**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 (Mark
        One)
 
 x QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934
 
 For
        the
        quarterly period ended June 29, 2008
 
 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 a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        the definitions of “large accelerated filer,” “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act.:
 Large
                  accelerated filer   o
              
              Accelerated filer     oNon-accelerated
                  filer    o
              
              Smaller
                  reporting company   x
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of Exchange Act). Yes
oNo
x
 
 At
        August
        12, 2008, there were 12,359,990 shares of Class A Common Stock outstanding
        and
        1,763,321 shares of Class B Common Stock outstanding.
  
 
 **SPORT
        CHALET, INC.**
 
 Table
        of
        Contents to Form 10-Q
 
 PART
        I – FINANCIAL INFORMATION
 
 PageItem
                  1.
              Financial
                  Statements
              3Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              11Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              19Item
                  4T.
              Controls
                  and Procedures
              19PART
                  II – OTHER INFORMATIONItem
                  1.
              Legal
                  Proceedings
              21Item
                  1A.
              Risk
                  Factors
              21Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              21Item
                  3.
              Defaults
                  Upon Senior Securities
              22Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              22Item
                  5.
              Other
                  Information
              22Item
                  6.
              Exhibits
              23
  2
  
 **PART
        I – FINANCIAL INFORMATION**
 
 **Item
        1.** **Financial
        Statements.**
 
 **SPORT
        CHALET, INC.**
 
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**
 
 First
                  fiscal quarter2009
              
              2008(in thousands, except per share amounts)Net
                  sales
              
              $
              87,120
              
              $
              91,554Cost
                  of goods sold, buying and occupancy costs
              
              
              64,412
              
              
              65,401Gross
                  profit
              
              
              22,708
              
              
              26,153Selling,
                  general and administrative expenses
              
              
              25,969
              
              
              23,746Depreciation
                  and amortization
              
              
              3,611
              
              
              3,163Loss
                  from operations
              
              
              (6,872
              )
              
              (756
              )Interest
                  expense
              
              
              657
              
              
              359Loss
                  before taxes
              
              
              (7,529
              )
              
              (1,115
              )Income
                  tax benefit
              
              
              (3,003
              )
              
              (451
              )Net
                  loss
              
              $
              (4,526
              )
              $
              (664
              )Loss
                  per share:Basic
              
              $
              (0.32
              )
              $
              (0.05
              )Diluted
              
              $
              (0.32
              )
              $
              (0.05
              )Weighted
                  average number ofcommon
                  shares outstanding:Basic
              
              
              14,123
              
              
              14,016Diluted
              
              
              14,123
              
              
              14,016
 
 **See
        accompanying notes.**
  3
  **SPORT
        CHALET, INC.**
 
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 
 June
                  29,
              
              March
                  30,2008
              
              2008(Unaudited)(in thousands, except share amounts)**Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              3,442
              
              $
              3,894Accounts
                  receivable, net
              
              
              2,508
              
              
              1,359Merchandise
                  inventories
              
              
              93,586
              
              
              86,145Prepaid
                  expenses and other current assets
              
              
              5,042
              
              
              6,170Prepaid
                  income taxes
              
              
              -
              
              
              1,405Deferred
                  income taxes
              
              
              7,510
              
              
              3,349Total
                  current assets
              
              
              112,088
              
              
              102,322Fixed
                  assets, net
              
              
              68,756
              
              
              66,619Deferred
                  income taxes
              
              
              2,631
              
              
              2,374Total
                  assets
              
              $
              183,475
              
              $
              171,315**Liabilities
                  and stockholders' equity**Current
                  liabilities:Accounts
                  payable
              
              $
              37,098
              
              $
              28,035Loan
                  payable to bank
              
              
              21,865
              
              
              17,216Salaries
                  and wages payable
              
              
              3,190
              
              
              4,620Other
                  accrued expenses
              
              
              17,764
              
              
              13,254Total
                  current liabilities
              
              
              79,917
              
              
              63,125Deferred
                  rent
              
              
              24,033
              
              
              24,221Commitments
                  and contingenciesStockholders’
                  equity:Preferred
                  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 – 12,359,990 atJune
                  29, 2008 and March 30, 2008
              
              
              124
              
              
              124Class
                  B Common Stock, $.01 par value:Authorized
                  shares - 2,000,000Issued
                  and outstanding shares – 1,763,321 atJune
                  29, 2008 and March 30, 2008
              
              
              18
              
              
              18Additional
                  paid-in capital
              
              
              34,176
              
              
              34,094Retained
                  earnings
              
              
              45,207
              
              
              49,733Total
                  stockholders’ equity
              
              
              79,525
              
              
              83,969Total
                  liabilities and stockholders’ equity
              
              $
              183,475
              
              $
              171,315
 
 **See
        accompanying notes.**
  4
  **SPORT
        CHALET, INC.**
 
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
 
 First
                  fiscal quarter2009
              
              2008(in
                  thousands)**Operating
                  activities**Net
                  loss
              
              $
              (4,526
              )
              $
              (664
              )Adjustments
                  to reconcile net loss to net cashprovided
                  by operating activities:Depreciation
                  and amortization
              
              
              3,611
              
              
              3,163Loss
                  on disposal of equipment
              
              
              -
              
              
              6Share-based
                  compensation
              
              
              72
              
              
              44Deferred
                  income taxes
              
              
              (4,418
              )
              
              (220
              )Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (1,149
              )
              
              (208
              )Merchandise
                  inventories
              
              
              (7,441
              )
              
              (3,732
              )Prepaid
                  expenses and other current assets
              
              
              1,128
              
              
              (29
              )Prepaid
                  income taxes
              
              
              1,405
              
              
              (498
              )Accounts
                  payable
              
              
              9,063
              
              
              6,005Salaries
                  and wages payable
              
              
              (1,430
              )
              
              (1,630
              )Other
                  accrued expenses
              
              
              4,510
              
              
              (2,344
              )Deferred
                  rent
              
              
              (188
              )
              
              631Net
                  cash provided by operating activities
              
              
              637
              
              
              524**Investing
                  activities**Purchase
                  of fixed assets
              
              
              (5,748
              )
              
              (5,823
              )Net
                  cash used in investing activities
              
              
              (5,748
              )
              
              (5,823
              )**Financing
                  activities**Proceeds
                  from bank borrowing
              
