UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





**FORM
      10-K**





ANNUAL
      REPORT


PURSUANT
      TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


(Mark
      One)





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





For
      the
      fiscal year ended **** **April
      1, 2007**





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
                Number)




One
                  Sport Chalet Drive, La Cañada,
                  California
              
              91011(Address
                  of principal executive
                  offices)
              
              (Zip
                  Code)


Registrant’s
      telephone number, including area code: (818) 949-5300


Securities
      registered pursuant to Section 12(b) of the Act:




Title
                of Each Class:
            
            Name
                of Each Exchange on Which
                Registered:**Class A Common Stock, $0.01
              par
              value**
            
            **The
                NASDAQ Stock Market
                LLC****Class B Common Stock, $0.01
              par
              value**
            
            **The
                NASDAQ Stock Market
                LLC**




Securities
      registered pursuant to Section 12(g) of the Act: None





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. o
      Yes   x No





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.  o
      Yes   x No





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.  x
      Yes   o No





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.  o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.:


Large
      accelerated filer  o Accelerated
      filer o Non-accelerated
      filer  x










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





The
      aggregate market value of Class A Common Stock and Class B Common Stock held
      by
      non-affiliates of the registrant as of October 1, 2006, was approximately $41.5
      million based upon the closing sale prices of Class A Common Stock and Class
      B
      Common Stock on that date.





At
      June
      12, 2007, there were 12,332,654 shares of Class A Common Stock outstanding
      and
      1,741,489 shares of Class B Common Stock outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the registrant’s definitive proxy statement to be filed with the Securities
      and Exchange Commission pursuant to Regulation 14A in connection with the 2007
      annual meeting of stockholders are incorporated by reference into Part III
      of
      this Report. The proxy statement will be filed with the Securities and Exchange
      Commission not later than 120 days after the registrant’s fiscal year ended
      April 1, 2007.









**TABLE
      OF CONTENTS**




Item
              
              Page**PART
                  I**1.
              Business
              11A.
              Risk
                  Factors
              71B.
              Unresolved
                  Staff Comments
              122.
              Properties
              133.
              Legal
                  Proceedings
              144.
              Submission
                  of Matters to a Vote of Security Holders
              14**PART
                  II**5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters andIssuer
                  Purchases of Equity Securities
              156.
              Selected
                  Financial Data
              177.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              187A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              308.
              Financial
                  Statements and Supplementary Data
              309.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              309A.
              Controls
                  and Procedures
              319B.
              Other
                  Information
              31**PART
                  III**10.
              Directors,
                  Executive Officers and Corporate Governance
              3211.
              Executive
                  Compensation
              3212.
              Security
                  Ownership of Certain Beneficial Owners and Management andRelated
                  Stockholder Matters
              3213.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              3214.
              Principal
                  Accountant Fees and Services
              32**PART
                  IV**15.
              Exhibits
                  and Financial Statement Schedules
              33









**PART
      I**





*This
      Annual Report on Form 10-K 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. You are cautioned
      not
      to 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 “Item 1A. Risk Factors.” We do not
      assume, and specifically disclaim, any obligation to update any forward-looking
      statements, which speak only as of the date made.*





**ITEM
      1. BUSINESS**





**General**





Sport
      Chalet, Inc. (referred to as the “Company,” “Sport Chalet,” “we,” “us,” and
“our” unless specified otherwise), is a leading operator of 45 full-service,
      specialty sporting goods stores in California, Nevada and Arizona. As of April
      1, 2007, we had 32 locations in Southern California, seven in Northern
      California, one in Central California, two in Nevada and three in Arizona.
      These
      stores average approximately 40,000 square feet in size. In addition, we operate
      a retail e-commerce store through GSI Commerce, Inc. at www.sportchalet.com .
      Originally we were incorporated in California and we reincorporated as a
      Delaware corporation in 1992. Our executive offices are located at One Sport
      Chalet Drive, La Cañada, California 91011, and our telephone number is (818)
      949-5300.





**Operating
      History and Growth Plans**





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. As a true
      pioneer in the industry, Norbert’s mission was three simple things. To “see
      things through the eyes of the customer”; “to do a thousand things a little bit
      better”; and to focus on “not being the biggest, but the best.” Over the last 48
      years, Sport Chalet has grown into a chain of 45 specialty sporting goods stores
      serving California, Nevada and Arizona.





Our
      growth strategy had historically focused on Southern California, but now
      includes opening new stores throughout California, Nevada, Arizona and Utah
      as
      suitable locations are found. We have opened five stores this fiscal year,
      fourteen stores in the last three years and nineteen in the last five years.
      We
      currently anticipate opening six to eight new stores during the upcoming year
      including our first store in Utah. 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 merchandising at competitive prices.
      For
      fiscal 2007, total sales exceeded $388 million with average sales per store
      of
      $9.2 million and corresponding average sales per square foot of
      $235.





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.
      Our stores generally require three to four years to attract a stable, mature
      customer base. 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, such
      as pre-opening rent and the costs associated with training employees and
      stocking the store. Cash requirements for opening costs of each new store can
      vary significantly depending on how much the landlord has agreed to contribute
      to our required improvements.




1




Our
      sales
      partially depend on the economic environment and level of consumer spending
      in
      the geographic regions around our stores. The retail industry historically
      has
      been subject to substantial cyclical variation, and a recession in the general
      economy or uncertainties regarding future economic prospects that affect
      consumer spending habits in our market areas have had, and may in the future
      have, a materially adverse effect on our results of operations.





**Stores
      and Merchandising**





Our
      prototype store is 42,000 square feet in size and showcases 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. Each shop is staffed by trained
      sales associates with expertise in the merchandise they sell, permitting us
      to
      offer our customers a high level of product knowledge and service from the
      beginner to the professional sports enthusiast.





Our
      prototype format boasts a natural and outdoor-feel color scheme, clear-coated
      fixtures, 30-foot clear ceilings, large sport-specific graphics, pool for SCUBA
      and watersports instruction and demonstrations, and a 100 foot shoe wall, among
      other improvements. In coming years we plan to retro-fit certain mature stores
      to conform to the prototype. During fiscal 2008, two stores will be remodeled,
      with expected completion dates in the fall of 2008 . For both
      new stores and remodels, we continually update our prototype format to remain
      competitive. While we have taken advantage of unusual building layouts in the
      past, and when appropriate may do so in the future, we will utilize as many
      standard prototype design elements as possible. We evaluate stores for remodel
      based on each store’s age and competitive situation, as well as how much the
      landlord will contribute to our required improvements. Future store remodeling
      plans will depend upon several factors, including, but not limited to, general
      economic conditions, competitive trends and the availability of capital. With
      the scheduled new store openings and remodels, 71% of our store base will be
      based on our prototype.





Our
      stores feature a number of distinct, specialty sports and lifestyle categories,
      offering a large assortment of quality brand name merchandise at competitive
      prices. The stores include traditional sporting goods merchandise (e.g.,
      footwear, apparel and other general athletic products) and core specialty
      merchandise such as snowboarding, mountaineering and SCUBA. The merchandise
      appeals to both experts and moderate users. In addition, our stores offer over
      50 services for the serious sports enthusiast, including backpacking,
      canyoneering, and kayaking instruction, custom golf club fitting and repair,
      ski
      rental and repair, SCUBA training and certification, SCUBA boat charters, team
      sales, racquet stringing, and bicycle tune-up and repair. Although the revenues
      generated by these support services are not material, these services further
      differentiate us from our competitors. Our stores are open seven days a week,
      typically from 9:30 a.m. to 9:30 p.m. Monday through Friday, 9:00 a.m. to 9:00
      p.m. Saturday, and 10:00 a.m. to 7:00 p.m. on Sunday.





The
      following table illustrates our merchandise assortment of hardlines, which
      are
      durable items, and softlines, which are non-durable items such  as
      apparel and footwear, as a percentage of total net sales for each of the last
      three fiscal years:




**Fiscal
                Year****2007**
            
            
            **2006**
            
            
            **2005**Hardlines
            
            
            53
            %
            
            52
            %
            
            53
            %Apparel
            
            
            27
            %
            
            29
            %
            
            28
            %Footwear
            
            
            20
            %
            
            19
            %
            
            19
            %Total
            
            
            100
            %
            
            100
            %
            
            100
            %





We
      operate our online store through GSI Commerce, Inc. (“GSI”) at www.sportchalet.com .
      GSI
      creates and operates all aspects of the www.sportchalet.com shopping
      experience, including fulfillment and purchasing, while remaining transparent
      to
      the customer. We receive a license fee based on a percentage of sales generated
      by the website. The licensing fee is not material to total
      revenues.




2




**Seasonality**





The
      market for retail sporting goods is seasonal in nature. As with many other
      retailers, our business is heavily affected by sales of merchandise during
      the
      Holiday season. In addition, our product mix has historically emphasized cold
      weather sporting goods merchandise, particularly winter-sports related products.
      In recent years, our third fiscal quarter, which includes the Holiday season,
      represented approximately 30% of our annual net sales. Winter-related products
      represent approximately 17% of our annual net sales and have ranged from 27%
      to
      31% of our fourth fiscal quarter. We anticipate this seasonal trend in sales
      will continue. We respond to changes in mid-season weather by maintaining
      flexibility in product placement at the stores and the marketing of product
      offerings. See “Item 1A. Risk Factors - *Seasonal
      fluctuations in the sales of sporting goods could cause our operating results
      to
      suffer.* ”





**Marketing
      and Advertising**





We
      generate all of our marketing and advertising campaigns in-house, with
      production support from outside vendors as needed. The campaigns are designed
      to
      reflect our strategic direction through our brand and product offerings, as
      well
      as communicate a focused and consistent theme/event calendar through media
      including direct mail, radio, billboards, newspaper, magazines and the
      internet. **** Through
      the Team Sales Division, we reach out to communities in which our stores do
      business, contributing to local teams and leagues. Our advertising leverage
      has
      been boosted by vendor payments under cooperative advertising arrangements
      as
      well as vendor participation in sponsoring events, clinics and athletes’
appearances. We are in the process of rolling out our customer relationship
      program, “Action Pass”, using NSB’s CRM software, the pilot began in spring 2006
      in select markets and is expected to be completely implemented in fall 2007.
      We
      are directly marketing to individual customers based on their personal shopping
      information.





**Purchasing
      and Distribution**





In
      order
      to provide a full line of specialty and sporting goods brands and a wide
      selection, we purchase merchandise from over 1,000 vendors. Vendor payment
      terms
      typically range from 30 to 120 days from our receipt, and there are no long-term
      purchase commitments. Our largest vendor, Nike, Inc., accounted for
      approximately 8% of our total inventory purchases for fiscal 2007 and 2006,
      respectively.





We
      operate one distribution center, a 326,000 square foot facility located in
      Ontario, California. The distribution center serves as the primary receiving,
      distribution and warehousing facility. A minimal amount of merchandise is
      shipped directly by vendors to our stores. Most of the product received at
      the
      distribution center is processed by unpacking and verifying the contents
      received and then sorting the contents by store for delivery. Some of the
      product received at the distribution center is pre-packaged and pre-ticketed
      by
      the vendor so it can be immediately cross-docked to trucks bound for the stores.
      Due to the efficiencies cross-docking creates, we encourage vendors to
      pre-package their merchandise in a floor-ready manner. Some of the merchandise
      is held at the distribution center for future allocation to the stores based
      on
      current sales trends as directed by our computerized replenishment and
      allocation systems to optimize inventory levels. We believe that the advantages
      of a single distribution center include reduced individual store inventory
      levels and better use of store floor space, timely inventory replenishment
      of
      store inventory needs, consolidated vendor returns, and reduced transportation
      costs. Common carriers deliver merchandise to our stores.





We
      use a
      sophisticated computerized replenishment system from JDA Software Group, Inc.
      The JDA E3 system consists of three modules: (i) warehouse replenishment, which
      manages purchases from vendors, (ii) store replenishment, which manages
      shipments from the warehouse to stores, and (iii) network optimization, which
      synchronizes the two systems. In addition, we utilize the JDA Consumer Outlook
      and Pinpoint seasonal profile software to help identify, create and manage
      the
      seasonal trends of our merchandise. Currently, we utilize the E3 system to
      manage approximately 47% of our total inventory. The remaining 53% of the
      inventory purchases historically was managed by traditional methods conducted
      by
      the buying staff.





During
      fiscal 2006, for merchandise planning and allocation we began using the SAS
      Marketmax software solution. The software solution includes merchandise
      planning, open-to-buy management, assortment planning, store clustering, high
      performance forecasting, performance analysis and allocation. We have converted
      our merchandise planning and open-to-buy management from a traditional
      spreadsheet-based, buyer-managed process to the robust functionality of
      Marketmax which is managed by our new merchandise planning department. With
      the
      deployment of the Marketmax allocation solution, we now allocate merchandise
      to
      our stores based on trends and statistical modeling while increasing our
      flow-through at our distribution center. We believe this technology package
      will
      continue to allow us to better plan and forecast our business and leverage
      the
      information to create optimal store assortments and allocate merchandise in
      a
      more precise and proactive manner.




3




During
      fiscal 2008, we are planning on implementing CRS’ EnterpriseSelling software
      which will replace our manual processes of locating and transferring products
      for a customer. This software will allow us to quickly close a sale and ship
      merchandise from our optimal location to the customer’s preferred destination.





**Information
      Systems**





Historically
      we have used a “best of breed” approach to information systems. All systems
      communicate with a legacy system that is the centralized data repository and
      the
      primary financial system.  Our inventory systems track purchasing, sales
      and inventory transfers down to the stock keeping unit or “SKU” level and allow
      us to manage by identifying individual SKU activity by location and projecting
      trends and replenishment needs on a timely basis.  Although we
      believe these systems have historically enabled us to increase margins
      by reducing inventory and markdowns while strengthening our in-stock positions,
      as part of our comprehensive review of internal control over financial reporting
      while also enhancing our ability to grow we feel the legacy system should now
      be
      replaced.





In
      October 2006, we selected mySAP2005
      ERP from SAP as the
      replacement system and the implementation process began. We are planning to
      go
      live with SAP before the fiscal 2008 Holiday season begins. Selecting SAP is
      a
      strategic decision focusing future resources on a single-vendor ERP solution
      in
      lieu of the historical “best of breed” approach. Our analysis has revealed that
      recent improvements in SAP’s solutions provide robust retail functions and we
      anticipate that future releases will provide additional support for improved
      retail business processes. This milestone decision will permit us to enjoy
      the
      efficiencies of a fully integrated solution without the traditional overhead
      generally associated with interfacing systems in a multi-vendor solution.
      BearingPoint, a global management and technology consulting company known for
      their deep industry experience, assisted with the software selection and is
      helping with the implementation.





The
      legacy system currently operates on a Sun computer. Store systems utilize the
      Retail Store 3.0 Suite of applications from CRS Retail Systems that were
      upgraded to the current release in the summer of 2006, including a Returns
      Management application, and new IBM SurePOS hardware. A custom rental
      program has been added to the store system. Merchandise replenishment is
      controlled by E3 software from JDA, running on an IBM iSeries. The processing
      of
      debit/credit card authorization allows on-line debit and signature capture.
      The
      distribution center uses warehouse management software from HighJump Software
      (a
      3M Company).  NSB’s CRM software handles data collection for customer
      purchases via our Action Pass program.




**Recapitalization
      Plan**





In
      September 2005, our stockholders approved a recapitalization plan designed
      to
      facilitate the orderly transition of control from our Founder to certain members
      of management and to increase financial flexibility for the Company and its
      stockholders. The recapitalization plan consisted of (1) the reclassification
      of
      each outstanding share of Common Stock as 0.25 share of Class B Common Stock,
      (2) the issuance of seven shares of Class A Common Stock for each outstanding
      share of Class B Common Stock and (3) the transfer of a portion of the Founder’s
      ownership to Craig Levra, Chairman and Chief Executive Officer, and Howard
      Kaminsky, Executive Vice President - Finance, Chief Financial Officer and
      Secretary. The recapitalization doubled our 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 Messrs. Levra
      and
      Kaminsky were treated as a contribution to the Company’s capital with the
      offsetting charge as compensation expense. The effect on net income is as
      follows:




4




Fiscal
                  year endedMarch
                  31, 2006Compensation
                  expense
              
              $
              8,221,826Professional
                  fees
              
              
              471,3888,693,214Income
                  tax benefit
              
              
              (854,000
              )Effect
                  on net income
              
              $
              7,839,214




**Trademarks
      and Trade Names**





We
      use
      the “Sport Chalet” name as a service mark in connection with our business
      operations. We have registered “Sport Chalet” as a service mark with the State
      of California, and have obtained federal registration for certain purposes,
      which has been successfully defended in the past against attack by third
      parties. We also retain common law rights to the name, which we have used since
      1959. The lack of federal registration for certain purposes might pose a problem
      if we were to expand into a geographic area where the name or any confusingly
      similar name is used by someone with prior rights.





**Industry
      and Competition**





The
      market for retail sporting goods is highly competitive, fragmented and
      segmented. We compete with a variety of other retailers, including the
      following:




·
            specialty
                stores, such as REI, Sportsman’s Warehouse, Finish Line, Chicks and
                Adventure 16;


·
            full-line
                sporting goods chains, such as The Sports Authority and Dick's Sporting
                Goods;


·
            supplier-owned
                stores, such as Nike, The North Face, adidas, New Balance and
                Puma;


·
            mass
                merchandisers, club stores, discount stores and department stores,
                such as
                Wal-Mart, Costco, Target and Kohl’s, Macy's and Nordstroms; and


·
            Internet
                retailers and catalog merchandisers, such as Bass Pro, Cabela’s and
                Sportsman’s Guide.




Many
      of
      these competitors have greater financial resources than we do, or better name
      recognition in regions into which we seek to expand. Our industry is dominated
      by sporting goods superstore retailers, i.e., full-line sporting goods chains
      with stores typically larger than 40,000 square feet. Superstore chains
      generally provide a greater selection of higher quality merchandise than other
      retailers, while remaining price competitive. Specialty retailers often have
      the
      advantage of a lower cost structure and a smaller "footprint" that can be
      located in shopping centers and strip malls, offering more customer convenience.
      Many of these competitors have an online store, offering customers easy access
      to merchandise.





