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 **** **March
      30, 2008**





OR





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





For
      the
      transition period from  to .





Commission
      file number: 0-20736





**Sport
      Chalet, Inc.**


(Exact
      name of registrant as specified in its charter)





Delaware
            
            95-4390071(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification 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, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.:


Large
                accelerated filero
            
            Accelerated
                fileroNon-accelerated
                filero
            
            Smaller
                reporting companyx





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 September 30, 2007, was approximately
      $43.5 million based upon the closing sale prices of Class A Common Stock and
      Class B Common Stock on that date.





At
      June
      24, 2008, there were 12,359,990 shares of Class A Common Stock outstanding
      and
      1,763,321 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 2008
      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
      March 30, 2008.








**TABLE
      OF CONTENTS**




Item
            
            Page**PART
                I**1.
            Business
            
            11A.
            Risk
                Factors
            
            71B.
            Unresolved
                Staff Comments
            
            142.
            Properties
            
            153.
            Legal
                Proceedings
            
            164.
            Submission
                of Matters to a Vote of Security Holders
            
            17**PART
                II**5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            
            186.
            Selected
                Financial Data
            
            207.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            217A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            348.
            Financial
                Statements and Supplementary Data
            
            349.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            349A(T).
            Controls
                and Procedures
            
            359B.
            Other
                Information
            
            36**PART
                III**10.
            Directors,
                Executive Officers and Corporate Governance
            
            3711.
            Executive
                Compensation
            
            3712.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            3713.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            3714.
            Principal
                Accountant Fees and Services
            
            37**PART
                IV**15.
            Exhibits
                and Financial Statement Schedules
            
            38





**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 51 full-service,
      specialty sporting goods stores in California, Nevada, Arizona and Utah,
      comprising a total of over two million square feet of retail space. As of March
      30, 2008, we had 31 locations in Southern California, seven in Northern
      California, two in Central California, three in Nevada, seven in Arizona and
      one
      in Utah. These stores average approximately 40,000 square feet in size. In
      addition, we have a retail e-commerce store operating by 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 49
      years, Sport Chalet has grown into a chain of 51 specialty sporting goods stores
      serving California, Nevada, Arizona and Utah.





Our
      growth strategy had historically focused on Southern California; but, since
      2001
      we have expanded our scope to all of California, Nevada, Arizona and Utah as
      suitable locations are found. We have opened seven stores this fiscal year,
      sixteen stores in the last three years and twenty-four in the last five years.
      In light of current macro-economic circumstances which include weak housing
      trends and rising gas prices in our core markets, we currently anticipate
      opening four new stores and relocating one store during the upcoming year and
      continue to look for additional opportunities in existing and new markets
      although we currently have no further new store commitments. We intend to
      continue adding new stores as broader economic trends improve. Future store
      openings are subject to availability of satisfactory store locations based
      on
      local competitive conditions, site availability and cost and our ability to
      provide and maintain high service levels and quality brand merchandise at
      competitive prices.





Store
      openings are expected to have a favorable impact on sales volume, but will
      negatively affect profit in the short term. New stores tend to have higher
      costs
      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.
      We believe our stores require three to four years to attract a stable, mature
      customer base; but, because of our relatively low number of stores, the impact
      of competitors’ stores and changing economic conditions, reliable statistical
      trends are not available and there can be no assurance that our stores will
      mature at that rate. We estimate the cash required to open an average new store
      is approximately $2.5 million consisting primarily of the investment in
      inventory (net of average vendor payables), the cost of leasehold improvements
      (net of landlord reimbursement), fixtures and equipment and pre-opening
      expenses, which are primarily the costs associated with training employees
      and
      stocking the store. Cash requirements for opening costs of each new store can
      vary significantly depending on how much the landlord has agreed to contribute
      to our required improvements. For fiscal 2009, we expect the average cash for
      each new store to increase to $3.8 million as two of the four stores to be
      opened are in highly desirable locations.


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 are having, and may in the future
      continue to have, a materially adverse effect on our results of operations.





For
      fiscal 2008, total sales exceeded $400 million with average sales per store
      of
      $8.5 million, down from $9.2 million in fiscal 2007, and corresponding average
      sales per square foot of $218, down from $235 in fiscal 2007. The decrease
      in
      average sales per store and sales per square foot are due to new stores, which
      take time to mature, along with a same store sales decrease of 4.5%. The same
      store sales decline is primarily due to the previously mentioned macro-economic
      conditions. As a result of the reduction in same store sales, the opening of
      new
      stores and an impairment loss, we incurred a net loss of $3.4 million or $0.24
      per diluted share, compared to net income of $7.1 million or $0.49 per diluted
      share, for fiscal 2007. See
“Item
      7. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.”





**Stores
      and Merchandising**





Our
      prototype store is 42,000 square feet in size and showcases every merchandise
      and service category with the feel of a specialty shop all contained under
      one
      roof. 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 experienced core 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 water sports instruction and demonstrations, and a 100 foot shoe wall,
      among
      other features. We have retro-fitted ten mature stores to conform to the
      prototype as much as was practical. 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 in fiscal 2009, 78% 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, skateboarding, mountaineering and SCUBA.
      The
      merchandise appeals to both experts and moderate users. Using our investments
      in
      technology, we tailor each store’s merchandise mix to appeal to our customers in
      each market. 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, snowboard and 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.


2


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****2008**
            
            **2007**
            
            **2006**Hardlines
            
            
            52
            %
            
            53
            %
            
            52
            %Apparel
            
            
            28
            %
            
            27
            %
            
            29
            %Footwear
            
            
            20
            %
            
            20
            %
            
            19
            %Total
            
            
            100
            %
            
            100
            %
            
            100
            %





While
      we
      currently have an online store for direct to consumer Ecommerce service only
      through GSI Commerce, Inc. (“GSI”) at www.sportchalet.com ,
      we
      expect to change this relationship during this 2009 fiscal year. GSI currently
      creates and operates all aspects of the www.sportchalet.com shopping
      experience, including fulfillment and purchasing, while attempting to remain
      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. In addition, we offer a branding website, www.actionpass.com, which
      presents our in store brands and specialty services in a robust manner. This
      site also serves our Action Pass members with notification of member-exclusive
      merchandise and experiences. The site also features athlete appearances and
      instructional information, blogs, and we plan on offering customer rating
      capabilities on merchandise and services we sell in our stores.





**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 annual 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 email, direct mail, radio, newspaper, magazines and the
      internet. **** Through
      our Team Sales Division, we reach out to communities in which our stores do
      business, contributing to local teams and leagues. Our marketing leverage has
      been boosted by vendor payments under cooperative marketing arrangements as
      well
      as vendor participation in sponsoring events, clinics and athletes’ appearances.
      During fiscal 2008 we rolled out our customer relationship program, “Action
      Pass”, after a successful pilot that began in fiscal 2007 in select markets.
      Action Pass members earn points for each purchase completed at our stores which
      enable members to receive a certificate that may be redeemed on future
      purchases. More importantly, Action Pass members have access to exclusive
      merchandise introductions where initial production runs are limited, plus they
      earn the opportunity to participate in once-in-a-lifetime-experiences pertaining
      to the sports in which we specialize, combined with the vendors from whom we
      buy
      merchandise and value-added services. Using the information we collect about
      our
      members allows us to directly market to each member based on their individual
      shopping patterns across various sports and brands. Combining individual data
      across multiple customers allows us to better understand behavior on an
      aggregate basis, which in turn drives assortments, category adjacencies, and
      more global marketing initiatives across our network of stores. This initiative
      is supported by our branding website, www.actionpass.com .


3


**Purchasing
      and Distribution**





In
      order
      to provide a full line of specialty and sporting goods brands and a wide
      selection, we purchase merchandise from approximately 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 2008 and 2007,
      respectively.





For
      merchandise planning and allocation we use 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 allocate merchandise to our stores based on trends
      and statistical modeling maximizing flow-through at our distribution center.
      We
      believe this technology package allows us to better plan and forecast our
      business and leverage the information to create optimal store assortments and
      allocate merchandise in a precise and proactive manner.





For
      replenishment we use a 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 54%
      of
      our total inventory. The remaining 46% of the inventory purchases are managed
      by
      the SAS Marketmax software.





With
      our
      EDI capabilities, we now provide sell through information by individual item
      size, color, and store to our key merchandise suppliers so that they can better
      forecast our inventory needs and we can better refine our assortments by store.





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.





During
      fiscal 2008, we rolled out the CRS Enterprise Selling software which replaced
      our manual processes of locating and transferring products for a customer.
      In
      the event we do not stock a particular item in a store, this software allows
      us
      to quickly locate the item in another location, including our distribution
      center, and complete the sale by accepting payment from the customer and
      shipping merchandise from the most optimal location to the customer’s preferred
      destination.





**Information
      Systems**





Historically
      we have used a “best of breed” approach to information systems. All systems
      communicated with a legacy system that was the centralized data repository
      and
      the primary financial system.  As part of our comprehensive review of
      internal control over financial reporting and also to enhance our ability to
      grow, effective March 31, 2008 the legacy system has been replaced.


4


In
      October 2006, we selected mySAP2005
      ERP from SAP as the
      replacement system and the implementation process began. Selecting SAP was
      a
      strategic decision focusing future resources on a single-vendor ERP solution
      in
      lieu of the historical “best of breed” approach. Our analysis had revealed that
      recent improvements in SAP’s solutions provided robust retail functions, and we
      anticipate that future releases will provide additional support for improved
      retail business processes. This milestone decision will eventually 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,
      assisted with the software selection and implementation.





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 IBM SurePOS hardware. CRS
      Enterprise Selling was added in fiscal 2008. The processing of debit/credit
      card
      authorization allows on-line debit and signature capture. A custom rental
      program is also a part of the store system. For merchandise planning and
      allocation we use the SAS Marketmax software solution. Merchandise replenishment
      is controlled by E3 software from JDA. The distribution center uses warehouse
      management software from HighJump Software (a 3M Company).





Our
      inventory systems track purchasing, sales and inventory transfers down to the
      lowest level of detail, individual items by size, color and store, which allows
      us to identify and project trends and replenishment needs on a timely
      basis.




**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 described
      in greater detail in Note 1 of Notes to Consolidated Financial
      Statements.





**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 federal service mark with the
      United States Patent and Trademark Office, along with the mark “Action Pass,”
among others. We also own additional common law trademarks and service marks
      which are used in commerce without dispute.





**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, Active Board
                Shops 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 Nordstrom; and




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




5


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.





**Employees**





As
      of
      March 30, 2008, we had a total of approximately 4,300 full and part-time
      employees, 4,000 of whom were employed in our stores and 300 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.





**A
      downturn in the economy has affected consumer purchases of discretionary items,
      reducing 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 downturn in the general economy or uncertainties regarding
      future economic prospects that affect consumer spending habits is having, and
      is
      likely to continue for some time to have, a materially adverse effect on our
      results of operations.





**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.




**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 as occurred in fiscal 2008. Although we have
      restructured our bank credit facility, the new agreement will cost more in
      the
      form of interest expense and fees. In addition, while we have historically
      had
      modest bank debt, we anticipate having much larger debt going forward.
      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




**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, Arizona and Utah.
      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, such as the mortgage
      crisis affecting California, Arizona and Nevada, 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.


7


**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 will experience lower
      net
      sales, higher inventory markdowns and lower margins. Products may or may not
      appeal to a broad range of consumers whose preferences cannot be predicted
      with
      certainty. These preferences are also subject to change. Specialty sporting
      goods are often subject to short-lived trends, such as the short-lived
      popularity of wheeled footwear. Apparel is significantly influenced by the
      latest fashion trends and styles. Our success depends upon the ability to
      anticipate and respond in a timely manner to trends in specialty 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.





**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, we are first required to
      perform an evaluation of our internal control over financial reporting in this
      Annual Report on Form 10-K. 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, and
      harm its stock price, especially if a restatement of financial statements for
      past periods were to be necessary.





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





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


8


There
      can
      be no assurance that we will be successful in documenting, testing or
      remediating (where applicable) the ERP System before the end of the first
      quarter of fiscal 2009 ending June 29, 2008 or at all, that we will not discover
      material weaknesses in our internal control over financial reporting, or that
      we
      will be able to remediate any such weakness.





**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 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, information systems, inventory
      management and distribution facilities. 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.





