10-K

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)

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

For the fiscal year ended March 31, 2006

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)

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

Class A Common Stock and Class B Common Stock, $0.01 par value

(Title of classes)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes þ 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 þ 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.

þ Yes o No

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ 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, 2005, was approximately $39.5 million based upon the closing sale prices of Class A Common Stock and Class B Common Stock on that date.

At June 12, 2006, there were 12,057,782 shares of Class A Common Stock outstanding and 1,705,154 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 2006 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 31, 2006.

TABLE OF CONTENTS

Item	Page
PART I
1. Business		1
1A. Risk Factors		7
1B. Unresolved Staff Comments		11
2. Properties		12
3. Legal Proceedings		13
4. Submission of Matters to a Vote of Security Holders		13
PART II
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		14
6. Selected Financial Data		15
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
7A. Quantitative and Qualitative Disclosures About Market Risk		26
8. Financial Statements and Supplementary Data		26
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		26
9A. Controls and Procedures		27
9B. Other Information		27
PART III
10. Directors and Executive Officers of the Registrant		28
11. Executive Compensation		28
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		28
13. Certain Relationships and Related Transactions		28
14. Principal Accountant Fees and Services		28
PART IV
15. Exhibits and Financial Statement Schedules		29
Exhibit 10.3
Exhibit 10.5
Exhibit 10.7
Exhibit 10.16
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

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 40 full-service, specialty sporting goods stores in California, Nevada and Arizona. As of March 31, 2006, we had 29 locations in Southern California, five in Northern California, one in Central California, two in Nevada and three in Arizona. These stores average 39,800 square feet in size. In addition, we operate a retail e-commerce store through GSI Commerce, Inc. at www.sportchalet.com. 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 Chairman Emeritus and 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 “being the best, not the biggest.” Over the last 47 years, Sport Chalet has grown into a chain of 40 specialty sporting goods stores serving California, Nevada and Arizona.

     Our growth strategy had historically focused on Southern California, but now includes opening new stores throughout California, Nevada and Arizona as suitable locations are found. Over the past three years, we have opened twelve new stores, five of which include our recent expansion into the Northern California market, one in the Central California market and three in the Phoenix, Arizona market. We currently plan to open five stores during the next 12 months. Future store openings are subject to availability of satisfactory store locations based on local competitive conditions, site availability and cost and our ability to provide and maintain high service levels and quality brand merchandising at competitive prices. For fiscal 2006, average sales per store for stores open throughout both fiscal 2006 and fiscal 2005 were $9.4 million, with corresponding average sales per square foot of $238.

     Store openings are expected to have a favorable impact on sales volume, but to negatively affect profit in the short term. New stores tend to have higher costs in the early years of operation, due primarily to increased promotional costs and lower sales on a per employee basis until the store matures. As the store matures, sales tend to level off and expenses decline as a percentage of sales. Our stores generally require three to four years to attract a stable, mature customer base. We estimate the cash required to open an average new store is approximately $2.5 million consisting primarily of the investment in inventory (net of average vendor payables), the cost of leasehold improvements (net of landlord reimbursement), fixtures and equipment and pre-opening expenses, such as the costs associated with training employees and stocking the store. Cash requirements for opening costs of each new store can

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vary significantly depending on how much the landlord has agreed to contribute to our required improvements.

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

Stores and Merchandising

     Our prototype stores range in size from 42,000 to 45,000 square feet and showcase each product category with the feel of a specialty shop all contained under one roof. The full-service approach to customer service and product knowledge is enhanced by fixtures which feature specific categories. Each shop is staffed by trained sales associates with expertise in the merchandise they sell, permitting us to offer our customers a high level of product knowledge and service from the beginner to the professional sports enthusiast.

     Our prototype format boasts a natural and outdoor-feel color scheme, clear-coated fixtures, 30-foot clear ceilings, large sport-specific graphics, pool for SCUBA and watersports instruction and demonstrations, and a 100 foot shoe wall, among other improvements. In coming years we plan to retro-fit certain mature stores to conform to the prototype. During fiscal 2007, two stores will be remodeled, with expected grand re-openings in fall of 2007. 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 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, competition trends and the availability of capital. Once a store is selected for remodel, an estimate of fixtures and leasehold improvements requiring disposal is prepared. The remaining book-value of these items is fully expensed over the period prior to the completion of the remodel. With the scheduled new store openings and remodels, 52% of our store base will be three years old or less.

     Our stores feature a number of distinct, specialty sporting goods divisions, 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 nontraditional merchandise such as snowboarding, mountaineering and SCUBA. The merchandise appeals to both experts and beginners. In addition, our stores offer over 40 services for the serious sports enthusiast, including backpacking, canyoneering, and kayaking instruction, custom golf club fitting and repair, ski rental and repair, SCUBA training and certification, SCUBA boat charters, team sales, racquet stringing, and bicycle tune-up and repair. Although the revenues generated by these support services are not material, these services further differentiate us from our competitors. Our stores are open seven days a week, typically from 9:30 a.m. to 9:30 p.m. Monday through Saturday, and 10:00 a.m. to 7:00 p.m. on Sunday.

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

	Year Ended March 31,
	2006			2005			2004
Hardlines		52	%		53	%		53	%
Apparel		29	%		28	%		28	%
Footwear		19	%		19	%		19	%
Total		100	%		100	%		100	%

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

     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, the months of November, December and January represented between 30% and 34% of our total net sales, while winter-related products ranged from 15% to 19% of total net sales. We anticipate this seasonal trend in sales will continue. We respond to changes in mid-season weather by maintaining flexibility in product placement at the stores and the marketing of product offerings. See “Item 1A. Risk Factors – Seasonal fluctuations in the sales of sporting goods could cause our operating results to suffer.”

Marketing and Advertising

     We generate all of our marketing and advertising campaigns in-house, with production support from outside vendors as needed. The campaigns are designed to reflect our strategic direction through our brand and product offerings, as well as communicate a focused and consistent theme/event calendar through media including newspaper, direct mail, radio, billboards, magazines and the internet. Through the Team Sales Division, we reach out to communities in which our stores do business, contributing to local teams and leagues. Our advertising leverage has been boosted by vendor payments under cooperative advertising arrangements as well as vendor participation in sponsoring sporting events and programs.

Purchasing and Distribution

     In order to provide a full line of specialty and sporting goods brands and a wide selection, we purchase merchandise from over 1,000 vendors. Vendor payment terms typically range from 30 to 120 days from our receipt, and there are no long-term purchase commitments. Our largest vendor, Nike, Inc., accounted for approximately 8.1% and 8.2% of our total inventory purchases for fiscal 2006 and 2005, respectively.

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

     We use a sophisticated computerized replenishment system from JDA Software Group, Inc. The JDA E3 system consists of three modules: (i) warehouse replenishment, which manages purchases from vendors, (ii) store replenishment, which manages shipments from the warehouse to stores, and (iii) network optimization, which synchronizes the two systems. In addition, we utilize the JDA Consumer Outlook and Pinpoint seasonal profile software to help identify, create and manage the seasonal trends of our merchandise. Currently, we utilize the E3 system to manage approximately 57% of our total inventory. The remaining 43% of the inventory purchases historically was managed by traditional methods conducted by the buying staff on a short-term purchase order basis.

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

     As part of our store systems upgrade during fiscal 2007 we will add CRS’ EnterpriseSelling software which will replace our manual processes of locating and transferring products for a customer. This software will allow us to quickly close a sale and ship merchandise from our optimal location to the customer’s preferred destination.

Information Systems

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

     The legacy system operates on a Sun computer. Store systems utilize the Encore Retail Suite of applications from CRS Retail Systems but are currently being upgraded with the latest CRS RetailStore 3.0 application, including EnterpriseSelling and Returns Management, and new IBM SurePOS hardware. A custom rental program has been added to the store system. Merchandise replenishment is controlled by E3 software from JDA, running on an IBM iSeries. The processing of debit/credit card authorization allows on-line debit and signature capture. The distribution center uses warehouse management software from HighJump Software (a 3M Company). HighJump is web-enabled, real-time, scaleable software that can expand to meet the demands of our growth plans.

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, 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 our 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

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proportion to the number of shares previously owned. The Class A Common Stock and the Class B Common Stock will generally vote on all matters as a single class. The holders of the Class A Common Stock and Class B Common Stock will vote as a separate class on any reverse stock split which results in holders of more than 5% of such class being converted into fractional shares. The holders of Class A Common Stock, voting as a separate class, are also entitled to elect one director, and the affirmative vote of the holders of a majority of the shares of Class A Common Stock, voting as a separate class, will be required to amend certain provisions of the Company’s Certificate of Incorporation. The recapitalization plan also included certain protection features for holders of Class A Common Stock in an effort to ensure parity in the trading of the two classes of Common Stock.

     The Founder transferred 974,150 shares of Class B Common Stock to Craig Levra and Howard Kaminsky, which was intended to give them approximately 45% of the combined voting interests of Class B and Class A Common Stock when added to the shares of Sport Chalet stock they then owned. These shares of Class B Common Stock transferred by the Founder are treated as a contribution to the Company’s capital with the offsetting charge as compensation expense. For the fiscal year ended March 31, 2006, the contribution to capital and related compensation expense was $8,221,826, the recapitalization plan expenses were $471,388 and the effect on net income was $7,839,214. The tax savings related to the recapitalization plan was limited to $854,000 as the transfer of shares resulted in compensation expense in excess of the specified limits for tax purposes. The effect on net income is as follows:

	Fiscal Year ended
	March 31, 2006
Compensation expense	$	8,221,826
Professional fees		471,388
		8,693,214
Income tax benefit		(854,000	)
Effect on net income	$	7,839,214

Trademarks and Trade Names

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

Industry and Competition

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

• full-line sporting goods chains, such as The Sports Authority, Dick’s Sporting Goods and Copeland Sports;

• specialty stores, such as REI, Bass Pro, Foot Locker, Finish Line, Chicks and Adventure 16;

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

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

• Internet retailers and catalog merchandisers, such as Cabela’s and Sportsman’s Guide.

     Many of these competitors have greater financial resources than we do, or better name recognition in regions into which we seek to expand. Our industry is dominated by sporting goods superstore retailers, i.e., full-line sporting goods chains with stores typically larger than 30,000 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

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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 than other superstore retailers in the California, Nevada and Arizona areas. 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 31, 2006, we had a total of approximately 3,149 full and part-time employees, 2,841 of whom were employed in our stores and 308 of whom were employed in warehouse and delivery operations or in executive 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 19 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 450 Fifth Street, NW, 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.

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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.

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

     Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company will be required, beginning in its fiscal year 2008, to perform an evaluation of its internal control over financial reporting and have its independent registered public accounting firm test and evaluate the design and operating effectiveness of such internal controls and publicly attest to such evaluation. The implementation process of Section 404 of the Sarbanes-Oxley Act of 2002 will be expensive, time-consuming and will require significant attention of the Company’s management. The Company cannot assure that it will not discover material weaknesses in its internal controls. The Company also cannot assure that it will complete the process of its evaluation and the auditors’ attestation on time. If the Company discovers a material weakness, corrective action may be time-consuming, costly and further divert the attention of management. The disclosure of a material weakness, even if quickly remedied, could reduce the market’s confidence in the Company’s financial statements, cause the delisting of its Common Stock from Nasdaq and harm its stock price, especially if a restatement of financial statements for past periods were to be necessary.

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

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

     Terrorist attacks or acts of war may harm our business.

     Terrorist attacks may cause damage or disruption to our employees, facilities, information systems, vendors and customers, which could significantly impact net sales, costs and expenses and financial condition. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility may cause greater uncertainty and cause us to suffer in ways that we currently cannot predict. Our geographical focus in California, Nevada and Arizona may make us more vulnerable to such uncertainties than other comparable retailers who may not have similar geographical concentration.

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

     The sporting goods business and the retail environment are highly competitive, and we compete with national, regional and local full-line sporting goods chains, specialty stores, supplier owned stores, discount and department stores, and internet retailers. A number of our competitors are larger and have greater resources.

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

     Currently, most of our stores are located in Southern California and the balance is located in Northern California, Central California, Nevada and Arizona. Accordingly, we are subject to regional risks, such as the economy, weather conditions, natural disasters and government regulations. For example,

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warm winter weather in the resorts frequented by our customers has affected sales in the past. When the region suffers an economic downturn or when other adverse events occur, historically there has been an adverse effect on our sales and profitability and this could also affect our ability to implement our planned growth. In addition, many of our vendors rely on the Ports of Los Angeles and Long Beach to process our shipments. Any disruption or congestion at the ports could impair our ability to adequately stock our stores. Several of our competitors operate stores across the United States and, thus, are not as vulnerable to such regional risks.

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

     We currently rely on a single distribution center in Ontario, California. Any natural disaster or other serious disruption to this distribution center due to fire, earthquake or any other cause could damage a significant portion of our inventory and could materially impair both our ability to adequately stock our stores and our sales and profitability.

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

     Our continued growth depends on a strategy of opening new, profitable stores in existing markets and in new regional markets. The ability to successfully implement this growth strategy could be negatively affected by any of the following:

• suitable sites may not be available for leasing;

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

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

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

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

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

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

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

     We may not be able to fund our future growth or react to competitive pressures if we lack sufficient funds. Unexpected conditions could cause us to be in violation of our lender’s operating

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covenants. Currently, we believe we have sufficient cash available through our bank credit facilities and cash from operations to fund existing operations for the foreseeable future. We cannot be certain that additional financing will be available in the future if necessary.