Historically,
      we have distinguished ourselves from our competitors by providing a broader
      selection of higher-end specialty items that require higher levels of customer
      service and sales associate expertise. We believe that our broad selection
      of
      high quality name brands and numerous specialty items at competitive prices,
      showcased by our well-trained sales associates, differentiates us from discount
      and department stores, traditional and specialty sporting goods stores and
      other
      superstore operations.





Our
      format takes advantage of several significant trends and conditions in the
      sporting goods industry. These conditions include the size of the industry,
      fragmented competition, limited assortments offered by many sporting goods
      retailers, consumer preference for one-stop shopping, and the importance of
      delivering value through selection, quality, service and price.




5




**Employees**





As
      of
      April 1, 2007, we had a total of approximately 3,600 full and part-time
      employees, 3,200 of whom were employed in our stores and 400 of whom were
      employed in warehouse and delivery operations or in corporate office positions.
      None of our employees are covered by a collective bargaining agreement. We
      encourage and welcome the communication of our employees’ ideas, suggestions and
      concerns and believe this contributes to our strong employee relations. A
      typical store has approximately 75 employees, of whom 20 to 40 are in the store
      at any given time on a normal operating basis. Generally, each store employs
      a
      general manager, two to three assistant managers, who along with area managers
      and department heads supervise the sales associates in customer service,
      merchandising, and operations. Additional part-time employees are typically
      hired during the Holiday and other peak seasons.





We
      are
      committed to the growth and training of our employees in order to provide “The
      Experts” in product knowledge and service to our customers. Our “Certified Pro”
program encourages employees to attend product-line-specific clinics and receive
      hands-on training to improve technical product and service expertise. Only
      after
      completing all of the clinics and training, in addition to passing specific
      testing, may an associate be considered a Certified Pro. Certified Pro
      certification is offered in 20 different service disciplines and is a
      requirement for new associates in their areas of expertise. Being knowledgeable
      and informed allows our work force to meet the customer's needs and enhance
      their shopping experience.





**Additional
      Information**




The
      Company makes available free of charge through our website, www.sportchalet.com,
      our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current
      Reports on Form 8-K and amendments to those reports filed or furnished pursuant
      to Section 13(a) of the Securities Exchange Act of 1934, as soon as reasonably
      practicable after those reports are filed with or furnished to the Securities
      and Exchange Commission (“SEC”).




The
      public may read any of the items we file with the SEC at the SEC’s Public
      Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
      information about the operation of the Public Reference Room by calling the
      SEC
      at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
      reports, proxy and information statements, and other information regarding
      the
      Company and other issuers that file electronically with the SEC at  www.sec.gov .




6




**ITEM
      1A. RISK FACTORS**





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 following risk factors, in addition to the information
      contained in this report. This Annual Report on Form 10-K 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.





**We
      are replacing our legacy merchandise and financial systems. Changes to our
      systems may disrupt our supply chain operations and have a material adverse
      impact on our business and results of operations.**




Our
      business operations are dependent on our logistical systems, which include
      our
      merchandise and financial systems. These systems affect our ability to manage
      the merchandise supply chain, sell products, accomplish payment functions and
      report financial data. We are in the process of replacing our legacy merchandise
      and financial systems with software from SAP. There are inherent costs and
      risks
      associated with transitioning to new systems, including supply chain and
      merchandising systems disruptions that affect our ability to get the correct
      products into the appropriate stores. We may also encounter application program
      bugs, system conflict crashes, user error, data integrity issues, and
      integration issues with our remaining systems. Implementing new data standards
      and converting existing data to accommodate a new system's requirements will
      also require a significant amount of capital expenditure and effort across
      our
      entire organization, which may divert the attention of management. These system
      disruptions could negatively impact our business and results of
      operations.




In
      addition, we are in the process of implementing Section 404 of the
      Sarbanes-Oxley Act of 2002. Beginning with our 2008 fiscal year, we will be
      required to perform an evaluation of our internal control over financial
      reporting, and beginning with our 2009 fiscal year our independent registered
      public accounting firm will have to test and evaluate the design and operating
      effectiveness of such internal controls and publicly attest to such evaluation.
      The risks associated with transitioning to these new systems may cause
      additional complications which may slow down the review process and delay our
      ability to complete our evaluation, and the auditors' ability to complete their
      attestation on time. See "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."




**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.**





Pursuant
      to Section 404 of the Sarbanes-Oxley Act of 2002, the Company is a
      non-accelerated filer and will be required, beginning in our 2008 fiscal year,
      to perform an evaluation of our internal control over financial reporting,
      and
      beginning in our 2009 fiscal year our independent registered public accounting
      firm will have to 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.





Our
      status as a non-accelerated filer is based on the aggregate market value of
      Class A Common Stock and Class B Common Stock held by our non-affiliates as
      of
      the end of our second fiscal quarter, at October 1, 2006, which was
      approximately $41.5 million. Should the aggregate market value of Class A Common
      Stock and Class B Common Stock held by our non-affiliates exceed $75 million
      on
      September 30, 2007 we would become an accelerated filer and as a result our
      independent registered public accounting firm would have to test and evaluate
      the design and operating effectiveness of our internal controls and publicly
      attest to such evaluation for the 2008 fiscal year. This could add additional
      expense and an increased risk of noncompliance with Section 404 of the
      Sarbanes-Oxley Act if the auditors do not complete their attestation on time.




7




**A
      downturn in the economy may affect consumer purchases of discretionary items,
      which would reduce our net sales.**




The
      retail industry historically has been subject to substantial cyclical
      variations. The merchandise sold by us is generally a discretionary expense
      for
      our customers. A recession in the general economy or uncertainties regarding
      future economic prospects that affect consumer spending habits has had, and
      in
      the future may have, a materially adverse effect on our results of operations.





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





Terrorist
      attacks may cause damage or disruption to our 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 us to
      suffer in ways that we currently cannot predict. Our geographical focus in
      California, Nevada and Arizona may make us more vulnerable to such uncertainties
      than other comparable retailers who may not have similar geographical
      concentration.





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





The
      sporting goods business and the retail environment are highly competitive,
      and
      we compete 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 our competitors are larger and have greater
      resources.





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





Currently,
      most of our stores are located in Southern California and the remaining are
      located in Northern California, Central California, Nevada and Arizona.
      Accordingly, we are 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 our customers 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 our sales and
      profitability and this could also affect our ability to implement our planned
      growth. In addition, many of our vendors rely on the Ports of Los Angeles and
      Long Beach to process our shipments. Any disruption or congestion at the ports
      could impair our ability to adequately stock our stores. Several of our
      competitors operate stores across the United States and, thus, are not as
      vulnerable to such regional risks.




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





We
      currently rely 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 our
      inventory and could materially impair both our ability to adequately stock
      our
      stores and our sales and profitability.




8




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





Our
      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;


·
            we
                may not be able to negotiate acceptable lease terms;


·
            we
                might not be able to hire and retain qualified store personnel; and


·
            we
                might not have the financial resources necessary to fund our expansion
                plans.




In
      addition, our 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 our stores,
      added strain on our distribution center, additional information to be processed
      by our management information systems and diversion of management attention
      from
      ongoing operations. We face additional challenges in entering new markets,
      including consumers’ lack of awareness of the Company, difficulties in hiring
      personnel and problems due to our unfamiliarity with local real estate markets
      and demographics. New markets may also have different competitive conditions,
      consumer tastes and discretionary spending patterns than our existing markets.
      To the extent that we are not able to meet these new challenges, sales could
      decrease and operating costs could increase. Furthermore, a decline in our
      overall financial performance, increased rents or any other adverse effects
      arising from the commercial real estate market in our geographical markets
      may
      adversely affect our current growth plan. There can be no assurance that we
      will
      possess sufficient funds to finance the expenditures related to our 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.




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





We
      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 our capital and our management’s attention from other business
      issues and opportunities. We may not be able to successfully integrate
      operations that we acquire, including their personnel, financial systems,
      distribution, operations and general store operating procedures. If we fail
      to
      successfully integrate acquisitions, our business could suffer. In addition,
      the
      integration of any acquired business, and their financial results, into ours
      may
      adversely affect our operating results. We currently do not have any agreements
      with respect to any such acquisitions.





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





We
      may
      not be able to fund our future growth or react to competitive pressures if
      we
      lack sufficient funds. Unexpected conditions could cause us to be in violation
      of our lender’s operating covenants. Currently, we believe we have sufficient
      cash available through our bank credit facilities and cash from operations
      to
      fund existing operations for the foreseeable future. We cannot be certain that
      additional financing will be available in the future if necessary.




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





Since
      our
      inception, we have experienced periods of rapid growth. No assurance can be
      given that we will be successful in maintaining or increasing our sales in
      the
      future. Any future growth in sales will require additional working capital
      and
      may place a significant strain on our management, management information
      systems, inventory management, distribution facilities and receivables
      management. Any failure to timely enhance our operating systems, or unexpected
      difficulties in implementing such enhancements, could have a material adverse
      effect on our results of operations.




9




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





We
      depend
      on the continued service of our senior management. The loss of the services
      of
      any key employee could hurt our business. Also, our future success depends
      on
      our 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 our annual operating
      results to suffer.**





Our
      sales
      volume increases significantly during the Holiday season as is typical with
      other sporting goods retailers. In addition, our product mix has historically
      emphasized cold weather sporting goods increasing the seasonality of our
      business. In recent years, our third fiscal quarter, which includes the Holiday
      season, represented approximately 30% of our annual net sales. Winter-related
      products represent approximately 17% of our annual net sales and have ranged
      from 27% to 31% of our fourth fiscal quarter. We anticipate this seasonal trend
      in sales will continue. The operating results historically have been influenced
      by the amount and timing of snowfall at the resorts frequented by our 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 us to
      make
      commitments for purchases of apparel and equipment by early spring for fall
      delivery, and only limited quantities of merchandise can be reordered during
      the
      fall. Consequently, we place our 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, we may be required
      to
      mark down our winter apparel and equipment.




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





We
      have
      experienced, and expect to continue to experience, a substantial variation
      in
      our net sales and operating results from quarter to quarter. We believe 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 our introduction of new products, the level
      of
      consumer acceptance of each new product, the seasonality of the markets in
      which
      we participate, the weather and actions of competitors. Accordingly, a
      comparison of our results of operations from period to period is not necessarily
      meaningful, and our results of operations for any period are not necessarily
      indicative of future performance.




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





At
      June
      12, 2007, Norbert Olberz, the Company's founder, Craig Levra, the Company’s
      Chairman and Chief Executive Officer, and Howard Kaminsky, the Company’s Chief
      Financial Officer, owned approximately 21%, 33% and 11%, respectively, of the
      Company’s outstanding voting 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 our information systems could disrupt our operations and negatively impact
      our financial results.**





Our
      success, in particular our ability to successfully manage inventory levels
      and
      our centralized distribution system, largely depends upon the efficient
      operation of our computer hardware and software systems. We use management
      information systems to track inventory information at the store level, replenish
      inventory from our warehouse, and aggregate daily sales information among other
      things. These systems and our operations are vulnerable to damage or
      interruption from:




10




·
            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.





We
      seek
      to minimize these risks by the use of backup facilities and redundant systems.
      Nevertheless any failure that causes an interruption in our operations or a
      decrease in inventory tracking could result in reduced net sales.





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




The
      increasing costs associated with information security — such as increased
      investment in technology, the costs of compliance with consumer protection
      laws
      and costs resulting from consumer fraud — could cause our business and
      results of operations to suffer materially. While we are taking significant
      steps to protect customer and confidential information, there can be no
      assurance that advances in computer capabilities or other developments will
      prevent the compromise of our customer transaction processing capabilities
      and
      personal data. If any such compromise of our information security were to occur,
      it could have a material adverse effect on our reputation, business, operating
      results and financial condition and may increase the costs we incur to protect
      against such information security breaches.





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





If
      we
      fail to anticipate changes in consumer preferences, we 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. Our success depends upon
      the ability to anticipate and respond in a timely manner to trends in sporting
      goods merchandise and consumers’ participation in sports on an individual market
      basis. Failure to identify and respond to these changes may cause net sales
      to
      decline. In addition, because we generally make 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 our Class A Common Stock and Class B Common Stock may be volatile.**





Our
      Class
      A Common Stock and Class B Common Stock are thinly traded making it difficult
      to
      sell large amounts. The market prices of our Class A Common Stock and Class
      B
      Common Stock are 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 us or our competitors of a material
      nature, additions or departures of key personnel, future sales of Class A Common
      Stock 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 our Class A Common Stock
      and Class B Common Stock.




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




11




At
      June
      12, 2007, Norbert Olberz, the Company's founder, Craig Levra, the Company’s
      Chairman and Chief Executive Officer, and Howard Kaminsky, the Company’s Chief
      Financial Officer, owned approximately 21%, 33% and 11%, respectively, of the
      Company’s outstanding voting 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 of
      Directors 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 of Directors.
      The Company's Certificate of Incorporation also provides that the Board of
      Directors 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 of
      Directors. 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.




**We
      may be subject to product liability claims and our insurance may not be
      sufficient to cover damages related to those claims.**





We
      may be
      subject to lawsuits resulting from injuries associated with the use of sporting
      goods equipment that we sell. We may incur losses relating to these claims
      or
      the defense of these claims. There is a risk that claims or liabilities will
      exceed our insurance coverage. In addition, we may be unable to retain adequate
      liability insurance in the future. In addition, we are subject to regulation
      by
      the Consumer Product Safety Commission and similar state regulatory agencies.
      If
      we fail to comply with government and industry safety standards, we may be
      subject to claims, lawsuits, fines and adverse publicity that could have a
      material adverse effect on our business, results of operations and financial
      condition.





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





Changes
      in our comparable store sales results could affect the price of our Class A
      Common Stock and Class B Common Stock. A number of factors have historically
      affected, and will continue to affect, our comparable store sales results,
      including: competition, our new store openings and remodeling, general regional
      and national economic conditions, actions taken by our competitors, consumer
      trends and preferences, changes in the shopping centers in which we are located,
      new product introductions and changes in our 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. Our
      comparable store sales may vary from quarter to quarter, and an unanticipated
      decline in revenues or comparable store sales may cause the price of our Class
      A
      Common Stock and Class B Common Stock to fluctuate significantly.





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None.




12




**ITEM
      2. PROPERTIES**




At
      April
      1, 2007, we had 45 store locations. The following table summarizes the key
      information on our retail properties:





Location
            
            Opening
                Date
            
            Gross
                Square FootageLa
                Cañada (1)
            
            
            June
                1960
            
            
            28,000Huntington
                Beach (2) (4)
            
            
            June
                1981
            
            
            50,000La
                Jolla
            
            
            June
                1983
            
            
            20,400Mission
                Viejo
            
            
            August
                1986
            
            
            29,900Point
                Loma (2)
            
            
            November
                1987
            
            
            34,600Valencia
                (2) (5)
            
            
            November
                1987
            
            
            40,000Marina
                del Rey (6)
            
            
            November
                1989
            
            
            42,300Beverly
                Hills
            
            
            November
                1989
            
            
            40,500Brea
                (2) (5)
            
            
            April
                1990
            
            
            40,500Oxnard
                (2)
            
            
            June
                1990
            
            
            40,500West
                Hills (2) (6)
            
            
            June
                1991
            
            
            44,000Burbank(7)
            
            
            August
                1992
            
            
            45,000Montclair
            
            
            November
                1992
            
            
            14,800Torrance
                (3)
            
            
            November
                1993
            
            
            43,700Glendora
            
            
            November
                1993
            
            
            40,400Rancho
                Cucamonga (2)
            
            
            June
                1994
            
            
            36,000Irvine
                (2)
            
            
            November
                1995
            
            
            35,000Laguna
                Niguel (4)
            
            
            November
                1997
            
            
            40,000Mission
                Valley (3)
            
            
            June
                1998
            
            
            47,000Long
                Beach (7)
            
            
            May
                1999
            
            
            43,400Porter
                Ranch
            
            
            July
                1999
            
            
            43,000Temecula
                (4)
            
            
            October
                1999
            
            
            40,000Chino
                Hills
            
            
            July
                2000
            
            
            42,000Palmdale
                (2)
            
            
            June
                2001
            
            
            39,400Henderson,
                NV (2)
            
            
            November
                2001
            
            
            42,000Costa
                Mesa - South Coast Plaza
            
            
            November
                2001
            
            
            41,600Summerlin,
                NV (2)
            
            
            November
                2002
            
            
            40,300Riverside
            
            
            November
                2002
            
            
            46,100Antioch
                (2)
            
            
            November
                2003
            
            
            40,000Redlands
                (2)
            
            
            November
                2003
            
            
            42,000Sacramento
                (2)
            
            
            December
                2003
            
            
            40,600Roseville
            
            
            August
                2004
            
            
            37,000Pleasanton
                (2)
            
            
            August
                2004
            
            
            40,500Arcadia
            
            
            October
                2004
            
            
            42,200Elk
                Grove (2)
            
            
            November
                2004
            
            
            42,000Visalia
                (2)
            
            
            November
                2004
            
            
            41,000Happy
                Valley, AZ (2)
            
            
            November
                2005
            
            
            42,000Chandler,
                AZ (2)
            
            
            November
                2005
            
            
            41,200Scottsdale,
                AZ (2)
            
            
            November
                2005
            
            
            41,500Foothill
                Ranch (2)
            
            
            February
                2006
            
            
            43,400Thousand
                Oaks (2)
            
            
            May
                2006
            
            
            40,300Vacaville
                (2)
            
            
            August
                2006
            
            
            41,600San
                Jose
            
            
            November
                2006
            
            
            44,000San
                Marcos (2)
            
            
            November
                2006
            
            
            40,000Mira
                Loma (2)
            
            
            November
                2006
            
            
            39,300Total
            
            
            1,789,000




13


(1)
              
              The original store opened in 1959.
                The number
                of facilities and square footage has fluctuated over the years. We
                have
                plans to relocate four buildings which have served the La Canada
                Flintridge, California market into a single 45,000 square foot store
                in
                calendar 2008. The four buildings, which the Company has historically
                reported as one store, together totaled 40,000 square feet. In preparation
                for the new store in calendar 2008, there will be construction occurring
                and the four buildings in La Canada Flintridge have been consolidated
                into
                a single temporary location which is approximately 28,000 square
                feet.(2)
              
              Includes swimming pool facility for
                SCUBA and
                kayaking instruction.(3)
              
              Remodels completed for fiscal
                2007.(4)
              
              Remodels completed in fiscal
                2006.(5)
              
              Remodels completed in fiscal
                2005.(6)
              
              Remodels completed in fiscal
                2004.(7)
              
              Remodels scheduled for fiscal
                2008.