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


9


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





We
      currently operate our online store through GSI Commerce, Inc. (“GSI”). GSI
      creates and operates all aspects of the www.sportchalet.com shopping
      experience, including fulfillment and purchasing, while remaining transparent
      to
      the customer. Customers’ expectations are changing with some customers shopping
      online for information before traveling to a store. If the customer does not
      get
      the information they need, in a fast and efficient process, they may not visit
      our stores. This could cause net sales to decline. There are no guarantees
      that
      our plans for managing our online business will be successful.





**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.


10


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





Our
      marketing campaigns
      rely on email, direct mail, radio, newspaper, magazines and the internet. Also
      our marketing leverage has been boosted by vendor payments under cooperative
      marketing arrangements. We are directly marketing to individual customers based
      on their personal shopping information through our customer relationship
      program, “Action Pass.” Technology is eroding the effectiveness of all forms of
      advertising. Customers have more entertainment choices, many of which have
      no
      advertising or provide the ability to skip the commercials. If
      we are
      unable to develop other effective strategies to reach potential customers within
      our desired markets, awareness of our stores, products and promotions could
      decline and our net sales could suffer. In addition, vendors’ ability or
      willingness to participate in new strategies may decline effectively increasing
      our cost of marketing which could adversely affect our operating results.





**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:





·
            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.





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





At
      June
      24, 2008, 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 12%, respectively, of the
      voting power 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.


11


**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.**





At
      June
      24, 2008, 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 12%, respectively, of the
      voting power 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** **periodic
      litigation that may adversely affect our business and financial
      performance.**





We
      may be
      subject to lawsuits resulting from injuries associated with the use of the
      products or services we sell, employment matters or violations of government
      regulations. 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. An
      unfavorable outcome or settlement in any such proceeding could, in addition
      to
      requiring us to pay any settlement or judgment amount, increase our operating
      expense as a consequence and cause damage to our reputation.


12


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





Generally
      accepted accounting principles and related accounting pronouncements,
      implementation guidelines and interpretations with regard to a wide range of
      matters that are relevant to our business, such as revenue recognition; lease
      accounting; the carrying amount of property and equipment, inventories and
      deferred income tax assets are highly complex and may involve many subjective
      assumptions, estimates and judgments by management. Changes in these rules
      or
      their interpretation or changes in underlying assumptions, estimates or
      judgments could significantly change our reported or expected financial
      performance.





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




**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.





**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
      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.


13


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





Changes
      to our environment, whether natural or man made, could cause significant
      disruption in both air temperature and snowfall, limiting our ability to
      capitalize on one of our core competencies-the winter business. In addition,
      lack of proper snowfall could have a negative impact on our fishing and
      lake-focused water sports businesses, as these rely on streams, rivers, and
      lakes to be at proper depth and clarity in order to provide enjoyable
      experiences for our customers.





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





Not
      applicable.


14


**ITEM
      2. PROPERTIES**




At
      March
      30, 2008, we had 51 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) (5)
            
            
            June
                1981
            
            
            50,000La
                Jolla
            
            
            June
                1983
            
            
            20,400Mission
                Viejo
            
            
            August
                1986
            
            
            29,900Point
                Loma (2)
            
            
            November
                1987
            
            
            34,600Valencia
                (2) (4)
            
            
            November
                1987
            
            
            40,000Marina
                del Rey (3)
            
            
            November
                1989
            
            
            42,300Beverly
                Hills
            
            
            November
                1989
            
            
            40,500Brea
                (2) (4)
            
            
            April
                1990
            
            
            40,500Oxnard
                (2)
            
            
            June
                1990
            
            
            40,500West
                Hills (2) (3)
            
            
            June
                1991
            
            
            44,000Burbank(7)
            
            
            August
                1992
            
            
            45,000Torrance
                (6)
            
            
            November
                1993
            
            
            43,700Glendora
            
            
            November
                1993
            
            
            40,400Rancho
                Cucamonga (2)
            
            
            June
                1994
            
            
            36,000Irvine
                (2)
            
            
            November
                1995
            
            
            35,000Laguna
                Niguel (5)
            
            
            November
                1997
            
            
            40,000Mission
                Valley (6)
            
            
            June
                1998
            
            
            47,000Long
                Beach (7)
            
            
            May
                1999
            
            
            43,400Porter
                Ranch
            
            
            July
                1999
            
            
            43,000Temecula
                (5)
            
            
            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
            
            
            39,300Tempe,
                AZ (2)
            
            
            July
                2007
            
            
            42,000Las
                Vegas, NV (2)
            
            
            November
                2007
            
            
            42,000Phoenix,
                AZ
            
            
            May
                2007
            
            
            40.900Bakersfield
            
            
            May
                2007
            
            
            42,000Goodyear,
                AZ (2)
            
            
            November
                2007
            
            
            41,400Peoria,
                AZ (2)
            
            
            November
                2007
            
            
            42,000West
                Jordan, UT (2)
            
            
            November
                2007
            
            
            42,000Total
            
            
            2,066,500


(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 fiscal
                  2009, 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 in fiscal 2004.


(4)
            Remodels
                completed in fiscal 2005.


(5)
            Remodels
                completed in fiscal 2006.


(6)
            Remodels
                completed in fiscal 2007.


(7)
            Remodels
                completed in fiscal 2008.


15


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, $2.5 million and $2.4 million in fiscal 2008,
      2007 and 2006, respectively.





On
      June
      2, 2008, our Board of Directors upon recommendation of the Audit Committee
      approved a lease to relocate and expand the La Canada store from a corporation
      under the control of the Founder. Four buildings which have served the La Canada
      Flintridge, California market will relocate into a single 45,000 square foot
      store in fiscal 2009. The initial term of the lease is ten years with three
      five-year option periods. Minimum annual rent for the first five years is $18.00
      per square foot, plus common area maintenance and property taxes, with
      provisions for additional rent based on sales exceeding preset amounts. At
      the
      time of opening the relocated store, the existing lease for the old buildings
      will terminate.





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**





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





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





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


16


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





No
      matters were submitted to our stockholders during the fourth quarter of fiscal
      2008.


17


**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 established two classes
      of common stock, on September 21, 2005, each outstanding share of 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 Class A, and Class B
      Common Stock for the periods indicated:





Class
                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
            
            $
            9.00





Class
                A
            
            Class
                BFiscal
                2008
            
            High
            
            Low
            
            High
            
            LowFirst
                Quarter
            
            $
            11.39
            
            $
            9.82
            
            $
            11.29
            
            $
            9.90Second
                Quarter
            
            $
            10.90
            
            $
            8.85
            
            $
            10.88
            
            $
            8.61Third
                Quarter
            
            $
            9.02
            
            $
            5.41
            
            $
            9.25
            
            $
            5.77Fourth
                Quarter
            
            $
            7.25
            
            $
            4.38
            
            $
            7.00
            
            $
            4.30





Class
                A
            
            Class
                BFiscal
                2009
            
            High
            
            Low
            
            High
            
            LowFirst
                Quarter (through June 20, 2008)
            
            $
            5.63
            
            $
            4.20
            
            $
            5.25
            
            $
            4.25





On
      June
      20, 2008, the closing price of our Class A Common Stock and Class B Common
      Stock
      as reported by Nasdaq was $4.60 and $4.50, 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 6, 2008 was 138 and 145, 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.


18


**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, 2003 to March 30, 2008 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, 2003 in the common stock and in each of the foregoing
      indices and the reinvestment of dividends through March 30, 2008. 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.




The
      graph
      shall not be deemed incorporated by reference by any general statement
      incorporating by reference this Annual Report into any filing under the
      Securities Act of 1933 or under the Securities Exchange Act of 1934, except
      to
      the extent that we specifically incorporate this information by reference,
      and
      shall not otherwise be deemed filed under such Acts.










**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.


19


**ITEM
      6. SELECTED FINANCIAL DATA**





The
      following sets forth selected consolidated financial data as of and for the
      five
      most recent fiscal years ended March 30, 2008. 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,****2008**
              
              **2007**
              
              **2006
                  (3)**
              
              **2005**
              
              **2004****Statements
                  of Operations Data:**
              
              **(In
                  thousands, except per share, stores open and per square foot
                  amounts)**Net
                  sales
              
              $
              402,534
              
              $
              388,209
              
              $
              343,204
              
              $
              309,090
              
              $
              264,237Cost
                  of goods sold, buying and occupancy costs
              
              
              285,982
              
              
              268,188
              
              
              237,137
              
              
              213,429
              
              
              184,047Gross
                  profit
              
              
              116,552
              
              
              120,021
              
              
              106,067
              
              
              95,661
              
              
              80,190Selling,
                  general and administrative expenses
              
              
              105,697
              
              
              96,357
              
              
              92,308
              
              
              77,453
              
              
              65,913Depreciation
                  and amortization
              
              
              12,898
              
              
              11,419
              
              
              9,226
              
              
              7,692
              
              
              6,447Impairment
                  charge
              
              
              2,077
              
              
              -
              
              
              -
              
              
              -
              
              
              -Income
                  (loss) from operations
              
              
              (4,120
              )
              
              12,245
              
              
              4,533
              
              
              10,516
              
              
              7,830Interest
                  expense
              
              
              1,466
              
              
              516
              
              
              267
              
              
              263
              
              
              190Income
                  (loss) before taxes
              
              
              (5,586
              )
              
              11,729
              
              
              4,266
              
              
              10,253
              
              
              7,640Income
                  tax provision (benefit)
              
              
              (2,224
              )
              
              4,630
              
              
              4,353
              
              
              4,082
              
              
              2,996Net
                  income (loss)
              
              $
              (3,362
              )
              $
              7,099
              
              $
              (87
              )
              $
              6,171
              
              $
              4,644Class
                  A and Class B earnings (loss) per share – basic
              
              $
              (0.24
              )
              $
              0.51
              
              $
              (0.01
              )
              $
              0.46
              
              $
              0.35Class
                  A and Class B earnings (loss) per share – diluted
              
              $
              (0.24
              )
              $
              0.49
              
              $
              (0.01
              )
              $
              0.44
              
              $
              0.33Weighted
                  average Class A and Class B shares outstanding:Basic
              
              
              14,075
              
              
              13,850
              
              
              13,506
              
              
              13,361
              
              
              13,291Diluted
              
              
              14,075
              
              
              14,460
              
              
              13,506
              
              
              14,007
              
              
              14,017**Selected
                  Operating Data:**Comparable
                  store sales increase (decrease) (1)
              
              
              (4.5
              )%
              
              2.0
              %
              
              1.9
              %
              
              5.7
              %
              
              3.7
              %Gross
                  profit margin
              
              
              29.0
              %
              
              30.9
              %
              
              30.9
              %
              
              30.9
              %
              
              30.3
              %Selling,
                  general and administrative expenses as percentage of net sales
              
              
              26.3
              %
              
              24.8
              %
              
              26.9
              %
              
              25.1
              %
              
              24.9
              %Net
                  cash provided by operating activities
              
              $
              16,374
              
              $
              10,664
              
              $
              15,962
              
              $
              17,955
              
              $
              7,608Stores
                  open at end of period
              
              
              51
              
              
              45
              
              
              40
              
              
              36
              
              
              31Total
                  square feet at end of period
              
              
              2,067
              
              
              1,789
              
              
              1,586
              
              
              1,412
              
              
              1,210Net
                  sales per square foot (2)
              
              $
              218
              
              $
              235
              
              $
              238
              
              $
              241
              
              $
              239Average
                  net sales per store (2)
              
              $
              8,533
              
              $
              9,232
              
              $
              9,351
              
              $
              9,430
              
              $
              9,221





**As
                of fiscal year end****Balance
                Sheet Data:**
            
            **2008**
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2004**Working
                capital
            
            $
            39,197
            
            $
            45,493
            
            $
            43,446
            
            $
            43,116
            
            $
            40,746Total
                assets
            
            
            171,315
            
            
            171,249
            
            
            132,238
            
            
            118,789
            
            
            95,057Bank
                debt
            
            
            17,216
            
            
            11,776
            
            
            -
            
            
            -
            
            
            -Total
                stockholders’ equity
            
            $
            83,969
            
            $
            86,426
            
            $
            77,468
            
            $
            69,110
            
            $
            62,811





(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.