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

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

     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, the months of November, December and January represented between 30% and 34% of our total net sales, while winter-related products ranged from 15% to 19% of total net sales. 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 April for fall delivery, and only limited quantities of merchandise can be reordered during the fall. Consequently, we place our orders in the spring anticipating snowfall in the winter. If the snowfall does not at least provide an adequate base or occurs late in the season, or if sales do not meet projections, we may be required to mark down our winter apparel and equipment.

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

     We have experienced, and expect to continue to experience, a substantial variation in our net sales and operating results from quarter to quarter. We believe that the factors which influence this variability of quarterly results include general economic and industry conditions that affect consumer spending, changing consumer demands, the timing of our introduction of new products, the level of consumer acceptance of each new product, the seasonality of the markets in which we participate, the weather and actions of competitors. Accordingly, a comparison of our results of operations from period to period is not necessarily meaningful, and our results of operations for any period are not necessarily indicative of future performance.

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

     At June 12, 2006, Norbert Olberz, the Company’s Chairman Emeritus, director and founder, Craig Levra, the Company’s Chairman and Chief Executive Officer, and Howard Kaminsky, the Company’s Chief Financial Officer, collectively owned approximately 67% of the Company’s outstanding Class A and Class B Common Stock. Messrs. Olberz, Levra and Kaminsky effectively have the ability to control the outcome on all matters requiring stockholder approval, including, but not limited to, the election and removal of directors, and any merger, consolidation or sale of all or substantially all of the Company’s

9

assets, and to control the Company’s management and affairs. Transactions may be pursued that could enhance Messrs. Olberz, Levra and Kaminsky’s interests in the Company while involving risks to the interests of the Company’s other stockholders, and there is no assurance that their interests will not conflict with the interests of the Company’s other stockholders.

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

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

• 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.

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

     If we fail to anticipate changes in consumer preferences, we may experience lower net sales, higher inventory markdowns and lower margins. Products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty. These preferences are also subject to change. Sporting goods are often subject to short-lived trends, such as the short-lived popularity of in-line scooters. Outdoor wear is significantly influenced by fashion. Our success depends upon the ability to anticipate and respond in a timely manner to trends in sporting goods merchandise and consumers’ participation in sports. Failure to identify and respond to these changes may cause net sales to decline. In addition, because we generally make commitments to purchase products from vendors up to nine months in advance of the proposed delivery, misjudging the market may over-stock unpopular products and force inventory markdowns that could have a negative impact on profitability, or have insufficient inventory of a popular item that can be sold at full markup.

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

     Our Class A Common Stock and Class B Common Stock are thinly traded making it difficult to sell large amounts. The market prices of our Class A Common Stock and Class B Common Stock are likely to be volatile and could be subject to significant fluctuations in response to factors such as quarterly variations in operating results, operating results which vary from the expectations of securities analysts and investors, changes in financial estimates, changes in market valuations of competitors, announcements by us or our competitors of a material nature, additions or departures of key personnel, future sales of Class A Common Stock and Class B Common Stock and stock volume fluctuations. Also, general political and economic conditions such as a recession or interest rate fluctuations may adversely affect the market price of our Class A Common Stock and Class B Common Stock.

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

     At June12, 2006, Norbert Olberz, the Company’s Chairman Emeritus, director and founder, Craig Levra, the Company’s Chairman and Chief Executive Officer, and Howard Kaminsky, the Company’s Chief Financial Officer, collectively owned approximately 67% of the Company’s outstanding Class A and

10

Class B Common Stock. The holder of a share of Class B Common Stock is entitled to one vote on each matter presented to the stockholders whereas the holder of a share of Class A Common Stock has 1/20th of one vote on each matter presented to the stockholders. Subject to the Class A protection provisions described below, Messrs. Olberz, Levra and Kaminsky will be able to sell shares of Class A Common Stock and use the proceeds to purchase additional shares of Class B Common Stock, thereby increasing their collective voting power. Subject to the prohibition on the grant, issuance, sale or transfer of Class B Common Stock to Messrs. Levra and Kaminsky, the Company will also be able to issue Class B Common Stock (subject to the applicable rules of the NASD and the availability of authorized and unissued shares of Class B Common Stock) to persons deemed by the Board of Directors to be preferable to a potential acquirer, thereby diluting the voting power of that potential acquirer. The Class A protection provisions in the Company’s Certificate of Incorporation could also make acquisition of voting control more expensive by requiring an acquirer of 10% or more of the outstanding shares of Class B Common Stock to purchase a corresponding proportion of Class A Common Stock.

     The Company’s Certificate of Incorporation contains certain other provisions that may have an “anti-takeover” effect. The Company’s Certificate of Incorporation does not provide for cumulative voting and, accordingly, a significant minority stockholder could not necessarily elect any designee to the Board of Directors. The Company’s Certificate of Incorporation also provides that the Board of Directors shall be divided into three classes, as nearly equal in number as possible, which are elected for staggered three-year terms and, accordingly, it could take at least two annual meetings to change a majority of the Board of Directors. As a result of these provisions in the Company’s Certificate of Incorporation, stockholders of the Company may be deprived of an opportunity to sell their shares at a premium over prevailing market prices and it would be more difficult to replace the directors and management of the Company.

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

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

     None.

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ITEM 2. PROPERTIES

     At March 31, 2006, we had 40 store locations. The following table summarizes the key information on our retail properties:

Location	Opening Date	Gross Square Footage
La Cañada (1)	June 1960		40,300
Huntington Beach (2) (4)	June 1981		50,000
La Jolla	June 1983		20,000
Mission Viejo	August 1986		30,000
Point Loma (2)	November 1987		34,600
Valencia (2) (5)	November 1987		40,000
Marina del Rey (6)	November 1989		42,300
Beverly Hills	November 1989		40,500
Brea (2) (5)	April 1990		40,500
Oxnard (2)	June 1990		40,100
West Hills (2) (6)	June 1991		44,000
Burbank	August 1992		45,000
Montclair	November 1992		18,000
Torrance (3)	November 1993		43,700
Glendora	November 1993		40,000
Rancho Cucamonga (2)	June 1994		36,000
Irvine (2)	November 1995		35,000
Laguna Niguel (4)	November 1997		40,000
Mission Valley (3)	June 1998		47,000
Long Beach	May 1999		43,000
Porter Ranch	July 1999		43,000
Temecula (4)	October 1999		40,000
Chino Hills	July 2000		40,000
Palmdale (2)	June 2001		40,000
Henderson, NV (2)	November 2001		42,000
Costa Mesa – South Coast Plaza	November 2001		41,500
Summerlin, NV (2)	November 2002		40,300
Riverside	November 2002		44,000
Antioch (2)	November 2003		40,000
Redlands (2)	November 2003		42,000
Sacramento (2)	December 2003		40,600
Roseville	August 2004		37,000
Pleasanton (2)	August 2004		40,500
Arcadia	October 2004		42,200
Elk Grove (2)	November 2004		42,000
Visalia (2)	November 2004		41,000
Happy Valley, AZ (2)	November 2005		42,000
Chandler, AZ (2)	November 2005		41,200
Scottsdale, AZ (2)	November 2005		41,500
Foothill Ranch (2)	February 2006		43,000
	Total		1,593,800

(1)	The original store opened in 1959. The existing store includes four facilities.
(2)	Includes swimming pool facility for SCUBA and kayaking instruction.
(3)	Remodels scheduled for fiscal 2007.
(4)	Remodels completed in fiscal 2006.
(5)	Remodels completed in fiscal 2005.
(6)	Remodels completed in fiscal 2004.

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     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 Chairman Emeritus and 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 $2.4 million, $2.4 million and $2.5 million in fiscal 2006, 2005 and 2004, respectively.

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

ITEM 3. LEGAL PROCEEDINGS

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

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

     No matters were submitted to our stockholders during the fourth quarter of fiscal 2006.

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PART II

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

Market Price for Common Shares

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

	Old Common Stock
Fiscal 2005	High		Low
First Quarter	$	13.90	$	9.65
Second Quarter	$	14.00	$	11.15
Third Quarter	$	14.70	$	11.51
Fourth Quarter	$	15.00	$	12.85

	Old Common Stock
Fiscal 2006	High		Low
First Quarter	$	19.50	$	12.84
Second Quarter	$	18.14	$	16.00

	Class A				Class B
Fiscal 2006	High		Low		High		Low
Second Quarter	$	10.75	$	8.50	$	68.00	$	13.00
Third Quarter	$	10.20	$	6.87	$	15.55	$	8.00
Fourth Quarter	$	8.36	$	7.01	$	8.70	$	7.12

	Class A				Class B
Fiscal 2007	High		Low		High		Low
First Quarter (through June 12, 2006)	$	8.45	$	7.49	$	8.34	$	7.50

     On June 12, 2006, the closing price of our Class A Common Stock and Class B Common Stock as reported by Nasdaq was $8.00 and $8.26, 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 12, 2006 was 154 and 170, 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.

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.

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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 31, 2006. 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.”

	Year Ended March 31,
	2006			2005			2004			2003			2002
	(In thousands, except per share, per square foot amounts)
Statements of Income Data:
Net sales	$	343,204		$	309,090		$	264,237		$	238,033		$	227,349
Cost of goods sold, buying and occupancy costs		237,137			213,429			184,047			168,519			162,368
Gross profit		106,067			95,661			80,190			69,514			64,981
Selling, general and administrative expenses (3)		101,534			85,145			72,360			62,579			57,443
Income from operations (3)		4,533			10,516			7,830			6,935			7,538
Interest expense		267			263			190			307			71
Income before taxes (3)		4,266			10,253			7,640			6,628			7,467
Income tax provision (3)		4,353			4,082			2,996			2,584			3,026
Net income (loss) (3)	$	(87	)	$	6,171		$	4,644		$	4,044		$	4,441
Class A and Class B earnings (loss) per share – basic (3)	$	(0.01	)	$	0.46		$	0.35		$	0.31		$	0.34
Class A and Class B earnings (loss) per share – diluted (3)	$	(0.01	)	$	0.44		$	0.33		$	0.29		$	0.32
Weighted average Class A and Class B shares outstanding:
Basic		13,506			13,361			13,291			13,230			13,174
Diluted		13,506			14,007			14,017			13,894			13,990
Selected Operating Data:
Comparable store sales increase (decrease) (1)		1.9	%		5.7	%		3.7	%		(0.9	)%		(1.1	)%
Gross profit margin		30.9	%		30.9	%		30.3	%		29.2	%		28.6	%
Selling, general and administrative expenses as percentage of net sales (3)		29.6	%		27.5	%		27.4	%		26.3	%		25.3	%
Net cash provided by operating activities	$	16,976		$	17,955		$	7,608		$	6,513		$	7,350
Depreciation and amortization	$	9,226		$	7,692		$	6,447		$	5,890		$	5,143
Stores open at end of period		40			36			31			28			26
Total square feet at end of period		1,586			1,412			1,210			1,087			1,002
Net sales per square foot (2)	$	238		$	241		$	239		$	241		$	247
Average net sales per store (2)	$	9,351		$	9,430		$	9,221		$	9,220		$	9,453

	As of March 31,
	2006		2005		2004		2003		2002
Balance Sheet Data:
Working capital	$	43,446	$	43,116	$	40,746	$	37,329	$	32,224
Total assets		132,238		118,789		95,057		89,492		85,510
Long-term debt		—		—		—		—		—
Total stockholders’ equity		77,468		69,110		62,811		57,456		53,223

(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.

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

     Our growth strategy had historically focused on Southern California, but now includes opening new stores throughout California, Nevada and Arizona as suitable locations are found. We have opened twelve stores in the last three years and seventeen in the last five years. Future store openings are subject to availability of satisfactory store locations based on local competitive conditions, site availability and cost and our ability to provide and maintain high service levels and quality brand merchandising at competitive prices. Store openings are expected to have a favorable impact on sales volume, but will negatively affect profit in the short term. New stores tend to have higher costs in the early years of operation, due primarily to increased promotional costs and lower sales on a per employee basis until the store matures. As the store matures, sales tend to level off and expenses decline as a percentage of sales. Our stores generally require three to four years to attract a stable, mature customer base.

     Our prototype stores range in size from 42,000 to 45,000 square feet and showcase each product category with the feel of a specialty shop all contained under one roof. The full service approach to customer service and product knowledge is enhanced by fixtures which feature specific categories, and give the customer an enhanced shopping experience. Mature stores are evaluated for remodel based on each store’s age and competitive situation, as well as how much the landlord will contribute to our required improvements. Future store remodeling plans will depend upon several factors, including, but not limited to, general economic conditions, competition trends and the availability of adequate capital.

     We believe that the overall growth of our business will allow us to maintain or increase our operating margins. Increased merchandise volumes should enable us to improve our purchasing leverage and achieve greater support throughout the supply chain. Gross profit as a percent of sales has increased from 28.6% to 30.9% over the past five years. Our overall growth should leverage our investments in infrastructure such as the distribution center, integration of corporate facilities into a single location, E3 replenishment system, HighJump warehouse management software and Marketmax planning and allocation technology. However, these increased efficiencies and improvements in logistics are partially offset by the operating costs of new and maturing stores. Selling, general and administrative

16

expenses, excluding the cost of the recapitalization plan during fiscal 2006, as a percent of sales have increased from 25.3% to 27.1% over the past five years.