We
      lease
      all of our existing store locations. The leases for most of the existing stores
      are for approximately ten-year terms plus 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.





We
      lease
      from corporations controlled by Norbert Olberz, Sport Chalet’s Founder (the
“Founder”); our corporate office space in La Cañada and our stores in La Cañada,
      Huntington Beach and Porter Ranch, California. We have incurred rental expense
      to the Founder of $2.5 million, $2.4 million and $2.4 million in fiscal 2007,
      2006 and 2005, respectively.





Management
      believes that the occupancy costs under the leases with corporations controlled
      by the Founder described above are no higher than those which would be charged
      by unrelated third parties under similar circumstances.





**ITEM
      3. LEGAL PROCEEDINGS**





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
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





No
      matters were submitted to our stockholders during the fourth quarter of fiscal
      2007.




14




**PART
      II**





**ITEM
      5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER** **MATTERS
      AND ISSUER PURCHASES OF EQUITY SECURITIES**





**Market
      Price for Common Shares**





Pursuant
      to the stockholder approved recapitalization plan that establishes two classes
      of Common Stock. On September 21, 2005, each outstanding share of Common Stock
      (“Old Common Stock”) was reclassified into 0.25 share of Class B Common Stock.
      On September 30, 2005 a non-taxable stock dividend of seven shares of Class
      A
      Common Stock for each one outstanding share of Class B Common Stock was paid.
      The recapitalization doubled our total number of shares outstanding and,
      therefore, had the same impact on earnings per share as a 2-for-1 stock split.
      Our Class A Common Stock and Class B Common Stock are traded on the Nasdaq
      Stock
      Market National Market System under the symbol “SPCHA” and “SPCHB”,
      respectively. The following table reflects the range of high and low sale prices
      of our Old, Class A, and Class B Common Stock for the periods
      indicated:


Old
                  Common StockFiscal
                  2006
              
              High
              
              LowFirst
                  Quarter
              
              $
              19.50
              
              $
              12.84Second
                  Quarter
              
              $
              18.14
              
              $
              16.00Class
                  A
              
              
              Class
                  BFiscal
                  2006
              
              
              High
              
              
              Low
              
              
              High
              
              
              LowSecond
                  Quarter
              
              $
              10.75
              
              $
              8.50
              
              $
              68.00
              
              $
              13.00Third
                  Quarter
              
              $
              10.20
              
              $
              6.87
              
              $
              15.55
              
              $
              8.00Fourth
                  Quarter
              
              $
              8.36
              
              $
              7.01
              
              $
              8.70
              
              $
              7.12Class
                  A
              
              
              Class
                  BFiscal
                  2007
              
              
              High
              
              
              Low
              
              
              High
              
              
              LowFirst
                  Quarter
              
              $
              8.45
              
              $
              7.46
              
              $
              8.34
              
              $
              7.50Second
                  Quarter
              
              $
              9.43
              
              $
              7.80
              
              $
              9.35
              
              $
              7.80Third
                  Quarter
              
              $
              10.48
              
              $
              7.86
              
              $
              9.96
              
              $
              8.55Fourth
                  Quarter
              
              $
              10.89
              
              $
              8.90
              
              $
              11.20
              
              $
              9.00Class
                  A
              
              
              Class
                  BFiscal
                  2008
              
              
              High
              
              
              Low
              
              
              High
              
              
              LowFirst
                  Quarter (through June 11, 2007)
              
              $
              11.44
              
              $
              9.99
              
              $
              11.30
              
              $
              9.40





On
      June
      11, 2007, the closing price of our Class A Common Stock and Class B Common
      Stock
      as reported by Nasdaq was $10.28 and $10.10, respectively. Stockholders are
      urged to obtain current market quotations for the Class A Common Stock and
      Class
      B Common Stock.





**Approximate
      Number of Holders of Common Shares**





The
      number of stockholders of record of our Class A Common Stock and Class B Common
      Stock as of June 8, 2007 was 145 and 150, respectively (excluding individual
      participants in nominee security position listings), and as of that date, we
      estimate that there were approximately 1,400 beneficial owners holding stock
      in
      nominee or “street” name.




15




**Performance
      Graph**





The
      following graph compares the yearly percentage change in cumulative total
      stockholder return of the Company's Common Stock during the period from
      April 1, 2002 to April 1, 2007 with (i) the cumulative total return of
      the Nasdaq Composite Stock Market Index and (ii) the cumulative total
      return of the S&P Specialty Stores Index. The comparison assumes $100 was
      invested on April 1, 2002 in the Common Stock and in each of the foregoing
      indices and the reinvestment of dividends through April 1, 2007. The stock
      price
      performance on the following graph is not necessarily indicative of future
      stock
      price performance.




In
      September 2005, the stockholders of the Company approved amendments to the
      Company's Certificate of Incorporation that resulted in the reclassification
      of
      each outstanding share of common stock as 0.25 share of Class B Common Stock
      and
      the issuance of seven shares of Class A Common Stock for each outstanding share
      of Class B Common Stock. For the period commencing on September 30, 2005, the
      Company has added the share price of one share of Class B Common Stock and
      seven
      shares of Class A Common Stock in calculating its cumulative total return for
      purposes of the following graph.










**Dividend
      Policy**





We
      have
      not paid any cash dividends to stockholders since our initial public offering
      in
      November 1992. We currently intend to retain earnings for use in the operation
      and potential expansion of our business and, therefore, do not anticipate
      declaring or paying any cash dividends in the foreseeable future. The
      declaration and payment of any such dividends in the future will depend upon
      our
      earnings, financial condition, capital needs and other factors deemed relevant
      by the Board of Directors.




16




**ITEM
      6. SELECTED FINANCIAL DATA**





The
      following sets forth selected consolidated financial data as of and for the
      five
      most recent fiscal years ended April 1, 2007. This data should be read in
      conjunction with the financial statements and related notes thereto and other
      financial information included herein. All share and per share information
      has
      been adjusted to reflect the reclassification and stock dividend as discussed
      in
“Item 1. Business Recapitalization Plan.”




**Fiscal
                year ended,****2007**
            
            
            **2006
                (3)**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003****Statements
                of Income Data:**
            
            
            **(In
                thousands, except per share, per square foot
                amounts)**Net
                sales
            
            $
            388,209
            
            $
            343,204
            
            $
            309,090
            
            $
            264,237
            
            $
            238,033Cost
                of goods sold, buying and occupancycosts
            
            
            268,188
            
            
            237,137
            
            
            213,429
            
            
            184,047
            
            
            168,519Gross
                profit
            
            
            120,021
            
            
            106,067
            
            
            95,661
            
            
            80,190
            
            
            69,514Selling,
                general and administrative expenses
            
            
            107,776
            
            
            101,534
            
            
            85,145
            
            
            72,360
            
            
            62,579Income
                from operations
            
            
            12,245
            
            
            4,533
            
            
            10,516
            
            
            7,830
            
            
            6,935Interest
                expense
            
            
            516
            
            
            267
            
            
            263
            
            
            190
            
            
            307Income
                before taxes
            
            
            11,729
            
            
            4,266
            
            
            10,253
            
            
            7,640
            
            
            6,628Income
                tax provision
            
            
            4,630
            
            
            4,353
            
            
            4,082
            
            
            2,996
            
            
            2,584Net
                income (loss)
            
            $
            7,099
            
            $
            (87
            )
            $
            6,171
            
            $
            4,644
            
            $
            4,044Class
                A and Class B earnings (loss) pershare
                - basic
            
            $
            0.51
            
            $
            (0.01
            )
            $
            0.46
            
            $
            0.35
            
            $
            0.31Class
                A and Class B earnings (loss) pershare
                - diluted
            
            $
            0.49
            
            $
            (0.01
            )
            $
            0.44
            
            $
            0.33
            
            $
            0.29Weighted
                average Class A and Class Bshares
                outstanding:Basic
            
            
            13,850
            
            
            13,506
            
            
            13,361
            
            
            13,291
            
            
            13,230Diluted
            
            
            14,460
            
            
            13,506
            
            
            14,007
            
            
            14,017
            
            
            13,894**Selected
                Operating Data:**Comparable
                store sales increase (decrease) (1)
            
            
            2.0
            %
            
            1.9
            %
            
            5.7
            %
            
            3.7
            %
            
            (0.9
            )%Gross
                profit margin
            
            
            30.9
            %
            
            30.9
            %
            
            30.9
            %
            
            30.3
            %
            
            29.2
            %Selling,
                general and administrative expenses aspercentage
                of net sales
            
            
            27.8
            %
            
            29.6
            %
            
            27.5
            %
            
            27.4
            %
            
            26.3
            %Net
                cash provided by operating activities
            
            $
            10,615
            
            $
            16,976
            
            $
            17,955
            
            $
            7,608
            
            $
            6,513Depreciation
                and amortization
            
            $
            11,419
            
            $
            9,226
            
            $
            7,692
            
            $
            6,447
            
            $
            5,890Stores
                open at end of period
            
            
            45
            
            
            40
            
            
            36
            
            
            31
            
            
            28Total
                square feet at end of period
            
            
            1,789
            
            
            1,586
            
            
            1,412
            
            
            1,210
            
            
            1,087Net
                sales per square foot (2)
            
            $
            235
            
            $
            238
            
            $
            241
            
            $
            239
            
            $
            241Average
                net sales per store (2)
            
            $
            9,232
            
            $
            9,351
            
            $
            9,430
            
            $
            9,221
            
            $
            9,220**As
                of Fiscal year end,****Balance
                Sheet Data:**
            
            
            **2007**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**Working
                capital
            
            $
            45,493
            
            $
            43,446
            
            $
            43,116
            
            $
            40,746
            
            $
            37,329Total
                assets
            
            
            171,249
            
            
            132,238
            
            
            118,789
            
            
            95,057
            
            
            89,492Bank
                debt
            
            
            11,776
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                stockholders’ equity
            
            
            86,426
            
            
            77,468
            
            
            69,110
            
            
            62,811
            
            
            57,456


________________


(1)****
            A
                store’s sales are included in the comparable store sales calculation after
                its twelfth full month of
                operation.


(2)****
            Calculated
                by using stores that were open for the full current fiscal year and
                were
                also open for the full prior fiscal
                year.


(3)****
            For
                fiscal 2006, the recapitalization plan 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. Selling, general and administrative expenses for fiscal
                2006
                without the expense from the recapitalization plan are 27.1% of sales.
                Basic and diluted earnings per share for fiscal 2006 without the
                expense
                of the recapitalization plan are $0.57 and $0.55,
                respectively.




17




**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
      OF OPERATIONS**





*This
      Annual Report on Form 10-K 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. You are cautioned
      not
      to 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 “Item 1A. Risk Factors.” 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 “Item 6. Selected Financial Data”
and our consolidated financial statements and related notes
      thereto.





**Overview**





We
      are a
      leading operator of 45 full service specialty sporting goods stores in
      California, Nevada and Arizona. 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 assortment.




Our
      growth strategy had historically focused on Southern California, but now
      includes opening new stores throughout California, Nevada, Arizona and Utah
      as
      suitable locations are found. We have opened five stores this fiscal year,
      fourteen stores in the last three years and nineteen in the last five years.
      We
      currently anticipate opening six to eight new stores during the upcoming year
      including our first store in Utah. 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 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
      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 needed 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, 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.





Our
      prototype store is 42,000 square feet in size and showcases 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 our 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. 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, such as
      pre-opening rent and 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.




18




Comparable
      store sales are a key performance measurement, a store’s sales are included in
      the comparable store sales calculation in the quarter following its twelfth
      full
      month of operation. Our comparable store sales growth has been positive for
      the
      last four fiscal years, many factors effect sales during a fiscal year; such
      as
      the overall economic conditions, unseasonable weather in our markets, the appeal
      of our merchandise assortments and marketing changes. In general our mature
      stores have leveled off in their growth and although we are focused on constant
      improvement in all stores, we expect our comparable store sales growth to be
      driven by maturing stores.





We
      believe that the overall growth of our business will allow us to maintain or
      increase our operating margins. Increased merchandise volumes should enable
      us
      to improve our purchasing leverage and achieve greater support throughout the
      supply chain.  Gross profit, which includes occupancy costs, as a percent
      of sales has increased from 29.2% to 30.9% over the past five years. However
      improvements in merchandise procurement have been offset by increased occupancy
      costs as a percent of sales from new stores. Our overall growth should leverage
      our investments in infrastructure such as the distribution center, corporate
      facilities, E3 replenishment system, HighJump warehouse management software,
      Marketmax planning and allocation technology and SAP merchandise and financial
      systems. However, these increased efficiencies and improvements have been offset
      by the operating costs of new and maturing stores. Selling, general and
      administrative expenses, excluding the cost of the recapitalization plan during
      fiscal 2006, as a percent of sales have increased from 26.3% to 27.8% over
      the
      past five years.





We
      are in
      the process of implementing Section 404 of the Sarbanes-Oxley Act of 2002 which
      requires an extensive review and remediation of our internal controls. To help
      meet the requirements of Section 404 and enhance the Company’s ability to grow,
      we are replacing our legacy merchandise and financial systems with mySAP2005
      ERP
      from SAP. Implementation of this system, as well as the other work required
      by
      Section 404, will be expensive, time-consuming and will require significant
      attention of management. Current rules require our compliance by end of fiscal
      2008.





Beginning
      April 1, 2006, our fiscal year end was changed from March 31 to the Sunday
      closest to March 31. Each fiscal year will consist of four 13 week quarters,
      with an extra week added onto the fourth quarter every five to six years. The
      2007 fiscal year includes 52 weeks of operating results. This fiscal calendar
      is
      widely used in the retail industry.




19




**Results
      of Operations**





***Fiscal
      2007 Compared to Fiscal 2006.***





The
      following table sets forth statement of operations data determined in accordance
      with generally accepted accounting principals (“GAAP”), the relative percentages
      of net sales, and the percentage increase or decrease, for the 2007 and 2006
      fiscal years (dollar amounts in thousands, except per share
      amounts).




**Fiscal
                  year ended**2007
              
              2006Amount
              
              Percent
              
              Amount
              
              Percent
              
              Dollar
                Change
              
              Percentage
                ChangeNet
                  sales
              
              $
              388,209
              
              
              100.0
              %
              $
              343,204
              
              
              100.0
              %
              $
              45,005
              
              
              13.1
              %Gross
                  profit
              
              
              120,021
              
              
              30.9
              %
              
              106,067
              
              
              30.9
              %
              
              13,954
              
              
              13.2
              %Selling,
                  general and administrative expenses
              
              
              107,776
              
              
              27.8
              %
              
              101,534
              
              
              29.6
              %
              
              6,242
              
              
              6.1
              %Income
                  from operations
              
              
              12,245
              
              
              3.2
              %
              
              4,533
              
              
              1.3
              %
              
              7,712
              
              
              170.1
              %Interest
                  expense
              
              
              516
              
              
              0.1
              %
              
              267
              
              
              0.1
              %
              
              249
              
              
              93.3
              %Income
                  before taxes
              
              
              11,729
              
              
              3.0
              %
              
              4,266
              
              
              1.2
              %
              
              7,463
              
              
              174.9
              %Net
                  income (loss)
              
              
              7,099
              
              
              1.8
              %
              
              (87
              )
              
              (0.0
              %)
              
              7,186
              
              
              (8,259.8
              %)Class
                  A and Class BEarnings
                  (loss) per share:Basic
              
              $
              0.51
              
              
              
              
              $
              (0.01
              )
              
              
              
              $
              0.52
              
              
              (5,200.0
              %)Diluted
              
              $
              0.49
              
              
              
              
              $
              (0.01
              )
              
              
              
              $
              0.50
              
              
              (5,000.0
              %)


To
      supplement consolidated financial statements presented in accordance with GAAP,
      non-GAAP financial measures are used as the compensation and other expenses
      related to the recapitalization plan during fiscal 2006 and are not expected
      to
      reoccur and their exclusion provides a consistent comparison to current year
      results. The presentation of this financial information is not intended to
      be
      considered in isolation or as a substitute for financial information prepared
      and presented in accordance with GAAP. For a reconciliation of non-GAAP results
      of operations measures to the nearest comparable GAAP measures see “Fiscal 2006
      Compared to Fiscal 2005” following.




The
      following table sets forth statement of operations data and relative percentages
      of net sales, and the percentage increase or decrease, for the 2007 and 2006
      fiscal years without regard to the effect of the recapitalization plan on
      selling, general and administrative expenses or income taxes (dollar amounts
      in
      thousands, except per share amounts).