20


**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 51 full service specialty sporting goods stores in
      California, Nevada, Arizona and Utah. In 1959, Norbert Olberz, our founder
      (the
“Founder”), purchased a small ski and tennis shop in La Cañada, California. A
      focus on providing quality merchandise with outstanding customer service was
      the
      foundation of Norbert’s vision. We continue this tradition and are focused on
      growth through a number of initiatives, including: continuing new store
      development; remodeling stores to conform to our prototype; and improving
      information systems to increase product flow-through, improve in-stock positions
      and optimize merchandise and specialty services assortment.




For
      fiscal 2008, total sales exceeded $400 million with average sales per store
      of
      $8.5 million, down from $9.2 million in fiscal 2007, and corresponding average
      sales per square foot of $218, down from $235 in fiscal 2007. The decrease
      in
      average sales per store and sales per square foot are from new stores, which
      take time to mature, along with a same store sales decrease of 4.5%. The same
      store sales decline is primarily due to the previously mentioned macro-economic
      conditions. As a result of the reduction in same store sales, the opening of
      new
      stores and an impairment loss, we incurred a net loss of $3.4 million or $0.24
      per diluted share, compared to net income of $7.1 million or $0.49 per diluted
      share, for fiscal 2007.





Our
      growth strategy had historically focused on Southern California; but, since
      2001
      we have expanded our scope to all of California, Nevada, Arizona and Utah as
      suitable locations are found. We have opened seven stores this fiscal year,
      sixteen stores in the last three years and twenty-four in the last five years.
      In light of current macro-economic circumstances which include weak housing
      trends and rising gas prices in our core markets, we currently anticipate
      opening four new stores and relocating one store during the upcoming year and
      continue to look for additional opportunities in existing and new markets
      although we currently have no further new store commitments. We intend to
      continue adding new stores as broader economic trends improve. Future store
      openings are subject to availability of satisfactory store locations based
      on
      local competitive conditions, site availability and cost and our ability to
      provide and maintain high service levels and quality brand merchandise at
      competitive prices. Store openings are expected to have a favorable impact
      on
      sales volume, but will negatively affect profit in the short term. New stores
      tend to have higher costs as a percent of sales in the early years of operation,
      due primarily to pre-opening and promotional costs and lower than average sales,
      which reduces the leverage 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,
      the
      impact of competitors’ stores and changing economic conditions, reliable
      statistical trends are not available and there can be no assurance that our
      stores will mature at that rate. A slower rate of maturity would cause reduced
      profitability as a percent of sales. In addition, we continue to invest in
      infrastructure improvements to more efficiently manage the increasing store
      base, these improvements generally increase overhead expenses in the form of
      computer hardware and software maintenance and depreciation as well as staff
      to
      operate these systems. At some point the growth in sales from new and mature
      stores is expected to exceed the growth in infrastructure costs, but there
      can
      be no assurance that this will occur.


21


Our
      prototype store is 42,000 square feet in size and showcases every merchandise
      and service category with the feel of a specialty shop all contained under
      one
      roof. 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. We estimate the cash required to open an average
      new store is approximately $2.5 million consisting primarily of the investment
      in inventory (net of average vendor payables), the cost of leasehold
      improvements (net of landlord reimbursement), fixtures and equipment and
      pre-opening expenses, which are primarily the costs associated with training
      employees and stocking the store. Cash requirements for opening costs of each
      new store varies significantly depending on how much the landlord has agreed
      to
      contribute to our required improvements. For fiscal 2009, we expect the average
      cash for each new store to increase to $3.8 million as two of the four stores
      to
      be opened are in highly desirable locations.





The
      terms
      comparable store sales or same store sales are used interchangeably and are
      considered a key performance measurement. The sales of a store are first
      included in the comparable store sales calculation in the quarter following
      its
      twelfth full month of operation. Our comparable store sales growth has been
      positive for the last four fiscal years prior to fiscal 2008. Comparable store
      sales declined 4.5% for fiscal 2008, due to, among other things, weak
      macro-economic conditions and to a lesser extent new store openings by the
      Company and our competitors. 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.





We
      believe that the overall growth of our business should allow us to increase
      our
      operating margins over time. Our investments in infrastructure such as the
      distribution center, corporate facilities and computer systems, combined with
      increased merchandise volumes, should enable us to improve our purchasing
      leverage and achieve greater efficiencies throughout the supply chain. However,
      improvements in merchandise procurement have been offset by increased expenses
      as a percent of sales primarily from new stores. In addition, the decrease
      in
      same store sales for fiscal 2008 reduced the leverage normally provided by
      mature stores.





Beginning
      April 1, 2006, our fiscal year end was changed from March 31 to the Sunday
      closest to March 31. Fiscal year 2007 and 2008 consist of four 13 week quarters
      or 52 weeks. An extra week will be added onto the fourth quarter every five
      to
      six years. This fiscal calendar is widely used in the retail
      industry.


22


**Results
      of Operations**





***Fiscal
      2008 Compared to Fiscal 2007***





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 2008 and 2007
      fiscal years (in thousands, except per share amounts).





**Fiscal
                year**2008
            
            2007
            
            Dollar
            
            PercentageAmount
            
            Percent
            
            Amount
            
            Percent
            
            Change
            
            ChangeNet
                sales
            
            $
            402,534
            
            
            100.0
            %
            $
            388,209
            
            
            100.0
            %
            $
            14,325
            
            
            3.7
            %Gross
                profit
            
            
            116,552
            
            
            29.0
            %
            
            120,021
            
            
            30.9
            %
            
            (3,469
            )
            
            (2.9
            )%Selling,
                general and administrative expenses
            
            
            105,697
            
            
            26.3
            %
            
            96,357
            
            
            24.8
            %
            
            9,340
            
            
            9.7
            %Depreciation
                and amortization
            
            
            12,898
            
            
            3.2
            %
            
            11,419
            
            
            2.9
            %
            
            1,479
            
            
            13.0
            %Impairment
                charge
            
            
            2,077
            
            
            0.5
            %
            
            -
            
            
            0.0
            %
            
            2,077Income
                (loss) from operations
            
            
            (4,120
            )
            
            (1.0
            )%
            
            12,245
            
            
            3.2
            %
            
            (16,365
            )
            
            *Interest
                expense
            
            
            1,466
            
            
            0.4
            %
            
            516
            
            
            0.1
            %
            
            950
            
            
            184.1
            %Income
                (loss) before taxes
            
            
            (5,586
            )
            
            (1.4
            )%
            
            11,729
            
            
            3.0
            %
            
            (17,315
            )
            
            *Net
                income (loss)
            
            
            (3,362
            )
            
            (0.8
            )%
            
            7,099
            
            
            1.8
            %
            
            (10,461
            )
            
            *Class
                A and Class BEarnings
                (loss) per share:Basic
            
            $
            (0.24
            )
            
            
            
            $
            0.51
            
            
            
            
            $
            (0.75
            )
            
            *Diluted
            
            $
            (0.24
            )
            
            
            
            $
            0.49
            
            
            
            
            $
            (0.73
            )
            
            *





*
      Percentage change not meaningful.





Sales
      increased $14.3 million, or 3.7%, to $402.5 million for fiscal 2008 from $388.2
      million for fiscal 2007. The sales growth is due to twelve new stores, not
      included in the same store sales calculation, which resulted in a $32.3 million
      increase in sales, or 8.5%, partially offset by a same store sales decrease
      of
      $16.8 million, or 4.5%. Same store sales were primarily impacted by
      macro-economic conditions,  which
      include weak housing trends and rising gas prices in our core markets. In
      addition, the opening of new stores by the Company and competitors, along with
      continued growth in viable Ecommerce competitors, contributed to the decline
      in
      same store sales. We believe the macro-economic trends also negatively affected
      our new stores.





Gross
      profit decreased $3.5 million, or 2.9%, as gross profit from increased sales
      of
      approximately $7.3 million was offset primarily by increased rent of $5.7
      million, primarily from new stores, and increased markdowns of $3.4 million
      taken to stimulate demand and reduce excess inventory. As a percent of sales,
      gross profit decreased 190 basis points to 29.0% from 30.9%. The decrease is
      primarily the result of increased rent as a percent of sales in newer stores
      which take time to reach operating efficiency and increased markdowns taken
      to
      stimulate demand.




Selling,
      general and administrative expenses (“SG&A”) increased $9.3 million, or
      9.7%, primarily from expenses related to additional stores, $10.5 million,
      offset by labor savings of $1.2 million in mature stores. As a percent of sales,
      SG&A expenses increased to 26.3% in fiscal 2008 from 24.8% in fiscal 2007
      primarily from the decrease in sales from our mature stores described above
      and
      the expenses associated with new stores which take time to reach operating
      efficiency.





Depreciation
      and amortization increased $1.5 million primarily from new
      stores.


23


A
      non-cash impairment charge of $2.1 million was recorded in fiscal 2008 related
      to certain California stores which opened with significantly lower than expected
      sales volume and based on recent trends are not expected to obtain sufficient
      cash flow over their remaining lease terms to support the net book value of
      their leasehold improvements and fixtures. The existence of the impairment
      was
      assessed by calculating the net cash flow of the individual store on an
      undiscounted basis and comparing it to the net book value of the individual
      store. The actual impairment charge was measured by determining the fair
      value of the store's assets and comparing it to the book value.  Fair
      value for fixtures is based on the book value less the cost of
      moving those assets to another store, while the fair value of leasehold
      improvements is based on the discounted net cash flow of the store over the
      remaining term of the lease.





The
      effective income tax rate was 39.8% for fiscal 2008 compared to 39.5% for fiscal
      2007. 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 decreased to 39.8% for fiscal 2008 from 40.7% in fiscal
      2007
      as a result of a rate decrease related to the reduction in our taxable
      income.





As
      a
      result of the reduction in same store sales, the opening of new stores and
      the
      impairment loss, we incurred a net loss of $3.4 million, $0.24 per diluted
      share, compared to net income of $7.1 million, $0.49 per diluted share, last
      year.





***Fourth
      Quarter 2008 Compared to Fourth Quarter 2007***





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 2008 and 2007 (in thousands, except per share amounts).





**Fourth
                fiscal quarter**2008
            
            2007
            
            Dollar
            
            PercentageAmount
            
            Percent
            
            Amount
            
            Percent
            
            Increase
            
            IncreaseNet
                sales
            
            $
            96,753
            
            
            100.0
            %
            $
            97,806
            
            
            100.0
            %
            $
            (1,053
            )
            
            (1.1
            )%Gross
                profit
            
            
            25,443
            
            
            26.3
            %
            
            28,681
            
            
            29.3
            %
            
            (3,238
            )
            
            (11.3
            )%Selling,
                general and administrative expenses
            
            
            26,629
            
            
            27.5
            %
            
            23,961
            
            
            24.5
            %
            
            2,668
            
            
            11.1
            %Depreciation
                and amortization
            
            
            3,131
            
            
            3.2
            %
            
            3,124
            
            
            3.2
            %
            
            7
            
            
            0.2
            %Income
                (loss) from operations
            
            
            (4,317
            )
            
            (4.5
            )%
            
            1,596
            
            
            1.6
            %
            
            (5,913
            )
            
            *Interest
                expense
            
            
            260
            
            
            0.3
            %
            
            164
            
            
            0.2
            %
            
            96
            
            
            58.5
            %Income
                (loss) before taxes
            
            
            (4,577
            )
            
            (4.7
            )%
            
            1,432
            
            
            1.5
            %
            
            (6,009
            )
            
            *Net
                income (loss)
            
            
            (2,755
            )
            
            (2.8
            )%
            
            881
            
            
            0.9
            %
            
            (3,636
            )
            
            *Class
                A and Class BEarnings
                (loss) per share:Basic
            
            $
            (0.20
            )
            
            
            
            $
            0.06
            
            
            
            
            $
            (0.26
            )
            
            *Diluted
            
            $
            (0.20
            )
            
            
            
            $
            0.06
            
            
            
            
            $
            (0.26
            )
            
            *





*
      Percentage change not meaningful.