     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. As a result, the Company recorded a one-time charge based on the stock price at the time of the transfer of approximately $8.7 million. See “Item 1. Business – Recapitalization Plan.”

     We are in the process of implementing Section 404 of the Sarbanes-Oxley Act of 2002 which requires an extensive review and likely remediation of our internal controls. To help meet the requirements of Section 404 and enhance the Company’s ability to grow we are considering replacing our legacy merchandise and financial systems. Implementation of these new systems as well as the other work required by Section 404 will be expensive, time-consuming and will require significant attention of management. Current rules require our compliance by March 31, 2008.

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

Results of Operations

     Fiscal 2006 Compared to Fiscal 2005.

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

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

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

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     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 are not expected to reoccur and their exclusion provides a consistent comparison to past results. The presentation of this financial information is not intended to be considered in isolation or as a substitute for financial information prepared and presented in accordance with GAAP.

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

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

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

     The following table sets fourth reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP measures. Compensation and other expenses related to the recapitalization plan are not expected to reoccur and their exclusion provides a consistent comparison to past results:

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

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

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

     Selling, general and administrative expenses (“SG&A”) increased $16.4 million, or 19.2%, primarily from expenses related to the recapitalization plan and additional stores. As a percent of sales, these expenses increased from 27.5% in fiscal 2005 to 29.6% in fiscal 2006. Excluding the effect of the recapitalization plan, SG&A expenses increased $7.7 million, or 9.0%, primarily from additional stores. As a percent of sales, SG&A expenses decreased from 27.5% in fiscal 2005 to 27.1% in fiscal 2006 primarily from increased litigation reserves in fiscal 2005 not required in fiscal 2006, the leverage created by increased sales in mature stores which is partially offset by new stores which take time to reach operating efficiency.

     The tax savings related to the recapitalization plan was limited to $854,000 as the transfer of shares resulted in compensation expense in excess of the specified limits for tax purposes as defined by Section 162(m) of the Internal Revenue Code. The effective income tax rate was 39.8% for the year ended March 31, 2005 compared to 40.2% excluding the effect of the recapitalization plan for the same period this year. These rates differ from the statutory rate of 39.8% primarily as a result of permanent differences between financial reporting and tax-basis income.

     Net income decreased from $6.2 million, or $0.44 per diluted share, for fiscal 2005, to a net loss of $87,000, or $0.01 loss per diluted share, for fiscal 2006, primarily from expenses related to the recapitalization plan. Excluding the effect of the recapitalization plan, we achieved record net income, having increased from $6.2 million, for fiscal 2005 to $7.8 million for fiscal 2006, primarily as a result of increased sales. Excluding the effect of the recapitalization plan, earnings per share increased from $0.44 per diluted share to $0.55 per diluted share, a 25.0% improvement.

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     Fourth Quarter 2006 Compared to Fourth Quarter 2005.

     The following tables set forth statement of income data and relative percentages of net sales, and the percentage increase or decrease, for the three months ended March 31, 2006 and 2005 (dollar amounts in thousands, except per share amounts).

	Quarter ended March 31,
	2006					2005					Dollar		Percentage
	Amount		Percent			Amount		Percent			Increase		Increase
Net sales	$	89,663		100.0	%	$	79,172		100.0	%	$	10,491		13.3	%
Gross profit		27,062		30.2	%		24,350		30.8	%		2,712		11.1	%
Selling, general and administrative expenses		24,251		27.0	%		23,162		29.3	%		1,089		4.7	%
Income from operations		2,811		3.1	%		1,188		1.5	%		1,623		136.6	%
Interest expense		77		0.1	%		27		0.0	%		50		185.2	%
Income before taxes		2,734		3.0	%		1,161		1.5	%		1,573		135.5	%
Net income		1,638		1.8	%		722		0.9	%		916		126.9	%
Class A and Class B
Earnings per share:
Basic	$	0.12				$	0.06				$	0.06		100.0	%
Diluted	$	0.12				$	0.05				$	0.07		140.0	%

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

     Sales increased $10.5 million, or 13.3%, from $79.2 million for the quarter ended March 31, 2005 to $89.7 million for the same period in fiscal 2006. The sales growth is the result of opening four stores in fiscal 2006 which resulted in a $5.7 million increase in sales, in addition to a comparable store sales increase of $4.5 million or 5.7%. The comparable store sales increase is believed to be due to a late winter compared to the same period last year. Comparable store sales, excluding winter related products, increased $3.0 million or 5.2% possibly due to increased customer traffic from the appeal of winter related merchandise. Comparable store sales are based upon stores open throughout both periods presented and exclude team sales.

     Gross profit increased $2.7 million, or 11.1%, primarily from increased sales. As a percent of sales, gross profit decreased from 30.8% for the quarter ended March 31, 2005 to 30.2% for the quarter ended March 31, 2006. The 60 basis point decrease resulted from increased markdowns on winter related merchandise due to the late winter compared to the same period last year where inventory levels of winter related products was reduced prior to the end-of-season clearance period.

     Selling, general and administrative expenses increased $1.1 million, or 4.7%, primarily from additional stores. As a percent of sales, SG&A decreased from 29.3% for the quarter ended March 31, 2005 to 27.0% for the quarter ended March 31, 2006, primarily from increased litigation reserves for the quarter ended March 31, 2005 not required in fiscal 2006, the leverage created by increased sales in mature stores which is partially offset by new stores which take time to reach operating efficiency.

     The effective tax rate, as a percent of pretax income, was 40.1% for the quarter ended March 31, 2006 and 37.8% for the same period in fiscal 2005. Both differ from the statutory rate of 39.8% primarily as a result of fourth quarter provision adjustments reconciling the estimated effective rate utilized in prior quarters to the annual effective tax rate.

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     Net income increased from $722,000, or $0.05 per diluted share, for the quarter ended March 31, 2005, to $1.6 million, or $0.12 per diluted share, for the quarter ended March 31, 2006, primarily due to increased sales and lower selling, general and administrative expenses as a percent of sales.

     Fiscal 2005 Compared to Fiscal 2004.

     The following tables set forth statement of income data and relative percentages of net sales, and the percentage increase or decrease, for the twelve months ended March 31, 2005 and 2004 (dollar amounts in thousands, except per share amounts).

	Year ended March 31,
	2005					2004					Dollar		Percentage
	Amount		Percent			Amount		Percent			Increase		Increase
Net sales	$	309,090		100.0	%	$	264,237		100.0	%	$	44,853		17.0	%
Gross profit		95,661		30.9	%		80,190		30.3	%		15,471		19.3	%
Selling, general and administrative expenses		85,145		27.5	%		72,360		27.4	%		12,785		17.7	%
Income from operations		10,516		3.4	%		7,830		3.0	%		2,686		34.3	%
Interest expense		263		0.1	%		190		0.1	%		73		38.4	%
Income before taxes		10,253		3.3	%		7,640		2.9	%		2,613		34.2	%
Net income		6,171		2.0	%		4,644		1.8	%		1,527		32.9	%
Class A and Class B
Earnings per share:
Basic	$	0.46				$	0.35				$	0.11		31.4	%
Diluted	$	0.44				$	0.33				$	0.11		33.3	%

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

     Sales increased $44.9 million, or 17.0%, from $264.2 million for the fiscal year ended March 31, 2004 to $309.1 million for fiscal 2005. The sales growth is the result of opening five stores in fiscal 2005 and three in fiscal 2004 which resulted in a $30.6 million increase in sales, or 11.6%, in addition to a comparable store sales increase of 5.7%. The comparable store sales increase is believed to be due to better inventory assortments compared to the same period last year and increased customer traffic from the appeal of winter related merchandise. Sales of winter related merchandise was driven by record winter weather conditions at the resorts frequented by our customers. Comparable store sales excluding winter related products increased 4.7%. Comparable store sales are based upon stores opened throughout both periods presented and exclude team sales.

     Gross profit increased $15.5 million, or 19.3%, primarily from increased sales. As a percent of sales, gross profit increased from 30.3% in fiscal 2004 to 30.9% in fiscal 2005. The 60 basis point increase for fiscal 2005 compared to fiscal 2004 resulted primarily from a great winter season which reduced the need for markdowns as well as reduced costs from more efficient inbound logistics.

     Selling, general and administrative expenses increased $12.8 million, or 17.7%, primarily from additional stores. As a percent of sales, these expenses increased from 27.4% in fiscal 2004 to 27.5% in fiscal 2005. The 10 basis point increase for fiscal 2005 compared to fiscal 2004 resulted primarily from approximately $1.5 million in: (i) increased litigation reserves and (ii) professional fees primarily associated with the recapitalization plan. This increase was partially offset by a decrease in workers’ compensation expense due to a significant reduction in claim activity which is believed to be the result of the implementation of a new safety program.

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     The effective tax rate as a percent of pretax income was 39.8% for fiscal 2005 and 39.2% for fiscal 2004. These rates may differ from the statutory rate of 39.8% primarily as a result of permanent differences between financial reporting and tax-basis income.

     Net income increased from $4.6 million, or $0.33 per diluted share, for fiscal 2004, to $6.2 million, or $0.44 per diluted share, for fiscal 2005, primarily due to increased sales and improved gross profit as a percent of sales partially offset by increased selling, general and administrative expenses.

Liquidity and Capital Resources

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

     Net cash provided by operating activities of $17.0 million, $18.0 million and $7.6 million for fiscal 2006, 2005 and 2004, respectively, was primarily the result of net income, adjusted for depreciation and amortization, and increases in accounts payable offset by inventory purchases. For fiscal 2006 net income also was impacted by a non-cash charge of $8.2 million from stock compensation related to the recapitalization plan.

     Typically, inventory levels increase from year to year due to the addition of new stores. Inventories increased $2.7 million in fiscal 2006, $10.9 million in fiscal 2005 and $3.3 million in fiscal 2004, primarily from the addition of four stores, five stores and three stores, respectively, partially offset by improvements in inventory management. In fiscal 2006, average inventory per store decreased 6.2% compared to fiscal 2005 as late winter snowfall resulted in a greater than expected sell through of winter related products.

     Historically, accounts payable increases as inventory increases. However, the timing of vendor payments or receipt of merchandise near the end of the fiscal year does influence this relationship. For fiscal 2006, accounts payable decreased $2.3 million while inventory increased $2.7 million; as the result of an overstock situation which occurred during our quarter ended December 31, 2005. The inventory on hand at December 31, 2005 reduced the need for purchases in our fourth quarter and as a result caused accounts payable to decrease.

     Other accrued expenses increased by $3.1 million, $3.4 million and $2.8 million for fiscal 2006, 2005 and 2004, respectively, primarily from sales tax and other expenses related to the increase in sales during the fourth quarter.

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

     Net cash used in investing activities was $19.8 million, $14.9 million and $9.0 million for fiscal 2006, 2005 and 2004, respectively, primarily for capital expenditures as shown below, in thousands:

	Year ended March 31,
	2006		2005		2004
New stores	$	10,033	$	9,840	$	3,595
Remodels		2,625		1,552		1,978
Existing stores		1,393		1,127		850
Information systems		4,768		1,152		1,496
Rental equipment		1,161		1,089		886
Other		315		438		196
Total	$	20,295	$	15,198	$	9,001

     We have continued to open new stores, four in fiscal 2006, five in fiscal 2005 and three in fiscal 2004. Net of landlord reimbursement, the average amount spent is $1.4 million, $1.4 million and $1.1 million for fiscal 2006, 2005 and 2004, respectively. We are also remodeling mature stores; four stores

22

were remodeled in fiscal 2006 and two in each of fiscal 2005 and 2004. Information systems are being upgraded with the addition of 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 2007, are expected to be approximately $19.0 million, which will be funded by cash flow from operations and our bank credit line, as needed. Approximately $4.8 million of this amount will be used to open five new stores. In addition, two stores are planned to be remodeled for approximately $2.3 million. The remainder is primarily for expenditures on information systems the most significant portion of which is for the replacement of our legacy merchandise and financial systems.

     Net cash provided by financing activities reflects advances and repayments of borrowings under our revolving credit facility. As of March 31, 2006, 2005, and 2004, we had no outstanding borrowings on this facility.

     Our amended credit facility with Bank of America, N.A. (the “Lender”) provides for advances up to $20.0 million, increasing to $35.0 million for the period October 1, through December 31, each year, less the amount of any outstanding draws, up to a $4.0 million maximum in authorized letters of credit. Interest accrues at the Lender’s prime rate (7.50% at March 31, 2006) or can be fixed for a period of time at the then current rate established under one of several indices, all at our option. In addition, there is an unused commitment fee of .20% per year, based on a weighted average formula. This credit facility expires on September 30, 2007, and we expect to renegotiate and extend the term of this agreement or obtain another form of financing before that date. Our obligation to the Lender is presently secured by a first priority lien on substantially all of our non-real estate assets, and we are subject to several restrictive covenants. The principal operating covenants require us to maintain certain minimum cash flow coverage and debt-to-equity ratios and restrict the level of capital expenditures, calculated on a quarterly basis. We are currently in compliance with the covenants. We believe our credit line with the Lender is sufficient to fund capital expenditures for the foreseeable future and to meet seasonal fluctuations in cash flow requirements. However, unexpected conditions could require us to request additional borrowing capacity from the Lender or alter our expansion plans or operations.