**Fiscal
                  year ended**2007
              
              2006Amount
              
              Percent
              
              Amount
              
              Percent
              
              Dollar
                Change
              
              Percentage
                ChangeNet
                  sales
              
              $
              388,209
              
              
              100.0
              %
              $
              343,204
              
              
              100.0
              %
              $
              45,005
              
              
              13.1
              %Gross
                  profit
              
              
              120,021
              
              
              30.9
              %
              
              106,067
              
              
              30.9
              %
              
              13,954
              
              
              13.2
              %Selling,
                  general and administrative expenses
              
              
              107,776
              
              
              27.8
              %
              
              92,841
              
              
              27.1
              %
              
              14,935
              
              
              16.1
              %Income
                  from operations
              
              
              12,245
              
              
              3.2
              %
              
              13,226
              
              
              3.9
              %
              
              (981
              )
              
              (7.4
              %)Interest
                  expense
              
              
              516
              
              
              0.1
              %
              
              267
              
              
              0.1
              %
              
              249
              
              
              93.3
              %Income
                  before taxes
              
              
              11,729
              
              
              3.0
              %
              
              12,959
              
              
              3.8
              %
              
              (1,230
              )
              
              (9.5
              %)Net
                  income
              
              
              7,099
              
              
              1.8
              %
              
              7,752
              
              
              2.3
              %
              
              (653
              )
              
              (8.4
              %)Class
                  A and Class BEarnings
                  per share:Basic
              
              $
              0.51
              
              
              
              
              $
              0.57
              
              
              
              
              $
              (0.06
              )
              
              (10.5
              %)Diluted
              
              $
              0.49
              
              
              
              
              $
              0.55
              
              
              
              
              $
              (0.06
              )
              
              (10.9
              %)




20




Sales
      increased $45.0 million, or 13.1%, to $388.2 million for fiscal 2007 from $343.2
      million for fiscal 2006. The sales growth is the result of opening five stores
      in fiscal 2007 and four in fiscal 2006, which resulted in a $37.3 million
      increase in sales, in addition to a comparable store sales increase of $6.7
      million or 2.0%. The comparable store sales increase was primarily from our
      newer stores as sales from our mature stores were impacted primarily by: (1)
      weakness in several hardgoods categories; (2) the expected decrease in sales
      of
      three mature stores due to the opening of one new store as part of our strategy
      to back-fill in our core Southern California market; and (3) the adverse effect
      on one store during the continuing renovation of the shopping mall in which
      it
      is located. Comparable store sales were also negatively impacted by the fact
      that fiscal 2007 was the driest year on record for Southern California which
      we
      believe dampened the demand for winter apparel and equipment primarily in the
      fourth quarter as shown in the table below (dollar amounts in
      thousands):




**Change
                  in Comparable Store Sales Fiscal Year 2007 to
                  2006**
              
              **Change
                  in Comparable Store Sales Fourth Quarter Fiscal**
                **2007
                  to 2006**Dollar
                Change
              
              Percentage
                Change
              
              Dollar
                Change
              
              Percentage
                ChangeNon-winter
                  related
              
              $
              5,837
              
              
              2.1
              %
              $
              1,530
              
              
              2.5
              %Winter
                  related
              
              
              877
              
              
              1.5
              %
              
              (2,439
              )
              
              (9.4
              %)Comparable
                  store sales
              
              $
              6,714
              
              
              2.0
              %
              $
              (909
              )
              
              (1.0
              %)




Comparable
      store sales are based upon stores open throughout both periods presented and
      exclude team sales.





Gross
      profit increased $14.0 million, or 13.2%, primarily from increased sales. As
      a
      percent of sales, gross profit was unchanged at 30.9% for fiscal 2007 and fiscal
      2006. Gross profit gains from merchandise procurement of approximately 20 basis
      points were offset by increased occupancy expense as a percent of sales in
      the
      new stores. We believe that the improvement in merchandise procurement is due
      to
      our continued investments in systems along with our growth in importance to
      our
      vendors. The increase in occupancy costs as a percent of sales is the result
      of
      our new stores which take time to reach operating efficiency.




Selling,
      general and administrative expenses (“SG&A”) increased $6.2 million, or
      6.1%, primarily from expenses related to additional stores partially offset
      by
      expenses related to the fiscal year 2006 recapitalization plan which were not
      repeated in fiscal 2007. Excluding the effect of the recapitalization plan,
      SG&A expenses increased $14.9 million, or 16.1%, primarily from additional
      stores. In addition, we experienced increases in utility costs of approximately
      $800,000 from rate increases and increased corporate labor of approximately
      $1.1
      million to facilitate our growth plans, partially offset by a reduction of
      incentive pay of approximately $500,000. As a percent of sales excluding the
      effect of the recapitalization plan, SG&A expenses increased to 27.8% in
      fiscal 2007 from 27.1% in fiscal 2006 primarily from lower growth in sales
      from
      our mature stores described above, the previously mentioned utilities and
      corporate labor increases and the expenses associated with new stores which
      take
      time to reach operating efficiency.





The
      effective income tax rate was 39.5% for fiscal 2007 compared to 40.2% excluding
      the effect of the recapitalization plan for fiscal 2006. Generally these rates
      differ from the statutory rates as a result of permanent differences between
      financial reporting and tax-basis income. Our statutory rate has increased
      to
      40.7% for fiscal 2007 from 39.8% in fiscal 2006 as a result of a rate increase
      related to the growth in our taxable income.




21




Net
      income increased to $7.1 million, or $0.49 per diluted share, for fiscal 2007,
      from a net loss of $87,000, or $0.01 loss per diluted share, for fiscal 2006,
      primarily from expenses related to the recapitalization plan in fiscal 2006.
      Excluding the effect of the recapitalization plan, net income decreased from
      $7.8 million, or $0.55 per diluted share, for fiscal 2006.





***Fourth
      Quarter 2007 Compared to Fourth Quarter 2006.***





The
      following tables set forth statement of income data and relative percentages
      of
      net sales, and the percentage increase or decrease, for the fourth quarter
      of
      fiscal 2007 and 2006 (dollar amounts in thousands, except per share
      amounts).




**Fourth
                  fiscal quarter ended,**2007
              
              2006Amount
              
              Percent
              
              Amount
              
              Percent
              
              Dollar
                Increase
              
              Percentage
                IncreaseNet
                  sales
              
              $
              97,806
              
              
              100.0
              %
              $
              89,663
              
              
              100.0
              %
              $
              8,143
              
              
              9.1
              %Gross
                  profit
              
              
              28,681
              
              
              29.3
              %
              
              27,062
              
              
              30.2
              %
              
              1,619
              
              
              6.0
              %Selling,
                  general and administrative expenses
              
              
              27,085
              
              
              27.7
              %
              
              24,251
              
              
              27.0
              %
              
              2,834
              
              
              11.7
              %Income
                  from operations
              
              
              1,596
              
              
              1.6
              %
              
              2,811
              
              
              3.1
              %
              
              (1,215
              )
              
              (43.2
              %)Interest
                  expense
              
              
              164
              
              
              0.2
              %
              
              77
              
              
              0.1
              %
              
              87
              
              
              113.0
              %Income
                  before taxes
              
              
              1,432
              
              
              1.5
              %
              
              2,734
              
              
              3.0
              %
              
              (1,302
              )
              
              (47.6
              %)Net
                  income
              
              
              881
              
              
              0.9
              %
              
              1,638
              
              
              1.8
              %
              
              (757
              )
              
              (46.2
              %)Class
                  A and Class BEarnings
                  per share:Basic
              
              $
              0.06
              
              
              
              
              $
              0.12
              
              
              
              
              $
              (0.06
              )
              
              (50.0
              %)Diluted
              
              $
              0.06
              
              
              
              
              $
              0.12
              
              
              
              
              $
              (0.06
              )
              
              (50.0
              %)




Sales
      increased $8.1 million, or 9.1%, to $97.8 million for the fourth quarter 2007
      from $89.7 million for the same period in fiscal 2006. The sales growth is
      the
      result of opening five stores in fiscal 2007 and one in the fourth quarter
      of
      fiscal 2006 which resulted in an $8.0 million increase in sales on a same day
      basis. In addition, a sales decrease of $909,000, or 1.0%, from comparable
      stores on a same day basis was more than offset by $1.3 million in additional
      sales from one extra day relative to the fourth quarter of fiscal 2006 as a
      result of our calendar change. Comparable store sales were negatively impacted
      by the fact that fiscal 2007 was the driest year on record for Southern
      California which we believe dampened the demand for winter apparel and
      equipment. Winter related product sales were down $2.4 million, or 9.4%, while
      non-winter related product sales were up $1.5 million, or 2.5%.





Gross
      profit increased $1.6 million, or 6.0%, primarily from increased sales. As
      a
      percent of sales, gross profit decreased to 29.3% from 30.2% for the fourth
      quarter of fiscal 2006. The 90 basis point decrease is primarily due to
      increased occupancy expense as a percent of sales in the new stores as new
      stores take time to reach operating efficiency.





Selling,
      general and administrative expenses increased $2.8 million, or 11.7%, primarily
      from expenses related to additional stores. As a percent of sales, SG&A
      increased to 27.7% in fiscal 2007 from 27.0% for the fourth quarter of fiscal
      2006, primarily from the decrease in comparable store sales in addition to
      expenses related to new stores which take time to reach operating
      efficiency.





22




The
      effective tax rate, as a percent of pretax income, was 38.5% for the fiscal
      2007
      fourth quarter and 40.1% for the same period in fiscal 2006. Generally these
      rates differ from the statutory rates as a result of permanent differences
      between financial reporting and tax-basis income. Our statutory rate has
      increased to 40.7% for fiscal 2007 from 39.8% in fiscal 2006 as a result of
      a
      rate increase related to the growth in our taxable income.





Net
      income decreased to $881,000, or $0.06 per diluted share, for the fiscal 2007
      fourth quarter, from $1.6 million, or $0.12 per diluted share, for the 2006
      fiscal fourth quarter.




***Fiscal
      2006 Compared to Fiscal 2005.***





The
      following table sets forth statement of operations data determined in accordance
      with generally accepted accounting principals (“GAAP”), the relative percentages
      of net sales, and the percentage increase or decrease, for the fiscal years
      ended March 31, 2006 and 2005 (dollar amounts in thousands, except per share
      amounts).


**Fiscal
                  year ended March 31,**2006
              
              2005Amount
              
              Percent
              
              Amount
              
              Percent
              
              Dollar
                Change
              
              Percentage
                ChangeNet
                  sales
              
              $
              343,204
              
              
              100.0
              %
              $
              309,090
              
              
              100.0
              %
              $
              34,114
              
              
              11.0
              %Gross
                  profit
              
              
              106,067
              
              
              30.9
              %
              
              95,661
              
              
              30.9
              %
              
              10,406
              
              
              10.9
              %Selling,
                  general and administrative expenses
              
              
              101,534
              
              
              29.6
              %
              
              85,145
              
              
              27.5
              %
              
              16,389
              
              
              19.2
              %Income
                  from operations
              
              
              4,533
              
              
              1.3
              %
              
              10,516
              
              
              3.4
              %
              
              (5,983
              )
              
              (56.9
              %)Interest
                  expense
              
              
              267
              
              
              0.1
              %
              
              263
              
              
              0.1
              %
              
              4
              
              
              1.5
              %Income
                  before taxes
              
              
              4,266
              
              
              1.2
              %
              
              10,253
              
              
              3.3
              %
              
              (5,987
              )
              
              (58.4
              %)Net
                  income (loss)
              
              
              (87
              )
              
              (0.0
              %)
              
              6,171
              
              
              2.0
              %
              
              (6,258
              )
              
              (101.4
              %)Class
                  A and Class BEarnings
                  (loss) per share:Basic
              
              $
              (0.01
              )
              
              
              
              $
              0.46
              
              
              
              
              $
              (0.47
              )
              
              (102.2
              %)Diluted
              
              $
              (0.01
              )
              
              
              
              $
              0.44
              
              
              
              
              $
              (0.45
              )
              
              (102.3
              %)







All
        share and per share information has been adjusted to reflect the
        reclassification and stock
        dividend as discussed in "Item 1 Business - Recapitalization
        Plan.”




To
      supplement consolidated financial statements presented in accordance with GAAP,
      non-GAAP financial measures are used as the compensation and other expenses
      related to the recapitalization plan during 2006 and are not expected to reoccur
      and their exclusion provides a consistent comparison to past results. The
      presentation of this financial information is not intended to be considered
      in
      isolation or as a substitute for financial information prepared and presented
      in
      accordance with GAAP.




23




The
      following table sets forth statement of operations data and relative percentages
      of net sales, and the percentage increase or decrease, for the fiscal years
      ended March 31, 2006 and 2005 determined without regard to the effect of the
      recapitalization plan on selling, general and administrative expenses or income
      taxes (dollar amounts in thousands, except per share amounts).


**Fiscal
                  year ended March 31,**2006
              
              2005Amount
              
              Percent
              
              Amount
              
              Percent
              
              Dollar
                Change
              
              Percentage
                ChangeNet
                  sales
              
              $
              343,204
              
              
              100.0
              %
              $
              309,090
              
              
              100.0
              %
              $
              34,114
              
              
              11.0
              %Gross
                  profit
              
              
              106,067
              
              
              30.9
              %
              
              95,661
              
              
              30.9
              %
              
              10,406
              
              
              10.9
              %Selling,
                  general and administrative expenses
              
              
              92,841
              
              
              27.1
              %
              
              85,145
              
              
              27.5
              %
              
              7,696
              
              
              9.0
              %Income
                  from operations
              
              
              13,226
              
              
              3.9
              %
              
              10,516
              
              
              3.4
              %
              
              2,710
              
              
              25.8
              %Interest
                  expense
              
              
              267
              
              
              0.1
              %
              
              263
              
              
              0.1
              %
              
              4
              
              
              1.5
              %Income
                  before taxes
              
              
              12,959
              
              
              3.8
              %
              
              10,253
              
              
              3.3
              %
              
              2,706
              
              
              26.4
              %Net
                  income
              
              
              7,752
              
              
              2.3
              %
              
              6,171
              
              
              2.0
              %
              
              1,581
              
              
              25.6
              %Class
                  A and Class BEarnings
                  per share:Basic
              
              $
              0.57
              
              
              
              
              $
              0.46
              
              
              
              
              $
              0.11
              
              
              23.9
              %Diluted
              
              $
              0.55
              
              
              
              
              $
              0.44
              
              
              
              
              $
              0.11
              
              
              25.0
              %







All
        share and per share information has been adjusted to reflect the
        reclassification and stock
        dividend as discussed in "Item 1 - Business Recapitalization
        Plan.”




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 (dollar amounts
      in thousands, except per share amounts).


Fiscal
                  year ended March 31, 2006GAAP
              
              Adjustments
              
              Non-GAAPSelling,
                  general and administrative expenses
              
              $
              101,534
              
              $
              (8,693
              )
              $
              92,841Income
                  from operations
              
              
              4,533
              
              
              8,693
              
              
              13,226Income
                  before taxes
              
              
              4,266
              
              
              8,693
              
              
              12,959Income
                  tax provision
              
              
              4,353
              
              
              (854
              )
              
              5,207Net
                  income (loss)
              
              $
              (87
              )
              $
              7,839
              
              $
              7,752Class
                  A and Class Bearning
                  (loss) per share:Basic
              
              $
              (0.01
              )
              $
              0.58
              
              $
              0.57Diluted
              
              $
              (0.01
              )
              $
              0.56
              
              $
              0.55




Sales
      increased $34.1 million, or 11.0%, from $309.1 million for the fiscal year
      ended
      March 31, 2005 to $343.2 million for fiscal 2006. The sales growth is the result
      of opening four stores in fiscal 2006 and five in fiscal 2005, which resulted
      in
      a $27.6 million increase in sales, in addition to a comparable store sales
      increase of $5.4 million or 1.9%. Comparable store sales increased despite
      the
      fact that fiscal 2006 did not have the benefit of the colder weather experienced
      early in our third quarter of fiscal year 2005 that helped stimulate demand
      for
      winter apparel and equipment. Comparable store sales excluding winter related
      products increased $7.7 million or 3.3%. Comparable store sales are based upon
      stores open throughout both periods presented and exclude team
      sales.




24




Gross
      profit increased $10.4 million, or 10.9%, primarily from increased sales. As
      a
      percent of sales, gross profit was unchanged at 30.9% for fiscal 2005 and fiscal
      2006. Gross profit gains from better inventory assortments and reduced shrink
      were offset by markdowns required on winter related products due to the late
      arrival of cold wet weather in fiscal 2006 as compared to fiscal 2005 in our
      markets.




Selling,
      general and administrative expenses (“SG&A”) increased $16.4 million, or
      19.2%, primarily from expenses related to the recapitalization plan and
      additional stores. As a percent of sales, these expenses increased from 27.5%
      in
      fiscal 2005 to 29.6% in fiscal 2006. Excluding the effect of the
      recapitalization plan, SG&A expenses increased $7.7 million, or 9.0%,
      primarily from additional stores. As a percent of sales, SG&A expenses
      decreased from 27.5% in fiscal 2005 to 27.1% in fiscal 2006 primarily from
      increased litigation reserves in fiscal 2005 not required in fiscal 2006, the
      leverage created by increased sales in mature stores which is 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 as the
      transfer of shares resulted in compensation expense in excess of the specified
      limits for tax purposes as defined by Section 162(m) of the Internal Revenue
      Code. The effective income tax rate was 39.8% for the year ended March 31,
      2005
      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 from $6.2 million, or $0.44 per diluted share, for fiscal
      2005,
      to a net loss of $87,000, or $0.01 loss per diluted share, for fiscal 2006,
      primarily from expenses related to the recapitalization plan. Excluding the
      effect of the recapitalization plan, we achieved record net income, having
      increased from $6.2 million, for fiscal 2005 to $7.8 million for fiscal 2006,
      primarily as a result of increased sales. Excluding the effect of the
      recapitalization plan, earnings per share increased from $0.44 per diluted
      share
      to $0.55 per diluted share, a 25.0% improvement.





**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 of $10.6 million, $17.0 million and $18.0
      million for fiscal 2007, 2006 and 2005, respectively, was primarily the result
      of net income, adjusted for depreciation and amortization, and increases in
      accounts payable offset by inventory purchases. For fiscal 2006 net income
      also
      was impacted by a non-cash charge of $8.2 million from stock compensation
      related to the recapitalization plan.




Accounts
      receivable increased $4.4 million for fiscal 2007 primarily from amounts due
      from our landlords for new store construction, the amounts and timing of
      landlord reimbursements varies considerably based on individual store lease
      negotiations and the timing of new store construction.





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. Inventories increased $19.3 million in fiscal 2007, $2.7 million in
      fiscal 2006 and $10.9 million in fiscal 2005, primarily from the addition of
      five stores in fiscal 2007, four stores in fiscal 2006 and five stores in fiscal
      2005. In fiscal 2007, average inventory per store increased 14.2% compared
      to
      fiscal 2006 for the following reasons: 1) we ended fiscal 2006 with unusually
      low levels of winter related products due to late winter snowfall that year
      which caused a greater than expected sell through of winter related products,
      and 2007 inventory is more in line with historic levels, 2) weakness in sales
      at
      our mature stores and in several hardgoods categories, which merchandise will
      sell down during our first quarter of 2008, and 3) front-loading of water sports
      inventory in March 2007 to speed the transition from winter.