Sales
      decreased $1.1 million, or 1.1%, to $96.8 million for the fourth quarter 2008
      from $97.8 million for the same period in fiscal 2007. Sales growth due to
      seven
      new stores, not included in the same store sales calculation, resulted in an
      $8.2 million increase in sales, or 8.4%. This increase was offset by a same
      store sales decrease of $8.4 million, or 8.6%. Same store sales were primarily
      impacted by macro-economic conditions,  which
      include weak housing trends and rising gas prices in our core markets. In
      addition, the opening of new stores by the Company and competitors, along with
      continued growth in viable Ecommerce competitors, contributed to the decline
      in
      same store sales. We believe the macro-economic trends also negatively affected
      our new stores. Historically our fourth quarter sales are influenced by the
      amount and timing of snowfall at the resorts frequented by our customers. The
      fourth quarter of fiscal 2008 experienced relatively normal winter weather
      patterns as compared to the fourth quarter of fiscal 2007, which was the driest
      year on record for Southern California; however, the expected increase in sales
      did not materialize.


24


Gross
      profit decreased $3.2 million, or 11.3%, primarily due to increased rent from
      new stores of $1.5 million and increased markdowns of $700,000 taken to
      stimulate demand. As a percent of sales, gross profit decreased 300 basis points
      to 26.3% from 29.3%. The decrease is primarily the result of increased rent
      as a
      percent of sales in newer stores which take time to reach operating efficiency
      and increased markdowns taken to stimulate demand.




Selling,
      general and administrative expenses increased $2.7 million, or 11.1%, primarily
      from expenses related to additional stores. As a percent of sales, SG&A
      increased to 27.5% from 24.5% for the fourth quarter of fiscal 2007, primarily
      from the decrease in comparable store sales and the expenses associated with
      new
      stores which take time to reach operating efficiency.




The
      effective tax rate, as a percent of pretax income, was 39.8% for the fiscal
      2008
      fourth quarter and 38.5% for the same period in fiscal 2007. 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
      decreased to 39.8% for fiscal 2008 from 40.7% in fiscal 2007 as a result of
      a
      rate decrease related to the reduction in our taxable income.





As
      a
      result of the reduction in same store sales and expenses related to new stores,
      we incurred a net loss of $2.8 million, $0.20 per diluted share, compared to
      net
      income of $881,000, $0.06 per diluted share, last year during the fourth
      quarter.





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





**Fiscal
                year ended**2007
            
            2006
            
            Dollar
            
            PercentageAmount
            
            Percent
            
            Amount
            
            Percent
            
            Change
            
            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
            
            
            96,357
            
            
            24.8
            %
            
            92,308
            
            
            26.9
            %
            
            4,049
            
            
            4.4
            %Depreciation
                and amortization
            
            
            11,419
            
            
            2.9
            %
            
            9,226
            
            
            2.7
            %
            
            2,193
            
            
            23.8
            %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
            
            
            *Class
                A and Class BEarnings
                (loss) per share:Basic
            
            $
            0.51
            
            
            
            
            $
            (0.01
            )
            
            
            
            $
            0.52
            
            
            *Diluted
            
            $
            0.49
            
            
            
            
            $
            (0.01
            )
            
            
            
            $
            0.50
            
            
            *





*
      Percentage change not meaningful.





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.





25


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
            
            2006
            
            Dollar
            
            PercentageAmount
            
            Percent
            
            Amount
            
            Percent
            
            Change
            
            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
            
            
            96,357
            
            
            24.8
            %
            
            83,615
            
            
            24.4
            %
            
            12,742
            
            
            15.2
            %Depreciation
                and amortization
            
            
            11,419
            
            
            2.9
            %
            
            9,226
            
            
            2.7
            %
            
            2,193
            
            
            23.8
            %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
            )%





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 (in thousands,
      except per share amounts).





Fiscal
                year ended March 31, 2006GAAP
            
            Adjustments
            
            Non-GAAPSelling,
                general and administrative expenses
            
            $
            92,308
            
            $
            (8,693
            )
            $
            83,615Income
                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 B earning (loss) per share:Basic
            
            $
            (0.01
            )
            $
            0.58
            
            $
            0.57Diluted
            
            $
            (0.01
            )
            $
            0.56
            
            $
            0.55


26


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. In addition,
      growth in gift card breakage of $135,000, which is included in sales and has
      no
      direct cost, helped to offset increased occupancy expenses as a percent of
      sales.




Selling,
      general and administrative expenses (“SG&A”) increased $4.0 million, or
      4.4%, 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 $12.7 million, or 15.2%, 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 24.8% in
      fiscal 2007 from 24.4% 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.


27


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.





**Liquidity
      and Capital Resources**





Our
      primary capital requirements are for inventory, store expansion, relocation
      and
      remodeling. Historically, cash from operations, credit terms from vendors and
      bank borrowing have met our liquidity needs. We believe that these sources
      will
      be sufficient to fund currently anticipated cash requirements for the
      foreseeable future.





Net
      cash
      provided by operating activities has generally been the result of net income
      or
      loss, adjusted for depreciation and amortization, and changes in inventory
      along
      with related accounts payable. The following table shows the more significant
      items from the past three years ended March 30, 2008:





**Fiscal
                year**(in
                thousands)
            
            **2008**
            
            **2007**
            
            **2006**Net
                income (loss)
            
            $
            (3,362
            )
            $
            7,099
            
            $
            (87
            )Depreciation
                and amortization
            
            
            12,898
            
            
            11,419
            
            
            9,226Merchandise
                inventories
            
            
            922
            
            
            (19,290
            )
            
            (2,716
            )Accounts
                payable
            
            
            (1,373
            )
            
            12,941
            
            
            (2,339
            )Impairment
                charge
            
            
            2,077
            
            
            -
            
            
            -Stock
                compensation
            
            
            233
            
            
            166
            
            
            8,222Accounts
                receivable
            
            
            5,535
            
            
            (4,415
            )
            
            (1,017
            )Deferred
                rent
            
            
            1,162
            
            
            5,442
            
            
            4,481Deferred
                income taxes
            
            
            1,928
            
            
            (456
            )
            
            (1,728
            )Other
            
            
            (3,646
            )
            
            (2,242
            )
            
            1,921Net
                cash provided by operating activities
            
            $
            16,374
            
            $
            10,664
            
            $
            15,962




Typically,
      inventory levels increase from year to year due to the addition of new stores,
      while improvements in inventory management decrease inventory required for
      each
      store. Average inventory per store was $1.7 million, $1.9 million and $1.7
      million at the end of fiscal year 2008, 2007 and 2006, respectively. The
      decrease of $922,000 in fiscal 2008 was due to the reduction in average
      inventory per store partially offset by the addition of seven new stores. The
      2007 increase in average inventory per store was primarily from higher levels
      of
      winter related products due to that year being dry combined with weakness in
      sales at our mature stores leaving us with more than the desired amount of
      inventory. For fiscal 2008, those issues have been corrected.





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.





Accounts
      receivable from sales to customers is not significant. Amounts due from our
      landlords for new store construction varies considerably based on individual
      store lease negotiations and the timing of new store construction. In fiscal
      2007 total landlord reimbursements were $6.2 million of which $5.0 million
      was
      collected in fiscal 2008. Likewise significant changes in deferred rent are
      a
      result of these reimbursements.





A
      change
      of asset lives for tax depreciation purposes caused an increase in tax
      depreciation expense which resulted in a $4.5 million tax refund received in
      January 2008. The effect of this change on deferred income taxes was partially
      offset by the impairment loss of $2.1 million which is a temporary difference
      realized for income taxes purposes over the tax lives of the assets impaired.


28


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




**Fiscal
                year**(in
                thousands)
            
            **2008**
            
            **2007**
            
            **2006**New
                stores
            
            $
            11,722
            
            $
            11,466
            
            $
            10,033Remodels
            
            
            2,343
            
            
            2,366
            
            
            2,625Existing
                stores
            
            
            1,198
            
            
            2,276
            
            
            1,393Information
                systems
            
            
            6,627
            
            
            5,291
            
            
            4,768Rental
                equipment
            
            
            433
            
            
            1,321
            
            
            1,161Other
            
            
            110
            
            
            136
            
            
            315Total
            
            $
            22,433
            
            $
            22,856
            
            $
            20,295





We
      have
      continued to open new stores, seven in fiscal 2008, five in fiscal 2007 and
      four
      in fiscal 2006. Net of landlord reimbursement, which is included in deferred
      rent, the average amount spent per store is $1.3 million, $1.1 million and
      $1.4
      million for fiscal 2008, 2007 and 2006, respectively. In addition, $1.8 million
      was spent on stores which will open in fiscal 2009. We also remodeling mature
      stores; two stores were remodeled in each of fiscal 2008 and 2007 and four
      in
      fiscal 2006. Information systems are being upgraded with the implementation
      of
      SAP in fiscal 2008 and 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 2009 are expected to be approximately $17 million,
      which
      will be funded by cash flow from operations and our bank credit line, as needed.
      Approximately $14 million of this amount will be used to open four new stores
      and relocate one. Capital expenditures, net of landlord reimbursement, for
      fiscal 2009 store openings will average $2.1 million which is more than our
      historical average as the relocation and two of the four new stores to be opened
      are in highly desirable locations.





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





Net
      cash
      provided by financing activities reflects advances and repayments of borrowings
      under our revolving credit facility. The outstanding balance as of March 30,
      2008 was $17.2 million which is primarily the result of funding new stores
      and
      information systems in excess of cash generated from operations.





In
      June
      2008, we negotiated a new credit facility with our existing lender, Bank of
      America, N.A. (the “Lender”), which provides for advances up to $45.0 million,
      previously $30.0 million, increasing to $70.0 million, previously $40 million,
      for the period September 1, through December 31, each year, up to a $10.0
      million maximum in authorized letters of credit. The amount we may borrow under
      this credit facility is limited to a percentage of the value of eligible
      inventory, minus certain reserves. Interest accrues at the Lender’s prime rate
      (5.00% at March 30, 2008) plus an applicable margin up to 0.50% based on our
      fixed charge coverage ratio or at our option we can fix the rate for a period
      of
      time at LIBOR plus an applicable margin (1.50% up to 2.50% based on our fixed
      charge coverage ratio). In addition, there is an unused commitment fee of 0.25%
      per year, based on a weighted average formula, a one-time, non-refundable
      commitment fee of $350,000 and an early termination fee of 1.50% in year one,
      0.75% in year two and 0.25% in year three which is waived if the loan is
      refinanced by the Lender or any of its affiliates. This credit facility expires
      in June 2012, and we expect to renegotiate and extend the term of this agreement
      or obtain another form of financing before that date. Our obligation to the
      Lender is presently secured by a first priority lien on substantially all of
      our
      non-real estate assets, and should availability fall below certain prescribed
      limits we would be subject to potentially restrictive covenants. These covenants
      require we maintain certain minimum cash flow coverage. The Company believes
      its
      credit line with the Lender is sufficient to fund capital expenditures for
      the
      foreseeable future and to meet seasonal fluctuations in cash flow requirements.
      However, unexpected conditions could require the Company to request additional
      borrowing capacity from the Lender or alter its expansion plans or
      operations.


29


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





Our
      off-balance sheet contractual obligations and commitments relate to operating
      lease obligations, employment contracts and letters of credit which are excluded
      from the balance sheet in accordance with generally accepted accounting
      principles. The following table summarizes such obligations as of March 30,
      2008:





**Payment due by period****Contractual Obligations****(in thousands)**
            
            **Total**
            
            **Less than 1**
              **year**
            
            **2-3 years**
            
            **4-5 years**
            
            **More than 5**
              **years**Operating
                Leases (a)
            
            $
            296,386
            
            $
            35,651
            
            $
            71,850
            
            $
            65,520
            
            $
            123,365Employment
                Contracts
            
            
            1,017
            
            
            170
            
            
            339
            
            
            339
            
            
            169Total
                Contractual Obligations
            
            $
            297,403
            
            $
            35,821
            
            $
            72,189
            
            $
            65,859
            
            $
            123,534





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





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





Generally,
      our purchase obligations are cancelable 45 days prior to shipment from our
      vendors. Letters of credit amounting to approximately $2.2 million relating
      to
      purchase commitments were outstanding as of March 30, 2008 and expire within
      one
      year.