     Our primary contractual obligations and commitments as of March 31, 2006, are store leases with initial terms expiring from 2006 through 2020, which typically provide for multiple five-year renewal options, and employment contracts:

	Operating		Employment
Payments due by period:	Leases		Contracts
Within 1 year	$	25,726,911	$	169,500
2 - 3 years		49,621,203		339,000
4 - 5 years		45,048,722		339,000
After 5 years		79,174,127		678,000
Total	$	199,570,963	$	1,525,500

     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 $2.9 million relating to purchase commitments were outstanding as of March 31, 2006 and expire within one year.

     No cash dividends have been declared on Class A Common Stock and Class B Common Stock in fiscal 2006. 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.

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Critical Accounting Policies and Use of Estimates

     Our significant accounting policies are described in Note 2 to the financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the financial statements, we are required to make estimates and judgments which affect the results of our operations and the reported value of assets and liabilities. Actual results may differ from these estimates. We believe that the following summarizes critical accounting policies which require significant judgments and estimates in the preparation of our consolidated financial statements.

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

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

     We regularly review aged and excess inventories to determine if the carrying value of such inventories exceeds market value. A reserve is recorded to reduce the carrying value to market value as necessary. A determination of market value requires estimates and judgment based on our historical markdown experience and anticipated markdowns based on future merchandising and advertising plans, seasonal considerations, expected business trends and other factors.

     Revenue Recognition. Sales are recognized upon the purchase by customers at our retail store locations, less merchandise returned by customers. Revenue from gift cards, gift certificates and store merchandise credits is recognized at the time of redemption. We generally accept returns up to 30 days from the date of purchase with a sales receipt or proof of purchase. Typically refunds are in the same form of payment originally received from the customer. We accommodate customers who do not have a receipt or proof of purchase by offering an exchange or store credit. When available we track the original sale date with each return and provide a reserve for projected merchandise returns based on this historical experience. As the reserve for merchandise returns is based on estimates, the actual returns could differ from the reserve, which could impact sales.

     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 five years of redemption data, approximately 90% of Gift Cards are redeemed within the year after issuance, and approximately 95% are redeemed within 36 months of the date of issuance, after which redemption activity is negligible. Accordingly, we recognize Breakage as revenue by periodically decreasing the carrying value of the Gift Card liability by approximately 5% of the aggregate amount.

     During the fiscal year ended March 31, 2005 and prior periods, we recognized Breakage at the time of issuance of Gift Cards. During the first quarter of fiscal 2006, we changed the method of

24

accounting to recognize Breakage at the time of redemption of Gift Cards. The effect of the change in accounting to record Breakage at the time of redemption is immaterial to our financial position and results of operations. The revenue from Breakage is included in the income statement line item net sales and amounted to approximately $397,000, $263,000 and $427,000 for the years ended March 31, 2006, 2005 and 2004, respectively.

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

     Impairment of Long-Lived Assets. 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.

     Accounting for Income Taxes. As part of the process of preparing the financial statements, income taxes are estimated for each of the jurisdictions in which 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 31, 2006. In the event that actual results differ from these estimates, or these estimates are adjusted in future periods, a valuation allowance may need to be established, which could impact our financial position and results of operations.

     Provisions for income taxes are based on numerous factors that are subject to audit by the Internal Revenue Service and the tax authorities in the various jurisdictions in which we do business.

     Stock-Based Compensation. The Company accounts for its employee stock option plan under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Under APB No. 25, no stock-option compensation is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying Common Stock on the date of grant and the related number of shares granted is fixed at that point in time. In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” The standard requires all entities to recognize compensation expense for all share-based payments granted to employees in an amount equal to the fair value. The new standard is effective for the next fiscal year that begins after June 15, 2005. 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. The options remaining to vest will not have a material effect on net income when we implement the new standard in our first quarter ending June 30, 2006.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

     (a) On November 15, 2004, we dismissed Ernst & Young LLP as our independent registered public accounting firm. Ernst & Young LLP had served as our independent registered public accounting firm since 1983. The decision to dismiss Ernst & Young LLP was made by the Audit Committee of our Board of Directors and, upon recommendation by that committee, was approved by the full Board of Directors.

     The reports of Ernst & Young LLP on our financial statements for the fiscal year ended March 31, 2004, contained no adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles.

     During the fiscal year ended March 31, 2004 and the subsequent interim period through the date of the dismissal, the Company had no disagreement with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Ernst & Young LLP, would have caused them to make reference to such disagreement in connection with their reports for such periods.

     During the fiscal year ended March 31, 2004 and the subsequent interim period through the date of the dismissal, there have been no reportable events (as defined in Regulation S-K, Item 304(a)(1)(v).

     We provided Ernst & Young LLP with a copy of the above disclosures and requested that they furnish us with a letter addressed to the Securities and Exchange Commission stating whether they agree with the above statements and, if not, stating the respects in which they do not agree.

     (b) On November 15, 2004, we engaged Moss Adams LLP as the independent registered public accounting firm to audit the Company’s financial statements for the fiscal year ending March 31, 2005. The engagement of Moss Adams LLP was made by the Audit Committee of our Board of Directors and, upon recommendation by that committee, was approved by the full Board of Directors.

     During the fiscal year ended March 31, 2004 and the subsequent interim period prior to engaging Moss Adams LLP, neither the Company, nor anyone on our behalf, has consulted with Moss Adams LLP regarding any of the matters set forth in Item 304(a)(2)(i)-(ii) of Regulation S-K.

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ITEM 9A. CONTROLS AND PROCEDURES

     Our Chief Executive Officer, Craig Levra, and Chief Financial Officer, Howard Kaminsky, with the participation of our management, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period covered by this report in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report.

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

     There were no changes in the Company’s internal controls over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer, which occurred during the 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

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

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

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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information concerning certain relationships and related transactions is incorporated herein by reference from the section entitled “Proposal 1-Election of Directors-Certain Relationships and Related Transactions” 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.

28

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 ended March 31, 2006, 2005 and 2004.

Allowance for		Balance at
Sales Returns		beginning of						Balance at
(Year ended)		period		Additions		Deductions		end of period
	3/31/2006	$	330,000	$	16,769,528	$	16,713,528	$	386,000
	3/31/2005	$	240,000	$	15,302,119	$	15,212,119	$	330,000
	3/31/2004		—	$	13,591,231	$	13,351,231	$	240,000

Allowances for estimated returns are recorded at the estimated gross profit based upon our historical return patterns. Sales return allowances are recorded in other accrued expenses on the Consolidated Balance Sheets.

(b) Exhibits — See Index on Page 52.

29

Sport Chalet, Inc.

Index to Audited Consolidated Financial Statements

	Page
Reports of Independent Registered Public Accounting Firms		31
Consolidated Statements of Operations for each of the three years in the period ended March 31, 2006		33
Consolidated Balance Sheets as of March 31, 2006 and 2005		34
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended March 31, 2006		35
Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2006		36
Notes to Consolidated Financial Statements		37

30

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 31, 2006 and 2005 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years then ended. 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 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Moss Adams LLP

Los Angeles, California
June 19, 2006

31

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Sport Chalet, Inc.

     We have audited the accompanying consolidated statements of operations, stockholders’ equity, and cash flows of Sport Chalet, Inc. for the year ended March 31, 2004. Our audit 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 financial statements based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Sport Chalet, Inc. for the year ended March 31, 2004, in conformity with United States generally accepted accounting principles.

/s/ Ernst & Young LLP

Los Angeles, California
May 21, 2004

32

Sport Chalet, Inc.

Consolidated Statements of Operations

	Year ended March 31,
	2006			2005		2004
Net sales	$	343,204,097		$	309,089,551	$	264,236,923
Cost of goods sold, buying and occupancy costs		237,137,009			213,428,269		184,046,770
Gross profit		106,067,088			95,661,282		80,190,153
Selling, general and administrative expenses		101,534,075			85,144,702		72,360,528
Income from operations		4,533,013			10,516,580		7,829,625
Interest expense		266,910			263,523		189,924
Income before taxes		4,266,103			10,253,057		7,639,701
Income tax provision		4,353,292			4,082,000		2,995,625
Net income (loss)	$	(87,189	)	$	6,171,057	$	4,644,076
Earnings (loss) per share:
Basic	$	(0.01	)	$	0.46	$	0.35
Diluted	$	(0.01	)	$	0.44	$	0.33
Weighted average number of common shares outstanding:
Basic		13,505,952			13,360,986		13,291,334
Diluted		13,505,952			14,007,372		14,016,760

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 year ended March 31, 2006. 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.

See accompanying notes.

33

Sport Chalet, Inc.

Consolidated Balance Sheets

	March 31,
	2006		2005
Assets
Current assets:
Cash and cash equivalents	$	2,563,930	$	6,176,689
Accounts receivable, less allowance of $130,000 in 2006 and $182,000 in 2005		2,479,386		1,462,042
Merchandise inventories		67,777,059		65,061,142
Prepaid expenses and other current assets		3,857,570		3,044,153
Deferred income taxes		3,920,192		3,915,079
Total current assets		80,598,137		79,659,105
Fixed assets, net		48,365,653		37,502,578
Deferred income taxes		3,274,015		1,550,753
Other assets		—		76,960
Total assets	$	132,237,805	$	118,789,396
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	16,467,120	$	18,805,953
Salaries and wages payable		5,473,610		5,080,320
Income taxes payable		302,274		825,059
Other accrued expenses		14,909,439		11,831,595
Total current liabilities		37,152,443		36,542,927
Deferred rent		17,616,994		13,136,303
Commitments 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 — 11,927,146 in 2006 and 11,700,794 in 2005		119,271		117,008
Class B Common stock, $.01 par value:
Authorized shares — 2,000,000 Issued and outstanding shares — 1,703,909 in 2006 and 1,671,571 in 2005		17,039		16,716
Additional paid-in capital		31,335,324		22,892,519
Retained earnings		45,996,734		46,083,923
Total stockholders’ equity		77,468,368		69,110,166
Total liabilities and stockholders’ equity	$	132,237,805	$	118,789,396

The recapitalization plan approved by the Company’s stockholders included the transfer of stock from the Company’s founder to certain members of management with a resulting contribution to capital of approximately $8.2 million. In addition, all share and per share information has been adjusted to reflect the reclassification and stock dividend as discussed in note 1- Description of Business and Recapitalization Plan.

See accompanying notes.

34

Sport Chalet, Inc.

Consolidated Statements of Stockholders’ Equity

			Common Stock
	Class A				Class B				Additional			Retained
	Share		Amount		Share		Amount		Paid-in Capital			Earnings			Total
Balance at March 31, 2003		11,599,238	$	115,992		1,657,063	$	16,571	$	22,055,089		$	35,268,790		$	57,456,442
Options exercised		79,100		791		11,300		113		225,669			—			226,573
Related income tax benefit										34,498			—			34,498
Shares granted				—				—		448,918			—			448,918
Net income for 2004													4,644,076			4,644,076
Balance at March 31, 2004		11,678,338	$	116,783		1,668,363	$	16,684	$	22,764,174		$	39,912,866		$	62,810,507
Options exercised		22,456		225		3,208		32		59,101			—			59,358
Related income tax benefit										69,244			—			69,244
Shares granted				—				—					—			—
Net income for 2005													6,171,057			6,171,057
Balance at March 31, 2005		11,700,794	$	117,008		1,671,571		16,716	$	22,892,519		$	46,083,923		$	69,110,166
Options exercised		226,352		2,263		32,338		323		471,603			—			474,189
Related income tax benefit										1,013,895			—			1,013,895
Optionee withholding taxes from exercise of stock options										(1,264,519	)		—			(1,264,519	)
Shares granted				—				—		8,221,826			—			8,221,826
Net income for 2006													(87,189	)		(87,189	)
Balance at March 31, 2006		11,927,146	$	119,271		1,703,909	$	17,039	$	31,335,324		$	45,996,734		$	77,468,368

The recapitalization plan approved by the Company’s stockholders included the transfer of stock from the Company’s founder to certain members of management with a resulting contribution to capital of approximately $8.2 million. In addition, all share and per share information has been adjusted to reflect the reclassification and stock dividend as discussed in note 1- Description of Business and Recapitalization Plan.

See accompanying notes.

35

Sport Chalet, Inc.