Historically,
      accounts payable increases as inventory increases. However, the timing of vendor
      payments or receipt of merchandise near the end of the fiscal year does
      influence this relationship. For fiscal 2007, accounts payable increased $12.9
      million while inventory increased $19.3 million, the relative difference is
      the
      result of beginning the current fiscal year with historically low inventory
      levels due to an unusual sell through of winter related products in fiscal
      2006.




25




Deferred
      rent increased $5.4 million, $4.5 million and $3.2 million for fiscal 2007,
      2006
      and 2005, respectively as we received large landlord reimbursements for
      improvements made to new stores. The landlord reimbursement varies based on
      our
      participation in the construction of a new store.





Net
      cash
      used in investing activities was $22.8 million, $19.8 million and $14.9 million
      for fiscal 2007, 2006 and 2005, respectively, primarily for capital expenditures
      as shown below, in thousands:




**Year
                ended April 1,****2007**
            
            **2006**
            
            **2005**New
                stores
            
            $
            11,466
            
            $
            10,033
            
            $
            9,840Remodels
            
            
            2,366
            
            
            2,625
            
            
            1,552Existing
                stores
            
            
            2,276
            
            
            1,393
            
            
            1,127Information
                systems
            
            
            5,291
            
            
            4,768
            
            
            1,152Rental
                equipment
            
            
            1,321
            
            
            1,161
            
            
            1,089Other
            
            
            136
            
            
            315
            
            
            438Total
            
            $
            22,856
            
            $
            20,295
            
            $
            15,198





We
      have
      continued to open new stores, five in fiscal 2007, four in fiscal 2006 and
      five
      in fiscal 2005. Net of landlord reimbursement, which is included in deferred
      rent, the average amount spent per store is $1.1 million, $1.4 million and
      $1.4
      million for fiscal 2007, 2006 and 2005, respectively. In addition, $3.5 million
      was spent on stores which will open in fiscal 2008. We are also remodeling
      mature stores; two stores were remodeled in fiscal 2007, four in fiscal 2006
      and
      two in 2005. Information systems are being upgraded with the partial
      implementation of SAP in fiscal 2007 in addition to merchandise planning and
      allocation software and an upgrade to our store systems during fiscal
      2006.





As
      a
      result of our ongoing growth and strategic initiatives, forecasted capital
      expenditures for fiscal 2008 are expected to be approximately $25 million,
      which
      will be funded by cash flow from operations and our bank credit line, as needed.
      Approximately $11 million of this amount will be used to open seven new stores
      with an additional $5 million for stores expected to open in fiscal 2009. These
      planned store openings are dependant on our landlords completing our buildings
      and surrounding retail centers on time. In addition, two stores are planned
      to
      be remodeled for approximately $2 million. In addition to the normal
      expenditures for existing stores and rental equipment, the remainder is
      primarily for expenditures on information systems, the most significant portion
      of which is the replacement of our legacy merchandise and financial systems.





Net
      cash
      provided by financing activities reflects advances and repayments of borrowings
      under our revolving credit facility. For the first time in nine years we ended
      the year with outstanding bank debt which totaled $11.8 million. The debt is
      the
      result of funding new stores and information systems as well as ending the
      year
      overstocked with inventory.





Our
      credit facility with bank, Bank of America, N.A. (the “Lender”) provides for
      advances up to $25.0 million, amended from $20.0 million in April 2007,
      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 (8.25%
      at April 1, 2007) or can be fixed for a period of time at the then current
      rate
      established under one of several indices, all at our option. In addition, there
      is an unused commitment fee of .20% per year, based on a weighted average
      formula. This credit facility expires on September 30, 2007 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
      we
      are subject to several restrictive covenants. The principal operating covenants
      require us to maintain certain minimum cash flow coverage and debt-to-equity
      ratios and restrict the level of capital expenditures, calculated on a quarterly
      basis. We are currently in compliance with the covenants. We believe our 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 us to request additional borrowing
      capacity from the Lender or alter our expansion plans or operations.





26




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 April 1,
      2007:





**Payments
                due by period:**
            
            **Operating****Leases**
            
            **Employment****Contracts**Within
                1 year
            
            $
            29,812,296
            
            $
            169,5002
                -
                3 years
            
            
            64,066,206
            
            
            339,0004
                -
                5 years
            
            
            59,348,550
            
            
            339,000After
                5 years
            
            
            127,402,040
            
            
            508,500Total
            
            $
            280,629,092
            
            $
            1,356,000





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 $3.0 million relating
      to
      purchase commitments were outstanding as of April 1, 2007 and expire within
      one
      year.





No
      cash
      dividends have been declared on Class A Common Stock and Class B Common Stock
      in
      fiscal 2007. 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**





Our
      significant accounting policies are described in Note 2 to the financial
      statements, which have been prepared in accordance with accounting principles
      generally accepted in the United States. In preparing the 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. We believe that the following summarizes critical
      accounting policies which require significant judgments and estimates in the
      preparation of our consolidated financial statements.





**Inventory
      Valuation.** Merchandise inventories are stated at the lower of cost (first-in, first-out
      “FIFO” basis determined by the retail method of accounting) or market. We
      consider cost to include direct cost of merchandise and inbound freight, plus
      internal costs associated with merchandise procurement, storage and handling.
      The retail method is widely used in the retail industry due to its practicality.
      Under the retail method, cost is determined by applying a calculated
      cost-to-retail ratio across groupings of similar items, known as departments.
      As
      a result, the retail method results in an averaging of inventory costs across
      similar items within a department. The cost-to-retail ratio is applied to ending
      inventory at its current owned retail valuation to determine the cost of ending
      inventory on a department basis. Current owned retail represents the retail
      price for which merchandise is offered for sale on a regular basis reduced
      for
      any permanent or clearance markdowns. As a result, the retail method normally
      results in an inventory valuation that is lower than a traditional FIFO cost
      basis.




Inherent
      in the retail method calculation are certain significant management judgments
      and estimates including initial mark-up, markdowns and shrinkage, which can
      significantly impact the owned retail and, therefore, the ending inventory
      valuation at cost. Specifically, the failure to take permanent or clearance
      markdowns on a timely basis can result in an overstatement of carrying cost
      under the retail method. Management believes that its application of the retail
      method reasonably states inventory at the lower of cost or market.




27




We
      regularly review 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 our 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 our 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. We generally accept 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. We accommodate
      customers who do not have a receipt or proof of purchase by offering an exchange
      or store credit. When available we track the original sale date with each return
      and provide 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.





We
      have a
      customer loyalty program, Action Pass, which allows members to earn points
      for
      each purchase completed at our stores. Points earned enable members to receive
      a
      certificate that may be redeemed on future purchases. The value of points earned
      are included in accrued expenses and recorded as a reduction in sales at the
      time the points are earned, based on the retail value of points that are
      projected to be redeemed.




**Gift
      Card/Certificate Redemption.** We
      offer
      our customers the option of purchasing gift cards and, in the past, gift
      certificates which may be used toward the future purchase of our 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. We record unredeemed Gift Cards as a liability until the
      point
      of redemption.




Our
      historical experience indicates that not all issued Gift Cards are redeemed
      (the
“Breakage”). Based upon over 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, we recognize 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, Breakage was recognized at the time of
      issuance of Gift Cards. For fiscal years subsequent to March 31, 2005, the
      method of accounting has been changed 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 was immaterial. The revenue from Breakage
      is
      included in the income statement line item net sales and amounted to
      approximately $532,000, $397,000 and $263,000 for fiscal years 2007, 2006 and
      2005, 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.** We
      account 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.” We review 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.




28




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





Significant
      management judgment is required in determining the provision for income taxes,
      deferred tax assets and liabilities and any valuation allowance recorded against
      net deferred tax assets. Based on our history of operating earnings, no
      valuation allowance has been recorded as of April 1, 2007. 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 our 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 we do business.





**Stock-Based
      Compensation** .
      Prior
      to the April 1, 2006 adoption of the Financial Accounting Standards Board
      (“FASB”) Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), the
      Company accounted for stock-based compensation using the intrinsic value method
      prescribed in Accounting Principles Board Opinion (“APB”) No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations. As
      permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS
      123”), stock-based compensation was included as a pro forma disclosure in the
      notes to the consolidated financial statements. Effective April 1, 2006, the
      Company adopted the fair value recognition provisions of SFAS 123R, using the
      modified-prospective transition method. Under this transition method,
      stock-based compensation expense was recognized in the consolidated financial
      statements for granted, modified or settled stock options. The provisions of
      SFAS 123R apply to new stock options and stock options outstanding, but not
      yet
      vested, on the effective date of April 1, 2006. Results for prior periods have
      not been restated, as provided for under the modified-prospective transition
      method. Total stock-based compensation expense recognized for the 2007 fiscal
      year was $166,178 before income taxes, and the related tax benefit was $67,711.
      On March 31, 2006 we accelerated the vesting of options to purchase an aggregate
      of 209,514 shares of Class A Common Stock and 29,931 shares of Class B Common
      Stock. The purpose of accelerating the vesting of the options is to reduce
      the
      non-cash compensation expense that we otherwise would be required to recognize.





**Recently
      Issued Accounting Pronouncements**





In
      July 2006, the Emerging Issues Task Force promulgated Issue No. 06-3
      (“Issue”), How Taxes Collected from Customers and Remitted to Governmental
      Authorities Should be Presented in the Income Statement (i.e., Gross Versus
      Net
      Presentation). The Task Force concluded that entities should present these
      taxes
      in the income statement on either a gross or a net basis based upon their
      accounting policy. However, this Issue states that if such taxes are
      significant, and are presented on a gross basis, the amounts of those taxes
      should be disclosed. This Issue should be applied to financial reports for
      interim and annual reporting periods beginning after December 15, 2006.
      Since we currently record taxes on a net basis (i.e., sales tax is not included
      in sales, but is instead recorded as a liability under accrued expenses), the
      adoption of this Issue will not have a material impact on our net earnings
      or
      financial position.





In
      July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in
      Income Taxes, an Interpretation of FASB Statement No. 109. FIN No. 48
      provides guidance regarding the recognition, measurement, presentation and
      disclosure in the financial statements of tax positions taken or expected to
      be
      taken on a tax return, including the decision whether to file or not to file
      in
      a particular jurisdiction. FIN No. 48 is effective for fiscal years
      beginning after December 15, 2006. We will adopt FIN No. 48 beginning
      in the first quarter of fiscal 2008. The cumulative effect of applying the
      provisions of FIN No. 48 upon initial adoption will be reported as an
      adjustment to retained earnings as of the beginning of fiscal 2008. We are
      evaluating the impact, if any, the adoption of FIN No. 48 will have on our
      operating income, net earnings or retained earnings.




29




In
      May 2007, the FASB issued FSP FIN No. 48-1, Definition of “Settlement”
in FASB Interpretation No. 48. FSP FIN No. 48-1 provides guidance on how a
      company should determine whether a tax position is effectively settled for
      the
      purpose of recognizing previously unrecognized tax benefits. FSP FIN
      No. 48-1 is effective upon initial adoption of FIN No. 48, which we
      will adopt in the first quarter of fiscal 2008, as indicated above.





In
      September 2006, the U.S. Securities and Exchange Commission (“SEC”) issued
      Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements, which provides interpretive guidance on the consideration of the
      effects of prior-year misstatements in quantifying current-year misstatements
      for the purpose of a materiality assessment. SAB No. 108 is effective for
      fiscal years ending after November 15, 2006. We adopted SAB No. 108 in
      the fourth quarter of fiscal 2007. The cumulative effect of initially applying
      the provisions of SAB No. 108 may be reported as a cumulative adjustment to
      retained earnings at the beginning of the year of adoption. The adoption of
      SAB
      No. 108 had no impact on our net earnings or financial
      position.





In
      September 2006, the FASB issued 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 December 15, 2007. We plan to adopt SFAS No. 157
      beginning in the first quarter of fiscal 2009. We are evaluating the impact,
      if
      any, the adoption of SFAS No. 157 will have on our operating income or net
      earnings.





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. Companies are not allowed to adopt
      SFAS No. 159 on a retrospective basis unless they choose early adoption. We
      are evaluating the impact, if any, the adoption of SFAS No. 159 will have
      on our operating income or net earnings.





**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





Our
      exposure to interest rate risk consists primarily of borrowings under our credit
      facility, which bears interest at floating rates (primarily LIBOR 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
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





The
      financial statements required by this section are submitted as part of Item
      15
      of this report.





**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND** **FINANCIAL
      DISCLOSURE**





None.




30




**ITEM
      9A. CONTROLS AND PROCEDURES**





Our
      Chief
      Executive Officer, Craig Levra, and Chief Financial Officer, Howard Kaminsky,
      with the participation of our 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 our disclosure controls
      and procedures are effective at the reasonable assurance level as of the end
      of
      the period covered by this report in making known 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,
      known to the Chief Executive Officer or the Chief Financial Officer, which
      occurred during the quarter ended April 1, 2007 that have materially affected,
      or are reasonably likely to materially affect, the Company’s internal control
      over financial reporting.





**ITEM
      9B. OTHER INFORMATION**





None.




31




**PART
      III**





**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**





The
      information concerning the directors and executive officers of the Company
      is
      incorporated herein by reference from the section entitled “Proposal 1 -
      Election of Directors” contained in the definitive proxy statement of the
      Company to be filed pursuant to Regulation 14A within 120 days after the end
      of
      the Company’s last fiscal year (the “Proxy Statement”).





**ITEM
      11. EXECUTIVE COMPENSATION**





The
      information concerning executive compensation is incorporated herein by
      reference from the section entitled “Proposal 1 - Election of Directors”
contained in the Proxy Statement.





**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT** **AND
      RELATED STOCKHOLDER MATTERS**





The
      information concerning the security ownership of certain beneficial owners
      and
      management is incorporated herein by reference from the sections entitled
“General Information - Security Ownership of Principal Stockholders and
      Management” and “Proposal 1 - Election of Directors” contained in the Proxy
      Statement.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND** **DIRECTOR
      INDEPENDENCE**





The
      information concerning certain relationships and related transactions is
      incorporated herein by reference from the section entitled “Proposal 1-Election
      of Directors” contained in the Proxy Statement.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





The
      information concerning principal accountant fees and services is incorporated
      herein by reference from the section entitled “Independent Registered Public
      Accounting Firm” contained in the Proxy Statement. ****




32




**PART
      IV**





**ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**




(a)
            
            (1)
            
            Financial Statements - The financial
              statements listed on the accompanying Index  to
              Audited Consolidated Financial Statements are filed as part of this
              report.


(2)
              
              Schedules
                  - Valuations and Qualifying
                  Accounts.
 For fiscal
                    years 2007,
                    2006 and 2005.


Allowance
                for Sales Returns (Year ended)
            
            Balance
                at beginning of period
            
            Additions
            
            Deductions
            
            Balance
                at end of period4/1/2007
            
            $
            386,000
            
            $
            19,763,851
            
            $
            19,755,851
            
            $
            394,0003/31/2006
            
            $
            330,000
            
            $
            16,769,528
            
            $
            16,713,528
            
            $
            386,0003/31/2005
            
            $
            240,000
            
            $
            15,302,119
            
            $
            15,212,119
            
            $
            330,000




Allowances
        for estimated returns are recorded at the estimated gross profit based upon
        our
        historical return patterns.  Sales return allowances are recorded in other
        accrued expenses on the Consolidated Balance Sheets.
 (b)
                
                Exhibits
                  - See Index on
                  Page 55.
  33





**Sport
      Chalet, Inc.**





**Index
      to Audited Consolidated Financial Statements**




PageReport
                  of Independent Registered Public Accounting Firm
              
              
              35Consolidated
                  Statements of Operations for each of the three years in theperiod
                  ended April 1, 2007
              
              
              36Consolidated
                  Balance Sheets as of April 1, 2007 and March 31, 2006
              
              
              37Consolidated
                  Statements of Stockholders’ Equity for each of the threeyears
                  in the period ended April 1, 2007
              
              
              38Consolidated
                  Statements of Cash Flows for each of the three years in theperiod
                  ended April 1, 2007
              
              
              39Notes
                  to Consolidated Financial Statements
              
              
              40




34




**Report
      of Independent Registered Public Accounting Firm**







To
      the
      Stockholders and Board of Directors


Sport
      Chalet, Inc.




We
        have
        audited the accompanying consolidated balance sheets of Sport Chalet, Inc.
        as of
        April 1, 2007 and March 31, 2006 and the related consolidated statements
        of
        operations, stockholders’ equity and cash flows for each of the years in the
        three year period ended April 1, 2007. Our audits also included the financial
        statement schedule listed in the Index at Item 15(a). These consolidated
        financial statements are the responsibility of the Company’s management. Our
        responsibility is to express an opinion on these consolidated financial
        statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. An audit
        includes consideration of internal control over financial reporting as a
        basis
        for designing audit procedures that are appropriate in the circumstances,
        but
        not for the purpose of expressing an opinion on the effectiveness of the
        Company’s internal control over financial reporting. Accordingly, we express no
        such opinion. An audit includes examining, on a test basis, evidence supporting
        the amounts and disclosures in the consolidated financial statements. An
        audit
        also includes assessing the accounting principles used and significant estimates
        made by management, as well as evaluating the overall financial statement
        presentation. We believe that our audits provide a reasonable basis for our
        opinion.
 
 In
        our
        opinion, the consolidated financial statements and schedule referred to above
        present fairly, in all material respects, the consolidated financial position
        of
        Sport Chalet, Inc. as of April 1, 2007 and March 31, 2006, and the consolidated
        results of its operations and its cash flows for each of the years in the
        three
        year period ended April 1, 2007, in conformity with accounting principles
        generally accepted in the United States of America.