              
              30,121
              
              
              29,337Repayments
                  of bank borrowing
              
              
              (25,472
              )
              
              (23,454
              )Proceeds
                  from exercise of stock options
              
              
              -
              
              
              192Tax
                  benefit on employee stock options
              
              
              10
              
              
              267Net
                  cash provided by financing activities
              
              
              4,659
              
              
              6,342Increase
                  (decrease) in cash and cash equivalents
              
              
              (452
              )
              
              1,043Cash
                  and cash equivalents at beginning of period
              
              
              3,894
              
              
              3,841Cash
                  and cash equivalents at end of period
              
              $
              3,442
              
              $
              4,884**Supplemental
                  Disclosure of Cash Flow Information**Cash
                  paid during the period for:Income
                  taxes
              
              $
              -
              
              $
              -Interest
              
              
              318
              
              
              318
 
 **See
        accompanying notes** **.**
  5
 
 **SPORT
        CHALET, INC.**
 
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 1.  Basis
        of
        Presentation
 
 The
        accompanying unaudited condensed consolidated financial statements have been
        prepared in accordance with accounting principles generally accepted in the
        United States for interim financial information and with the instructions
        to
        Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
        all
        information and footnotes required by accounting principles generally accepted
        in the United States for complete financial statements. In the opinion of
        management, all adjustments, consisting of normal recurring accruals, considered
        necessary for a fair presentation of the results of operations for the periods
        presented have been included.
 
 The
        accompanying condensed consolidated financial statements should be read in
        conjunction with the audited consolidated financial statements included in
        the
        Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2008.
        Interim results are not necessarily indicative of results for the full
        year.
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make estimates
        and assumptions that affect the amounts reported in the financial statements
        and
        accompanying notes. Actual results could differ from those
        estimates.
 
 Certain
        reclassifications, primarily related to depreciation, were made to the prior
        year financial statements to conform to current year presentation with regard
        to
        the consolidated statement of operations and the consolidated statement of
        cash
        flows.
 
 2.  Change
        in Inventory Valuation Method
 
 In
        connection with the implementation of a new financial and merchandising system,
        effective March 31, 2008, we have changed the inventory valuation method
        from
        the first-in, first-out “FIFO” basis determined by the retail method of
        accounting to a weighted-average cost basis, using the retail method. We
        have
        accounted for the change in accounting principle prospectively, in accordance
        with Statement of Financial Accounting Standards (“SFAS”) No.154, “Accounting
        Changes and Error Corrections.” The cumulative effect of this change is not
        determinable as we do not have the ability to recalculate average cost for
        prior
        periods. We are beginning fiscal 2009 with the FIFO costs as used for the
        ending
        fiscal 2008 inventory valuation; going forward these amounts will be updated
        as
        new purchases are made. We do not anticipate this change will have a material
        effect on our results of operations, and we chose this method based on our
        new
        system capabilities.
  6
  3.  Loss per
        Share
 
 Loss
        per
        share, basic, is computed based on the weighted average number of common
        shares
        outstanding for the period. Loss per share, diluted, is computed based on
        the
        weighted average number of common and potentially dilutive common equivalent
        shares outstanding for the period. A reconciliation of the numerators and
        denominators of the basic and diluted loss per share computations are set
        forth
        below:
 
 First
                  fiscal quarter2009
              
              2008(in thousands, except per share data)Net
                  loss
              
              $
              (4,526
              )
              $
              (664
              )Weighted
                  average number of common shares:Basic
              
              
              14,123
              
              
              14,016Effect
                  of dilutive securities-stock
                  options
              
              
              -
              
              
              -Diluted
              
              $
              14,123
              
              $
              14,016Class
                  A and Class Bloss
                  per share:Basic
              
              $
              (0.32
              )
              $
              (0.05
              )Effect
                  of dilutive securities-stock
                  options
              
              
              -
              
              
              -Diluted
              
              $
              (0.32
              )
              $
              (0.05
              )
  An
        aggregate of 1,669,555
        and 1,424,837
        options for the first quarter of fiscal 2009 and 2008, respectively, are
        excluded from the computation of diluted loss per share as their effect would
        have been anti-dilutive.
 
 4.  Loan
        Payable to Bank
 
 In
        June
        2008, we negotiated a new credit facility with our existing lender, Bank
        of
        America, N.A. (the “Lender”), which provides for advances up to $45.0 million,
        increasing to $70.0 million, for the period September 1, through December
        31,
        each year, up to a $10.0 million maximum in authorized letters of credit.
        The
        amount we may borrow under this credit facility is limited to a percentage
        of
        the value of eligible inventory, minus certain reserves. Interest accrues
        at the
        Lender’s prime rate plus an applicable margin up to 0.50% based on our fixed
        charge coverage ratio (4.75% at June 29, 2008) or at our option we can fix
        the
        rate for a period of time at LIBOR plus an applicable margin (1.50% up to
        2.50%
        based on our fixed charge coverage ratio). In addition, there is an unused
        commitment fee of 0.25% per year, based on a weighted average formula, a
        one-time, non-refundable commitment fee of $350,000 and an early termination
        fee
        of 1.50% in year one, 0.75% in year two and 0.25% in year three which is
        waived
        if the loan is refinanced by the Lender or any of its affiliates. This credit
        facility expires in June 2012, and we expect to renegotiate and extend the
        term
        of this agreement or obtain another form of financing before that date. Our
        obligation to the Lender is presently secured by a first priority lien on
        substantially all of our non-real estate assets, and should availability
        fall
        below certain prescribed limits we would be subject to a potentially restrictive
        covenant. This covenant requires that we maintain certain minimum cash flow
        coverage. The 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.
  7
  The
        amount we can borrow under the credit facility with the Lender is determined
        based on a defined borrowing base formula related to eligible inventory.
        A
        significant decrease in eligible inventory due to the aging of inventory,
        or
        other factors, could have an adverse effect on our borrowing capabilities
        under
        our credit facility, which may adversely affect the adequacy of our working
        capital.
 
 5.  Share-based
        Compensation
 
 Total
        share-based compensation expense and the related income tax benefit recognized
        for the first quarter of fiscal 2009 and 2008 was $72,000 and $44,000,
        respectively, before income taxes. The related tax benefit was $28,000 and
        $18,000 for each of the periods, respectively.
 
