Net Sales. Net sales for the twenty-six week period ended July 1, 2006 increased by 21.7%, or $10.5 million, to $58.7 million from $48.2 million in the twenty-six week period ended July 2, 2005. The sales increase was due to the addition of eight new stores and a comparable store sales increase of 1.1%. Comparable store sales are based upon stores open as least 13 consecutive months.

Gross Profit. Cost of sales includes landed merchandise and occupancy expenses. Gross profit for the twenty-six week period ended July 1, 2006 increased by 20.1%, or $3.4 million, to $20.2 million from $16.8 million in the twenty-six week period ended July 2, 2005, primarily as a result of increased sales. As a percent of sales, gross profit decreased to 34.5% for the twenty-six week period ended July 1, 2006 from 34.9% in the twenty-six week period ended July 2, 2005, due to higher occupancy expenses of 2.1%, primarily related to new stores, partially offset by improved selling margins of 1.7%.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the twenty-six week period ended July 1, 2006 increased by 21.2%, or $3.1 million, to $17.9 million from $14.8 million in the twenty-six week period ended July 2, 2005. The increase is primarily from expenses related to additional stores, which resulted in approximately $1.4 million in store salaries and $240,000 in utilities. The Company also incurred $194,000 in legal fees related to the defense and settlement of a lawsuit. As a percent of sales, SG&A expenses decreased to 30.5% for the twenty-six week period ended July 1, 2006 from 30.6% in the twenty-six week period ended July 2, 2005. The decrease as a percent of sales is primarily due to savings of 0.7% in advertising and 0.2% in credit card fees from the settlement of the Visa card lawsuit, partially offset by increases of 0.3% in store salaries, 0.3% in contract warehouse fees and 0.2% in utilities.

Interest Expense. Interest expense for the twenty-six week period ended July 1, 2006 increased by 19.1%, or $45,000, to $281,000 from $236,000 in the twenty-six week period ended July 2, 2005, due to a higher average interest rate and increased borrowings under the Company's Revolving Credit Facility during the twenty-six week period ended July 1, 2006 compared to the twenty-six week period ended July 2, 2005.

Income Tax Expense. The Company's effective income tax rate rose from 39.2% to 40.4%, due primarily to the effect of incentive stock options that were issued in prior years. Because the Company adopted SFAS 123R effective January 1, 2006, it began recognizing compensation expense that corresponds to the vesting of stock options. Most of the options that are now vesting are incentive stock options. The compensation expense recorded for the vesting of this type of option is not deductible for income tax purposes. As a result, income tax as a percentage of taxable income increased.

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Liquidity and Capital Resources

The Company's primary capital requirements are for inventory and store expansion, relocation and remodeling. Historically, cash flows from operations and available borrowings under the Company's Revolving Credit Facility have met the Company's liquidity needs. Management believes that these sources will be sufficient to fund currently anticipated cash requirements for the foreseeable future.

During the twenty-six week period ended July 1, 2006, the Company opened three stores in Texas, four stores in California and one store in Washington. Additionally, the Company introduced new brands and key product lines such as men's and women's casual and active shoes, as well as men's and women's sandals. To open the stores and supplement existing footwear offerings required an increase in overall inventory of $15.2 million. The increase also reflects the build-up of seasonal inventory. Additional costs of opening the stores included investing $3.4 million in fixed assets such as signage, racks for the shoes, sales counters, point-of-sale computers and software and other tenant improvements.

The activities described above resulted in a net use of cash in operating activities of $7.4 million for the twenty-six week period ended July 1, 2006, compared to cash provided by operations of $553,000 for the twenty-six week period ended July 2, 2005. Furthermore, the additional purchase of fixed assets resulted in cash used in investing activities of $3.5 million for the twenty-six week period ended July 1, 2006, compared to $1.0 million for the twenty-six week period ended July 2, 2005.

To finance the increased inventory and the opening of new stores, as well as paying down $7.6 million of principal on the Company's Revolving Credit Facility, the Company completed a public offering of 2 million shares of its common stock on March 29, 2006. The net proceeds to the Company from this sale was $12.8 million.

Additionally, on March 15, 2006, the Company and Wells Fargo Retail Finance LLC ("Lender") amended and extended the Company's Revolving Credit Facility to allow for maximum borrowing of $20 million, which may be increased by the Company to $30 million. The new amendment expires April 18, 2011. At July 1, 2006, the Company had in excess of $11.3 million available under the amended Revolving Credit Facility. The Company currently is in compliance with the covenants of the Revolving Credit Facility. The Company believes its credit line with the Lender is sufficient to fund capital expenditures for the foreseeable future and to meet seasonal fluctuations in cash flow requirements. However, unexpected conditions could require the Company to request additional borrowing capacity from the Lender or alter its expansion plans or operations.