Consolidated Statements of Cash Flows

	Year ended March 31,
	2006			2005			2004
Operating activities
Net (loss) income	$	(87,189	)	$	6,171,057		$	4,644,076
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		9,225,765			7,692,015			6,446,657
(Gain) Loss on disposal of equipment		(213,122	)		360,761			354,608
Stock compensation		8,221,826			—			448,918
Deferred income taxes		(1,728,375	)		(1,787,158	)		(1,073,494	)
Tax benefit on employee stock options		1,013,895			69,244			34,498
Changes in operating assets and liabilities:
Accounts receivable		(1,017,344	)		(253,108	)		(68,415	)
Merchandise inventories		(2,715,917	)		(10,889,087	)		(3,285,425	)
Prepaid expenses and other current assets		(813,417	)		(842,117	)		(163,448	)
Refundable income taxes		—			—			58,990
Bank overdraft		—			—			(5,764,355	)
Accounts payable		(2,338,833	)		7,787,476			1,778,029
Salaries and wages payable		393,290			1,725,952			1,163,033
Other accrued expenses		3,077,844			3,887,638			2,789,208
Income taxes payable		(522,785	)		789,428			35,631
Deferred rent		4,480,691			3,242,722			209,066
Net cash provided by operating activities		16,976,329			17,954,823			7,607,577
Investing activities
Purchases of fixed assets		(20,295,088	)		(15,197,322	)		(9,001,374	)
Other assets		76,960			24,076			8,869
Proceeds from sales of fixed assets		419,370			264,106			—
Net cash used in investing activities		(19,798,758	)		(14,909,140	)		(8,992,505	)
Financing activities
Proceeds from bank borrowings		46,361,065			10,700,000			10,225,000
Repayment of bank borrowings		(46,361,065	)		(10,700,000	)		(10,225,000	)
Proceeds from exercise of stock options		474,189			59,358			226,573
Optionee withholding taxes from exercise of stock options		(1,264,519	)		—			—
Net cash provided by (used) financing activities		(790,330	)		59,358			226,573
Increase (decrease) in cash and cash equivalents		(3,612,759	)		3,105,041			(1,158,355	)
Cash and cash equivalents at beginning of year		6,176,689			3,071,648			4,230,003
Cash and cash equivalents at end of year	$	2,563,930		$	6,176,689		$	3,071,648
Cash paid during the year for:
Income taxes	$	5,591,000		$	3,624,000		$	3,940,000
Interest		157,946			101,512			189,925

See accompanying notes.

36

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 40 full-service, specialty sporting goods stores in California, Nevada and Arizona. The Company has 29 locations in Southern California, five in Northern California, one in Central California, two in Nevada and three in Arizona.

     In the second quarter of fiscal 2006, the Company’s Board of Directors approved a recapitalization plan designed to facilitate the orderly transition of control from the Company’s founder (the “Founder”) to certain members of management and to increase financial flexibility for the Company and its stockholders. The recapitalization plan transferred a portion of the Founder’s ownership to Craig Levra, Chairman and Chief Executive Officer, and Howard Kaminsky, Executive Vice President — Finance, Chief Financial Officer and Secretary, and allowed current stockholders to retain existing ownership and voting interests.

     The recapitalization established two classes of common stock and was effected through a reclassification of each outstanding share of Common Stock into 0.25 share of Class B Common Stock. The reclassification was followed by a non-taxable stock dividend of seven shares of Class A Common Stock for each one outstanding share of Class B Common Stock. Each share of Class B Common Stock entitles the holder to one vote, and each share of Class A Common Stock entitles the holder to 1/20th of one vote.

     The recapitalization doubled the total number of shares outstanding and, therefore, had the same impact on earnings per share as a 2-for-1 stock split. However, the establishment of dual classes of common stock did not affect the relative voting or equity interests of existing stockholders since the reclassification of Common Stock and issuance of a stock dividend affected each stockholder in proportion to the number of shares previously owned. The Class A Common Stock and the Class B Common Stock will generally vote on all matters as a single class. The holders of the Class A Common Stock and Class B Common Stock will vote as a separate class on any reverse stock split which results in holders of more than 5% of such class being converted into fractional shares. The holders of Class A Common Stock, voting as a separate class, are also entitled to elect one director, and the affirmative vote of the holders of a majority of the shares of Class A Common Stock, voting as a separate class, will be required to amend certain provisions of the Company’s Certificate of Incorporation. The recapitalization plan also included certain protection features for holders of Class A Common Stock in an effort to ensure parity in the trading of the two classes of common stock.

     The Founder transferred 974,150 shares of Class B Common Stock to Craig Levra and Howard Kaminsky, which was intended to give them approximately 45% of the combined voting interests of Class B and Class A Common Stock when added to the shares of Sport Chalet stock they then owned. These shares of Class B Common Stock transferred by the Founder are treated as a contribution to the Company’s capital with the offsetting charge as compensation expense. For the fiscal year ended March 31, 2006, the contribution to capital and related compensation expense was $8,221,826, the recapitalization plan expenses were $471,388 and the effect on net income was $7,839,214. The tax savings related to the recapitalization plan was limited to $854,000 as the transfer of shares resulted in compensation expense in excess of the specified limits for tax purposes. The effect on net income is as follows:

37

Sport Chalet, Inc.

Notes to Consolidated Financial Statements (continued)

	Fiscal year ended
	March 31, 2006
Compensation expense	$	8,221,826
Professional fees		471,388
		8,693,214
Income tax benefit		(854,000	)
Effect on net income	$	7,839,214

     The Chairman Emeritus (the “Founder”) along with certain members of management collectively own approximately 67% of the Company’s outstanding Class A and Class B Common Stock at March 31, 2006.

Segments of an Enterprise

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

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

Cash and Cash Equivalents

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

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

Merchandise Inventories

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

38

Sport Chalet, Inc.

Notes to Consolidated Financial Statements (continued)

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

     The Company regularly reviews aged and excess inventories to determine if the carrying value of such inventories exceeds market value. A reserve is recorded to reduce the carrying value to market value as necessary.

Accounts Receivable

     Accounts receivable is reported net of an allowance for doubtful accounts. The allowance for doubtful accounts represents an estimate of the losses inherent in accounts receivable based on several factors, including historical trends of aging of accounts, write-off experience and expectations of future performance.

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 years
Rental equipment	3 years
Vehicles	5 years
Leasehold improvements	10-15 years

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

	March 31,
	2006			2005
Fixtures and equipment	$	40,864,670		$	31,175,598
Rental equipment		5,010,435			4,454,223
Vehicles		376,448			307,366
Leasehold improvements		41,448,392			33,583,082
		87,699,946			69,520,269
Accumulated depreciation		(39,334,293	)		(32,017,691	)
Net fixed assets	$	48,365,653		$	37,502,578

     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.

39

Sport Chalet, Inc.

Notes to Consolidated Financial Statements (continued)

Long Lived Assets

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

Financial Instruments

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

Pre-opening Costs

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

Revenue Recognition

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

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”) is recognized at the time of redemption. The Gift Cards have no expiration dates.

     Our historical experience indicates that not all issued Gift Cards are redeemed (the “Breakage”). Accordingly, Breakage is recognized as revenue by periodically decreasing the carrying value of the Gift Card liability by approximately 5% of the aggregate amount. During the fiscal year ended March 31, 2005 and prior periods, we recognized Breakage at the time of issuance of Gift Cards. For the fiscal year ended March 31, 2006, the method of accounting has been changed to recognize Breakage at the time of redemption of Gift Cards. The effect of the change in accounting to record Breakage at the time of redemption is immaterial. The revenue from Breakage is included in the income statement line item net sales and amounted to approximately $397,000, $263,000 and $427,000 for the years ended March 31, 2006, 2005 and 2004, respectively.

Vendor Allowances

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

40

Sport Chalet, Inc.

Notes to Consolidated Financial Statements (continued)

Advertising Costs

     Advertising costs are expensed as incurred. Advertising expense, net of vendor reimbursement, amounted to $8,166,267, $7,923,512 and $6,639,668 for the years ended March 31, 2006, 2005 and 2004, respectively.

Income Taxes

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

Deferred Rent

     Rent expense under non-cancelable operating leases with scheduled rent increases or free rent periods is accounted for on a straight line basis over the lease term, beginning on the date of initial possession, which is generally when the Company begins construction build-out. The amount of the excess of straight line rent expense over scheduled payments is recorded as a deferred rent liability. Construction allowances and other such lease incentives are recorded as deferred credits, and are amortized on a straight line basis as a reduction of rent expense.

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.

41

Sport Chalet, Inc.

Notes to Consolidated Financial Statements (continued)

Earnings Per Share

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

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

				March 31,
	2006			2005		2004
	(in thousands, except per share data)
Basic EPS computation:
Numerator	$	(87	)	$	6,171	$	4,644
Denominator:
Weighted average common shares outstanding		13,506			13,361		13,291
Basic earnings (loss) per share	$	(0.01	)	$	0.46	$	0.35
Diluted EPS computation:
Numerator	$	(87	)	$	6,171	$	4,644
Denominator:
Weighted average common shares outstanding		13,506			13,361		13,291
Incremental shares from assumed conversion of options		—			646		726
Total weighted average common shares — assuming dilution		13,506			14,007		14,017
Diluted earnings (loss) per share	$	(0.01	)	$	0.44	$	0.33

     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 year ended March 31, 2006. 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.

     An aggregate of 551,806 options for the years ended March 31, 2006 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.

42

Sport Chalet, Inc.

Notes to Consolidated Financial Statements (continued)

Stock-Based Compensation

     The Company accounts for its employee stock option plan under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Under APB No. 25, no stock-based compensation is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying Common Stock on the date of grant and the related number of shares granted is fixed at that point in time. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“Statement 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123” (“Statement 148”). Statement 148 requires prominent disclosures in annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company measures compensation expense for its stock option awards under the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. APB 25 requires compensation expense to be recognized based on the excess, if any, of the quoted market price of the stock at the date of the grant and the amount an employee must pay to acquire the stock.

     The Company used the Black-Scholes option-pricing model with the following weighted-average assumptions in determining the fair value of options granted in fiscal 2006, 2005 and 2004: weighted-average risk-free interest rates of 4.0%, 4.0% and 4.0%, respectively; dividend yields of 0%; weighted-average volatility factors of the expected market price of the Company’s Class A Common Stock and Class B Common Stock of 38% for 2006, 35% for 2005 and 33% for 2004; and a weighted average expected life of the option of five years. Because additional options are expected to be granted each year, the pro forma disclosures may not be representative of pro forma effects on reported results for future periods. 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. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not provide a reliable single measure of the fair value of employee stock options.

     The weighted average fair value of options granted during fiscal 2006, 2005 and 2004 was $3.11, $1.16 and $2.86, respectively.

     In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” The standard requires all entities to recognize compensation expense for all share-based payments granted to employees in an amount equal to the fair value. The new standard is effective for the next fiscal year that begins after June 15, 2005, and allows two different methods of transition. Depending on the model used to calculate stock-based compensation expense in the future and other requirements of SFAS No. 123(R), the pro forma disclosure may not be indicative of the stock-based compensation expense that will be recognized in the Company’s future financial statements. On March 31, 2006 the Company 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 for seven executive officers and two additional key employees of the Company. The compensation charge from the acceleration of vesting is not material. The exercise prices of the Options range between $3.62 and $8.15 per share, and the weighted average exercise price per share is $7.18. The Company expects to implement the new standard in the first quarter ending June 30, 2006 and does not expect the effect on net income to be material.

43

Sport Chalet, Inc.

Notes to Consolidated Financial Statements (continued)

     The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (see Note 6).

				March 31,
	2006			2005			2004
Net income (loss) as reported	$	(87,189	)	$	6,171,057		$	4,644,076
Add:
Stock based compensation expense included in reported net income, net of related tax effects		7,541,662			—			271,146
Cancellation of Sport Chalet Option, LLC		747,351			—			—
Deduct:
Sport Chalet Option, LLC		—			348,660			313,476
Stock-based compensation expense from recapitalization		(7,541,662	)		—			—
Total stock-based employee compensation expense determined under fair market value based method for all awards, net of related tax effects		(1,215,712	)		(202,138	)		(492,306	)
Pro forma net income (loss)	$	(555,550	)	$	5,620,259		$	4,109,440
Earnings (loss) per share — basic and diluted
As reported — basic	$	(0.01	)	$	0.46		$	0.35
As reported — diluted	$	(0.01	)	$	0.44		$	0.33
Pro forma — basic	$	(0.04	)	$	0.42		$	0.31
Pro forma — diluted	$	(0.04	)	$	0.40		$	0.29

     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 year ended March 31, 2006. 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.

     During the year ended March 31, 2006, per the terms of the Company’s employee stock option plan, certain employees exercised 398,000 options for 210,292 shares of Common Stock in a phantom stock exchange transaction. The Company withheld $1,264,519 for remittance to taxing authorities on behalf of those employees.

44

Sport Chalet, Inc.

Notes to Consolidated Financial Statements (continued)

3. Loans Payable to Bank

     The Company’s credit facility with Bank of America, N.A. (the “Lender”) provides for advances up to $20.0 million, increasing to $35.0 million for the period October 1, through December 31, each year, less the amount of any outstanding draws, up to a $4.0 million maximum in authorized letters of credit. Interest accrues at the Lender’s prime rate (7.50% at March 31, 2006) or can be fixed for a period of time at the then current rate established under one of several indices, all at the Company’s option. In addition, there is an unused commitment fee of .20% per year, based on a weighted average formula. This credit facility expires on September 30, 2007, and the Company expects to renegotiate and extend the term of this agreement or obtain another form of financing before that date. The Company’s obligation to the Lender is presently secured by a first priority lien on substantially all of the Company’s non-real estate assets, and the Company is subject to several restrictive covenants. The principal operating covenants require the Company to maintain certain minimum cash flow coverage and debt to equity ratios and restrict the level of capital expenditures, calculated on a quarterly basis. The Company currently is in compliance with the covenants. The Company believes its credit line with the Lender is sufficient to fund capital expenditures for the foreseeable future and to meet seasonal fluctuations in cash flow requirements. However, unexpected conditions could require the Company to request additional borrowing capacity from the Lender or alter its expansion plans or operations.