No
      cash
      dividends have been declared on Class A Common Stock and Class B Common Stock
      in
      fiscal 2008. 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
      consolidated financial statements are prepared in accordance with accounting
      principles generally accepted in the United States. In connection with the
      preparation of our financial statements, we are required to make assumptions
      and
      estimates about future events, and apply judgments that affect the reported
      amounts of assets, liabilities, revenue, expenses and the related disclosures.
      We base our assumptions, estimates and judgments on historical experience,
      current trends and other factors that management believes to be relevant at
      the
      time our consolidated financial statements are prepared. On a regular basis,
      management reviews the accounting policies, assumptions, estimates and judgments
      to ensure that our financial statements are presented fairly and in accordance
      with accounting principles generally accepted in the United States. However,
      because future events and their effects cannot be determined with certainty,
      actual results could differ from our assumptions and estimates, and such
      differences could be material.


30


Our
      significant accounting policies are discussed in Note 2, Summary of Significant
      Accounting Policies, of the Notes to Consolidated Financial Statements, included
      in Item 8, Financial Statements and Supplementary Data, of this Annual Report
      on
      Form 10-K. Management believes that the following accounting estimates are
      the most critical to aid in fully understanding and evaluating our reported
      financial results, and they require management’s most difficult, subjective or
      complex judgments, resulting from the need to make estimates about the effect
      of
      matters that are inherently uncertain. Management has reviewed these critical
      accounting estimates and related disclosures with the Audit Committee of our
      Board.





**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.




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.





We
      have
      not made any material changes in the accounting methodology used to establish
      our inventory valuation or the related markdown or inventory loss reserves
      during the past three fiscal years. We do not believe there is a reasonable
      likelihood that there will be a material change in future estimates or
      assumptions we use to calculate our inventory. However, if estimates regarding
      consumer demand are inaccurate or our ability to maintain our cost complement
      percentages for certain products changes in an unforeseen manner, we may be
      exposed to losses or gains that could be material. A 10% difference in cost
      complement percentages at March 30, 2008, would have affected net earnings
      by
      approximately $8.2 million in fiscal 2008. Additionally, a 10% change in our
      reserve for slow moving inventories would not be material to the Company’s
      financial statements for the past three years.





**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.


31


We
      have
      not made any material changes in the accounting methodology used to recognize
      revenue during the past three fiscal years. We do not believe there is a
      reasonable likelihood that there will be a material change in the estimates
      we
      use to reserve for returns. Additionally, we believe that a 10% change in our
      reserves for merchandise returns would not be material to the Company’s
      financial statements for the past three years.





We
      have
      recently implemented 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. A 10% change in our
      customer loyalty program liability at March 30, 2008, would not have been
      material to the Company’s financial statements.





**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. A 10% change in our breakage estimates
      at March 30, 2008, would not have been material to the Company’s financial
      statements.





We
      recognize Breakage at the time of redemption of Gift Cards. The revenue from
      Breakage is included in the income statement line item net sales and amounted
      to
      approximately $552,000, $532,000 and $397,000 for fiscal years 2008, 2007 and
      2006, respectively.





**Self-insurance** .
      Property, general liability and workers' compensation insurance coverage is
      self-insured for various levels. When estimating our self-insured liabilities,
      we consider a number of factors, including historical claims experience,
      demographic factors, severity factors and valuations provided by independent
      third-party actuaries. Self-insurance accruals include claims filed, as well
      as
      estimates of claims incurred but not yet reported based on historical
      trends.





We
      have
      not made any material changes in the accounting methodology used to establish
      our self-insured liabilities during the past three fiscal years. We do not
      believe there is a reasonable likelihood that there will be a material change
      in
      the estimates or assumptions we use to calculate our self-insured liabilities.
      However, if actual results are not consistent with our estimates or assumptions,
      we may be exposed to losses or gains that could be material. A 10% change in
      our
      self-insured accruals at March 30, 2008, would not have been material to the
      Company’s financial statements.





**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.


32




Our
      impairment loss calculations contain uncertainties because they require
      management to make assumptions and to apply judgment to estimate future cash
      flows and asset fair values, including forecasting useful lives of the assets
      and selecting the discount rate that reflects the risk inherent in future cash
      flows. We have not made any material changes in our impairment loss assessment
      methodology during the past three fiscal years. We do not believe there is
      a
      reasonable likelihood that there will be a material change in the estimates
      or
      assumptions we use to calculate long-lived asset impairment losses. However,
      if
      actual results are not consistent with our estimates and assumptions used in
      estimating future cash flows and asset fair values, we may be exposed to losses
      that could be material. Using the impairment evaluation methodology described
      herein, we recorded long-lived asset impairment charges totaling $2.1 million,
      in the aggregate, during fiscal 2008. The carrying value of property and
      equipment was approximately $65.7 million as of March 30, 2008.





**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 March 30, 2008. 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.





Although
      management believes that the judgments and estimates discussed herein are
      reasonable, actual results could differ, and we may be exposed to losses or
      gains that could be material. An unfavorable tax settlement would require use
      of
      our cash and would result in an increase in our effective income tax rate in
      the
      period of resolution.





**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. 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. Total stock-based compensation expense recognized for the 2008 and
      2007 fiscal years was $233,000 and $166,000 before income taxes, and the related
      tax benefit was $91,000 and $68,000 for each year respectively.





We
      do not
      believe there is a reasonable likelihood that there will be a material change
      in
      the future estimates or assumptions we use to determine stock-based compensation
      expense. A 10% change in our stock-based compensation expense for the 2008
      fiscal year, would not have been material to our financial
      statements.


33


**Recently
      Issued Accounting Pronouncements**





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 November 15, 2007. Implementation of
      SFAS No. 157 as it relates to the fair value measurements of nonfinancial
      assets and nonfinancial liabilities, except for items that are recognized or
      disclosed at fair value in an entity's financial statements on a recurring
      basis, has been deferred to fiscal years beginning after November 15, 2008.
      The adoption of SFAS No. 157 in fiscal 2009 is not expected to have a
      material impact on our financial condition.





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 does not expect the adoption to have a material
      impact on net earnings or financial position.





**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.





Although
      we cannot precisely determine the overall effect of inflation our operations
      are
      influenced by general economic conditions, we do not believe that, historically,
      inflation has had a material impact on our results of operations as we are
      generally able to pass along inflationary increases in costs to our
      customers.  However, in recent periods, we have experienced an impact
      on overall sales due to a consumer spending slowdown as a result of
      macro-economic circumstances which include weak housing trends and rising gas
      prices in our core markets





**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.


34


**ITEM
      9A(T). CONTROLS AND PROCEDURES**





**Disclosure
      Controls and Procedures**




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




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




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




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




**Management’s
      Annual Report on Internal Control Over Financial Reporting**




Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting. Internal control over financial reporting is a process
      designed by, or under the supervision of, the Company's Chief Executive Officer
      and the Chief Financial Officer and implemented by the Company's Board of
      Directors, management and other personnel, to provide reasonable assurance
      regarding the reliability of financial reporting and the preparation of
      financial statements for external purposes in accordance with generally accepted
      accounting principles in the United States of America.




The
      Company’s internal control over financial reporting includes those policies and
      procedures that: (1) pertain to the maintenance of records that, in reasonable
      detail, accurately and fairly reflect the transactions and dispositions of
      the
      assets of the Company; (2) provide reasonable assurance that transactions are
      recorded as necessary to permit preparation of financial statements in
      accordance with generally accepted accounting principles in the United States
      of
      America, and that receipts and expenditures of the Company are being made only
      in accordance with authorizations of management and directors of the Company;
      and (3) provide reasonable assurance regarding prevention or timely detection
      of
      unauthorized acquisition, use or disposition of the Company's assets that could
      have a material effect on the financial statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




Under
      the
      supervision and with the participation from management, including our Chief
      Executive Officer and Chief Financial Officer, we conducted a limited evaluation
      of the effectiveness of our internal control over financial reporting based
      on
      the framework and criteria established in Internal Control - Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO). This evaluation included a review of the documentation of,
      and testing of the operating effectiveness of, only selected controls as
      described below and a conclusion on this evaluation. Based on this limited
      evaluation, management cannot conclude that the Company’s internal control over
      financial reporting was effective as of March 30, 2008.


35




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




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




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




Notwithstanding
      the foregoing, there can be no assurance that we will be successful in
      documenting, testing or remediating (where applicable) the ERP System before
      the
      end of the first quarter of fiscal 2009 ending June 29, 2008 or at all, that
      we
      will not discover material weaknesses in our internal control over financial
      reporting, or that we will be able to remediate any such weakness. Furthermore,
      if we discover a material weakness, corrective action may be time-consuming,
      costly and further divert the attention of management. The disclosure of a
      material weakness, even if quickly remedied, could reduce the market's
      confidence in the Company’s financial statements, and harm its stock price,
      especially if a restatement of financial statements for past periods were to
      be
      necessary. See "Item 1A. Risk Factors - 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."




This
      Annual Report on Form 10-K does not include an attestation report of the
      Company's registered public accounting firm regarding internal control over
      financial reporting. Management's report was not subject to attestation by
      the
      Company's registered public accounting firm pursuant to temporary rules of
      the
      Securities and Exchange Commission that permit the Company to provide only
      management's report in this Annual Report on Form 10-K.





**Changes
      in Internal Control Over Financial Reporting**





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





**ITEM
      9B. OTHER INFORMATION**





None.


36


**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 sections entitled “Proposal 1 - Election of Directors,”
“Compensation Discussion and Analysis” and “Executive Compensation” 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 “Executive Compensation” 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. ****


37


**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 2008, 2007 and 2006, in thousands.





Allowance
                for
              Sales Returns
              (Year ended)
            
            Balance at
              Beginning of
              Period
            
            Additions
            
            Deductions
            
            Balance at
              End of Period3/30/2008
            
            $
            394
            
            $
            20,738
            
            $
            20,689
            
            $
            4434/1/2007
            
            $
            386
            
            $
            19,764
            
            $
            19,756
            
            $
            3943/31/2006
            
            $
            330
            
            $
            16,770
            
            $
            16,714
            
            $
            386





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 62.


38





**Sport
      Chalet, Inc.**





**Index
      to Audited Consolidated Financial Statements**




PageReport
                of Independent Registered Public Accounting Firm
            
            40Consolidated
                Statements of Operations for each of the three years in the period
                ended
                March 30, 2008
            
            41Consolidated
                Balance Sheets as of March 30, 2008 and April 1, 2007
            
            42Consolidated
                Statements of Stockholders’ Equity for each of the three years in the
                period ended March 30, 2008
            
            43Consolidated
                Statements of Cash Flows for each of the three years in the period
                ended
                March 30, 2008
            
            44Notes
                to Consolidated Financial Statements
            
            45


39


**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
      March 30, 2008 and April 1, 2007 and the related consolidated statements of
      operations, stockholders’ equity and cash flows for each of the years in the
      three-year period ended March 30, 2008. 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 March 30, 2008 and April 1, 2007, and the consolidated
      results of its operations and its cash flows for each of the years in the
      three-year period ended March 30, 2008, in conformity with accounting principles
      generally accepted in the United States of America. Also, in our opinion, the
      related financial statement schedule, when considered in relation to the basic
      consolidated financial statements taken as a whole, presents fairly, in all
      material respects, the information set forth therein.