 The
        fair
        value of each option granted is estimated on the date of grant using the
        Black-Scholes option-valuation model. The Black-Scholes option valuation
        model
        was developed for use in estimating the fair value of traded options which
        have
        no vesting restrictions and are fully transferable. In addition, option
        valuation models require the input of highly subjective assumptions including
        the expected stock price volatility. There were no options granted during
        the
        quarter ended July 1, 2007.
 
 The
        following weighted average assumptions are used to estimate the fair value
        for
        stock options granted in the period listed below:
 
 First fiscal quarter2009Risk-free
                  interest rate
              
              
              2.5
              %Expected
                  volatility
              
              
              38.9
              %Expected
                  dividend yield
              
              
              0.0
              %Expected
                  life in years
              
              
              7.5
 
 
 The
        following table sets forth information concerning stock option activity for
        the
        first quarter of fiscal 2009:
 
 Options
              
              Weighted
                Average
                Exercise Price
              
              Weighted-
                Average
                Remaining
                Contractual Term
                (Years)
              
              Aggregate
                Intrinsic Value
                (in 000's)Outstanding
                  as of March 30, 2008
              
              
              1,432,055
              
              $
              5.28Granted
              
              
              237,500
              
              
              4.93Exercised
              
              
              -Forfeited
                  or expired
              
              
              -Outstanding
                  as of June 29, 2009
              
              
              1,669,555
              
              $
              5.23
              
              
              5.4
              
              $
              1,277
 
 The
        aggregate intrinsic value in the table above is based on the Company’s closing
        stock price of $4.75 and $4.50 for Class A and Class B, respectively, as
        of the
        last trading day of the period ended June 29, 2008.
  8
  6.  Recently
        Issued Accounting Pronouncements
 
 In
        September 2006, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
        Measurements.” SFAS No. 157 defines fair value, establishes a framework for
        measuring fair value in generally accepted accounting principles and expands
        disclosures about fair value measurements. SFAS No. 157 applies under other
        accounting pronouncements that require or permit fair value measurements,
        the
        FASB having previously concluded in those accounting pronouncements that
        fair
        value is the relevant measurement attribute. Accordingly, SFAS No. 157 does
        not require any new fair value measurements. SFAS No. 157 is effective for
        fiscal years beginning after November 15, 2007. Implementation of
        SFAS No. 157 as it relates to the fair value measurements of nonfinancial
        assets and nonfinancial liabilities, except for items that are recognized
        or
        disclosed at fair value in an entity's financial statements on a recurring
        basis, has been deferred to fiscal years beginning after November 15, 2008.
        The adoption of the applicable provisions of SFAS No. 157 at the beginning
        of fiscal 2009 has not had a material impact on our financial condition.
        We do
        not expect the adoption of the remaining provisions of SFAS No. 157 to have
        a
        material impact on our results of operations, cash flows, or financial
        position.
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
        for Financial Assets and Financial Liabilities.” SFAS No. 159 permits
        companies to choose to measure many financial instruments and certain other
        items at fair value. The objective is to improve financial reporting by
        providing companies with the opportunity to mitigate volatility in reported
        earnings caused by measuring related assets and liabilities differently without
        having to apply complex hedge accounting provisions. SFAS No. 159 is
        effective for fiscal years beginning after November 15, 2007. We have
        adopted SFAS No. 159 at the beginning of fiscal 2009 but elected not to
        apply the Fair Value Option of SFAS No. 159.
 
 In
        December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“FAS
        141(R)”), to replace FAS 141, Business Combinations. FAS 141(R) requires use of
        the acquisition method of accounting, defines the acquirer, establishes the
        acquisition date and broadens the scope to all transactions and other events
        in
        which one entity obtains control over one or more other businesses. This
        statement is effective for financial statements issued for fiscal years
        beginning on or after December 15, 2008 with earlier adoption prohibited.
        While
        the Company does not expect that the adoption of FAS 141(R) to have a material
        impact to its consolidated financial statements for transactions completed
        prior
        to December 31, 2008, the impact of the accounting change could be material
        for
        business combinations which may be consummated subsequent thereto.
 
 In
        December 2007, the FASB issued SFAS No. 160, Non controlling Interests in
        Consolidated Financial Statements — an amendment of ARB No. 51, (“FAS 160”). FAS
        160 establishes accounting and reporting standards for the non controlling
        interest in a subsidiary and for the retained interest and gain or loss when
        a
        subsidiary is deconsolidated. This statement is effective for financial
        statements issued for fiscal years beginning on or after December 15, 2008
        with
        earlier adoption prohibited. The Company currently does not have any
        non-controlling interests or deconsolidated subsidiaries and therefore FAS
        160
        will not have any impact on its consolidated financial statements.
  9
  In
        May
        2008, the FASB issued SFAS No. 162, Hierarchy of Generally Accepted Accounting
        Principles (“SFAS 162”). This statement is intended to improve financial
        reporting by identifying a consistent framework, or hierarchy, for selecting
        accounting principles to be used in preparing financial statements of
        nongovernmental entities that are presented in conformity with GAAP. This
        statement will be effective 60 days following the U.S. Securities and Exchange
        Commission’s approval of the Public Company Accounting Oversight Board amendment
        to AU Section 411, The Meaning of Present Fairly in Conformity with Generally
        Accepted Accounting Principles. We believe that FAS 162 will have no effect
        on
        our financial statements.
  10
 
 **Item
                2.**
              **Management’s
                  Discussion and Analysis of Financial Condition and****Results
                  of Operations.**
 
 *This
        Quarterly Report on Form 10-Q contains statements that constitute
        forward-looking statements within the meaning of Section 27A of the Securities
        Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
        1934,
        as amended. These forward-looking statements are made pursuant to the safe
        harbor provisions of the Private Securities Litigation Reform Act of 1995.
        These
        forward-looking statements include statements relating to trends in, or
        representing management’s beliefs about, our future strategies, operations and
        financial results, as well as other statements including words such as
“believe,” “anticipate,” “expect,” “estimate,” “predict,” “intend,” “plan,”
“project,” “will,” “could,” “may,” “might” or any variations of such words or
        other words with similar meanings. Forward-looking statements are made based
        upon management’s current expectations and beliefs concerning trends and future
        developments and their potential effects on the Company. Prospective investors
        are cautioned that they should not place undue reliance on forward-looking
        statements as predictions of actual results. These statements are not guarantees
        of future performance and involve risks and uncertainties that are difficult
        to
        predict. Further, certain forward-looking statements are based upon assumptions
        as to future events that may not prove to be accurate. Actual results may
        differ
        materially from those suggested by forward-looking statements as a result
        of
        risks and uncertainties which are discussed in further detail under “- Factors
        That May Affect Future Results.” We do not assume, and specifically disclaim,
        any obligation to update any forward-looking statements, which speak only
        as of
        the date made.*
 
 The
        following should be read in conjunction with the Company’s financial statements
        and related notes thereto provided under “Item 1-Financial Statements”
above.
 