     At March 31, 2006, there were no outstanding borrowings under the facility. Letters of credit amounting to $2,909,000 relating to purchase commitments were outstanding as of March 31, 2006.

     The weighted average interest rate on borrowings during the year ended March 31, 2006 was 6.32%.

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, consist of the following at March 31, 2006:

	Leases with		Unrelated
	Founder		Leases		Total
2007	$	1,876,445	$	23,850,466	$	25,726,911
2008		1,876,445		23,784,685		25,661,130
2009		1,876,445		22,083,628		23,960,073
2010		1,876,445		21,763,683		23,640,128
2011		1,793,111		19,615,482		21,408,593
Thereafter		3,444,329		75,729,799		79,174,128
	$	12,743,220	$	186,827,743	$	199,570,963

45

Sport Chalet, Inc.

Notes to Consolidated Financial Statements (continued)

     Total rent expense amounted to $29,426,607, $26,382,577 and $21,957,345 for the years ended March 31, 2006, 2005 and 2004, respectively, which include $2,433,933, $2,460,243 and $2,140,206, 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 $774,009, $1,540,158 and $1,918,429 for the years ended March 31, 2006, 2005 and 2004, respectively. Included in the accompanying balance sheets are amounts representing prepaid rent to the Founder of $138,678 at March 31, 2006 and $135,472 at March 31, 2005. Pursuant to his amended employment contract dated April 1, 2000, the Founder is paid a base salary of $150,000 per year until March 31, 2014.

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

5. Income Taxes

     The provision for income taxes for the years ended March 31, 2006, 2005 and 2004 consists of the following:

	2006			2005			2004
Federal:
Current	$	4,953,795		$	4,430,000		$	3,278,625
Deferred		(1,492,424	)		(1,186,000	)		(919,000	)
		3,461,372			3,244,000			2,359,625
State:
Current		1,127,871			1,439,000			799,000
Deferred		(235,951	)		(601,000	)		(163,000	)
		891,921			838,000			636,000
	$	4,353,292		$	4,082,000		$	2,995,625

     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 March 31, 2006 and 2005 are as follows:

	2006					2005
				Non-				Non-
	Current			current		Current		current
Deferred tax assets:
Fixed assets	$	—		$	1,752,668	$	—	$	166,973
Uniform cost capitalization		309,007			—		297,944		—
Inventory reserves		876,357			—		796,688		—
Accrued vacation		337,170			—		316,058		—
Bonus accrual		730,961			—		637,350		—
Self-insurance accruals		1,049,847			—		991,612		—
Allowance for bad debt and sales returns		205,546			—		397,092		—
State income taxes		591,745			—		326,965		—
Deferred rent		—			1,521,347		—		1,383,780
Other		(180,441	)		—		151,370		—
Total deferred tax assets	$	3,920,192		$	3,274,015	$	3,915,079	$	1,550,753

46

Sport Chalet, Inc.

Notes to Consolidated Financial Statements (continued)

     A reconciliation of the provision for income taxes for the years ended March 31, 2006, 2005 and 2004 with the amount computed using the federal statutory rate follows:

	2006		2005			2004
Statutory rate, 34% applied to income before taxes	$	1,450,475	$	3,486,000		$	2,597,000
State taxes, net of federal tax effect		248,901		598,000			446,000
Nondeductible stock award		2,629,668
Other, net		24,248		(2,000	)		(47,375	)
	$	4,353,292	$	4,082,000		$	2,995,625

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. At March 31, 2006 and 2005, there were 1,618,409 and 1,811,264 remaining shares, respectively, reserved for future issuance and available for grant under the 2004 Plan.

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

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

47

Sport Chalet, Inc.

Notes to Consolidated Financial Statements (continued)

Stock Based Compensation, the estimated fair value at the date of grant was $4.3 million for the option and was being amortized to expense over the option’s vesting period, which has been estimated at nine years. Effective with the recapitalization plan this option was terminated, see Note 1 — Description of Business and Recapitalization Plan.

     A summary of the Company’s stock option activity and related information follows:

	March 31, 2006					March 31, 2005					March 31, 2004
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Options			Price		Options			Price		Options			Price
Outstanding at beginning of year		2,016,000		$	3.04		1,811,334		$	2.57		1,879,334		$	2.55
Granted		426,500			7.75		256,334			6.35		86,000			3.61
Exercised		(258,687	)		1.83		(25,668	)		2.31		(90,400	)		2.51
Forfeited		(233,645	)		2.56		(26,000	)		3.40		(63,600	)		3.55
Outstanding at end of year		1,950,168		$	4.29		2,016,000		$	3.04		1,811,334		$	2.57
Exercisable at end of year		1,865,612		$	4.19		1,560,466		$	2.43		1,455,068		$	2.29

     The following table provides certain information with respect to stock options outstanding and stock options exercisable at March 31, 2006:

	Stock Options Outstanding						Stock Options Exercisable
					Weighted
			Weighted		Average				Weighted
Range of Exercise			Average		Remaining				Average
Prices	Shares		Exercise Price		Life		Shares		Exercise Price
Under $3.00		897,000	$	2.30		2.7		897,000	$	2.30
$3.00-$4.50		408,000		4.12		5.3		402,000		4.12
$4.50-$5.99		20,000		4.58		0.2		20,000		4.58
$6.00-$7.50		461,168		6.92		9.1		387,612		7.00
Above $7.50		164,000		8.15		9.3		159,000		8.17
		1,950,168		4.29		5.3		1,865,612		4.19

48

Sport Chalet, Inc.

Notes to Consolidated Financial Statements (continued)

Stock Award

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

     During the year ended March 31, 2004, the Founder and his spouse, through their family trust, awarded 38,600 shares to certain executives. Award recipients were not required to pay consideration for the shares. The fair market value of the shares, $448,918, was treated as a capital contribution by the Founder and expensed as compensation to recipients as of March 31, 2004.

     The Company granted loans to employees to pay the income taxes associated with certain stock awards granted and expensed in fiscal 1999 and fiscal 2001. These loans bear interest at 6%, were due in June 2005 and are secured by the awarded shares. At March 31, 2005 and 2004 the loan balance was $76,960 and $101,036, respectively.

7. Employee Retirement Plan

     Effective January 1, 1997, the Company adopted the Sport Chalet, Inc. Employee Retirement Savings Plan (the “401(k) Plan”). All employees who have completed 3 months of service and are 21 years of age or older are eligible to participate. Employees may contribute from 2% to 100% of their eligible earnings or the government limit (whichever is less). The Company matches 25% of the first 4% of employee pre-tax earnings deferred into the 401(k) Plan. The Company expense related to this plan was $110,014, $129,004 and $152,817 for the years ended March 31, 2006, 2005 and 2004, respectively.

8. Other Accrued Expenses

     Other accrued expenses consist of the following:

	March 31,
	2006		2005
Amount due to customers	$	3,741,056	$	3,036,509
Accrued sales tax		2,421,609		2,249,770
Self-insurance accruals		2,400,527		2,364,336
Other		6,346,247		4,180,980
Other accrued expenses	$	14,909,439	$	11,831,595

49

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

	First		Second			Third		Fourth
	Quarter		Quarter			Quarter		Quarter
Fiscal 2006
Net sales	$	72,144	$	81,732		$	99,665	$	89,663
Gross profit		21,304		25,958			31,743		27,062
Income (loss) from operations		655		(4,241	)		5,308		2,811
Net income (loss)		389		(5,163	)		3,049		1,638
Basic earnings (loss) per share	$	0.03		($0.38	)	$	0.22	$	0.12
Diluted earnings (loss) per share	$	0.03		($0.38	)	$	0.22	$	0.12

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Fiscal 2005
Net sales	$	61,538	$	72,465	$	95,914	$	79,172
Gross profit		17,768		22,297		31,246		24,350
Income from operations		282		2,707		6,340		1,188
Net income		137		1,594		3,719		722
Basic earnings per share	$	0.01	$	0.12	$	0.28	$	0.06
Diluted earnings per share	$	0.01	$	0.11	$	0.26	$	0.05

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

     The fourth quarter of fiscal 2005 includes approximately $1.2 million in: (i) increased litigation reserves and (ii) professional fees primarily associated with the recapitalization plan.

50

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 21, 2006		By:	/s/ Howard K. Kaminsky
		Howard 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/ Norbert Olberz	Date: June 21, 2006
Norbert Olberz,
Chairman Emeritus and Director
/s/ Craig L. Levra	Date: June 21, 2006
Craig L. Levra, Chairman,
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Howard K. Kaminsky	Date: June 21, 2006
Howard K. Kaminsky, Executive Vice President –
Finance, Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
/s/ John R. Attwood	Date: June 21, 2006
John R. Attwood, Director
/s/ Donald J. Howard	Date: June 21, 2006
Donald J. Howard, Director
/s/ Al D. McCready	Date: June 21, 2006
Al D. McCready, Director
/s/ Eric S. Olberz	Date: June 21, 2006
Eric S. Olberz, Director
/s/ Kenneth Olsen	Date: June 21, 2006
Kenneth Olsen, Director
/s/ Frederick H. Schneider	Date: June 21, 2006
Frederick H. Schneider, Director

51

Exhibit Index

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

52

Exhibit Index

Number	Description
10.21*	Employment Agreement dated as of November 15, 2002, between the Company and Dennis D. Trausch.	(19	)
14.1	Code of Conduct.	(20	)
16.1	Letter regarding change in accounting firm.	(21	)
23.1	Report of Independent Registered Public Accounting Firm.	†
23.2	Report of Independent Registered Public Accounting Firm.	†
24.1	Power of attorney (see signature page).
31.1	Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	†
31.2	Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	†
32.1	Certification Pursuant to 18 U.S.C. Section 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	†
†	Filed as part of this Annual Report on Form 10-K.
*	Constitute management contracts, or compensatory plans or arrangements, which are required to be filed pursuant to Item 601 of Regulation S-K.
(1)	Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Registration Statement No. 33-53120).
(2)	Incorporated by reference to Exhibit A to the Company’s definitive proxy statement for the 2005 annual meeting of stockholders.
(3)	Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-8 (Registration Statement No. 333-107683).
(4)	Incorporated by reference to Exhibit 4.1 and 4.2 to the Company’s Registration of Certain Classes of Securities on Form 8-A (Registration Statement No. 000-20736).
(5)	Incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1 (Registration Statement No. 33-53120).
(6)	Incorporated by reference to Appendix D to the Company’s definitive proxy statement for the 2004 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.

53

Exhibit Index

Number	Description
(14)	Incorporated by reference to Exhibit 10.55 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2002.
(15)	Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
(16)	Incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed on October 3, 2005
(17)	Incorporated by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2000.
(18)	Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on December 9, 2005
(19)	Incorporated by reference to Exhibits 10.1, 10.2 and 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2002.
(20)	Incorporated by reference to Exhibit 14.1 to Amendment No.1 to the Company’s Annual Report on Form 10-K/A for the fiscal year ended March 31, 2004.
(21)	Incorporated by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K filed on November 18, 2004.

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EX-10.3

Exhibit 10.3

Sport Chalet, Inc.

INDEMNIFICATION AGREEMENT

          This Indemnification Agreement (the “Agreement”), dated as of                     , 200      is made and effective as of the date set forth in Section 14 of the Agreement, by and between Sport Chalet, Inc., a Delaware corporation (the “Corporation”), and                     , a director and/or officer of the Corporation (the “Indemnitee”).

RECITALS

          A. The Corporation and the Indemnitee recognize that the present state of the law relating to director and officer liability is too uncertain to provide the Corporation’s directors and officers with adequate and reliable advance knowledge or guidance with respect to the legal risks and potential liabilities to which they may become personally exposed as a result of performing their duties for the Corporation;

          B. The Corporation and the Indemnitee are aware of the substantial growth in the number of lawsuits filed against corporate directors and officers in connection with their activities in such capacities and by reason of their status as such;

          C. The Corporation and the Indemnitee recognize that the cost of defending against such lawsuits, whether or not meritorious, is typically beyond the financial resources of most directors and officers of the Corporation;

          D. The Corporation and the Indemnitee recognize that the legal risks and potential liabilities, and the threat thereof, associated with proceedings filed against the directors and officers of the Corporation bear no reasonable relationship to the amount of compensation received by the Corporation’s directors and officers;

          E. The Corporation, after reasonable investigation prior to the date hereof, has determined that the liability insurance coverage available to the Corporation as of the date hereof is inadequate, unreasonably expensive or both. The Corporation believes, therefore, that the interest of the Corporation’s stockholders would be best served by a combination of (i) such insurance as the Corporation may elect to obtain as provided in Section 8 below and (ii) a contract with its directors and officers, including the Indemnitee, to indemnify them to the fullest extent permitted by law (as in effect on the date hereof, or, to the extent any amendment may expand such permitted indemnification, as hereafter in effect) against personal liability for actions taken in the performance of their duties to the Corporation;

          F. The Corporation’s Certificate of Incorporation and Bylaws authorize the indemnification of the directors and officers of the Corporation, subject to the limitations set forth in Section 145 of the Delaware General Corporation Law (the “DGCL”);

          G. The Board of Directors of the Corporation has concluded that, to retain and attract talented and experienced individuals to serve as directors and officers of the Corporation and to encourage such individuals to take the business risks necessary for the

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success of the Corporation, it is necessary for the Corporation to contractually indemnify its directors and officers, and to assume for itself liability for expenses and damages in connection with certain claims against such directors and officers in connection with their service to the Corporation, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Corporation and its stockholders;

          H. The Corporation desires and has requested the Indemnitee to serve or continue to serve as a director or officer of the Corporation, free from undue concern for the risks and potential liabilities associated with such services to the Corporation; and

          I. The Indemnitee is willing to serve, or continue to serve, the Corporation, provided, and on the expressed condition, that he or she is furnished with the indemnification provided for herein.