/s/
      Moss
      Adams LLP





Los
      Angeles, California


June
      24,
      2008


40


**Sport
      Chalet, Inc.**





**Consolidated
      Statements of Operations**





**Fiscal
                year****2008**
            
            **2007**
            
            **2006**(in
                thousands, except per share amounts)Net
                sales
            
            **$**
            **402,534**
            
            $
            388,209
            
            $
            343,204Cost
                of goods sold, buying and occupancy costs
            
            
            **285,982**
            
            
            268,188
            
            
            237,137Gross
                profit
            
            
            **116,552**
            
            
            120,021
            
            
            106,067Selling,
                general and administrative expenses
            
            
            **105,697**
            
            
            96,357
            
            
            92,308Depreciation
                and amortization
            
            
            **12,898**
            
            
            11,419
            
            
            9,226Impairment
                charge
            
            
            **2,077**
            
            
            -
            
            
            -Income
                (loss) from operations
            
            
            **(4,120**
            **)**
            
            12,245
            
            
            4,533Interest
                expense
            
            
            **1,466**
            
            
            516
            
            
            267Income
                (loss) before taxes
            
            
            **(5,586**
            **)**
            
            11,729
            
            
            4,266Income
                tax provision (benefit)
            
            
            **(2,224**
            **)**
            
            4,630
            
            
            4,353Net
                income (loss)
            
            **$**
            **(3,362**
            )
            $
            7,099
            
            $
            (87
            )Earnings
                (loss) per share:Basic
            
            **$**
            **(0.24**
            **)**
            $
            0.51
            
            $
            (0.01
            )Diluted
            
            **$**
            **(0.24**
            **)**
            $
            0.49
            
            $
            (0.01
            )Weighted
                average number of common shares outstanding:Basic
            
            
            **14,075**
            
            
            13,850
            
            
            13,506Diluted
            
            
            **14,075**
            
            
            14,460
            
            
            13,506




*See
      accompanying notes.*


41


**Sport
      Chalet, Inc.**





**Consolidated
      Balance Sheets**





**March
                30,**
            
            April
                1,**2008**
            
            2007(in
                thousands, except share amounts)**Assets**Current
                assets:Cash
                and cash equivalents
            
            **$**
            **3,894**
            
            $
            3,841Accounts
                receivable
            
            
            **1,359**
            
            
            6,894Merchandise
                inventories
            
            
            **86,145**
            
            
            87,067Prepaid
                expenses and other current assets
            
            
            **6,170**
            
            
            4,827Prepaid
                income taxes
            
            
            **1,405**
            
            
            1,482Deferred
                income taxes
            
            
            **3,349**
            
            
            3,146Total
                current assets
            
            
            **102,322**
            
            
            107,257Fixed
                assets, net
            
            
            **66,619**
            
            
            59,487Deferred
                income taxes
            
            
            **2,374**
            
            
            4,505Total
                assets
            
            **$**
            **171,315**
            
            $
            171,249**Liabilities
                and stockholders’ equity**Current
                liabilities:Accounts
                payable
            
            **$**
            **28,035**
            
            $
            29,408Loan
                payable to bank
            
            
            **17,216**
            
            
            11,776Salaries
                and wages payable
            
            
            **4,620**
            
            
            4,999Other
                accrued expenses
            
            
            **13,254**
            
            
            15,581Total
                current liabilities
            
            
            **63,125**
            
            
            61,764Deferred
                rent
            
            
            **24,221**
            
            
            23,059Commitments
                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 – 12,359,990 in 2008 and
                12,252,654 in 2007
            
            
            **124**
            
            
            123Class
                B Common stock, $.01 par value:Authorized
                shares – 2,000,000 Issued and outstanding shares – 1,763,321 in 2008 and
                1,741,489 in 2007
            
            
            **18**
            
            
            17Additional
                paid-in capital
            
            
            **34,094**
            
            
            33,191Retained
                earnings
            
            
            **49,733**
            
            
            53,095Total
                stockholders’ equity
            
            
            **83,969**
            
            
            86,426Total
                liabilities and stockholders’ equity
            
            **$**
            **171,315**
            
            $
            171,249





*See
      accompanying notes.*


42


**Sport
      Chalet, Inc.**





**Consolidated
      Statements of Stockholders’ Equity**





**Common Stock****Class A**
            
            **Class B**
            
            **Additional**
            
            **Retained****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Paid-in Capital**
            
            **Earnings**
            
            **Total**(in thousands, except share amounts)Balance at March 31, 2005
            
            
            11,700,794
            
            $
            117
            
            
            1,671,571
            
            
            17
            
            $
            22,892
            
            $
            46,084
            
            $
            69,110Options
                exercised
            
            
            226,352
            
            
            2
            
            
            32,338
            
            
            -
            
            
            472
            
            
            -
            
            
            474Related
                income tax benefit
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,014
            
            
            -
            
            
            1,014Optionee
                withholding taxes from exercise of stock options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,265
            )
            
            -
            
            
            (1,265
            )Share-based
                compensation
            
            
            
            
            
            -
            
            
            
            
            
            -
            
            
            8,222
            
            
            -
            
            
            8,222Net
                loss for 2006
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (87
            )
            
            (87
            )Balance
                at March 31, 2006
            
            
            11,927,146
            
            $
            119
            
            
            1,703,909
            
            $
            17
            
            $
            31,335
            
            $
            45,997
            
            $
            77,468Options
                exercised
            
            
            325,508
            
            
            3
            
            
            37,580
            
            
            -
            
            
            1,354
            
            
            -
            
            
            1,357Related
                income tax benefit
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,226
            
            
            -
            
            
            1,226Optionee
                withholding taxes from exercise of stock options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (890
            )
            
            -
            
            
            (890
            )Share-based
                compensation
            
            
            
            
            
            -
            
            
            
            
            
            -
            
            
            166
            
            
            -
            
            
            166Net
                income for 2007
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,099
            
            
            7,099Balance
                at April 1, 2007
            
            
            12,252,654
            
            $
            123
            
            
            1,741,489
            
            $
            17
            
            $
            33,191
            
            $
            53,095
            
            $
            86,426Options
                exercised
            
            
            **107,336**
            
            
            **1**
            
            
            **21,832**
            
            
            **-**
            
            
            **371**
            
            
            **-**
            
            
            **372**Related
                income tax benefit
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            **300**
            
            
            **-**
            
            
            **300**Share-based
                compensation
            
            
            
            
            
            -
            
            
            
            
            
            -
            
            
            **233**
            
            
            -
            
            
            **233**Net
                loss for 2008
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            **(3,362**
            **)**
            
            **(3,362**
            **)**Balance
                at March 30, 2008
            
            
            **12,359,990**
            
            **$**
            **124**
            
            
            **1,763,321**
            
            **$**
            **18**
            
            **$**
            **34,094**
            
            **$**
            **49,733**
            
            **$**
            **83,969**




*See
      accompanying notes.*


43


**Sport
      Chalet, Inc.**





**Consolidated
      Statements of Cash Flows**





**Fiscal
                Year****2008**
            
            2007
            
            2006(in
                thousands)**Operating
                activities**Net
                income (loss)
            
            **$**
            **(3,362**
            **)**
            $
            7,099
            
            $
            (87
            )Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            **12,898**
            
            
            11,419
            
            
            9,226(Gain)
                loss on disposal of equipment
            
            
            **326**
            
            
            315
            
            
            (215
            )Impairment
                charge
            
            
            **2,077**
            
            
            -
            
            
            -Share-based
                compensation
            
            
            **233**
            
            
            166
            
            
            8,222Deferred
                income taxes
            
            
            **1,928**
            
            
            (456
            )
            
            (1,728
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            **5,535**
            
            
            (4,415
            )
            
            (1,017
            )Merchandise
                inventories
            
            
            **922**
            
            
            (19,290
            )
            
            (2,716
            )Prepaid
                expenses and other current assets
            
            
            **(1,343**
            **)**
            
            (970
            )
            
            (813
            )Prepaid
                income taxes
            
            
            **77**
            
            
            (1,482
            )
            
            -Accounts
                payable
            
            
            **(1,373**
            **)**
            
            12,941
            
            
            (2,339
            )Salaries
                and wages payable
            
            
            **(379**
            **)**
            
            (474
            )
            
            393Other
                accrued expenses
            
            
            **(2,327**
            **)**
            
            671
            
            
            3,078Income
                taxes payable
            
            
            -
            
            
            (302
            )
            
            (523
            )Deferred
                rent
            
            
            **1,162**
            
            
            5,442
            
            
            4,481Net
                cash provided by operating activities
            
            
            **16,374**
            
            
            10,664
            
            
            15,962**Investing
                activities**Purchases
                of fixed assets
            
            
            **(22,433**
            **)**
            
            (22,856
            )
            
            (20,295
            )Other
                assets
            
            
            -
            
            
            -
            
            
            77Proceeds
                from sales of fixed assets
            
            
            -
            
            
            -
            
            
            419Net
                cash used in investing activities
            
            
            **(22,433**
            **)**
            
            (22,856
            )
            
            (19,799
            )******Financing
                activities**Proceeds
                from bank borrowings
            
            
            **110,573**
            
            
            70,380
            
            
            46,361Repayment
                of bank borrowings
            
            
            **(105,133**
            **)**
            
            (58,604
            )
            
            (46,361
            )Proceeds
                from exercise of stock options
            
            
            **372**
            
            
            1,357
            
            
            475Optionee
                withholding taxes from exercise of stock options
            
            
            **-**
            
            
            (890
            )
            
            (1,265
            )Tax
                benefit on employee stock options
            
            
            **300**
            
            
            1,226
            
            
            1,014Net
                cash provided by financing activities
            
            
            **6,112**
            
            
            13,469
            
            
            224Increase
                (decrease) in cash and cash equivalents
            
            
            **53**
            
            
            1,277
            
            
            (3,613
            )Cash
                and cash equivalents at beginning of year
            
            
            **3,841**
            
            
            2,564
            
            
            6,177Cash
                and cash equivalents at end of year
            
            **$**
            **3,894**
            
            $
            3,841
            
            $
            2,564Cash
                paid during the year for:Income
                taxes
            
            **$**
            **30**
            
            $
            5,645
            
            $
            5,591Interest
            
            **$**
            **1,247**
            
            $
            357
            
            $
            158





*See
      accompanying notes.*


44




**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 51
      full-service, specialty sporting goods stores in California, Nevada, Arizona
      and
      Utah. The Company has 31 locations in Southern California, seven in Northern
      California, two in Central California, three in Nevada, seven in Arizona and
      one
      in Utah.





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.





Each
      share of Class A Common Stock and each share of Class B Common Stock
      shall have identical rights with respect to dividends and distributions;
      provided, however, that the holder of each share of Class A Common Stock shall
      be entitled to receive a regular cash dividend equal to 110% of any regular
      cash
      dividend paid with respect to a share of Class B Common Stock; and provided,
      further, that dividends or other distributions payable on the common stock
      in
      shares of common stock shall be made to all holders of common stock and may
      be
      made only as follows: (i) in shares of Class A Common Stock to the
      record holders of Class A Common Stock and to the record holders of
      Class B Common Stock, (ii) in shares of Class A Common Stock to
      the record holders of Class A Common Stock and in shares of Class B
      Common Stock to the record holders of Class B Common Stock solely in
      connection with a proportionate dividend to effectuate a split of the common
      stock, or (iii) in any other authorized class or series of capital
      stock to the holders of both classes of common stock.


45


**Sport
        Chalet, Inc.**
 
 **Notes
        to Consolidated Financial Statements**


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 Common Stock and Class A Common Stock
      when
      added to the shares of common 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 $8.2 million, the recapitalization plan expenses were
      $471,000 and the effect on net income was $7.8 million. 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.




The
      effect on net income, in thousands, is as follows:





Fiscal
                year2006Compensation
                expense
            
            $
            8,222Professional
                fees
            
            
            4718,693Income
                tax benefit
            
            
            (854
            )Effect
                on net income
            
            $
            7,839





The
      Founder along with certain members of management collectively own approximately
      65% of the outstanding shares of the Class A Common Stock and Class B Common
      Stock at March 30, 2008.





**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.


46


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


**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. 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.




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, in
      thousands, as follows:





**March 30, 2008**
            
            April 1, 2007Customers
            
            **$**
            **1,298**
            
            $
            1,267Vendors
            
            
            **246**
            
            
            657Landlords
            
            
            **23**
            
            
            5,095Other
            
            
            **101**
            
            
            21**1,668**
            
            
            7,040Allowance
                for doubtful accounts
            
            
            **(309**
            **)**
            
            (146
            )Net
                accounts receivable
            
            **$**
            **1,359**
            
            $
            6,894




47


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


**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





The
      following is a summary of the components of fixed assets, in
      thousands:





**March 30,**
            
            April 1,**2008**
            
            2007Fixtures
                and equipment
            
            **$**
            **37,676**
            
            $
            30,963Computer
                software and equipment
            
            
            **27,182**
            
            
            20,251Rental
                equipment
            
            
            **6,811**
            
            
            6,291Vehicles
            
            
            **460**
            
            
            408Leasehold
                improvements
            
            
            **56,533**
            
            
            50,243**128,662**
            
            
            108,156Accumulated
                depreciation
            
            
            **(62,043**
            **)**
            
            (48,669
            )Net
                fixed assets
            
            **$**
            **66,619**
            
            $
            59,487




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.


48


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


**Revenue
      Recognition**





Revenue
      from retail sales are recognized at the time the customer receives the
      merchandise, net of sales tax and 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.