 **Overview**
 
 We
        are a
        leading operator of 52 full service specialty sporting goods stores in
        California, Nevada, Arizona and Utah. In 1959, Norbert Olberz, our founder
        (the
“Founder”), purchased a small ski and tennis shop in La Cañada, California. A
        focus on providing quality merchandise with outstanding customer service
        was the
        foundation of Norbert’s vision. We continue this tradition and are focused on
        growth through a number of initiatives, including: continuing new store
        development; remodeling stores to conform to our prototype; and improving
        information systems to increase product flow-through, improve in-stock positions
        and optimize merchandise and specialty services assortment. Our prototype
        store
        is 42,000 square feet in size and showcases every merchandise and service
        category with the feel of a specialty shop all contained under one roof.
 
 Our
        comparative store sales growth has been positive for the four fiscal years
        prior
        to fiscal 2008. Comparative store sales declined 4.5% for fiscal 2008. Same
        store sales were negative in the past three quarters as we continue to confront
        a difficult macro-economic environment, which includes weak housing trends
        and
        rising gas prices in our core markets. As a result of the reduction in same
        store sales for the first fiscal quarter of 2009 and the opening of new stores,
        we incurred a net loss of $4.5 million, or $0.32 per diluted share, compared
        to
        a net loss of $664,000, or $0.05 per diluted share, for first quarter of
        fiscal
        2008. Same store sales for the past five quarters from the first quarter
        of
        fiscal 2008 to the first quarter of fiscal 2009 are +1.3%, +2.2%, -6.9, -8.8%
        and -11.1%, respectively.
  11
 
 Our
        growth strategy had historically focused on Southern California; but, since
        2001
        we have expanded our scope to all of California, Nevada, Arizona and Utah
        as
        suitable locations are found. We opened seven stores fiscal year 2008, seventeen
        stores in the last three years and twenty-five in the last five years. In
        light
        of current macro-economic circumstances we have lease commitments for, and
        currently anticipate opening, four new stores and relocating one store during
        fiscal 2009 and continue to look for additional opportunities in existing
        and
        new markets although we currently have no further new store commitments.
        We
        intend to continue adding new stores as broader economic trends improve.
        Future
        store openings are subject to availability of satisfactory store locations
        based
        on local competitive conditions, site availability and cost and our ability
        to
        provide and maintain high service levels and quality brand merchandise at
        competitive prices. Store openings are expected to have a favorable impact
        on
        sales volume, but will negatively affect profit in the short term. New stores
        tend to have higher costs as a percent of sales in the early years of operation,
        due primarily to pre-opening and promotional costs and lower than average
        sales,
        which reduces the leverage available to offset direct and indirect store
        expenses. As the store matures, sales tend to level off and expenses decline
        as
        a percent of sales. We believe our stores require three to four years to
        attract
        a stable, mature customer base; but, because of our relatively low number
        of
        stores, the impact of competitors’ stores and changing economic conditions,
        reliable statistical trends are not available and there can be no assurance
        that
        our stores will mature at that rate. A slower rate of maturity would cause
        reduced profitability as a percent of sales. In addition, we continue to
        invest
        in infrastructure improvements to more efficiently manage the increasing
        store
        base. These improvements generally increase overhead expenses in the form
        of
        computer hardware and software maintenance and depreciation as well as staff
        to
        operate these systems. At some point, the growth in sales from new and mature
        stores is expected to exceed the growth in infrastructure costs, but there
        can
        be no assurance that this will occur.
 
 We
        estimate the cash required to open an average new store is approximately
        $2.5
        million consisting primarily of the investment in inventory (net of average
        vendor payables), the cost of leasehold improvements (net of landlord
        reimbursement), fixtures and equipment and pre-opening expenses, which are
        primarily the costs associated with training employees and stocking the store.
        Cash requirements for opening costs of each new store varies significantly
        depending on how much the landlord has agreed to contribute to our required
        improvements. For fiscal 2009, we expect the average cash required for each
        new
        store to increase to $3.8 million as two of the four stores to be opened
        are in
        highly desirable locations.
 
 Aside
        from the recent negative macro-economic trends, we believe that the overall
        growth of our business should allow us to increase our operating margins
        over
        time. Our investments in infrastructure such as the distribution center,
        corporate facilities and computer systems, combined with increased merchandise
        volumes, should enable us to improve our purchasing leverage and achieve
        greater
        efficiencies throughout the supply chain. However, improvements in merchandise
        procurement have been offset by increased expenses as a percent of sales
        primarily from new stores and more recently the decrease in same store sales.
 
 The
        terms
        comparable store sales or same store sales are used interchangeably and are
        considered a key performance measurement. The sales of a store are first
        included in the comparable store sales calculation in the quarter following
        its
        twelfth full month of operation.
  12
  **Results
        of Operations**
 
 ***First
        Quarter 2009 Compared to First Quarter 2008***
 
 The
        following table sets forth statements of operations data and relative
        percentages of net sales for the first quarter of fiscal 2009 and 2008 (dollar
        amounts in thousands, except per share amounts).
 **First fiscal quarter**2009
                
                2008
                
                Dollar
                  Change
                
                Percentage
                  ChangeAmount
                
                Percent
                
                Amount
                
                PercentNet
                    sales
                
                $
                87,120
                
                
                100.0
                %
                $
                91,554
                
                
                100.0
                %
                $
                (4,434
                )
                
                (4.8
                )%Gross
                    profit
                
                
                22,708
                
                
                26.1
                %
                
                26,153
                
                
                28.6
                %
                
                (3,445
                )
                
                (13.2
                )%Selling,
                    general and administrative expenses
                