AGREEMENT

          NOW, THEREFORE, the Corporation and Indemnitee agree as follows:

          1. Definitions.

               a. “Expenses” means, for the purposes of this Agreement, all direct and indirect costs of any type or nature whatsoever (including, without limitation, any fees and disbursements of Indemnitee’s counsel, accountants and other experts and other out-of-pocket costs) actually and reasonably incurred by the Indemnitee in connection with the investigation, preparation, defense or appeal of a Proceeding; provided, however, that Expenses shall not include judgments, fines, penalties or amounts paid in settlement of a Proceeding.

               b. “Other enterprise” includes, for the purposes of this Agreement, employee benefit plans; references to “fines” includes any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to “serving at the request of the Corporation” includes any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Agreement.

               c. “Proceeding” means, for the purposes of this Agreement, any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action brought by or in the right of the Corporation) in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a director or officer of the Corporation, by reason of any action taken by Indemnitee or of any inaction on Indemnitee’s part while acting as such director or officer or by reason of the fact that Indemnitee is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director and/or officer of the foreign or domestic corporation which was a predecessor corporation to the Corporation or of another enterprise at the request of such predecessor corporation, whether or not Indemnitee is serving in such

2

capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement.

          2. Agreement to Serve. In consideration of the protection afforded by this Agreement, if Indemnitee is a director of the Corporation, Indemnitee agrees to serve at least for the balance of the current term as a director and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. If Indemnitee is an officer of the Corporation not serving under an employment contract, Indemnitee agrees to serve in such capacity at least for the balance of the current fiscal year of the Corporation and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. Following the applicable period set forth above, Indemnitee agrees to serve or continue to serve in such capacity as a director or officer of the Corporation to the best of his or her abilities at the will of the Corporation or under separate contract, if such contract exists, for so long as Indemnitee is duly elected or appointed and qualified or until such time as Indemnitee tenders his or her resignation in writing. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment.

          3. Indemnification.

               a. Third Party Proceedings. The Corporation shall, except to the extent prohibited by the DGCL or any other applicable law, rule, regulation or order, indemnify Indemnitee against Expenses, judgments, fines, penalties or amounts paid in settlement (if the settlement is approved in advance by the Corporation) actually and reasonably incurred by Indemnitee in connection with a Proceeding (other than a Proceeding by or in the right of the Corporation) if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee’s conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal Proceeding, had no reasonable cause to believe that Indemnitee’s conduct was unlawful.

               b. Proceedings by or in the Right of the Corporation. To the fullest extent permitted by law, the Corporation shall indemnify Indemnitee against Expenses and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with a Proceeding by or in the right of the Corporation to procure a judgment in its favor if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation. Notwithstanding the foregoing, no indemnification shall be made in respect of any claim, issue or matter as to which the Indemnitee shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which the proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine.

               c. Scope. Notwithstanding any other provision of this Agreement but subject to Section 13(b), the Corporation shall indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by

3

other provisions of this Agreement, the Corporation’s Certificate of Incorporation, the Corporation’s Bylaws or by statute.

          4. Determination of Right to Indemnification. Upon receipt of a written claim addressed to the Board of Directors for indemnification pursuant to Section 3, the Corporation shall determine by any of the methods set forth in Section 145 of the DGCL whether Indemnitee has met the applicable standards of conduct which make it permissible under applicable law to indemnify Indemnitee. If a claim under Section 3 is not paid in full by the Corporation within thirty (30) days after such written claim has been received by the Corporation or if applicable, whatever time is reasonably necessary for the Corporation to complete the investigation contemplated in Section 3 of this Agreement, the Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. The Indemnitee’s Expenses incurred in connection with successfully establishing his or her right to indemnification or advances, in whole or in part, in any such Proceeding shall also be indemnified by the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to make a determination prior to the commencement of such action that indemnification of the Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct under applicable law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has not met the applicable standard of conduct. The Corporation shall have the burden of proof concerning whether the Indemnitee has or has not met the applicable standard of conduct.

          5. Advancement and Repayment of Expenses.

               a. Proceedings. The Expenses incurred by Indemnitee in defending and investigating any Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceeding within thirty (30) days after receiving from Indemnitee the copies of invoices presented to Indemnitee for such Expenses, if Indemnitee shall provide an undertaking to the Corporation to repay such amount to the extent it is ultimately determined that Indemnitee is not entitled to indemnification. In determining whether or not to make an advance hereunder, the ability of Indemnitee to repay shall not be a factor. Notwithstanding the foregoing, in a proceeding brought by the Corporation directly, in its own right (as distinguished from an action bought derivatively or by any receiver or trustee), the Corporation shall not be required to make the advances called for hereby if the Board of Directors determines, in its sole discretion, that it does not appear that Indemnitee has met the standards of conduct which make it permissible under applicable law to indemnify Indemnitee and the advancement of Expenses would not be in the best interests of the Corporation and its stockholders.

               b. Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits in defense of any action, suit, or other proceeding referred to in Section 3 hereof or in defense of any claim, issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith.

          6. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification or advancement by the Corporation of some or a portion of any Expenses or liabilities of any type whatsoever (including, but not limited to, judgments,

4

fines, penalties, and amounts paid in settlement) incurred by Indemnitee in the investigation, defense, settlement or appeal of a Proceeding, but is not entitled to indemnification or advancement of the total amount thereof, the Corporation shall nevertheless indemnify or pay advancements to the Indemnitee for the portion of such Expenses or liabilities to which the Indemnitee is entitled.

          7. Notice to Corporation by Indemnitee. Indemnitee shall notify the Corporation in writing of any matter with respect to which Indemnitee intends to seek indemnification hereunder as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof; provided, however, that any delay in so notifying Corporation shall not constitute a waiver by Indemnitee of his or her rights hereunder. The written notification to the Corporation shall be addressed to the Board of Directors and shall include a description of the nature of the Proceeding and the facts underlying the Proceeding and be accompanied by copies of any documents filed by any state or federal regulatory agency or with the court in which the Proceeding is pending. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.

          8. Maintenance of Liability Insurance.

               a. The Corporation hereby agrees that so long as Indemnitee shall continue to serve as a director or officer of the Corporation and thereafter so long as Indemnitee shall be subject to any possible Proceeding, the Corporation, subject to Section 8(b), shall use its best efforts to obtain and maintain in full force and effect directors’ and officers’ liability insurance (“D&O Insurance”) which provides Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Corporation’s directors, if Indemnitee is a director, or of the Corporation’s officers, if Indemnitee is not a director of the Corporation but is an officer.

               b. Notwithstanding the foregoing, the Corporation shall have no obligation to obtain or maintain D&O Insurance if the Corporation determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Corporation.

               c. Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 7 hereof, the Corporation has D&O Insurance in effect, the Corporation shall give prompt notice of the commencement of such claim to the insurers in accordance with the procedures set forth in the respective policies. The Corporation shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies.

               d. The obligation of the Corporation to indemnify the Indemnitee under this Agreement shall be secondary and any insurance purchased by the Corporation shall be primary.

          9. Defense of Claim. In the event that the Corporation shall be obligated under Section 5 hereof to pay any Expenses of any Proceeding against Indemnitee, the

5

Corporation, if appropriate, shall be entitled to assume the defense of such Proceeding with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Corporation, the Corporation will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Proceeding, provided that (i) Indemnitee shall have the right to employ his or her counsel in any such Proceeding, at Indemnitee’s expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Corporation, or (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and the Indemnitee in the conduct of such defense or (C) the Corporation shall not, in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses of Indemnitee’s counsel shall be at the expense of the Corporation.

          10. Attorneys’ Fees. In the event that Indemnitee or the Corporation institutes an action to enforce or interpret any terms of this Agreement, the Corporation shall reimburse Indemnitee for all of the Indemnitee’s reasonable fees and expenses in bringing and pursuing such action or defense, unless as part of such action or defense, a court of competent jurisdiction determines that the material assertions made by Indemnitee as a basis for such action or defense were not made in good faith or were frivolous.

          11. Continuation of Obligations. All agreements and obligations of the Corporation contained herein shall continue during the period the Indemnitee is a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and shall continue thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of the fact that Indemnitee served in any capacity referred to herein.

          12. Successors and Assigns. This Agreement establishes contract rights that shall be binding upon, and shall inure to the benefit of, the successors, assigns, heirs and legal representatives of the parties hereto.

          13. Non-exclusivity.

               a. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed to be exclusive of any other rights that the Indemnitee may have under any provision of law, the Corporation’s Certificate of Incorporation or Bylaws, the vote of the Corporation’s stockholders or disinterested directors, other agreements or otherwise, both as to action in his or her official capacity and action in another capacity while occupying his or her position as a director or officer of the Corporation. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity.

               b. In the event of any changes, after the date of this Agreement, in any applicable law, statute, or rule which expand the right of a Delaware corporation to indemnify its officers and directors, the Indemnitee’s rights and the Corporation’s obligations under this Agreement shall be expanded to the full extent permitted by such changes. In the event of any

6

changes in any applicable law, statute or rule, which narrow the right of a Delaware corporation to indemnify a director or officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties’ rights and obligations hereunder.

          14. Effectiveness of Agreement. This Agreement shall be effective as of the date set forth on the first page and may apply to acts or omissions of Indemnitee which occurred prior to such date if Indemnitee was an officer, director, employee or other agent of the Corporation, or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred.

          15. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Corporation to do or fail to do any act in violation of applicable law. The Corporation’s inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 15. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

          16. Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware, except to the extent federal law is applicable. To the extent permitted by applicable law, the parties hereby waive any provisions of law which render any provision of this Agreement unenforceable in any respect.

          17. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.

          18. Mutual Acknowledgment. Both the Corporation and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Corporation from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Corporation has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Corporation’s right under public policy to indemnify Indemnitee.

          19. Subrogation. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Corporation effectively to bring suit to enforce such rights.

7

          20. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original.

          21. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto.

          IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year set forth above.

	Sport Chalet, Inc.
	By
	One Sport Chalet Drive
	La Canada, CA 91011
INDEMNITEE:

  (Type Name)

  (Signature)

  (Address)

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EX-10.5

Exhibit 10.5

FIRST AMENDMENT TO LEASE

     THIS FIRST AMENDMENT TO LEASE (this “First Amendment”) is made and entered into as of March 31, 2006, by and between LA CANADA PROPERTIES, INC., a California corporation (“Landlord”), and SPORT CHALET, INC., a Delaware corporation (“Tenant”).

RECITALS:

A. Landlord currently leases to Tenant certain “Premises” (as more particularly described in the “Lease”, as hereinafter defined), located in La Canada, California, pursuant to that certain Standard Industrial/Commercial Single-Tenant Lease-Net (the “Base Lease”) and Addendum to Standard Industrial Lease (the “Addendum”), each dated as of September 1, 1992 (the Base Lease, as modified and supplemented by the Addendum is referred to herein as the “Lease”), by and between Norbert Olberz and Irene Olberz (“Original Landlord”), as “Landlord”, and Tenant (then known as Sport Chalet, Incorporated, a California corporation), as “Tenant”. Landlord is successor in interest to Original Landlord, as “Landlord” under the Lease. All initial capitalized terms used herein but not herein defined shall have the meaning ascribed to such terms in the Lease.

B. Landlord and Tenant now desire to enter into this First Amendment to amend the Lease to provide for (a) an acknowledgement of the exercise of the first and second options to extend granted pursuant to the Lease, and (b) the grant of three (3) additional options to extend pursuant to the Lease, on the terms and subject to the conditions more particularly provided herein.

     NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows:

1. Notwithstanding anything to the contrary contained in the Lease:

     (a) The parties acknowledge that Tenant has exercised the option to extend the term of the Lease by the initial five (5) year extension period pursuant to Section 3 of the Addendum, such that the term of the Lease would be scheduled to expire on August 31, 2007.

     (b) The parties acknowledge that Tenant has also exercised early and with Landlord’s knowledge and consent, the second five (5) year extension period pursuant to Section 3 of the Addendum, such that the term of the Lease is now scheduled to expire on August 31, 2012.