/s/
      Moss
      Adams LLP







Los
      Angeles, California


June
      12,
      2007




35




**Sport
      Chalet, Inc.**





**Consolidated
      Statements of Operations**





**Fiscal
                year ended,****2007**
            
            **2006**
            
            **2005**Net
                sales
            
            **$**
            **388,209,155**
            
            $
            343,204,097
            
            $
            309,089,551Cost
                of goods sold, buying and occupancy costs
            
            
            **268,188,190**
            
            
            237,137,009
            
            
            213,428,269Gross
                profit
            
            
            **120,020,965**
            
            
            106,067,088
            
            
            95,661,282Selling,
                general and administrative expenses
            
            
            **107,775,726**
            
            
            101,534,075
            
            
            85,144,702Income
                from operations
            
            
            **12,245,239**
            
            
            4,533,013
            
            
            10,516,580Interest
                expense
            
            
            **516,332**
            
            
            266,910
            
            
            263,523Income
                before taxes
            
            
            **11,728,907**
            
            
            4,266,103
            
            
            10,253,057Income
                tax provision
            
            
            **4,630,193**
            
            
            4,353,292
            
            
            4,082,000Net
                income (loss)
            
            **$**
            **7,098,714**
            
            $
            (87,189
            )
            $
            6,171,057Earnings
                (loss) per share:Basic
            
            **$**
            **0.51**
            
            $
            (0.01
            )
            $
            0.46Diluted
            
            **$**
            **0.49**
            
            $
            (0.01
            )
            $
            0.44Weighted
                average number of common shares outstanding:Basic
            
            
            **13,850,220**
            
            
            13,505,952
            
            
            13,360,986Diluted
            
            
            **14,459,547**
            
            
            13,505,952
            
            
            14,007,372





*See
      accompanying notes.*




36




**Sport
      Chalet, Inc.**





**Consolidated
      Balance Sheets**





**April
                1,**
            
            March
                31,**2007**
            
            2006**Assets**Current
                assets:**Cash
                and cash equivalents**
            
            **$**
            **3,840,757**
            
            $
            2,563,930Accounts
                receivable
            
            
            **6,894,282**
            
            
            2,479,386Merchandise
                inventories
            
            
            **87,066,998**
            
            
            67,777,059Prepaid
                expenses and other current assets
            
            
            **4,827,232**
            
            
            3,857,570Prepaid
                income taxes
            
            
            **1,481,914**
            
            
            -Deferred
                income taxes
            
            
            **3,145,502**
            
            
            3,920,192Total
                current assets
            
            
            **107,256,685**
            
            
            80,598,137Fixed
                assets, net
            
            
            **59,487,415**
            
            
            48,365,653Deferred
                income taxes
            
            
            **4,504,986**
            
            
            3,274,015Total
                assets
            
            **$**
            **171,249,086**
            
            $
            132,237,805**Liabilities
                and stockholders’ equity**Current
                liabilities:Accounts
                payable
            
            **$**
            **29,407,673**
            
            $
            16,467,120Loan
                payable to bank
            
            
            **11,776,278**
            
            
            -Salaries
                and wages payable
            
            
            **4,999,139**
            
            
            5,473,610Income
                taxes payable
            
            
            **-**
            
            
            302,274Other
                accrued expenses
            
            
            **15,580,770**
            
            
            14,909,439Total
                current liabilities
            
            
            **61,763,860**
            
            
            37,152,443Deferred
                rent
            
            
            **23,059,084**
            
            
            17,616,994Commitments
                and contingencies**Stockholders’
                equity:Preferred
                stock, $.01 par value:Authorized
                shares - 2,000,000
              Issued
                and outstanding shares - none
            
            
            **-**
            
            
            -Class
                A Common stock, $.01 par value:Authorized
                shares - 46,000,000
              Issued
                and outstanding shares - 12,252,654 in 2007 and
              11,927,146
                in 2006
            
            
            **122,527**
            
            
            119,271Class
                B Common stock, $.01 par value:Authorized
                shares - 2,000,000
              Issued
                and outstanding shares - 1,741,489 in 2007 and
              1,703,909
                in 2006
            
            
            **17,415**
            
            
            17,039Additional
                paid-in capital
            
            
            **33,190,752**
            
            
            31,335,324Retained
                earnings
            
            
            **53,095,448**
            
            
            45,996,734Total
                stockholders’ equity
            
            
            **86,426,142**
            
            
            77,468,368Total
                liabilities and stockholders’ equity
            
            **$**
            **171,249,086**
            
            $
            132,237,805





*See
      accompanying notes.*




37




**Sport
      Chalet, Inc.**





**Consolidated
      Statements of Stockholders’ Equity**


**Common
                  Stock****Class
                  A**
              
              **Class
                  B****Share**
              
              **Amount**
              
              **Share**
              
              **Amount**
              
              **Additional
                  Paid-in Capital**
              
              **Retained
                  Earnings**
              
              **Total**Balance
                  at March 31, 2004
              
              
              11,678,338
              
              $
              116,783
              
              
              1,668,363
              
              $
              16,684
              
              $
              22,764,174
              
              $
              39,912,866
              
              $
              62,810,507Options
                  exercised
              
              
              22,456
              
              
              225
              
              
              3,208
              
              
              32
              
              
              59,101
              
              
              -
              
              
              59,358Related
                  income tax benefit
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              69,244
              
              
              -
              
              
              69,244Shares
                  granted
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              -Net
                  income for 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,171,057
              
              
              6,171,057Balance
                  at March 31, 2005
              
              
              11,700,794
              
              
              117,008
              
              
              1,671,571
              
              
              16,716
              
              
              22,892,519
              
              
              46,083,923
              
              
              69,110,166Options
                  exercised
              
              
              226,352
              
              
              2,263
              
              
              32,338
              
              
              323
              
              
              471,603
              
              
              -
              
              
              474,189Related
                  income tax benefit
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,013,895
              
              
              -
              
              
              1,013,895Optionee
                  withholdingtaxes
                  from exercise of stock options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,264,519
              )
              
              -
              
              
              (1,264,519
              )Shares
                  granted
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              8,221,826
              
              
              -
              
              
              8,221,826Net
                  loss for 2006
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (87,189
              )
              
              (87,189
              )Balance
                  at March 31, 2006
              
              
              11,927,146
              
              
              119,271
              
              
              1,703,909
              
              
              17,039
              
              
              31,335,324
              
              
              45,996,734
              
              
              77,468,368Options
                  exercised
              
              
              **325,508**
              
              
              **3,256**
              
              
              **37,580**
              
              
              **376**
              
              
              **1,353,850**
              
              
              **-**
              
              
              **1,357,482**Related
                  income tax benefit
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              **1,225,662**
              
              
              **-**
              
              
              **1,225,662**Optionee
                  withholdingtaxes
                  from exercise of stock options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              **(890,264**
              **)**
              
              **-**
              
              
              **(890,264**
              **)**Shares
                  granted
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              **166,180**
              
              
              -
              
              
              **166,180**Net
                  income for 2007
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              **7,098,714**
              
              
              **7,098,714**Balance
                  at April 1, 2007
              
              
              **12,252,654**
              
              **$**
              **122,527**
              
              
              **1,741,489**
              
              **$**
              **17,415**
              
              **$**
              **33,190,752**
              
              **$**
              **53,095,448**
              
              **$**
              **86,426,142**




*See
      accompanying notes.*




38




**Sport
      Chalet, Inc.**





**Consolidated
      Statements of Cash Flows**





**Fiscal
                Year ended,****2007**
            
            2006
            
            2005**Operating
                activities**Net
                income (loss)
            
            **$**
            **7,098,714**
            
            $
            (87,189
            )
            $
            6,171,057Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            **11,418,930**
            
            
            9,225,765
            
            
            7,692,015(Gain)
                Loss on disposal of equipment
            
            
            **266,396**
            
            
            (213,122
            )
            
            360,761Stock
                compensation
            
            
            **166,178**
            
            
            8,221,826
            
            
            -Deferred
                income taxes
            
            
            **(456,281**
            **)**
            
            (1,728,375
            )
            
            (1,787,158
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            **(4,414,894**
            **)**
            
            (1,017,344
            )
            
            (253,108
            )Merchandise
                inventories
            
            
            **(19,289,939**
            **)**
            
            (2,715,917
            )
            
            (10,889,087
            )Prepaid
                expenses and other current assets
            
            
            **(969,662**
            **)**
            
            (813,417
            )
            
            (842,117
            )Prepaid
                income taxes
            
            
            **(1,481,914**
            **)**
            
            -
            
            
            -Accounts
                payable
            
            
            **12,940,553**
            
            
            (2,338,833
            )
            
            7,787,476Salaries
                and wages payable
            
            
            **(474,471**
            **)**
            
            393,290
            
            
            1,725,952Other
                accrued expenses
            
            
            **671,331**
            
            
            3,077,844
            
            
            3,887,638Income
                taxes payable
            
            
            **(302,274**
            **)**
            
            (522,785
            )
            
            789,428Deferred
                rent
            
            
            **5,442,090**
            
            
            4,480,691
            
            
            3,242,722Net
                cash provided by operating activities
            
            
            **10,614,757**
            
            
            15,962,434
            
            
            17,885,579**Investing
                activities**Purchases
                of fixed assets
            
            
            **(22,855,770**
            **)**
            
            (20,295,088
            )
            
            (15,197,322
            )Other
                assets
            
            
            **-**
            
            
            76,960
            
            
            24,076Proceeds
                from sales of fixed assets
            
            
            **48,682**
            
            
            419,370
            
            
            264,106Net
                cash used in investing activities
            
            
            **(22,807,088**
            **)**
            
            (19,798,758
            )
            
            (14,909,140
            )**Financing
                activities**Proceeds
                from bank borrowings
            
            
            **70,380,235**
            
            
            46,361,065
            
            
            10,700,000Repayment
                of bank borrowings
            
            
            **(58,603,957**
            **)**
            
            (46,361,065
            )
            
            (10,700,000
            )Proceeds
                from exercise of stock options
            
            
            **1,357,482**
            
            
            474,189
            
            
            59,358Optionee
                withholding taxes from exercise of stock options
            
            
            **(890,264**
            **)**
            
            (1,264,519
            )
            
            -Tax
                benefit on employee stock options
            
            
            **1,225,662**
            
            
            1,013,895
            
            
            69,244Net
                cash provided by (used in) financing activities
            
            
            **13,469,158**
            
            
            223,565
            
            
            128,602Increase
                (decrease) in cash and cash equivalents
            
            
            **1,276,827**
            
            
            (3,612,759
            )
            
            3,105,041Cash
                and cash equivalents at beginning of year
            
            
            **2,563,930**
            
            
            6,176,689
            
            
            3,071,648Cash
                and cash equivalents at end of year
            
            **$**
            **3,840,757**
            
            $
            2,563,930
            
            $
            6,176,689Cash
                paid during the year for:Income
                taxes
            
            **$**
            **5,645,000**
            
            $
            5,591,000
            
            $
            3,624,000Interest
            
            
            **356,801**
            
            
            157,946
            
            
            101,512





*See
      accompanying notes.*




39




**Sport
      Chalet, Inc.**


**Notes
        to Consolidated Financial Statements**




**1.
      Description of Business and Recapitalization Plan**





Sport
      Chalet, Inc. (the “Company”), founded in 1959, is a leading operator of 45
      full-service, specialty sporting goods stores in California, Nevada and Arizona.
      The Company has 32 locations in Southern California, seven in Northern
      California, one in Central California, two in Nevada and three in Arizona.





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 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
      Levra, Chairman and Chief Executive Officer, and Howard 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.





The
      recapitalization doubled the 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 Levra and
      Howard 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 stock they then owned. These shares of Class B Common
      Stock transferred by the Founder are treated as a contribution to the Company’s
      capital with the offsetting charge as compensation expense. For the fiscal
      year
      ended March 31, 2006, 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 tax savings related to the
      recapitalization plan was limited to $854,000 as the transfer of shares resulted
      in compensation expense in excess of the specified limits for tax purposes.




40




**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements
          (continued)**




The
      effect on net income is as follows:




Fiscal
                  year endedMarch
                  31, 2006Compensation
                  expense
              
              $
              8,221,826Professional
                  fees
              
              
              471,3888,693,214Income
                  tax benefit
              
              
              (854,000
              )Effect
                  on net income
              
              $
              7,839,214




The
      Founder along with certain members of management collectively own approximately
      66% of the Company’s outstanding Class A and Class B Common Stock at April 1,
      2007.





**Segments
      of an Enterprise**





The
      Company reports segment information in accordance with SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information” (“SFAS
      131”). Under SFAS 131 all publicly traded companies are required to report
      certain information about the operating segments, products, services and
      geographical areas in which they operate and their major customers. The Company
      operates in a single business segment and operates only in the United States.





**2.
      Summary of Significant Accounting Policies**





**Principles
      of Consolidation**





The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries. All significant inter-company transactions and
      balances have been eliminated in consolidation.





**Cash
      and Cash Equivalents**





The
      Company considers all highly liquid investments with maturities of less than
      three months when purchased to be cash equivalents.





The
      Company has a concentration of credit risk when cash deposits in banks are
      in
      excess of federally insured limits in the event of nonperformance by the related
      financial institution. However, management does not anticipate nonperformance
      by
      these financial institutions.





**Merchandise
      Inventories**





Merchandise
      inventories are stated at the lower of cost (first-in, first-out “FIFO” basis
      determined by the retail method of accounting) or market. Cost includes the
      direct cost of merchandise and inbound freight, plus internal costs associated
      with merchandise procurement, storage and handling. The retail method is widely
      used in the retail industry due to its practicality. Under the retail method,
      cost is determined by applying a calculated cost-to-retail ratio across
      groupings of similar items, known as departments. As a result, the retail method
      results in an averaging of inventory costs across similar items within a
      department. The cost-to-retail ratio is applied to ending inventory at its
      current owned retail valuation to determine the cost of ending inventory on
      a
      department basis. Current owned retail represents the retail price for which
      merchandise is offered for sale on a regular basis reduced for any permanent
      or
      clearance markdowns. As a result, the retail method normally results in an
      inventory valuation that is lower than a traditional FIFO cost
      basis.




41




**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements
          (continued)**




Inherent
      in the retail method calculation are certain significant management judgments
      and estimates including initial mark-up, markdowns and shrinkage, which can
      significantly impact the owned retail and, therefore, the ending inventory
      valuation at cost. Specifically, the failure to take permanent or clearance
      markdowns on a timely basis can result in an overstatement of carrying cost
      under the retail method. Management believes that its application of the retail
      method reasonably states inventory at the lower of cost or market.




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.





**Accounts
      Receivable**





Accounts
      receivable is reported net of an allowance for doubtful accounts. The allowance
      for doubtful accounts represents an estimate of the losses inherent in accounts
      receivable based on several factors, including historical trends of aging of
      accounts, write-off experience and expectations of future performance. Accounts
      receivable consists of amounts due from customers, vendors and landlords as
      follows:


**April
                  1,**
              
              March
                  31,**2007**
              
              2006Customers
              
              **$**
              **1,267,403**
              
              $
              868,194Vendors
              
              
              **656,771**
              
              
              565,838Landlords
              
              
              **5,095,506**
              
              
              1,135,121Other
              
              
              **20,772**
              
              
              40,233**7,040,452**
              
              
              2,609,386Allowance
                  for doubtful accounts
              
              
              **(146,170**
              **)**
              
              (130,000
              )Net
                  accounts receivable
              
              **$**
              **6,894,282**
              
              $
              2,479,386




**Fixed
      Assets**





Fixed
      assets are primarily fixtures, equipment, and leasehold improvements which
      are
      stated on the basis of cost. Depreciation of fixtures and equipment is computed
      primarily on the straight-line method over the estimated useful lives of the
      assets. Leasehold improvements are amortized on the straight-line method over
      the shorter of the life of the asset or the remaining lease term. The estimated
      useful lives of the assets are as follows:





Fixtures
                and equipment
            
            
            5-7
                yearsComputer
                software and equipment
            
            
            3-7
                yearsRental
                equipment
            
            
            3
                yearsVehicles
            
            
            5
                yearsLeasehold
                improvements
            
            
            10-15
                years




42




**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements (continued)**


The
      following is a summary of the components of fixed assets:


**April
                  1,**
              
              March
                  31,**2007**
              
              2006Fixtures
                  and equipment
              
              **$**
              **30,962,838**
              
              $
              25,252,625Computer
                  software and equipment
              
              
              **20,251,062**
              
              
              15,612,045Rental
                  equipment
              
              
              **6,291,406**
              
              
              5,010,435Vehicles
              
              
              **407,908**
              
              
              376,448Leasehold
                  improvements
              
              
              **50,243,510**
              
              
              41,448,393**108,156,724**
              
              
              87,699,946Accumulated
                  depreciation
              
              
              **(48,669,309**
              **)**
              
              (39,334,293
              )Net
                  fixed assets
              
              **$**
              **59,487,415**
              
              $
              48,365,653





Maintenance
      and repairs are charged to expense as incurred and the costs of additions and
      betterments that increase the useful lives of the assets are capitalized. When
      leasehold improvements or equipment are disposed of, the cost and related
      accumulated depreciation and amortization are removed from the accounts and
      any
      gain or loss is included in operations.





**Long
      Lived Assets**





The
      Company accounts for long-lived assets in accordance with the provisions of
      Statement of Financial 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.





**Financial
      Instruments**





Cash
      and
      cash equivalents, marketable securities, accounts receivable and accounts
      payable are carried at cost which approximates fair value due to their
      short-term nature.




**Pre-opening
      Costs**




Non-capital
      expenditures incurred prior to the opening of a new store are charged to
      operations as incurred.




**Revenue
      Recognition**




Revenue
      from retail sales are recognized at the time the customer receives the
      merchandise, net of an allowance for estimated returns. Issuance of gift cards
      and store credits are recorded as a liability until redeemed for merchandise.
      Revenues from services and licensing agreement are generally recorded on a
      cash
      basis, which approximates when the revenue is earned, and are not material.





The
      Company has a customer loyalty program, Action Pass, which allows members to
      earn points for each purchase completed at our stores. Points earned enable
      members to receive a certificate that may be redeemed on future purchases.
      The
      value of points earned are included in accrued expenses and recorded as a
      reduction in sales at the time the points are earned, based on the retail value
      of points that are projected to be redeemed.




43




**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements (continued)**


**Gift
      Card/Certificate Redemption**




Gift
      cards and certificates are issued by the Company to be used toward the future
      purchase of the Company’s products. Revenue from gift cards, gift certificates
      and store merchandise credits (the “Gift Cards”) are recognized at the time of
      redemption. The Gift Cards have no expiration dates.