                
                25,969
                
                
                29.8
                %
                
                23,746
                
                
                25.9
                %
                
                2,223
                
                
                9.4
                %Depreciation
                    and amortization
                
                
                3,611
                
                
                4.1
                %
                
                3,163
                
                
                3.5
                %
                
                448
                
                
                14.2
                %Loss
                    from operations
                
                
                (6,872
                )
                
                (7.9
                )%
                
                (756
                )
                
                (0.8
                )%
                
                (6,116
                )
                
                809.0
                %Interest
                    expense
                
                
                657
                
                
                0.8
                %
                
                359
                
                
                0.4
                %
                
                298
                
                
                83.0
                %Loss
                    before taxes
                
                
                (7,529
                )
                
                (8.6
                )%
                
                (1,115
                )
                
                (1.2
                )%
                
                (6,414
                )
                
                575.2
                %Net
                    loss
                
                
                (4,526
                )
                
                (5.2
                )%
                
                (664
                )
                
                (0.7
                )%
                
                (3,862
                )
                
                581.6
                %Class
                    A and Class BNet
                    loss per share:Basic
                
                $
                (0.32
                )
                
                
                
                $
                (0.05
                )
                
                
                
                $
                (0.27
                )
                
                540.0
                %Diluted
                
                $
                (0.32
                )
                
                
                
                $
                (0.05
                )
                
                
                
                $
                (0.27
                )
                
                540.0
                %
 
 Sales
        decreased $4.4 million, or 4.8%, to $87.1 million  for
        the
        first quarter 2009 from $91.5 million for the same period in fiscal 2008.
        Sales
        from eight new stores, not included in the same store sales calculation,
        resulted in an $5.5 million increase in sales, or 6.0%. This increase was
        offset
        by a same store sales decrease of $9.4 million, or 11.1%. Same store sales
        were
        primarily impacted by macro-economic conditions, which include weak housing
        trends and rising gas prices in our core markets. In addition, but to a lesser
        degree, the opening of new stores by the Company and competitors contributed
        to
        the decline in same store sales. We believe the macro-economic trends also
        negatively affected our new stores.
 
 Gross
        profit decreased $3.5 million, or 13.2%, primarily due to a $2.8 million
        reduction related to the sales decrease and a $1.5 million increase in rent
        from
        new stores. As a percent of sales, gross profit decreased 250 basis points
        to
        26.1% from 28.6%. The decrease is primarily the result of increased rent
        as a
        percent of sales in newer stores which take time to reach operating efficiency.
  Selling,
        general and administrative expenses increased $2.2 million, or 9.4%, due
        primarily to $1.5 million from expenses related to additional stores and
        $337,000 for professional fees related to new system implementation support
        and
        training. As a percent of sales, SG&A increased to 29.8% from 25.9% for the
        first quarter of fiscal 2008, primarily from the decrease in comparable store
        sales, the expenses associated with new stores which take time to reach
        operating efficiency and new system implementation support.
 
 Depreciation
        and amortization increased $448,000, or 14.2%, $379,000 from new stores and
        $225,000 primarily from new systems, offset by decreases in existing stores
        as
        some of their assets became fully depreciated.
 
 Interest
        expense increased $298,000 primarily due to a $350,000 closing fee for the
        amended and restated bank credit facility, partially offset by lower interest
        rates on higher average outstanding debt.
  13
  Primarily
        as a result of the reduction in same store sales and the opening of new stores,
        we incurred a net loss of $4.5 million, $0.32 per diluted share, compared
        to a
        net loss of $664,000, $0.05 per diluted share, for the same period last year.
 
 **Liquidity
        and Capital Resources**
 
 Our
        primary capital requirements are for inventory, store expansion, relocation
        and
        remodeling. Historically, cash from operations, credit terms from vendors
        and
        bank borrowing have met our liquidity needs. We believe that these sources
        will
        be sufficient to fund currently anticipated cash requirements for the
        foreseeable future.
 
 Net
        cash
        provided by operating activities has generally been the result of net income
        or
        loss, adjusted for depreciation and amortization, and changes in inventory
        along
        with related accounts payable. The following table shows the more significant
        items from the first quarter of fiscal 2009 and 2008, in thousands:
 
 **First fiscal quarter****2009**
              
              **2008**Net loss
              
              $
              (4,526
              )
              $
              (664
              )Depreciation
                  and amortization
              
              
              3,611
              
              
              3,163Merchandise
                  inventories
              
              
              (7,441
              )
              
              (3,732
              )Accounts
                  payable
              
              
              9,063
              
              
              6,005Deferred
                  income taxes
              
              
              (4,418
              )
              
              (220
              )Other
                  accrued expenses
              
              
              4,510
              
              
              (2,344
              )Other
              
              
              (162
              )
              
              (1,684
              )Net
                  cash provided by operating activities
              
              $
              637
              
              $
              524
 
 Typically,
        inventory levels increase from year to year due to the addition of new stores,
        while improvements in inventory management decrease inventory required for
        each
        store. Average inventory per store decreased 6.8% to $1.8 million from $1.9
        million at the end of the first fiscal quarter of 2009 and 2008, respectively.
        The increase of $7.4 million in the first quarter of fiscal 2009 compared
        to the
        $3.7 increase in the first quarter of fiscal 2008 was primarily due to the
        reduction in average inventory per store at the end of each respective fiscal
        year end which allowed for increased receipts of new products during the
        first
        quarter of 2009 as compared to 2008.
 
 Historically,
        accounts payable increases as inventory increases. However, the timing of
        vendor
        payments or receipt of merchandise near the end of the period does influence
        this relationship.
 
 The
        loss
        for the first fiscal quarter of 2009 is expected to be recovered in future
        years
        and is reflected in deferred income taxes. The loss in fiscal 2008 combined
        with
        a change of asset lives for tax depreciation purposes for fiscal 2007 used
        the
        available carry-back.
  14


Net
      cash
      used in investing activities is primarily for capital expenditures as shown
      below, in thousands:





**First
                fiscal quarter****2009**
            
            **2008**New
                stores
            
            $
            3,180
            
            $
            2,987Remodels/Relocations
            
            
            1,439
            
            
            251Existing
                stores
            
            
            244
            
            
            866Information
                systems
            
            
            708
            
            
            1,697Other
            
            
            177
            
            
            22Total
            
            $
            5,748
            
            $
            5,823





We
      opened
      one store in the first quarter of fiscal 2009 compared to two new stores in
      the
      first quarter of fiscal 2008. The costs to open new stores can vary
      significantly depending on the terms of the lease. The store opened in fiscal
      2009 was significantly more expensive to open than our historical average as
      it
      is in a highly desirable location.