     (c) Tenant is hereby granted three (3) additional options to extend the term of the Lease for periods of five (5) years each on the terms and conditions set forth in Section 3 of the Addendum, such that together with the exercised option terms granted pursuant to Section 3 of the Addendum, Tenant shall now have remaining three (3) separate options to extend, each for an additional period of five (5) years, each subject to the provisions of Section 3 of the Addendum, with the applicable option terms, if exercised, to be for the following periods:

     First remaining option term: September 1, 2012 through and including August 31, 2017

     Second remaining option term: September 1, 2017 through and including August 31, 2022

     Third remaining option term: September 1, 2022 through and including August 31, 2027

     (d) Landlord and Tenant each represent and warrant that it has had no dealings with any real estate broker or agent in connection with the extension of the Lease term pursuant hereto or negotiation of this First Amendment, and that it knows of no real estate broker, agent or finder who is or might be entitled to a commission or fee in connection with the extension of the Lease term pursuant hereto and/or this First Amendment. In the event of any claim for broker’s or finder’s fees or commissions in connection with the extension of the Lease term pursuant hereto and/or this First Amendment, (i) Landlord shall indemnify, hold harmless and defend Tenant from and against any and all liability, claims, demands, damages and costs (including, without limitation, reasonable attorneys’ fees and other litigation expenses) on account of such claim if it shall be based upon any statement, representation or agreement claimed to have been made by Landlord, and (ii) Tenant shall indemnify, hold harmless and defend Landlord from and against any and all liability, claims, demands, damages and costs (including, without limitation,

reasonable attorneys’ fees and other litigation expenses) on account of such claim if it shall be based upon any statement, representation or agreement claimed to have been made by Tenant.

2. Except as specifically amended by this First Amendment, the Lease shall continue in full force and effect. In the event of any conflict between the provisions of the Lease and the provisions of this First Amendment, the provisions of this First Amendment shall prevail.

3. This First Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original, but any number of which, taken together, shall constitute one and the same instrument.

     IN WITNESS WHEREOF, Landlord and Tenant have executed this First Amendment as of the date first written above.

LANDLORD:	TENANT:
LA CANADA PROPERTIES, INC.,	SPORT CHALET, INC.,
a California corporation	a Delaware corporation
By: Eric Olberz	By: /s/ Dennis Trausch
Eric Olberz, CFO	Dennis Trausch, Executive Vice President
(Print Name and Title)	(Print Name and Title)

EX-10.7

Exhibit 10.7

FIRST AMENDMENT TO LEASE

     THIS FIRST AMENDMENT TO LEASE (this “First Amendment”) is made and entered into as of March 31, 2006, by and between HUNTINGTON BEACH PROPERTIES, INC., a California corporation (“Landlord”), and SPORT CHALET, INC., a Delaware corporation (“Tenant”).

RECITALS:

A. Landlord currently leases to Tenant certain “Premises” (as more particularly described in the “Lease”, as hereinafter defined), located at the southeast corner of Beach Boulevard and Stark Street in Huntington Beach, California, pursuant to that certain Lease (the “Lease”) dated as of August 25, 1994, by and between Landlord and Tenant (then known as Sport Chalet, Incorporated, a Delaware corporation). All initial capitalized terms used herein but not herein defined shall have the meaning ascribed to such terms in the Lease.

B. Landlord and Tenant now desire to enter into this First Amendment to amend the Lease to provide for the grant of two (2) additional options to extend the Term of the Lease, each by an additional five (5) year Option Term (in addition to the two (2) existing options to extend the Term of the Lease each by an additional five (5) year Option Term, as provided in the Lease) for a total of four (4) Option Terms of five (5) years each, on the terms and subject to the conditions more particularly provided herein.

     NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows:

1. Notwithstanding anything to the contrary contained in the Lease

     (a) Section 3(c) of the Lease is hereby amended and restated as follows:

     Landlord hereby grants Tenant four (4) separate options (the “Options”) to extend the Term of this Lease for four (4) separate consecutive terms (the “Option Terms”) of five (5) years each, following expiration of the then existing Term, upon all the terms and conditions contained in this Lease, except for the payment of Minimum Rent which shall be in accordance with the provisions of
Section 5(a) below. Tenant shall give written notice of the exercise of each Option to Landlord at least six (6) months prior to the expiration of the then applicable Term. Should Tenant neglect to exercise any Option by the dates specified above, Tenant’s right to exercise shall not expire until thirty (30) days after notice from Landlord of Tenant’s failure to exercise such Option. References in this Lease to the “Term” shall mean the initial Term of this Lease, as the same may be extended by any Option Terms, as applicable. Tenant shall have no other right to extend the Term beyond the expiration of the fourth (4th) Option Term.

     (b) Section 4(a) of the Lease is hereby amended and restated as follows:

     Tenant shall pay Landlord “Minimum Rent” during the Term initially in the amount of Forty-One Thousand Six Hundred Sixty-Seven Dollars ($41,667.00) per month, and increasing as of April 1, 2006 to the amount of Fifty-Four Thousand One Hundred Sixty-Six and 67/100ths Dollars ($54,166.67) per month, which amount shall remain effective through to the expiration of the initial Term of the Lease. In the event of the extension of the Term by any one or more of the Option Terms, Minimum Rent during the Option Term(s) shall be as follows:

     (i) In the event of the extension of the Term by the first Option Term, Minimum Rent shall be adjusted as of the commencement of the first Option Term to equal the product obtained by multiplying the monthly Minimum Rent in effect immediately preceding the commencement of the first Option Term (being $54,166.67 per month) by a fraction, the numerator of which is two (2) times the “Index” (as hereinafter defined) for the calendar month which is two (2) full months immediately preceding the commencement of the first Option Term and the denominator of which is the Index for the calendar month which is two (2) full months immediately preceding April 1, 2006; provided that in no event shall Minimum Rent increase to be more than $56,875.00 (being one hundred five percent (105%) of the Minimum Rent in effect prior to the commencement of the first Option Term).

     (ii) In the event of the extension of the Term by the second Option Term, the third Option Term and/or the Fourth Option Term, Minimum Rent shall be adjusted as of the commencement of the applicable Option Term to equal the product obtained by multiplying the monthly Minimum Rent in effect immediately preceding the commencement of the applicable Option Term by a fraction, the numerator of which is two (2) times the Index for the calendar month which is two (2) full months immediately preceding the commencement of such Option Term and the denominator of which is the Index for the calendar month which is sixty-two (62) full months immediately preceding the commencement of such Option Term; provided that in no event shall Minimum Rent increase to be more than one hundred ten percent (110%) of the Minimum Rent in effect prior to the commencement of the applicable Option Term.

As used herein, the “Index” shall mean the Consumer Price Index for All Urban Consumers (Los Angeles/Anaheim/Riverside Area; Base 1982-84=100), as published by the United States Department of Labor, Bureau of Labor Statistics (the “Bureau”). Should such Bureau discontinue the publication of the Index, publish the same less frequently or alter the same in some other manner, then the parties shall adopt a substitute index or substitute procedure which reasonably reflects and monitors consumer prices. Minimum Rent for any partial month occurring during the Term shall be prorated based upon the number of days within such month occurring during the Term. Minimum Rent shall be paid in monthly installments, in advance, on the first day of each calendar month, without demand, offset or abatement, except as specifically otherwise provided in this Lease.

     (c) Landlord and Tenant each represent and warrant that it has had no dealings with any real estate broker or agent in connection with the extension of the Lease term pursuant hereto or negotiation of this First Amendment, and that it knows of no real estate broker, agent or finder who is or might be entitled to a commission or fee in connection with the extension of the Lease term pursuant hereto and/or this First Amendment. In the event of any claim for broker’s or finder’s fees or commissions in connection with the extension of the Lease term pursuant hereto and/or this First Amendment, (i) Landlord shall indemnify, hold harmless and defend Tenant from and against any and all liability, claims, demands, damages and costs (including, without limitation, reasonable attorneys’ fees and other litigation expenses) on account of such claim if it shall be based upon any statement, representation or agreement claimed to have been made by Landlord, and (ii) Tenant shall indemnify, hold harmless and defend Landlord from and against any and all liability, claims, demands, damages and costs (including, without limitation, reasonable attorneys’ fees and other litigation expenses) on account of such claim if it shall be based upon any statement, representation or agreement claimed to have been made by Tenant.

2. Except as specifically amended by this First Amendment, the Lease shall continue in full force and effect. In the event of any conflict between the provisions of the Lease and the provisions of this First Amendment, the provisions of this First Amendment shall prevail.

3. This First Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original, but any number of which, taken together, shall constitute one and the same instrument.

     IN WITNESS WHEREOF, Landlord and Tenant have executed this First Amendment as of the date first written above.

LANDLORD:	TENANT:
HUNTINGTON BEACH PROPERTIES, INC.,	SPORT CHALET, INC.,
a California corporation	a Delaware corporation
By: Eric Olberz	By: /s/ Dennis Trausch
Eric Olberz, CFO	Dennis Trausch, Executive Vice President
(Print Name and Title)	(Print Name and Title)

EX-10.16

Exhibit 10.16

AMENDMENT NO. 7 TO LOAN AGREEMENT

     This Amendment No. 7 (the “Amendment”) dated as of March 31, 2006 between Bank of America, N.A. (“the Bank”) and Sport Chalet, Inc. (the “Borrower”).

RECITALS

A. The Bank and the Borrower entered into a certain Business Loan Agreement dated as of June 19, 1998 (together with any previous amendments, the “Agreement”).

B. The Bank and the Borrower desire to amend the Agreement.

AGREEMENT

1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement.

2. Amendments. The Agreement is hereby amended as follows:

2.1 Paragraph 8.9 of the Agreement is amended to read in its entirety as follows:

“8.9 Capital Expenditures. Not to spend or incur obligations (including the amount of any capital leases but excluding landlord reimbursements) to acquire fixed assets for more than Nineteen Million Dollars ($19,000,000) in any single fiscal year on a consolidated basis.”

     3. Representations and Warranties. When the Borrower signs this Amendment, the Borrower represents and warrants to the Bank that: (a) there is no event which is, or with notice or lapse of time or both would be, a default under the Agreement except those events, if any, that have been disclosed in writing to the Bank or waived in writing by the Bank (b) the representations and warranties in the Agreement are true as of the date of this Amendment as if made on the date of this Amendment, (c) this Amendment does not conflict with any law, agreement, or obligation by which the Borrower is bound, and (d) if the Borrower is a business entity or a trust, this Amendment is within the Borrower’s powers, has been duly authorized, and does not conflict with any of the Borrower’s organizational papers.

4. Effect of Amendment. Except as provided in this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect.

5. Counterparts. This Amendment may be executed in counterparts, each of which when so executed shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument.

6. FINAL AGREEMENT. BY SIGNING THIS DOCUMENT EACH PARTY REPRESENTS AND AGREES THAT: (A) THIS DOCUMENT REPRESENTS THE FINAL AGREEMENT BETWEEN PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, (B) THIS DOCUMENT SUPERSEDES ANY COMMITMENT LETTER, TERM SHEET OR OTHER WRITTEN OUTLINE OF TERMS AND CONDITIONS RELATING TO THE SUBJECT MATTER HEREOF, UNLESS SUCH COMMITMENT LETTER, TERM SHEET OR OTHER WRITTEN OUTLINE OF TERMS AND CONDITIONS EXPRESSLY PROVIDES TO THE CONTRARY, (C) THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES, AND (D) THIS DOCUMENT MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR UNDERSTANDINGS OF THE PARTIES.

This Amendment is executed as of the date stated at the beginning of this Amendment.

BANK:
Bank of America, N.A.
By:	/s/ Matthew Koenig
	Matthew Koenig, Senior Vice President
BORROWER:
Sport Chalet, Inc.
By:	/s/ Howard Kaminsky
	Howard K. Kaminsky, Executive Vice President-Finance, Chief Financial Officer and Secretary

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-107683, No. 333-61503, No. 33-61612 and No. 333-129887) pertaining to the Sport Chalet, Inc. Employee Retirement Savings Plan and the Sport Chalet, Inc. 1992 Incentive Award Plan, and the 2004 Equity Incentive Plan of our report dated June 19, 2006, with respect to the consolidated financial statements and schedule of Sport Chalet, Inc. included in the Annual Report (Form 10-K) for the year ended March 31, 2006.

	/s/ Moss Adams LLP
Los Angeles, California
June 19, 2006

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-107683, No. 333-61503, No. 33-61612 and No. 333-129887) pertaining to the Sport Chalet, Inc. Employee Retirement Savings Plan and the Sport Chalet, Inc. 1992 Incentive Award Plan, and the 2004 Equity Incentive Plan of our report dated May 21, 2004, with respect to the consolidated financial statements and schedule of Sport Chalet, Inc. included in the Annual Report (Form 10-K) for the year ended March 31, 2006.

	/s/ Ernst & Young LLP
Los Angeles, California
June 19, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Craig Levra, certify that:

1.	I have reviewed this annual report on Form 10-K of Sport Chalet, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 21, 2006	/s/ Craig Levra
	Craig Levra,
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Howard Kaminsky, certify that:

1.	I have reviewed this annual report on Form 10-K of Sport Chalet, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 21, 2006	/s/ Howard Kaminsky
	Howard Kaminsky,
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to their knowledge, the Annual Report on Form 10-K for the period ended March 31, 2006 of Sport Chalet, Inc. (the “Company”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such 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.

Date: June 21, 2006
	/s/ Craig L. Levra
	Chairman of the Board, Chief Executive Officer and
	President
	/s/ Howard K. Kaminsky
	Executive Vice President-Finance,
	Chief Financial Officer and Secretary

A signed original of this written statement required by Section 906 has been provided to Sport Chalet, Inc. and will be furnished to the Securities and Exchange Commission or its staff upon request.