The
      Company’s experience indicates that not all issued Gift Cards are redeemed (the
“Breakage”). Accordingly, Breakage is recognized 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 Breakage
      was
      recognized at the time of issuance of Gift Cards. For fiscal years subsequent
      to
      March 31, 2005, the method of accounting has been changed 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 was immaterial. The revenue from
      Breakage is included in the income statement line item net sales and amounted
      to
      approximately $532,000, $397,000 and $263,000 for fiscal years 2007, 2006 and
      2005, respectively.




**Cost
      of Goods Sold, Buying and Occupancy**




Cost
      of
      goods sold, buying and occupancy includes product costs, net of discounts and
      allowances, and inbound freight charges, as well as distribution center,
      purchasing, and occupancy costs.  Distribution center costs include
      receiving costs, internal transfer costs, labor, building rent, utilities,
      depreciation, repairs and maintenance for the Company’s distribution center and
      distribution system.  Purchasing costs include both labor and
      administrative expense associated with the purchase of the Company’s
      products.  Occupancy costs primarily consist of store rent.  All these
      costs reflect, in management’s opinion, the direct cost involved in bringing the
      Company’s product to market




**Vendor
      Allowances**




Vendor
      allowances include consideration received from vendors, such as volume rebates
      and cooperative advertising funds. The majority of this consideration is based
      on contract terms. Amounts that represent the reimbursement of costs incurred
      for advertising are recorded as a reduction of the related expense in the period
      incurred. Amounts expected to be received from vendors relating to the purchase
      of merchandise are recognized as a reduction of cost of good sold as the
      merchandise is sold.




**Advertising
      Costs**




Advertising
      costs are expensed as incurred. Advertising expense, net of vendor
      reimbursement, amounted to $9,601,644, $8,166,267 and $7,923,512 for fiscal
      years 2007, 2006 and 2005, respectively.




**Income
      Taxes**




The
      Company utilizes the liability method of accounting to compute the difference
      between the tax basis of assets and liabilities and the related financial
      reporting amounts using currently enacted tax laws and rates.




**Deferred
      Rent**




Rent
      expense under non-cancelable operating leases with scheduled rent increases
      or
      free rent periods is accounted for on a straight line basis over the lease
      term,
      beginning on the date of initial possession, which is generally when the Company
      begins 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.




44




**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements
          (continued)**




**Self-insurance
      Accruals**




The
      Company self insures a significant portion of expected losses under workers’
compensation and general liability programs. Accrued liabilities have been
      recorded based on estimates of the ultimate costs to settle incurred claims,
      both reported and unreported.





**Earnings
      Per Share**





Earnings
      per share has been computed in accordance with Statement of Financial Accounting
      Standard No. 128, “Earnings Per Share” (“EPS”). Basic EPS equals net income
      divided by the number of weighted average common shares. Diluted EPS includes
      potentially dilutive securities such as stock options and convertible
      securities.





A
      reconciliation of the numerators and denominators of the basic and diluted
      EPS
      computations are illustrated below:





**Fiscal
                year ended,****2007**
            
            **2006**
            
            **2005**(in
                thousands, except per share data)Basic
                EPS computation:Numerator
            
            **$**
            **7,099**
            
            $
            (87
            )
            $
            6,171Denominator:Weighted
                average common shares outstanding
            
            
            **13,850**
            
            
            13,506
            
            
            13,361Basic
                earnings (loss) per share
            
            **$**
            **0.51**
            
            $
            (0.01
            )
            $
            0.46Diluted
                EPS computation:Numerator
            
            **$**
            **7,099**
            
            $
            (87
            )
            $
            6,171Denominator:Weighted
                average common shares outstanding
            
            
            **13,850**
            
            
            13,506
            
            
            13,361Incremental
                shares from assumed conversion of options
            
            
            **609**
            
            
            -
            
            
            646Total
                weighted average common shares - assuming dilution
            
            
            **14,460**
            
            
            13,506
            
            
            14,007Diluted
                earnings (loss) per share
            
            **$**
            **0.49**
            
            $
            (0.01
            )
            $
            0.44





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 2006 fiscal year. In addition, all share and per share
      information has been adjusted to reflect the reclassification and stock dividend
      as discussed in Note 1- Description of Business and Recapitalization
      Plan.




45




**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements (continued)**


An
      aggregate of 88,000 and 551,806 options for fiscal years 2007 and 2006,
      respectively, are excluded from the computation of diluted earnings per share
      as
      their effect would have been anti-dilutive.





**Use
      of Estimates**





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.





**Stock-Based
      Compensation**





Prior
      to
      the April 1, 2006 adoption of the Financial Accounting Standards Board (“FASB”)
      Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), the Company
      accounted for stock-based compensation using the intrinsic value method
      prescribed in Accounting Principles Board Opinion (“APB”) No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations. As
      permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS
      123”), stock-based compensation was included as a pro forma disclosure in the
      notes to the consolidated financial statements. Effective April 1, 2006, the
      Company adopted the fair value recognition provisions of SFAS 123R, using the
      modified-prospective transition method. Under this transition method,
      stock-based compensation expense was recognized in the consolidated financial
      statements for granted, modified or settled stock options. The provisions of
      SFAS 123R apply to new stock options and stock options outstanding, but not
      yet
      vested, on the effective date of April 1, 2006. Results for prior periods have
      not been restated, as provided for under the modified-prospective transition
      method. Total stock-based compensation expense recognized for the 2007 fiscal
      year was $166,178 before income taxes, and the related tax benefit was $67,711.





Under
      the
      modified prospective application method, results for periods prior to April
      1,
      2006, have not been restated to reflect the effects of implementing SFAS 123R.
      The following pro forma information is presented for comparative purposes and
      illustrates the pro forma effect on net income and earnings per share for the
      2006 and 2005 fiscal years, as if we had applied the fair value recognition
      provisions of SFAS No. 123 to the stock-based compensation for that
      period:


**Fiscal
                  Year ended,****2006**
              
              **2005**Net
                  income (loss) as reported
              
              $
              (87,189
              )
              $
              6,171,057Add: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
              
              
              -
              
              
              (348,660
              )Stock-based
                  compensation expense from recapitalization, net of related tax
                  effects
              
              
              (7,541,662
              )
              
              -Total
                  stock-based employee compensation expense determined under fair
                  market
                  value based method for all awards, net of related tax effects
              
              
              (1,215,712
              )
              
              (202,138
              )Pro
                  forma net income (loss)
              
              $
              (555,550
              )
              $
              5,620,259Class
                  A and Class B income (loss) per shareAs
                  reported – basic
              
              $
              (0.01
              )
              $
              0.46As
                  reported – diluted
              
              $
              (0.01
              )
              $
              0.44Pro
                  forma – basic
              
              $
              (0.04
              )
              $
              0.42Pro
                  forma – diluted
              
              $
              (0.04
              )
              $
              0.40




46




**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements
          (continued)**




The
      fair
      value of each option granted is estimated on the date of grant using the
      Black-Scholes option-pricing 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. The following weighted average assumptions are used
      to
      estimate the fair value for stock options granted in the years listed
      below:




Fiscal
                  Year ended,2007
              
              2006
              
              2005Risk-free
                  interest rate
              
              
              4.9
              %
              
              4.0
              %
              
              4.0
              %Expected
                  volatility
              
              
              41.1
              %
              
              38.0
              %
              
              35.0
              %Expected
                  dividend yield
              
              
              0.0
              %
              
              0.0
              %
              
              0.0
              %Expected
                  life in years
              
              
              7.5
              
              
              5.0
              
              
              5.0





The
      weighted average fair value of options granted during fiscal 2007, 2006 and
      2005
      was $4.32, $3.11 and $1.16, respectively .





**Recently
      Issued Accounting Pronouncements**





In
      July 2006, the Emerging Issues Task Force promulgated Issue No. 06-3
      (“Issue”), How Taxes Collected from Customers and Remitted to Governmental
      Authorities Should be Presented in the Income Statement (i.e., Gross Versus
      Net
      Presentation). The Task Force concluded that entities should present these
      taxes
      in the income statement on either a gross or a net basis based upon their
      accounting policy. However, this Issue states that if such taxes are
      significant, and are presented on a gross basis, the amounts of those taxes
      should be disclosed. This Issue should be applied to financial reports for
      interim and annual reporting periods beginning after December 15, 2006.
      Since the Company currently record taxes on a net basis (i.e., sales tax is
      not
      included in sales, but is instead recorded as a liability under accrued
      expenses), the adoption of this Issue will not have a material impact on net
      earnings or financial position.





In
      July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in
      Income Taxes, an Interpretation of FASB Statement No. 109. FIN No. 48
      provides guidance regarding the recognition, measurement, presentation and
      disclosure in the financial statements of tax positions taken or expected to
      be
      taken on a tax return, including the decision whether to file or not to file
      in
      a particular jurisdiction. FIN No. 48 is effective for fiscal years
      beginning after December 15, 2006. The Company will adopt FIN No. 48
      beginning in the first quarter of fiscal 2008. The cumulative effect of applying
      the provisions of FIN No. 48 upon initial adoption will be reported as an
      adjustment to retained earnings as of the beginning of fiscal 2008. The Company
      is evaluating the impact, if any, the adoption of FIN No. 48 will have on
      operating income, net earnings or retained earnings.





In
      May 2007, the FASB issued FSP FIN No. 48-1, Definition of “Settlement”
in FASB Interpretation No. 48. FSP FIN No. 48-1 provides guidance on how a
      company should determine whether a tax position is effectively settled for
      the
      purpose of recognizing previously unrecognized tax benefits. FSP FIN
      No. 48-1 is effective upon initial adoption of FIN No. 48, which the
      Company will adopt in the first quarter of fiscal 2008, as indicated
      above.





In
      September 2006, the U.S. Securities and Exchange Commission (“SEC”) issued
      Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements, which provides interpretive guidance on the consideration of the
      effects of prior-year misstatements in quantifying current-year misstatements
      for the purpose of a materiality assessment. SAB No. 108 is effective for
      fiscal years ending after November 15, 2006. The Company adopted SAB
      No. 108 in the fourth quarter of fiscal 2007. The cumulative effect of
      initially applying the provisions of SAB No. 108 may be reported as a
      cumulative adjustment to retained earnings at the beginning of the year of
      adoption. The adoption of SAB No. 108 had no impact on net earnings or
      financial position.




47




**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements (continued)**


In
      September 2006, the FASB issued 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 December 15, 2007. The Company plans to adopt SFAS
      No. 157 beginning in the first quarter of fiscal 2009 and is evaluating the
      impact, if any, the adoption of SFAS No. 157 will have on operating income
      or net earnings.





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. Companies are not allowed to adopt
      SFAS No. 159 on a retrospective basis unless they choose early adoption.
      The Company plans to adopt SFAS No. 159 at the beginning of fiscal 2009 and
      is evaluating the impact, if any, the adoption of SFAS No. 159 will have on
      operating income or net earnings




**3.
      Loans Payable to Bank**





The
      Company’s credit facility with bank, Bank of America, N.A. (the “Lender”)
      provides for advances up to $25.0 million, amended from $20.0 million in April
      2007, 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 (8.25% at April 1, 2007) 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 .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.





At
      April
      1, 2007, there is $11.8 million outstanding under the facility as well as
      letters of credit amounting to $3.0 million relating to purchase
      commitments.





The
      weighted average interest rate on borrowings during the 2007 and 2006 fiscal
      years were 7.19% and 6.32% respectively.





**4.
      Commitments and Contingencies**





The
      Company leases all buildings (including its corporate office space and three
      stores from the Company’s Founder). The leases for most of the stores are
      approximately ten-year terms plus 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 to 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. All of the leases obligate the Company to pay costs of maintenance,
      utilities, and property taxes.




48




**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements (continued)**


Future
      minimum payments, by year and in the aggregate, under those leases with terms
      of
      one year or more, consist of the following at April 1, 2007:





**Leases
                with Founder**
            
            **Unrelated
                Leases**
            
            **Total**2008
            
            **$**
            **2,026,441**
            
            **$**
            **27,785,855**
            
            **$**
            **29,812,296**2009
            
            
            **2,026,441**
            
            
            **29,630,352**
            
            
            **31,656,793**2010
            
            
            **2,026,441**
            
            
            **30,382,972**
            
            
            **32,409,413**2011
            
            
            **1,972,275**
            
            
            **28,053,984**
            
            
            **30,026,259**2012
            
            
            **1,376,441**
            
            
            **27,945,851**
            
            
            **29,322,292**Thereafter
            
            
            **2,182,591**
            
            
            **125,219,448**
            
            
            **127,402,039****$**
            **11,610,630**
            
            **$**
            **269,018,462**
            
            **$**
            **280,629,092**




Total
      rent expense amounted to $33,999,055, $29,426,607 and $26,382,577 for fiscal
      years 2007, 2006 and 2005, respectively, which include $2,486,170, $2,433,933
      and $2,460,243, respectively, for the leases with the Founder. Also, total
      rent
      expense includes contingent rentals calculated as a percentage of gross sales
      over certain base amounts of $671,606, $774,009 and $1,540,158 for fiscal years
      2007, 2006 and 2005, respectively. Included in the accompanying balance sheets
      are amounts representing prepaid rent to the Founder of $151,241 at April 1,
      2007 and $138,678 at March 31, 2006.





Pursuant
      to his amended employment contract dated April 1, 2000, the Founder is paid
      a
      base salary of $150,000 per year until March 31, 2014.





The
      Company is involved from time to time in routine legal matters incidental to
      its
      business. In the opinion of the Company’s management, resolution of such matters
      will not have a material effect on its financial position or results of
      operations.





**5.
      Income Taxes**





The
      provision for income taxes for fiscal years 2007, 2006 and 2005 consists of
      the
      following:





**2007**
            
            **2006**
            
            **2005**Federal:Current
            
            **$**
            **4,001,249**
            
            $
            4,953,796
            
            $
            4,430,000Deferred
            
            
            **(388,953**
            **)**
            
            (1,492,424
            )
            
            (1,186,000
            )**3,612,296**
            
            
            3,461,372
            
            
            3,244,000State:Current
            
            
            **1,085,225**
            
            
            1,127,871
            
            
            1,439,000Deferred
            
            
            **(67,328**
            **)**
            
            (235,951
            )
            
            (601,000
            )**1,017,897**
            
            
            891,921
            
            
            838,000**$**
            **4,630,193**
            
            $
            4,353,292
            
            $
            4,082,000




49




**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements (continued)**


Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of the
      Company’s deferred tax liabilities and assets as of fiscal year end 2007 and
      2006 are as follows:





**2007**
            
            2006**Current**
            
            **Non-**
              **current**
            
            Current
            
            Non-
              currentDeferred
                tax assets:Fixed
                assets
            
            $
            -
            
            **$**
            **3,202,490**
            
            $
            -
            
            $
            1,752,668Uniform
                cost capitalization
            
            
            **471,711**
            
            
            **-**
            
            
            309,007
            
            
            -Inventory
                reserves
            
            
            **1,100,142**
            
            
            **-**
            
            
            876,357
            
            
            -Accrued
                vacation
            
            
            **409,566**
            
            
            **-**
            
            
            337,170
            
            
            -Bonus
                accrual
            
            
            **236,327**
            
            
            **-**
            
            
            730,961
            
            
            -Self-insurance
                accruals
            
            
            **582,016**
            
            
            **-**
            
            
            1,049,847
            
            
            -Allowance
                for bad debt andsales
                returns
            
            
            **220,098**
            
            
            **-**
            
            
            205,546
            
            
            -State
                income taxes
            
            
            **378,614**
            
            
            **-**
            
            
            591,745
            
            
            -Deferred
                rent
            
            
            
            
            
            **1,302,496**
            
            
            -
            
            
            1,521,347Other
            
            
            **(252,972**
            **)**
            
            
            
            
            (180,441
            )
            
            -Total
                deferred tax assets
            
            **$**
            **3,145,502**
            
            **$**
            **4,504,986**
            
            $
            3,920,192
            
            $
            3,274,015





A
      reconciliation of the provision for income taxes for fiscal years 2007, 2006
      and
      2005 with the amount computed using the federal statutory rate
      follows:





**2007**
            
            **2006**
            
            **2005**Statutory
                rate, 35% in 2007, 34% in 2006 and 2005 applied to income before
                taxes
            
            **$**
            **4,105,117**
            
            $
            1,450,475
            
            $
            3,486,000State
                taxes, net of federal tax effect
            
            
            **673,943**
            
            
            248,901
            
            
            598,000Nondeductible
                stock award
            
            
            **-**
            
            
            2,629,668
            
            
            **-**Other,
                net
            
            
            **(148,867**
            **)**
            
            24,248
            
            
            (2,000
            )**$**
            **4,630,193**
            
            $
            4,353,292
            
            $
            4,082,000





For
      the
      years ended April 1, 2007, March 31, 2006 and March 31, 2005, we recorded tax
      benefits related to the exercise of non-qualified stock options which were
      recorded as a credit to additional paid-in capital in the amount of $1,225,662,
      $1,013,895 and $69,244, respectively.





**6.
      Award Plan and Stock Award**





**Award
      Plan**





The
      Company’s 2004 Equity Incentive Plan (“2004 Plan”) became effective on
      August 2, 2004 and terminated its prior plan (“1992 Plan”). Awards
      outstanding under the 1992 Plan may be exercised or settled in accordance with
      their original terms. Any shares not issued under the 1992 Plan were added
      to
      the shares available for issuance under the 2004 Plan.




50




**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements
          (continued)**




Under
      the
      2004 Plan, awards may be granted to employees, directors and consultants of
      the
      Company and its affiliates under which stock options or other awards to purchase
      or receive shares of the Company’s Common Stock may be granted. Generally the
      option price per share shall not be less than fair market value at the date
      of
      grant and options vest for periods up to five years and if not exercised, expire
      ten years from the date of grant. The 2004 Plan also provides for issuance
      by
      the Company of stock appreciation rights, restricted stock and performance
      awards.





On
      December 20, 2002, the Company’s Founder, Norbert Olberz, and his wife, through
      a family trust, granted an option to purchase all of the shares (then 4,400,510)
      of the Company’s Common Stock held by the family trust to a newly formed limited
      liability company (the “LLC”). The Company’s senior executives owned the LLC.
      Under the terms of the grant, the option becomes exercisable for one year from
      the date of death (“vesting” or “measurement” date) of Mr. Olberz, at an
      exercise price equal to the market price on the date of Mr. Olberz’ death.