As
      a
      result of our ongoing growth and strategic initiatives, forecasted capital
      expenditures for the remainder of fiscal 2009 are expected to be approximately
      $11.0 million, which will be funded by cash flow from operations and our bank
      credit line, as needed. Approximately $8.0 million of this amount will be used
      to open three additional new stores and relocate one.





These
      planned store openings are dependant on our landlords completing our buildings
      and surrounding retail centers on time. In addition to the normal expenditures
      for existing stores, the remainder is primarily for expenditures on information
      systems.





Net
      cash
      provided by financing activities reflects advances and repayments of borrowings
      under our revolving credit facility. The outstanding balance as of June 29,
      2008
      is $21.9 million compared to $17.2 million at the end of fiscal 2008 and is
      primarily the result of funding new and relocated stores in excess of cash
      generated from operations.





In
      June
      2008, we negotiated a new credit facility with our existing lender, Bank of
      America, N.A. (the “Lender”), which provides for advances up to $45.0 million,
      increasing to $70.0 million, for the period September 1, through December 31,
      each year, up to a $10.0 million maximum in authorized letters of credit. The
      amount we may borrow under this credit facility is limited to a percentage
      of
      the value of eligible inventory, minus certain reserves. Interest accrues at
      the
      Lender’s prime rate plus an applicable margin up to 0.50% based on our fixed
      charge coverage ratio (4.75% at June 29, 2008) or at our option we can fix
      the
      rate for a period of time at LIBOR plus an applicable margin (1.50% up to 2.50%
      based on our fixed charge coverage ratio). In addition, there is an unused
      commitment fee of 0.25% per year, based on a weighted average formula, a
      one-time, non-refundable commitment fee of $350,000 and an early termination
      fee
      of 1.50% in year one, 0.75% in year two and 0.25% in year three which is waived
      if the loan is refinanced by the Lender or any of its affiliates. This credit
      facility expires in June 2012, and we expect to renegotiate and extend the
      term
      of this agreement or obtain another form of financing before that date. Our
      obligation to the Lender is presently secured by a first priority lien on
      substantially all of our non-real estate assets, and should availability fall
      below certain prescribed limits we would be subject to a potentially restrictive
      covenant. This covenant requires that we maintain certain minimum cash flow
      coverage. The Company believes its credit line with the Lender is sufficient
      to
      fund capital expenditures for the foreseeable future and to meet seasonal
      fluctuations in cash flow requirements. However, unexpected conditions could
      require the Company to request additional borrowing capacity from the Lender
      or
      alter its expansion plans or operations.


15


The
      amount we can borrow under the credit facility with the Lender is determined
      based on a defined borrowing base formula related to eligible inventory. A
      significant decrease in eligible inventory due to the aging of inventory, or
      other factors, could have an adverse effect on our borrowing capabilities under
      our credit facility, which may adversely affect the adequacy of our working
      capital.





Our
      off-balance sheet contractual obligations and commitments relate to operating
      lease obligations, employment contracts and letters of credit which are excluded
      from the balance sheet in accordance with generally accepted accounting
      principles.





The
      following table summarizes such obligations as of June 29, 2008:





**Contractual
                Obligations****(in 000s)**
            
            **Payment
                due by period****Total**
            
            **Less
                than 1**
              **year**
            
            **2-3
                years**
            
            **4-5
                      years**
            
            **More
                than 5**
              **years**Operating
                Leases(a)
            
            $
            287,767
            
            $
            36,383
            
            $
            71,073
            
            $
            64,406
            
            $
            115,905Employment
                Contracts
            
            
            975
            
            
            170
            
            
            339
            
            
            339
            
            
            127Total
                Contractual Obligations
            
            $
            288,742
            
            $
            36,553
            
            $
            71,412
            
            $
            64,745
            
            $
            116,032





(a)
      Amounts include the direct lease obligations. Other obligations required by
      the
      lease agreements such as contingent rent based on sales, common area
      maintenance, property taxes and insurance are not fixed amounts and are
      therefore not included. The amount of the excluded expenses are; $9.6 million,
      $8.5 million and $7,2 million for the fiscal years 2008, 2007 and 2006,
      respectively.





We
      lease
      all of our existing store locations. The leases for most of the existing stores
      are for approximately ten-year terms with multiple option periods under
      non-cancelable operating leases with scheduled rent increases. The leases
      provide for contingent rent based upon a percentage of sales in excess of
      specified minimums. If there are any free rent periods, they are accounted
      for
      on a straight line basis over the lease term, beginning on the date of initial
      possession, which is generally when we enter the space and begin the
      construction build-out. The amount of the excess of straight line rent expense
      over scheduled payments is recorded as a deferred rent liability. Construction
      allowances and other such lease incentives are recorded as deferred credits,
      and
      are amortized on a straight line basis as a reduction of rent expense over
      the
      lease term.





Generally,
      our purchase obligations are cancelable 45 days prior to shipment from our
      vendors. Letters of credit amounting to approximately $1.8 million relating
      to
      workers’ compensation insurance were outstanding as of June 29, 2008 and expire
      within one year.





No
      cash
      dividends have been declared on Class A Common Stock and Class B Common Stock
      as
      we intend to retain earnings for use in the operation and expansion of our
      business and, therefore, do not anticipate paying any cash dividends in the
      foreseeable future.





**Critical
      Accounting Policies and Use of Estimates**





In
      preparing our consolidated financial statements we are required to make
      estimates and judgments which affect the results of our operations and the
      reported value of assets and liabilities. Actual results may differ from these
      estimates. As discussed in “Item 7 - Management’s Discussion and Analysis
      of Financial Condition and Results of Operations” section of the Company’s
      Annual Report on Form 10-K for the fiscal year ended March 30, 2008, we consider
      our policies on inventory valuation, revenue recognition, gift card redemption,
      self insurance reserves, impairment of long-lived assets, accounting for income
      taxes and stock-based compensation to be the most critical in understanding
      the
      significant estimates and judgments that are involved in preparing our
      consolidated financial statements.