**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. The Company recognizes Breakage at the time of redemption
      of Gift Cards. The revenue from Breakage is included in the income statement
      line item net sales and amounted to $552,000, $532,000 and $397,000 for fiscal
      years 2008, 2007 and 2006, 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. Vendor rebates other than for cooperative
      advertising are immaterial and accounted for when received. 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 goods sold as the merchandise is sold.




**Advertising
      Costs**




Advertising
      costs are expensed as incurred. Advertising expense, net of vendor
      reimbursement, amounted to $10.1 million, $9.6 million and $8.2 million for
      fiscal years 2008, 2007 and 2006, respectively. The amount of vendor
      reimbursements amounted to $5.8 million, $5.1 million and $4.4 million for
      fiscal years 2008, 2007 and 2006, respectively.


49


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


**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.




**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.


50


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


**Earnings
      Per Share**





Earnings
      per share has been computed in accordance with SFAS 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. The Company does not utilize the
      two-class method to report its earnings per share. The two-class method is
      an
      earnings allocation formula that determines earnings per share for each class
      of
      common stock according to participation rights in undistributed earnings. Our
      recapitalization plan provided that Class A Common Stock shall be entitled
      to
      receive a regular cash dividend equal to 110% of any regular cash dividend
      paid
      with respect to a share of Class B Common Stock, which could result in the
      two-class method of computing earnings per share. However the application of
      this method would result in an immaterial change in earnings per share and
      is
      therefore not presented.





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





**Fiscal year****2008**
            
            2007
            
            2006(in thousands, except per share data)Basic
                EPS computation:Numerator
            
            **$**
            **(3,362**
            **)**
            $
            7,099
            
            $
            (87
            )Denominator:Weighted
                average common shares outstanding
            
            
            **14,075**
            
            
            13,850
            
            
            13,506Basic
                earnings (loss) per share
            
            **$**
            **(0.24**
            **)**
            $
            0.51
            
            $
            (0.01
            )Diluted
                EPS computation:Numerator
            
            **$**
            **(3,362**
            **)**
            $
            7,099
            
            $
            (87
            )Denominator:Weighted
                average common shares outstanding
            
            
            **14,075**
            
            
            13,850
            
            
            13,506Incremental
                shares from assumed conversion of options
            
            
            **-**
            
            
            610
            
            
            -Total
                weighted average common shares - assuming dilution
            
            
            **14,075**
            
            
            14,460
            
            
            13,506Diluted
                earnings (loss) per share
            
            **$**
            **(0.24**
            **)**
            $
            0.49
            
            $
            (0.01
            )




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.


51


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


Options
      to purchase an aggregate of 517,000, 88,000 and 552,000 shares for fiscal years
      2008, 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.





**Share-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 share-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”), share-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,
      share-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 share-based compensation expense recognized for the 2008 and
      2007
      fiscal years was $233,000 and $166,000, respectively, before income taxes,
      and
      the related tax benefit was $91,000 and $68,000 for each year,
      respectively.





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 fiscal year, as if we had applied the fair value recognition provisions
      of
      SFAS No. 123 to the share-based compensation for that period:





**Fiscal
                Year****2006**(in thousands, except
              per share data)Net
                income (loss) as reported
            
            $
            (87
            )Add:Share-based
                compensation expense included in reported net income, net of related
                tax
                effects
            
            
            7,542Cancellation
                of Sport Chalet Option, LLC
            
            
            747Deduct:Share-based
                compensation expense from recapitalization, net of related tax effects
            
            
            (7,542
            )Total
                share-based employee compensation expense determined under fair market
                value based method for all awards, net of related tax effects
            
            
            (1,216
            )Pro
                forma net income (loss)
            
            $
            (556
            )Class
                A and Class B income (loss) per shareAs
                reported – basic
            
            $
            (0.01
            )As
                reported – diluted
            
            $
            (0.01
            )Pro
                forma – basic
            
            $
            (0.04
            )Pro
                forma – diluted
            
            $
            (0.04
            )




52


**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-valuation model. The Black-Scholes option valuation model
      was developed for use in estimating the fair value of traded options which
      have
      no vesting restrictions and are fully transferable. In addition, option
      valuation models require the input of highly subjective assumptions including
      the expected stock price volatility. The following weighted average assumptions
      are used to estimate the fair value for stock options granted in the years
      listed below:





**Fiscal
                year****2008**
            
            2007
            
            2006Risk-free
                interest rate
            
            
            **4.9**
            **%**
            
            4.9
            %
            
            4.0
            %Expected
                volatility
            
            
            **36.6**
            **%**
            
            41.1
            %
            
            38.0
            %Expected
                dividend yield
            
            
            **0.0**
            **%**
            
            0.0
            %
            
            0.0
            %Expected
                life in years
            
            
            **7.5**
            
            
            7.5
            
            
            5.0





The
      weighted average fair value of options granted during fiscal 2008, 2007 and
      2006
      was $5.02 $4.32 and $3.11, respectively .





**Recently
      Issued Accounting Pronouncements**





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 November 15, 2007. Implementation of
      SFAS No. 157 as it relates to the fair value measurements of nonfinancial
      assets and nonfinancial liabilities, except for items that are recognized or
      disclosed at fair value in an entity's financial statements on a recurring
      basis, has been deferred to fiscal years beginning after November 15, 2008.
      The adoption of SFAS No. 157 in fiscal 2009 is not expected to have a
      material impact on our financial condition.





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 adoption of SFAS No. 159 at the beginning of
      fiscal 2009 is not expected to have a material impact on net earnings or
      financial position.




**3.
      Loans Payable to Bank**





In
      June
      2008, the Company negotiated a new credit facility with our existing lender,
      Bank of America, N.A. (the “Lender”), which provides for advances up to $45.0
      million, previously $30.0 million, increasing to $70.0 million, previously
      $40
      million, for the period September 1, through December 31, each year, up to
      a
      $10.0 million maximum in authorized letters of credit. The amount the Company
      may borrow under this credit facility is limited to a percentage of the value
      of
      eligible inventory, minus certain reserves. Interest accrues at the Lender’s
      prime rate (5.00% at March 30, 2008) plus an applicable margin up to 0.50%
      based
      on the fixed charge coverage ratio or at the Company’s option the rate can be
      fixed for a period of time at LIBOR plus an applicable margin (1.50% up to
      2.50%
      based on the fixed charge coverage ratio). In addition, there is an unused
      commitment fee of 0.25% per year, based on a weighted average formula, a
      one-time, non-refundable commitment fee of $350,000 and an early termination
      fee
      of 1.50% in year one, 0.75% in year two and 0.25% in year three which is waived
      if the loan is refinanced by the Lender or any of its affiliates. This credit
      facility expires in June 2012, and the


53


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


Company
      expects to renegotiate and extend the term of this agreement or obtain another
      form of financing before that date. This obligation to the Lender is presently
      secured by a first priority lien on substantially all of the Company’s non-real
      estate assets, and should availability fall below certain prescribed limits
      the
      Company would be subject to potentially restrictive covenants. These covenants
      require maintenance of certain minimum cash flow coverage. The Company believes
      its credit line with the Lender is sufficient to fund capital expenditures
      for
      the foreseeable future and to meet seasonal fluctuations in cash flow
      requirements. However, unexpected conditions could require the Company to
      request additional borrowing capacity from the Lender or alter its expansion
      plans or operations.





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





At
      March
      30, 2008, there is $17.2 million outstanding under the facility as well as
      letters of credit amounting to $2.2 million relating to purchase
      commitments.





The
      weighted average interest rate on borrowings during the 2008, 2007 and 2006
      fiscal years were 6.09%, 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.





Future
      minimum payments, by year and in the aggregate, under those leases with terms
      of
      one year or more, in thousands, consist of the following at March 30,
      2008:





**Leases with**
              **Founder**
            
            **Unrelated**
              **Leases**
            
            **Total**2009
            
            $
            2,351
            
            $
            33,300
            
            $
            35,6512010
            
            
            2,536
            
            
            34,521
            
            
            37,0572011
            
            
            2,428
            
            
            32,365
            
            
            34,7932012
            
            
            1,886
            
            
            32,072
            
            
            33,9582013
            
            
            1,649
            
            
            29,913
            
            
            31,562Thereafter
            
            
            6,269
            
            
            117,097
            
            
            123,365$
            17,119
            
            $
            279,268
            
            $
            296,386





Total
      rent expense amounted to $39.8 million, $34.0 million and $29.4 million for
      fiscal years 2008, 2007 and 2006, respectively, which include $2.5 million,
      $2.5
      million and $2.4 million, 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 $591,000, $672,000 and $774,000 for
      fiscal years 2008, 2007 and 2006, respectively. Included in the accompanying
      balance sheets are amounts representing prepaid rent to the Founder of $148,000
      at March 30, 2008 and $151,000 at April 1, 2007.


54


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


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.





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





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





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


55


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


**5.
      Income Taxes**





The
      provision (benefit) for income taxes for fiscal years 2008, 2007 and 2006,
      in
      thousands, consists of the following:





**2008**
            
            2007
            
            2006Federal:Current
            
            **$**
            **(4,033**
            **)**
            $
            4,001
            
            $
            4,953Deferred
            
            
            **2,395**
            
            
            (389
            )
            
            (1,492
            )**(1,638**
            **)**
            
            3,612
            
            
            3,461State:Current
            
            
            **(117**
            **)**
            
            1,085
            
            
            1,128Deferred
            
            
            **(469**
            **)**
            
            (67
            )
            
            (236
            )**(586**
            **)**
            
            1,018
            
            
            892**$**
            **(2,224**
            **)**
            $
            4,630
            
            $
            4,353





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 2008 and
      2007, in thousands, are as follows:


**2008**
              
              2007**Current**
              
              **Non-**
                **current**
              
              Current
              
              Non-
                currentDeferred
                  tax assets:Fixed
                  assets
              
              **$**
              **-**
              
              **$**
              **1,181**
              
              $
              -
              
              $
              3,202Uniform
                  cost capitalization
              
              
              **510**
              
              
              **-**
              
              
              472
              
              
              -Inventory
                  reserves
              
              
              **1,235**
              
              
              **-**
              
              
              1,100
              
              
              -Accrued
                  vacation
              
              
              **467**
              
              
              **-**
              
              
              410
              
              
              -Bonus
                  accrual
              
              
              **101**
              
              
              **-**
              
              
              236
              
              
              -Self-insurance
                  accruals
              
              
              **539**
              
              
              **-**
              
              
              582
              
              
              -Allowance
                  for bad debt andsales
                  returns
              
              
              **300**
              
              
              **-**
              
              
              220
              
              
              -State
                  income taxes
              
              
              **(26**
              **)**
              
              **-**
              
              
              379
              
              
              -Deferred
                  rent
              
              
              **-**
              
              
              **1,193**
              
              
              -
              
              
              1,303Other
              
              
              **223**
              
              
              **-**
              
              
              (253
              )
              
              -Total
                  deferred tax assets
              
              **$**
              **3,349**
              
              **$**
              **2,374**
              
              $
              3,146
              
              $
              4,505


A
      change
      of asset lives for tax depreciation purposes caused an increase in tax
      depreciation expense which resulted in a $4.5 million tax refund received in
      January 2008. The effect of this change on deferred income taxes was partially
      offset by the impairment loss of $2.1 million which is a temporary difference
      realized for income taxes purposes over the tax lives of the assets impaired.


56


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


A
      reconciliation of the provision for income taxes for fiscal years 2008, 2007
      and
      2006 with the amount computed using the federal statutory rate, in thousands,
      follows:





**2008**
            
            2007
            
            2006Statutory
                rate, 34% in 2008 and 2006, 35% in 2007 applied to income before
                taxes
            
            **$**
            **(1,899**
            **)**
            $
            4,105
            
            $
            1,450State
                taxes, net of federal tax effect
            
            
            **(321**
            **)**
            
            674
            
            
            249Nondeductible
                stock award
            
            
            **-**
            
            
            -
            
            
            2,630Other,
                net
            
            
            **(4**
            **)**
            
            (149
            )
            
            24**$**
            **(2,224**
            **)**
            $
            4,630
            
            $
            4,353





For
      the
      years ended March 30, 2008, April 1, 2007 and March 31, 2006, 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 $300,000,
      $1.2 million and $1.0 million, respectively.





