UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended May 1, 2004

OR

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

For the transition period from _____to _____ to _____

Commission File No. 000-32911

GALYAN’S TRADING COMPANY, INC.
(Exact name of registrant as specified in its charter)

2437 East Main StreetOne Galyans Parkway
Plainfield, Indiana 46168
(Address of principal executive offices) (Zip Code)

(317) 612-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

Indicate by check mark whether the Registrant is an accelerated filer as defined in Exchange Act Rule 12b-2

Number of shares of Common Stock outstanding at December 2, 2003:  17,230,200May 20, 2004:  17,378,368

GALYAN’S TRADING COMPANY, INC.

Index to Form 10-Q
For the three and nine month periodsperiod ended NovemberMay 1, 20032004

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Galyan’s Trading Company, Inc.
Condensed Consolidated Statements of Operations
For the Three and Nine Month Periods Ended NovemberMay 1, 20032004 and November 2, 2002May 3, 2003
(dollars in thousands, except per share data)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Galyan’s Trading Company, Inc.
Condensed Consolidated Balance Sheets
As of NovemberMay 1, 20032004 and February 1, 2003January 31, 2004
(dollars in thousands, except share data)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Galyan’s Trading Company, Inc.
Condensed Consolidated Statements of Cash Flows
For the NineThree Month Periods Ended NovemberMay 1, 20032004 and November 2, 2002May 3, 2003
(dollars in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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GALYAN’S TRADING COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1:  Organization and Significant Accounting Policies

Description of Business
Galyan’s Trading Company, Inc. isWe are a specialty retailer that offers a broad range of products appealing to consumers with active lifestyles, from the casual consumer to the serious sports enthusiast.  We sell outdoor and athletic equipment, apparel, footwear and accessories, as well as casual apparel and footwear.  We have two primary store formats.  Our typical store formatbuilt over the past several years has two shopping levels, ranges in size from approximately 80,000 to 100,000 gross square feet, and our merchandising strategyfeatures an open, airy atmosphere with a fifty five foot high interior atrium, metal appointments and interactive elements, such as rock climbing walls and putting greens, that are targeteddesigned to appealcreate an enjoyable and interactive shopping experience appealing to consumers with active lifestyles, fromboth the casual consumer toand the serious sports enthusiast.  Our one-level stores, which are generally about 65,000 gross square feet, contain many of the same features as our two-level stores, including a thirty-foot climbing wall.  We intend to use both formats in the future, depending on many factors, including market size, available space, and store cost considerations.  As of NovemberMay 1, 2003,2004, we operated 4347 stores in 19 states and one clearance center.  The clearance center location is not included in our store count above as it is not part of our long-term strategy.21 states.

Basis of Presentation
We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the requirements of Form 10-Q and, therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America.  In our opinion, the financial statements reflect all adjustments that are necessary for a fair presentation of the results of operations for the periods shown. All such adjustments are of a normal recurring nature. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.

The balance sheet at February 1, 2003January 31, 2004 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

This Report should be read in conjunction with our Annual Report on Form 10-K for the year ended February 1, 2003,January 31, 2004, as filed with the Securities and Exchange Commission (“SEC”).

Certain amounts in the fiscal 2002 condensed consolidated financial statements have been reclassified to conform to the fiscal 2003 presentation.

(Loss) EarningsLoss Per Share
(Loss) earningsLoss per share of common stock is based on the weighted average number of shares outstanding during the related periods.  Since we had a (loss)loss from operations for the three month periods ended NovemberMay 1, 2004 and May 3, 2003, 106,597 and November 2, 2002, and for the nine month period ended November 1, 2003, 113,164 and 29,83458,297 incremental shares, respectively, for the three month periods and 100,267 incremental shares for the nine month period relating to the dilutive effect of stock options and restricted stockwarrants were excluded from the calculation of diluted (loss)loss per share due to their anti-dilutive effect.  Diluted earnings per share for the nine month period ended November 2, 2002, included 149,445 incremental shares relating to the dilutive effect of stock options.

Stock Compensation
In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation, we will continue to account for stock-based employee compensation under the provisions of APB Opinion No. 25 and related interpretations.

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GALYAN’S TRADING COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

Note 1:  Organization and Significant Accounting Policies (continued)

The following illustrates the pro forma effect on net (loss) earningsloss and (loss) earningsloss per share if we had applied the fair value recognition provisions of SFAS No. 123:

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GALYAN’S TRADING COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED

Note 1:  Organization and Significant Accounting Policies (continued)

The pro forma amounts are not representative of the effects on reported earnings for future periods.