The Company's business, measured in terms of net sales, is subject to seasonal fluctuations and trends. Historically, a higher amount of the Company's net sales were, and may continue to be realized during the fourth quarter of the Company's fiscal year, which includes the winter holiday season. In addition, quarterly results are affected by the timing of the opening of new stores, and the Company's rapid growth may conceal the impact of other seasonal influences. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require the Company to make estimates and assumptions about future events and their impact on amounts reported in the Company's financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from the Company's estimates. Such differences could be material to the Company's financial statements.

The Company believes that its application of accounting policies, and the estimates inherently required therein, are reasonable. The Company constantly reevaluates these accounting policies and estimates, and adjustments are made when facts and circumstances dictate a change. Historically, the Company has found its application of accounting policies to be appropriate, and its actual results have not differed materially from those determined by using necessary estimates. The Company believes that the following summarizes critical accounting policies which require significant judgments and estimates in the preparation of its consolidated financial statements.

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Revenue Recognition. The Company recognizes revenue at the time products are received by its customers in accordance with the provisions of Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" as amended by SAB No. 104, "Revenue Recognition". Revenue is recognized for store sales at the point at which the customer receives and pays for the merchandise at the register with either cash or credit card. For online sales, revenue is recognized at the time the customer receives the product. Customers typically receive goods within several days of shipment. Amounts related to shipping costs billed to customers are reflected in net sales and the related costs are reflected in costs of sales.

Discounts offered to customers consist primarily of point of sale markdowns and are recorded at the time of the related sale as a reduction of revenue. Gift certificates are carried as a liability when sold and revenue is recognized when the gift certificate is redeemed. Similarly, customers may receive a store credit in exchange for returned goods. Store credits are carried as a liability until redeemed.

Inventory Valuation. Merchandise inventories are stated at the lower of average cost or market. The Company adjusts inventory based on historical experience and current information in order to assure that inventory is recorded properly at the lower of cost or market. The factors the Company considers include current sell through, seasonality and length of time held in inventory. The amount ultimately realized from the sale of the Company's inventory could differ materially from its estimates.

Long-lived Assets. In evaluating the fair value and future benefits of property and equipment, the Company performs an analysis of the anticipated undiscounted future net cash flows associated with stores and reduces their carrying value by the excess, if any, of the result of such calculation. The Company believes at this time that the carrying values and useful lives of its property and equipment continue to be appropriate.

Self-insurance. The Company records an estimated liability for the self-insured portion of the workers' compensation claims based on historical experience and an evaluation of outstanding claims.

Cost of Sales. Cost of sales includes product costs, inbound freight, inventory shrinkage and store occupancy costs. It does not include purchasing, warehousing, distribution costs and inter-store freight transportation, which are included in selling, general and administrative expenses. The Company's gross margin may not be comparable to other retailers as some of these entities include purchasing, warehousing, distribution and inter-store freight transportation expenses in cost of sales.

Income Taxes. The Company provides a valuation allowance when it is more likely than not that some or a portion or the entire deferred tax asset will not be realized. Based upon the Company's history of earnings, it believes that the realization of its deferred tax asset is more likely than not and therefore the Company has not provided a valuation allowance for its deferred tax asset.

There have been no material changes from the information reported in the Company's Form 10-K for the year ended December 31, 2005.

The Company maintains a system of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

During the preparation of its Quarterly Report on Form 10-Q for the thirteen weeks ended July 1, 2006, the Company evaluated the design and operating effectiveness of its disclosure controls and procedures as of the end of the period covered by this Report, under the supervision and with the participation of its management, pursuant to Rule 13a-15(e) of the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.

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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.

The Chief Executive Officer and the Chief Financial Officer of the Company, with the participation of the Company's management, also conducted an evaluation of our internal controls over financial reporting to determine whether any change occurred during the second quarter of 2006 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. Based on that evaluation, our management concluded that there was a material change during the second quarter.

In the course of evaluating the design and operating effectiveness of the Company's disclosure controls and procedures for the thirteen weeks ended April 1, 2006, management identified the following deficiencies that increased the likelihood of potential material errors in the Company's financial reporting: (i) an insufficient number of accounting and finance personnel with the appropriate depth of experience, and (ii) a need for a more formalized process to identify, analyze and record significant financial information and transactions in conformity with current accounting literature.

In remediation of these deficiencies, during the second quarter, the Company increased its accounting staff by hiring a Financial Reporting Manager who is responsible for analyzing, developing and formalizing accounting policies and practices and an Accounting Manager who is experienced in retail accounting. The Company has also established formal procedures that require the analysis and documentation of all new significant accounting policies to assure that such policies comply with the appropriate accounting literature.

Except as discussed above, there were no changes made in the Company's internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act, during the period covered by this Report that have materially affected, or are likely to materially affect, these controls subsequent to the date of their last evaluation.

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PART II - OTHER INFORMATION