For
      financial accounting purposes, the grant of the option by the Founder of the
      Company was treated in a manner consistent with a grant of an option by the
      Company. The Company has also treated the grant of the option to the LLC as
      if
      the grant was made directly to employees of the Company, as the members of
      the
      LLC are employees of the Company and, for economic and tax purposes, the LLC
      is
      a pass-through entity in that all income or losses of the LLC are passed through
      to its individual members. Because the option has been granted with an exercise
      price equal to the market price on the measurement date, under APB No. 25,
      the
      Company has not been required to recognize compensation expense in connection
      with the grant of the option. The fair value of the option is being recognized
      as compensation expense for purposes of calculating pro forma net income and
      pro
      forma earnings per share as required by FASB Statement No.123, “Accounting for
      Stock-Based Compensation.” The fair value for the option was estimated at the
      date of grant using a Black-Scholes option pricing model For purposes of pro
      forma disclosures displayed in Note 2 - Summary of Significant Accounting
      Policies: Stock Based Compensation, the estimated fair value at the date of
      grant was $4.3 million for the option and was being amortized to expense over
      the option’s vesting period, which has been estimated at nine years. Effective
      with the recapitalization plan this option was terminated (see Note 1 -
      Description of Business and Recapitalization Plan).





Stock
      options generally vest over five years in 20% increments from the date of grant
      and expire 10 years from the date of grant. As of April 1, 2007, there were
      1,684,442 shares of common stock available for issuance pursuant to future
      stock
      option grants. The stock option activity during the 2007 fiscal year is
      presented in the following table:


Options
              
              Weighted
                  Average Exercise Price
              
              Weighted-Average
                  Remaining Contractual Term (Years)
              
              Aggregate
                  Intrinsic ValueOutstanding
                  as of March 31, 2006
              
              
              1,950,168
              
              $
              4.29Granted
              
              
              97,500
              
              
              8.04Exercised
              
              
              (363,090
              )
              
              4.23Forfeited
                  or expired
              
              
              (176,992
              )
              
              3.74Outstanding
                  as of April 1, 2007
              
              
              1,507,586
              
              $
              4.84
              
              
              5.4
              
              $
              9,117,296Exercisable
                  as of April 1, 2007
              
              
              1,380,890
              
              $
              4.57
              
              
              5.1
              
              $
              8,717,100




The
      aggregate intrinsic value in the table above is based on the Company’s closing
      stock price of $10.89 and $10.85 for Class A and Class B, respectively, as
      of
      the last trading day of the period ended April 1, 2007. The total intrinsic
      value for stock options exercised during the 2007, 2006 and 2005 fiscal years
      was $1,726,153, $2,929,465 and $107,902. During the 2007 fiscal year, the total
      fair value of options vested was $141,528.




51


**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements
          (continued)**




The
      non-vested stock option activity during the 2007 fiscal year is presented in
      the
      following table: .


Shares
              
              Weighted
                  Average Fair ValueNonvested,
                  March 31, 2006
              
              
              89,642
              
              $
              3.68Granted
              
              
              97,500
              
              
              4.32Vested
              
              
              (40,948
              )
              
              3.46Forfeited
              
              
              (19,498
              )
              
              3.90Nonvested,
                  April 1, 2007
              
              
              126,696
              
              
              4.16




As
      of
      April 1, 2007, total unrecognized stock-based compensation expense related
      to
      non-vested stock options was $419,298, which is expected to be recognized over
      a
      weighted average period of approximately 1.9 years.





The
      Company issues new shares of common stock upon exercise of stock
      options.





Additional
      information regarding options outstanding as of April 1, 2007, is as
      follows:


Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of Exercise Price
              
              Shares
              
              Weighted
                  average Remaining Contractual Life (Years)
              
              Weighted
                  Average Exercise Price
              
              Shares
              
              Weighted
                  Average Exercise PriceUnder
                  $3
              
              
              551,500
              
              
              2.32
              
              $
              2.29
              
              
              551,500
              
              $
              2.29$3.00
                  to $4.490
              
              
              314,000
              
              
              4.77
              
              
              4.09
              
              
              314,000
              
              
              4.09$4.50
                  to $5.99
              
              
              1,250
              
              
              4.14
              
              
              4.55
              
              
              1,250
              
              
              4.55$6.00
                  to $7.50
              
              
              413,836
              
              
              8.31
              
              
              6.98
              
              
              378,140
              
              
              7.01$7.51
                  to $10.00
              
              
              225,500
              
              
              8.68
              
              
              8.15
              
              
              136,000
              
              
              8.17$0.00
                  to $10.00
              
              
              1,506,086
              
              
              5.43
              
              
              4.83
              
              
              1,380,890
              
              
              4.57




**Stock
      Award**





During
      the year ended March 31, 2006 the Founder transferred 974,150 shares of Class
      B
      Common Stock to certain executives. The fair market value of these shares of
      Class B Common Stock transferred by the Founder was $8,221,826 and is treated
      as
      a contribution to the Company’s capital with the offsetting charge as
      compensation expense.





**7.
      Employee Retirement Plan**





Effective
      January 1, 1997, the Company adopted the Sport Chalet, Inc. Employee Retirement
      Savings Plan (the “401(k) Plan”). All employees who have completed 3 months of
      service and are 21 years of age or older are eligible to participate. Employees
      may contribute from 2% to 100% of their eligible earnings or the government
      limit (whichever is less). The Company matches 25% of the first 4% of employee
      pre-tax earnings deferred into the 401(k) Plan. The Company expense related
      to
      this plan was $113,571, $110,014 and $129,004 for fiscal years 2007, 2006 and
      2005, respectively.




52


**Sport
        Chalet, Inc.**
 **Notes
          to Consolidated Financial Statements (continued)**


**8.
      Other Accrued Expenses**





Other
      accrued expenses consist of the following:





**April
                1,**
            
            March
                31,**2007**
            
            2006Amount
                due to customers
            
            **$**
            **4,745,663**
            
            $
            3,741,056Accrued
                sales tax
            
            
            **2,870,362**
            
            
            2,421,609Self-insurance
                accruals
            
            
            **1,182,400**
            
            
            2,400,527Other
            
            
            **6,782,345**
            
            
            6,346,247Other
                accrued expenses
            
            **$**
            **15,580,770**
            
            $
            14,909,439





**9.
      Quarterly Results of Operations (Unaudited)**





A
      summary
      of the unaudited quarterly results of operations follows (dollar amounts in
      thousands, except per share amounts). All share information has been adjusted
      to
      reflect the reclassification and stock dividend as discussed in Item 1 Business
      “Recapitalization Plan”.





**First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter****Fiscal
                2007**Net
                sales
            
            **$**
            **84,418**
            
            **$**
            **91,303**
            
            **$**
            **114,683**
            
            **$**
            **97,806**Gross
                profit
            
            
            **24,749**
            
            
            **29,360**
            
            
            **37,231**
            
            
            **28,681**Income
                from operations
            
            
            **920**
            
            
            **2,800**
            
            
            **6,929**
            
            
            **1,596**Net
                income
            
            
            **530**
            
            
            **1,682**
            
            
            **4,005**
            
            
            **881**Basic
                earnings per share
            
            
            **0.04**
            
            
            **0.12**
            
            
            **0.29**
            
            
            **0.06**Diluted
                earnings per share
            
            **$**
            **0.04**
            
            **$**
            **0.12**
            
            **$**
            **0.28**
            
            **$**
            **0.06**First
              Quarter
            
            
            Second
              Quarter
            
            
            Third
              Quarter
            
            
            Fourth
              Quarter**Fiscal
                2006**Net
                sales
            
            $
            72,144
            
            $
            81,732
            
            $
            99,665
            
            $
            89,663Gross
                profit
            
            
            21,304
            
            
            25,958
            
            
            31,743
            
            
            27,062Income
                (loss) from operations
            
            
            655
            
            
            (4,241
            )
            
            5,308
            
            
            2,811Net
                income (loss)
            
            
            389
            
            
            (5,163
            )
            
            3,049
            
            
            1,638Basic
                earnings (loss) per share
            
            
            0.03
            
            
            (0.38
            )
            
            0.22
            
            
            0.12Diluted
                earnings (loss) per share
            
            $
            0.03
            
            $
            (0.38
            )
            $
            0.22
            
            $
            0.12





The
      recapitalization plan approved by the Company’s stockholders included the
      transfer of stock from the Company’s founder to certain members of management
      with a resulting charge to selling, general and administrative expenses of
      $8.7
      million, primarily related to stock compensation, and a reduction to net income
      of $7.8 million primarily incurred in the second quarter of fiscal 2006 (see
      Note 1 - - Description of Business and Recapitalization Plan).




53




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) 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.**
                **(Registrant)**Date:
                June 12,
                2007
              By:
              /s/ Howard
                K.
                KaminskyHoward
                K. Kaminsky, Executive Vice President -
                Finance,
                  Chief Financial Officer and Secretary
                (Principal
                  Financial and Accounting Officer)




KNOW
      ALL
      PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
      constitutes and appoints Howard K. Kaminsky, Executive Vice President, Chief
      Financial Officer and Secretary, his true and lawful attorney-in-fact and agent,
      with full power of substitution, to sign and execute on behalf of the
      undersigned any and all amendments to this report, and to perform any acts
      necessary in order to file the same, with all exhibits thereto and other
      documents in connection therewith with the Securities and Exchange Commission,
      granting unto said attorney-in-fact and agent full power and authority to do
      and
      perform each and every act and thing requested and necessary to be done in
      connection therewith, as fully to all intents and purposes as he might or could
      do in person, hereby ratifying and confirming all that said attorney-in-fact
      and
      agent, or their or his or her substitutes, shall do or cause to be done by
      virtue hereof.





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.


/s/ Craig
                  L.
                  Levra
                Date: June 12, 2007Craig
                    L. Levra, Chairman,
                  Chief
                    Executive Officer and President
                  (Principal
                    Executive Officer)
 /s/ Howard
                    K.
                    Kaminsky
                  Date: June 12, 2007Howard
                        K. Kaminsky, Executive Vice President -
                      Finance,
                        Chief Financial Officer and Secretary
                      (Principal
                        Financial and Accounting Officer)
 /s/ John
                      R.
                      Attwood
                    Date: June 12, 2007John
                        R. Attwood, Director
 /s/ Donald
                        J.
                        Howard
                      Date: June 12, 2007Donald
                          J. Howard, Director


/s/ Al
                    D.
                    McCready
                  Date: June 12, 2007Al
                      D. McCready, Director
 /s/ Eric
                      S.
                      Olberz
                    Date: June 12, 2007Eric
                        S. Olberz, Director


/s/ Kenneth
                      Olsen
                    Date: June 12, 2007Kenneth
                        Olsen, Director
 /s/ Frederick
                      H. Schneider
                    Date: June 12, 2007Frederick
                          H. Schneider, Director
  54


**Exhibit
        Index**


**Number**
            
            **Description**3.1
            
            Amended
                and Restated Certificate of Incorporation.
            
            (1)3.2
            
            Certificate
                of Amendment to the Amended and Restated Certificate of
                Incorporation.
            
            (2)3.3
            
            Bylaws,
                of Sport Chalet, Inc., as amended.
            
            (3)4.1
            
            Form
                of Certificate for the Class A Common Stock.
            
            (4)4.2
            
            Form
                of Certificate for the Class B Common Stock.
            
            (4)10.1
            
            1992
                Incentive Award Plan.
            
            (5)10.2
            
            2004
                Equity Incentive Plan.
            
            (6)10.3*
            
            Form
                of Director and Officer Indemnification Agreement.
            
            (21)10.4
            
            Lease
                for La Cañada stores dated as of September 1, 1992, between the Company
                and La Cañada Properties, Inc.
            
            (7)10.5
            
            Amendment
                to Lease for La Cañada stores dated as of June 12, 2006, between the
                Company and La Cañada Properties, Inc.
            
            (21)10.6
            
            Lease
                for Huntington Beach store dated as of August 25, 1994, between the
                Company and Huntington Beach Properties, Inc.
            
            (8)10.7
            
            Amendment
                to Lease for Huntington Beach store dated as of June 12, 2006, between
                the
                Company and Huntington Beach Properties, Inc.
            
            (21)10.8
            
            Lease
                for Porter Ranch store dated as of May 7, 1999, between the Company
                and
                North San Fernando Valley Properties, Inc.
            
            (9)10.9
            
            Lease
                for La Cañada offices dated as of October 1, 2002, between the Company and
                La Cañada Properties, Inc.
            
            (10)10.10
            
            Business
                Loan Agreement dated as of June 19, 1998, between the Company and
                Bank of
                America, N.A.
            
            (11)10.11
            
            Amendment
                No. 2 to Business Loan Agreement dated as of June 19,1998, between
                the
                Company and Bank of America, N.A.
            
            (12)10.12
            
            Amendment
                No. 3 to Business Loan Agreement dated as of November 20, 2001, between
                the Company and Bank of America, N.A.
            
            (13)10.13
            
            Amendment
                No. 4 to Business Loan Agreement dated as of June 10, 2002, between
                the
                Company and Bank of America, N.A.
            
            (14)10.14
            
            Amendment
                No. 5 to Loan Agreement, dated as of September 25, 2003, between
                the
                Company and Bank of America, N.A.
            
            (15)10.15
            
            Amendment
                No. 6 to Loan Agreement, dated as of September 30, 2006, between
                the
                Company and Bank of America, N.A.
            
            (16)10.16
            
            Amendment
                No. 7 to Loan Agreement, dated as of March 31, 2006, between the
                Company
                and Bank of America, N.A.
            
            (21)10.17
            
            Amendment
                No. 8 to Loan Agreement, dated as of April 19, 2007, between the
                Company
                and Bank of America, N.A.
            
            †10.18*
            
            Employment
                Agreement dated as of April 1, 2000, between the Company and Norbert
                J.
                Olberz.
            
            (17)10.19*
            
            Amendment
                No. 1 to Employment Agreement, dated as of December 9, 2005,
                between Sport Chalet, Inc. and Norbert J. Olberz.
            
            (18)10.20*
            
            Employment
                Agreement dated as of November 15, 2002, between the Company and
                Craig L.
                Levra.
            
            (19)




55




Exhibit
      Index




**Number**
            
            **Description**10.21*
            
            Employment
                Agreement dated as of November 15, 2002, between the Company and
                Howard K.
                Kaminsky.
            
            (19)





10.22*
            
            Employment
                Agreement dated as of November 15, 2002, between the Company and
                Dennis D.
                Trausch.
            
            (19)10.31*
            
            Form
                of letter agreement re acceleration of vesting of options between
                the
                Company and certain of its executive officers and key
                employees.
            
            (22)14.1
            
            Code
                of Conduct
            
            (20)23.1
            
            Report
                of Independent Registered Public Accounting Firm.
            
            †24.1
            
            Power
                of attorney (see signature page).31.1
            
            Certification
                Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
                Adopted
                Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
            
            †31.2
            
            Certification
                Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
                Adopted
                Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
            
            †32.1
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002.
            
            ††
            
            Filed
                as part of this Annual Report on Form 10-K.*
            
            Constitute
                management contracts, or compensatory plans or arrangements, which
                are
                required to be filed pursuant to Item 601 of Regulation
                S-K.(1)
            
            Incorporated
                by reference to Exhibit 3.1 to the Company’s Registration Statement on
                Form S-1 (Registration Statement No. 33-53120).(2)
            
            Incorporated
                by reference to Exhibit A to the Company's definitive proxy statement
                for
                the 2005 annual meeting of stockholders.(3)
            
            Incorporated
                by reference to Exhibit 3.2 to the Company’s Registration Statement on
                Form S-8 (Registration Statement No. 333-107683).(4)
            
            Incorporated
                by reference to Exhibit 4.1 and 4.2 to the Company’s Registration of
                Certain Classes of Securities on Form 8-A (Registration Statement
                No.
                000-20736).(5)
            
            Incorporated
                by reference to Exhibit 10.19 to the Company’s Registration Statement on
                Form S-1 (Registration Statement No. 33-53120).(6)
            
            Incorporated
                by reference to Appendix D to the Company's definitive proxy statement
                for
                the 2005 annual meeting of stockholders.(7)
            
            Incorporated
                by reference to Exhibit 10.1 to the Company’s Registration Statement on
                Form S-1 (Registration Statement No. 33-53120).(8)
            
            Incorporated
                by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
                10-Q for the quarter ended September 30, 1994.(9)
            
            Incorporated
                by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K
                for the fiscal year ended March 31, 1999.(10)
            
            Incorporated
                by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
                10-Q for the quarter ended September 30, 2002.(11)
            
            Incorporated
                by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K
                for the fiscal year ended March 31, 1998.(12)
            
            Incorporated
                by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
                10-Q for the quarter ended June 30, 2000.(13)
            
            Incorporated
                by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
                10-Q for the quarter ended December 31, 2001.





56




Exhibit
      Index


**Number**
            
            **Description**(14)
            
            Incorporated
                by reference to Exhibit 10.55 to the Company’s Annual Report on Form 10-K
                for the fiscal year ended March 31, 2002.(15)
            
            Incorporated
                by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
                10-Q for the quarter ended September 30, 2003.(16)
            
            Incorporated
                by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K
                filed on October 3, 2005(17)
            
            Incorporated
                by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K
                for the fiscal year ended March 31, 2000.(18)
            
            Incorporated
                by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
                filed on December 9, 2005(19)
            
            Incorporated
                by reference to Exhibits 10.1, 10.2 and 10.3 to the Company’s Quarterly
                Report on Form 10-Q for the quarter ended December 31,
                2002.(20)
            
            Incorporated
                by reference to Exhibit 14.1 to Amendment No.1 to the Company’s Annual
                Report on Form 10-K/A for the fiscal year ended March 31,
                2005.(21)
            
            Incorporated
                by reference to Exhibit 10.3, 10.5, 10.7 and 10.16 to the Company’s Annual
                Report on Form 10-K for the fiscal year ended March 31,
                2006.(22)
            
            Incorporated
                by reference to Exhibit 99.1to the Company’s Current Report on Form 8-K
                filed on April 3, 2006.




57