16


In
      connection with the implementation of a new financial and merchandising system,
      effective March 31, 2008, we have changed the inventory valuation method from
      the first-in, first-out “FIFO” basis determined by the retail method of
      accounting to a weighted-average cost basis, using the retail method. We have
      accounted for the change in accounting principle prospectively, in accordance
      with Statement of Financial Accounting Standards (“SFAS”) No.154, “Accounting
      Changes and Error Corrections.” The cumulative effect of this change is not
      determinable as we do not have the ability to recalculate average cost for
      prior
      periods. We are beginning fiscal 2009 with the FIFO costs as used for the ending
      fiscal 2008 inventory valuation; going forward these amounts will be updated
      as
      new purchases are made. We do not anticipate this change will have a material
      effect on our results of operations, and we chose this method based on our
      new
      system capabilities.





**Factors
      That May Affect Future Results**





Our
      short-term and long-term success is subject to many factors that are beyond
      our
      control. Stockholders and prospective stockholders in the Company should
      consider carefully the following risk factors, in addition to the information
      contained elsewhere in this Report. This Report on Form 10-Q contains
      forward-looking statements, which are subject to a variety of risks and
      uncertainties. Our actual results could differ materially from those anticipated
      in these forward-looking statements as a result of various factors including
      those set forth below.





For
      more
      detailed discussion of these factors, see the “Risk Factors” discussion in Item
      1A of the Company’s most recent Annual Report on Form 10-K. The forward-looking
      statements included in this Quarterly Report on Form 10-Q are made only as
      of
      the date of this report, and the Company undertakes no obligation to update
      the
      forward-looking statements to reflect subsequent events or circumstances.





Risks
      Related To Our Business:





·
            A
                downturn in the economy has affected consumer purchases of discretionary
                items, reducing our net sales.





·
            Intense
                competition in the sporting goods industry could limit our growth
                and
                reduce our profitability.




·
            Our
                future growth will be dependent on the availability of additional
                financing.





·
            Because
                our stores are concentrated in the western portion of the United
                States,
                we are subject to regional risks.





·
            If
                we are unable to predict or react to changes in consumer demand,
                we may
                lose customers and our sales may decline.




17




·
            Implementing
                Section 404 of the Sarbanes-Oxley Act of 2002 will be expensive,
                time-consuming and require significant management attention, and
                may not
                be successful.





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





·
            If
                we are unable to successfully implement our controlled growth strategy
                or
                manage our growing business, our future operating results could suffer.





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





·
            Failure
                to maintain an online presence that mirrors our customers’ in-store
                experience could adversely impact net sales.




·
            If
                  we lose key management or are unable to attract and retain talent,
                  our
                  operating results could suffer.




·
            Seasonal
                fluctuations in the sales of sporting goods could cause our annual
                operating results to suffer.





·
            Our
                quarterly operating results may fluctuate substantially, which may
                adversely affect our business.





·
            Declines
                in the effectiveness of marketing could cause our operating results
                to
                suffer.





·
            Problems
                with our information systems could disrupt our operations and negatively
                impact our financial results.





·
            We
                are controlled by our Founder and management, whose interests may
                differ
                from other stockholders.





·
            The
                price of our Class A Common Stock and Class B Common Stock may be
                volatile.





·
            Provisions
                in the Company's charter documents could discourage a takeover that
                stockholders may consider favorable.





·
            We
                may be subject toperiodic
                litigation that may adversely affect our business and financial
                performance.





·
            Changes
                in accounting standards and subjective assumptions, estimates and
                judgments related to complex accounting matters could significantly
                affect
                our financial results.





·
            Terrorist
                attacks or acts of war may harm our business.




18




·
            We
                rely on one distribution center and any disruption could reduce our
                sales.





·
            We
                may pursue strategic acquisitions, which could have an adverse impact
                on
                our business.





·
            Our
                comparable store sales will fluctuate and may not be a meaningful
                indicator of future performance.





·
            Global
                warming could cause erosion of both our winter and summer seasonal
                businesses over a long-term basis.





**Item
      3.** **Quantitative
      and Qualitative Disclosures About Market Risk.**





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





**Item
      4T.** **Controls
      and Procedures.**





**Disclosure
      Controls and Procedures**




The
      Company's Chief Executive Officer, Craig Levra, and Chief Financial Officer,
      Howard Kaminsky, with the participation of the Company's management, carried
      out
      an evaluation of the effectiveness of the Company's disclosure controls and
      procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation,
      the Chief Executive Officer and the Chief Financial Officer concluded that,
      as a
      result of the material weakness described below, the Company’s disclosure
      controls and procedures are not effective, as of the end of the period covered
      by this report, to provide reasonable assurance that information required to
      be
      disclosed in this report is:




·
            recorded,
                processed, summarized and reported within the time period specified
                in the
                Securities and Exchange Commission’s rules and forms; and




·
            accumulated
                and communicated to our management, including our principal executive
                and
                principal financial officer, to allow timely decisions regarding
                required
                disclosure.




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




In
      October 2006, we selected an enterprise resource management system (the "ERP
      System") from SAP to replace our existing merchandise and financial information
      systems. Over the next eighteen months, we were in the process of implementing
      this system, including testing the system in a controlled environment, training
      our personnel in the use of the system and documenting and testing the control
      environment in preparation for compliance with Section 404 of the Sarbanes-Oxley
      Act of 2002. Our planned “go-live” date for the new system was October 1, 2007.
      However, we encountered delays in, among other things, integrating the ERP
      System with our existing "best of breed" merchandise planning system. As a
      result of such delays we elected to postpone implementation of the ERP System
      until after the end of the fiscal year ended March 30, 2008 as we did not
      believe it would be prudent to implement the new system so close to our fiscal
      year-end. We implemented the ERP System on March 31, 2008.


19




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




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




Notwithstanding
      the foregoing, there can be no assurance that we will be successful in
      documenting, testing or remediating (where applicable) the ERP System before
      the
      end of fiscal 2009 or at all, that we will not discover material weaknesses
      in
      our internal control over financial reporting, or that we will be able to
      remediate any such weakness. Furthermore, if we discover a material weakness,
      corrective action may be time-consuming, costly and further divert the attention
      of management. The disclosure of a material weakness, even if quickly remedied,
      could reduce the market's confidence in the Company’s financial statements, and
      harm its stock price, especially if a restatement of financial statements for
      past periods were to be necessary. See "Item 2. Factors that May Affect Future
      Results - Implementing Section 404 of the Sarbanes-Oxley Act of 2002 will be
      expensive, time-consuming and require significant management attention, and
      may
      not be successful."