We
      adopted the provisions of FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No.
      109 (“SFAS 109”), on April 2, 2007. We have no unrecognized income tax benefits.
      When applicable, we recognize interest and penalties related to uncertain tax
      positions in income tax expense. The tax years ending March 31, 2004 to April
      1,
      2007 remain open to examination by the Internal Revenue Service and the years
      ended March 31, 2005 to April 1, 2007 are currently under audit by the Internal
      Revenue Service. The tax years ending March 31, 2003 to April 1, 2007 remain
      open to examination by the state of California. The tax years ending March
      31,
      2006 to April 1, 2007 remain open to examination by the state of Arizona.





**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.




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 were 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 had not been required to recognize compensation expense in connection
      with the grant of the option. The fair value of the option was being recognized
      as compensation expense for purposes of calculating pro forma net income and
      pro
      forma earnings per share as required by FASB Statement No.123, “Accounting for
      Stock-Based Compensation.” The fair value for the option was estimated at the
      date of grant using a Black-Scholes option valuation model. For purposes of
      pro
      forma disclosures displayed in Note 2 - Summary of Significant Accounting
      Policies: Share-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 had been estimated at nine years. Effective
      with the recapitalization plan this option was terminated (see Note 1 -
      Description of Business and Recapitalization Plan).


57


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


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 March 30, 2008, there were
      1,627,888 shares of common stock available for issuance pursuant to future
      stock
      option grants. The stock option activity during the 2008 fiscal year is
      presented in the following table:





Options
            
            Weighted
              Average
              Exercise Price
            
            Weighted-
              Average
              Remaining
              Contractual
              Term (Years)
            
            Aggregate
              Intrinsic Value
              (in
                000's)Outstanding
                as of April 1, 2007
            
            
            1,507,586
            
            $
            4.84Granted
            
            
            94,000
            
            
            10.13Exercised
            
            
            (129,168
            )
            
            3.77Forfeited
                or expired
            
            
            (40,363
            )
            
            2.89Outstanding
                as of March 30, 2008
            
            
            1,432,055
            
            $
            5.28
            
            
            4.9
            
            $
            1,648





Options
      to purchase Class A Common Stock and Class B Common Stock are combined in the
      table above. The aggregate intrinsic value is based on the Company’s closing
      stock price of $5.25 and $6.70 for Class A Common Stock and Class B Common
      Stock, respectively, as of the last trading day of the period ended March 30,
      2008. The total intrinsic value for stock options exercised during the 2008
      fiscal year was $778,000. During the 2008 fiscal year, the total fair value
      of
      options vested was $225,000.





The
      non-vested stock option activity during the 2008 fiscal year is presented in
      the
      following table:





Shares
            
            Weighted
              Average
              Fair ValueNonvested,
                April 1, 2007
            
            
            126,696
            
            $
            3.68Granted
            
            
            94,000
            
            
            5.02Vested
            
            
            (55,196
            )
            
            4.07Forfeited
            
            
            (5,300
            )
            
            4.91Nonvested,
                March 30, 2008
            
            
            160,200
            
            
            4.71





As
      of
      March 30, 2008, total unrecognized share-based compensation expense related
      to
      non-vested stock options was $635,000, 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.


58


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


Additional
      information regarding options outstanding as of March 30, 2008, 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
            
            
            445,750
            
            
            1.50
            
            $
            2.29
            
            
            445,750
            
            $
            1.50$3.00
                to $4.490
            
            
            306,000
            
            
            3.75
            
            
            4.10
            
            
            306,000
            
            
            3.75$4.50
                to $5.99
            
            
            1,250
            
            
            3.15
            
            
            4.55
            
            
            1,250
            
            
            3.15$6.00
                to $7.50
            
            
            373,755
            
            
            7.33
            
            
            7.00
            
            
            364,755
            
            
            7.32$7.51
                to $10.00
            
            
            305,300
            
            
            8.18
            
            
            8.73
            
            
            154,100
            
            
            7.56$0.00
                to $10.00
            
            
            1,432,055
            
            
            4.93
            
            
            5.28
            
            
            1,271,855
            
            
            4.45





**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 $8.2 million 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 three 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 $115,000, $114,000 and $110,000 for fiscal years 2008,
      2007 and 2006, respectively.





**8.
      Other Accrued Expenses**





Other
      accrued expenses consist of the following, in thousands:





**March 30,**
            
            April 1,**2008**
            
            2007Amount
                due to customers
            
            **$**
            **5,861**
            
            $
            4,746Accrued
                sales tax
            
            
            **2,837**
            
            
            2,870Self-insurance
                accruals
            
            
            **1,062**
            
            
            1,182Other
            
            
            **3,494**
            
            
            6,783Other
                accrued expenses
            
            **$**
            **13,254**
            
            $
            15,581


59


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


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





A
      summary
      of the unaudited quarterly results of operations follows (dollar amounts in
      thousands, except per share amounts).





**First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter****Fiscal
                2008**Net
                sales
            
            **$**
            **91,554**
            
            **$**
            **97,669**
            
            **$**
            **116,558**
            
            **$**
            **96,753**Gross
                profit
            
            
            **26,153**
            
            
            **29,710**
            
            
            **35,247**
            
            
            **25,443**Income
                (loss) from operations
            
            
            **(756**
            **)**
            
            **1,608**
            
            
            **(655**
            **)**
            
            **(4,317**
            **)**Net
                income (loss)
            
            
            **(664**
            **)**
            
            **739**
            
            
            **(682**
            **)**
            
            **(2,755**
            **)**Basic
                earnings (loss) per share
            
            
            **(0.05**
            **)**
            
            **0.05**
            
            
            **(0.05**
            **)**
            
            **(0.20**
            **)**Diluted
                earnings (loss) per share
            
            **$**
            **(0.05**
            **)**
            **$**
            **0.05**
            
            **$**
            **(0.05**
            **)**
            **$**
            **(0.20**
            **)**First
              Quarter
            
            
            Second
              Quarter
            
            
            Third
              Quarter
            
            
            Fourth
              Quarter**Fiscal
                2007**Net
                sales
            
            $
            84,418
            
            $
            91,303
            
            $
            114,683
            
            $
            97,806Gross
                profit
            
            
            24,749
            
            
            29,360
            
            
            37,231
            
            
            28,681Income
                from operations
            
            
            920
            
            
            2,800
            
            
            6,929
            
            
            1,596Net
                income
            
            
            530
            
            
            1,682
            
            
            4,005
            
            
            881Basic
                earnings per share
            
            
            0.04
            
            
            0.12
            
            
            0.29
            
            
            0.06Diluted
                earnings per share
            
            $
            0.04
            
            $
            0.12
            
            $
            0.28
            
            $
            0.06




60


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


**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 24, 2008
            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 24, 2008Craig
                L. Levra, Chairman,Chief
                Executive Officer and President(Principal
                Executive Officer)/s/
                Howard K. Kaminsky
            Date: June 24, 2008Howard
                K. Kaminsky, Executive Vice President -Finance,
                Chief Financial Officer and Secretary(Principal
                Financial and Accounting Officer)/s/
                John R. Attwood
            Date: June 24, 2008John
                R. Attwood, Director/s/
                Donald J. Howard
            Date: June 24, 2008Donald
                J. Howard, Director/s/
                Al D. McCready
            Date: June 24, 2008Al
                D. McCready, Director/s/
                Eric S. Olberz
            Date: June 24, 2008Eric
                S. Olberz, Director/s/
                Frederick H. Schneider
            Date: June 24, 2008Frederick
                H. Schneider, Director


61


**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 as of November 5, 2007.
            (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 La Cañada store dated as of January 11, 2008, between the Company and
                La Cañada Properties, Inc.
            †10.7
            Lease
                for Huntington Beach store dated as of August 25, 1994, between the
                Company and Huntington Beach Properties, Inc.
            (8)10.8
            Amendment
                to Lease for Huntington Beach store dated as of June 12, 2006, between
                the
                Company and Huntington Beach Properties, Inc.
            (21)10.9
            Lease
                for Porter Ranch store dated as of May 7, 1999, between the Company
                and
                North San Fernando Valley Properties, Inc.
            (9)10.10
            Lease
                for La Cañada offices dated as of October 1, 2002, between the Company and
                La Cañada Properties, Inc.
            (10)10.11
            Business
                Loan Agreement dated as of June 19, 1998, between the Company and
                Bank of
                America, N.A.
            (11)10.12
            Amendment
                No. 2 to Business Loan Agreement dated as of June 19,1998, between
                the
                Company and Bank of America, N.A.
            (12)10.13
            Amendment
                No. 3 to Business Loan Agreement dated as of November 20, 2001, between
                the Company and Bank of America, N.A.
            (13)10.14
            Amendment
                No. 4 to Business Loan Agreement dated as of June 10, 2002, between
                the
                Company and Bank of America, N.A.
            (14)10.15
            Amendment
                No. 5 to Loan Agreement dated as of September 25, 2003, between the
                Company and Bank of America, N.A.
            (15)10.16
            Amendment
                No. 6 to Loan Agreement dated as of September 30, 2006, between the
                Company and Bank of America, N.A.
            (16)10.17
            Amendment
                No. 7 to Loan Agreement dated as of March 31, 2007, between the Company
                and Bank of America, N.A.
            (21)10.18
            Amendment
                No. 8 to Loan Agreement dated as of April 19, 2007, between the Company
                and Bank of America, N.A.
            (23)10.19
            Loan
                Agreement dated as of August 31, 2007, between the Company and Bank
                of
                America, N.A.
            (24)10.20
            Security
                Agreement dated August 31, 2007, between the Company and Bank of
                America,
                N.A.
            (24)


62


**Exhibit
      Index**





**Number**
            **Description**10.21
            Amended
                and Restated Loan and Security Agreement dated June 20, 2008, between
                the
                Company, together with each of the other Obligated Parties party
                thereto
                from time to time, certain financial institutions, as Lenders thereunder,
                and Bank of America, N.A., as Agent.
            †10.22
            Pledge
                Agreement dated June 20, 2008, between the Company and Bank of America,
                N.A., as administrative agent for the Lenders.
            †10.23
            Secured
                Continuing Guaranty dated June 20, 2008, by Sport Chalet Value Services,
                LLC in favor of Bank of America, N.A., as administrative agent for
                the
                Lenders.
            †10.24
            Website
                Security Agreement and Power of Attorney dated June 20, 2008, between
                the
                Company and Bank of America, N.A., as administrative agent for the
                Lenders.
            †10.25
            Post
                Closing Agreement dated June 20, 2008, between the Company and Bank
                of
                America, N.A. , as administrative agent for the Lenders.
            †10.26
            Trademark
                Security Agreement dated June 20, 2008, between the Company and Bank
                of
                America, N.A. , as administrative agent for the Lenders.
            †10.27*
            Employment
                Agreement dated as of April 1, 2000, between the Company and Norbert
                J.
                Olberz.
            (17)10.28*
            Amendment
                No. 1 to Employment Agreement dated as of December 9, 2005,
                between the Company and Norbert J. Olberz.
            (18)10..29*
            Employment
                Agreement dated as of November 15, 2002, between the Company and
                Craig L.
                Levra.
            (19)10.30*
            Employment
                Agreement dated as of November 15, 2002, between the Company and
                Howard K.
                Kaminsky.
            (19)10.31*
            Employment
                Agreement dated as of November 15, 2002, between the Company and
                Dennis D.
                Trausch.
            (19)10.32*
            Employment
                Agreement dated as of March 31, 2008, between the Company and Thomas
                H.
                Tennyson.
            †10.33*
            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 3.1 to the Company's current report on From
                8-K
                filed on September 22, 2005.


63


**Exhibit
      Index**





**Number**
            **Description**(3)
            Incorporated
                by reference to Exhibit 3.2 to the Company’s Quarterly report on Form 10-Q
                fpr the quarter ended September 30, 2007(4)
            Incorporated
                by reference to Exhibits 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.(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 April 1,
                2007.(22)
            Incorporated
                by reference to Exhibit 99.1to the Company’s Current Report on Form 8-K
                filed on April 3, 2006.(23)
            Incorporated
                by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K
                for the fiscal year ended April 1, 2007.(24)
            Incorporated
                by reference to Exhibits 10.1 and 10.2 to the Company’s Current Report on
                Form 8-K filed on August 31, 2007.


64


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