
      attorneys' fees and expenses in an aggregate amount of $480,000.




We
      are
      involved in various routine legal proceedings incidental to the conduct of
      our
      business. Management does not believe that any of these legal proceedings will
      have a material adverse impact on the business, financial condition or results
      of operations, either due to the nature of the claims, or because management
      believes that such claims should not exceed the limits of our insurance
      coverage.




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





Not
      Applicable.





**Item
      3.**  **** **Defaults
      Upon Senior Securities.**





Not
      Applicable.





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





Not
      Applicable.





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





**Stockholder
      Proposals**





The
      proxy
      materials for the 2005 annual meeting of the stockholders 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. The date of the Company’s proxy statement for the 2005 annual
      meeting was September 6, 2005. 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.


28





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 15, 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.




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.


29




(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.




(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**





In
      the
      second quarter of fiscal 2006, 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.


30





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 then owned. 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.”





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)




31




3.3
            Certificate
                of Amendment to the Amended and Restated Certificate of Incorporation
                of
                Sport Chalet, Inc. (incorporated by reference to Exhibit 3.1 of the
                Company’s Form 8-K filed on September 22, 2005)4.1
            Form
                of Certificate for Class A Common Stock, par value $0.01 per share
                (incorporated by reference to Exhibit 4.1 to the Company's Form 8-A
                filed
                on September 29, 2005)4.2
            Form
                of Certificate for Class B Common Stock, par value $0.01 per share
                (incorporated by reference to Exhibit 4.2 to the Company's Form 8-A
                filed
                on September 29, 2005)31.1
            Certification
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                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




















32


**SIGNATURE**








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




SPORT
                CHALET,
                INC.Date: February
                8, 2006
              By:
              /s/ Howard
                K.
                KaminskyHoward
                K. KaminskyExecutive
                  Vice President-Finance,Chief
                  Financial Officer and Secretary(On
                  behalf of the Registrant and asPrincipal
                  Financial and Accounting
                  Officer)


















33