**Changes
      in Internal Control Over Financial Reporting**





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


20


**Part
      II - OTHER INFORMATION**





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





On
      April 10, 2008, we were served with a complaint filed in the California
      Superior Court in the County of San Diego, entitled *Cole
      v. Sport Chalet, Inc.* ,
      Case
      No. 37-2008-00081675-CU-BT-CTL, alleging violations of the California Civil
      Code and Business & Professions Code, as well as invasion of
      privacy.   This complaint was brought as a purported class action on
      behalf of persons who made purchases at our stores in California using credit
      cards and were requested to provide their zip codes. The plaintiff alleges,
      among other things, that customers making purchases with credit cards at our
      stores in California were improperly requested to provide their zip code at
      the
      time of such purchases. The plaintiff seeks, on behalf of the class members,
      statutory penalties, actual damages, punitive damages, disgorgement of
      profits, injunctive relief to require us to discontinue the allegedly
      improper conduct, and attorneys’ fees and costs. We intend to defend
      the suit vigorously.  We are not able to evaluate the likelihood of an
      unfavorable outcome or to estimate a range of potential loss in the event of
      an
      unfavorable outcome at the present time. If resolved unfavorably to us, this
      litigation could have a material adverse effect on our financial condition,
      and
      any required change in our business practices, as well as the costs of defending
      this litigation, could have a negative impact on our results of
      operations.





By
      letter
      dated May 14, 2008, an attorney for a former employee has asserted claims
      for sexual harassment by a former supervisor during the former employee’s one
      year of employment. The former employee alleges being subjected to verbal and
      physical harassment. The former employee is seeking compensatory damages and
      punitive damages, attorneys' fees and costs. We have just begun a review of
      the
      allegations, and we are not able to evaluate the likelihood of an unfavorable
      outcome nor can we estimate a range of potential loss in the event of an
      unfavorable outcome at the present time. If resolved unfavorably to us, this
      litigation could have a material adverse effect on our financial
      condition.





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





**Item
      1A.** **Risk
      Factors.**





There
      were no material changes to the risk factors from those disclosed in our Annual
      Report on Form 10-K for the year ended March 30, 2008. Our short- and long-term
      success is subject to many factors that are beyond our control. Stockholders
      and
      prospective stockholders in the Company should consider carefully the risk
      factors set forth in Part I, “Item 2. Management’s Discussion and
      Analysis of Financial Condition and Results of Operations - Factors That May
      Affect Future Results.”




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





Not
      Applicable.


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**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**





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 2009 annual meeting of stockholders must
      be received by the Secretary of the Company at the Company’s office at One Sport
      Chalet Drive, La Canada, California 91011 not less than 120 calendar days before
      the date of the Company’s proxy statement released to stockholders in connection
      with the 2008 annual meeting in a form that complies with applicable
      regulations. The date of the Company’s proxy statement for the 2008 annual
      meeting was July 1, 2008. If the date of the 2009 annual meeting is advanced
      or
      delayed more than 30 days from the date of the 2008 annual meeting, stockholder
      proposals intended to be included in the proxy statement for the 2009 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 2009 annual
      meeting.





SEC
      rules
      also govern a company's ability to use discretionary proxy authority with
      respect to stockholder proposals that were not submitted by the stockholders
      in
      time to be included in the proxy statement. SEC rules provide that if a
      stockholder proposal is not submitted to the Company at least 45 calendar days
      before the date on which the Company first mailed the Company’s proxy statement
      for the 2008 annual meeting, the proxies solicited by the Board for the 2009
      annual meeting of stockholders will confer authority on the proxyholders to
      vote
      the shares in accordance with the recommendations of the Board if the proposal
      is presented at the 2009 annual meeting of stockholders without any discussion
      of the proposal in the proxy statement for such meeting. The Company first
      mailed the proxy statement for the 2008 annual meeting to stockholders on July
      1, 2008. If the date of the 2009 annual meeting is advanced or delayed more
      than
      30 days from the date of the 2008 annual meeting, then the stockholder proposal
      must not have been submitted to the Company within a reasonable time before
      the
      Company mails the proxy statement for the 2009 annual meeting.





The
      2009
      annual meeting of stockholders is presently expected to be held on or about
      August 4, 2009. Upon any determination that the date of the 2009 annual meeting
      will be advanced or delayed from this date, the Company will disclose the change
      in the earliest practical Quarterly Report on Form 10-Q.


22


**Item
      6.**  **** **Exhibits.**





Exhibits:





3.1
            
            Amended
                and Restated Certificate of Incorporation (incorporated by reference
                to
                Exhibit 3.1 of the Company’s Registration Statement on Form S-1, File No.
                33-53120)3.2
            
            Bylaws
                of Sport Chalet, Inc. amended as of November 5, 2007 (incorporated
                by
                reference to Exhibit 3.2 of the Company’s Form 10-Q filed on November 9,
                2007)3.3
            
            Certificate
                of Amendment to the Amended and Restated Certificate of Incorporation
                of
                Sport Chalet, Inc. (incorporated by reference to Exhibit 3.1 of the
                Company’s Form 8-K filed on September 22, 2005)4.1
            
            Form
                of Certificate for Class A Common Stock, par value $0.01 per share
                (incorporated by reference to Exhibit 4.1 to the Company's Form 8-A
                filed
                on September 29, 2005)4.2
            
            Form
                of Certificate for Class B Common Stock, par value $0.01 per share
                (incorporated by reference to Exhibit 4.2 to the Company's Form 8-A
                filed
                on September 29, 2005)18.1
            
            Preferability
                letter dated August 11, 2008, provided by Moss Adams LLC, the Company’s
                independent registered public accounting firm regarding the change
                from
                valuing inventory at the lower of FIFO (first-in, first-out) cost
                or
                market value as determined by the retail inventory method to valuing
                inventory at the lower of weighted average cost or market value as
                determined by the retail inventory method.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


23


**SIGNATURE**





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





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


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