The weighted average fair value of options granted for the three and nine month periods ended NovemberMay 1, 2004 and May 3, 2003 were $5.78$4.89 and $6.31, respectively.   The weighted average fair value of options granted for the three and nine month periods ended November 2, 2002 were $5.68 and $8.37,$4.95, respectively.  The weighted average fair value of the options calculated in accordance with SFAS No. 123 were determined using the Black-Scholes option-pricing model with the following weighted average assumptions:

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GALYAN’S TRADING COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUEDcontinued

Note 2:  Long-Term Debt

On April 25, 2003, we entered into an amended and restated credit agreement with JPMorgan Chase Bank, as administrative agent, for the syndication of participating banks, which matures on April 24, 2008.  Under this agreement, ourOur revolving credit facility maximum borrowing capacity is $250.0 million of which $30.0 million may be used for the issuance of letters of credit.  The revolving credit facility is an asset basedasset-based loan with a borrowing base calculated on certain percentages of eligible inventory, eligible accounts receivables, and certain real property as defined in the agreement.  The revolving credit facility bears interest, at our election, at either an adjusted prime rate or an adjusted LIBOR, in each case plus additional interest, which varies depending on our availability level or EBITDA measured at each quarter end.  Availability is defined as the lesser of the monthly borrowing base or $250.0 million;million, minus the total borrowings, including letters of credit.  We pay an annual commitment fee on the unused portions of the revolving credit facility at a variable amount based on utilization of the total facility.  As of NovemberMay 1, 2003,2004, the commitment fee rate was 0.425%.  We will not be subject to any financial covenants, provided we maintain a minimum of $35.0 million of availability.   If availability is less than $35.0 million for more than five consecutive days we will be subject to a minimum EBITDA covenant.  The revolving credit facility contains certain other covenants, including covenants that restrict our ability to incur indebtedness or to create various liens, and restrict our ability to engage in mergers or acquisitions, sell assets, or make junior payments, including cash dividends. As of the date of this Report,May 1, 2004, we were in compliance with all applicable covenants. The revolving credit facility is secured by a first priority security interest in our cash, inventory, intellectual property, and certain real estate if the real estatethat is included in the borrowing base.  Our subsidiaries have guaranteed, and any future subsidiaries will be required to guarantee, our obligations under the revolving credit facility. As of NovemberMay 1, 2003,2004, we had $76.0$55.0 million in outstanding borrowings and a remainingan availability of $62.1$53.9 million, net of $4.6$5.6 million used in support of letters of credit, under our revolving credit facility.

On August 8,During fiscal 2003, we sold our interest in buildings and leasehold improvements for threetwo store locations for approximately $21.0$12.0 million to CPA®:15, a member of the W.P. Carey Group and simultaneously entered into lease agreements for these threetwo store locations. The transaction included our store locations in Buffalo, New York, and Greenwood, Indiana, as well as a future store location in Freehold, New Jersey that is scheduled to open inIndiana.  Although we leased back the summer of 2004.  Approximately $9.0 million of the $21.0 million total is attributable to the future store location in Freehold, New Jersey, and will not be funded fully until that store opens.  Thisproperties, this transaction was accounted for as a financing obligation, andwith the relatedfuture lease payments are classified as a liability in our financial statements.statements and quarterly lease payments classified as payments of principal and interest expense relating to a financing obligation.  The net proceeds from this transaction were used to repay current borrowings under our revolving credit facility.  As of NovemberMay 1, 2003,2004, we had an outstanding obligation of $11.7 million, with a fixed interest rate of 10.6% that maturesand with a maturity date in 2024.

During fiscal 2001, we entered into a $6.0 million line of credit agreement with a bank to be used for the construction of a new store building.  On May 1, 2003, we paid all remaining outstanding principal and interest on this loan.

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GALYAN’S TRADING COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED

Long-term debt consists of the following at NovemberMay 1, 20032004 and February 1, 2003January 31, 2004 (in thousands):

Note 3:  Shareholders’ Equity
During the thirdfirst quarter of fiscal 2003,2004, we issued options to purchase 325,000357,500 shares of common stock under our 1999 Stock Option Plan at $11.43exercise prices ranging from $8.74 to $8.80 per share to certain employees. These options vest over a three year period, and expire seven years after the grant date.  Optionsdate and were granted at the fair value on the date of grant.grant date.

Also, during the third quarter of fiscal 2003, we issued a restricted stock award for 100,000 shares of common stock to Edwin Holman, President and Chief Operating Officer. The shares will vest over a three year period.8

Note 4:  New Accounting Pronouncements
On January 1, 2003, we adopted Emerging Issues Task Force (“EITF”) 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor. This EITF addresses the classification of cash consideration received from vendors in a reseller’s consolidated financial statements. The guidance related to income statement classification is to be applied in annual and interim financial statements for agreements entered into, or modifications of existing agreements, after January 1, 2003. The consensus of the EITF establishes an overall presumption that cash received from vendors is a reduction in the price of vendor’s products and should be recognized accordingly as a reduction in cost of sales at the time the related inventory is sold. Some consideration could be characterized as a reduction of expense if the cash received represents a reimbursement of specific, incremental, identifiable costs incurred by the retailer to sell the vendor’s products.  For the three and nine month periods ended November 1, 2003, the adoption of this statement increased our operating loss by $442,000 ($265,000 net of income taxes or $0.02 per share on a fully diluted basis) and $1,252,000  ($751,000 net of income taxes or $0.04 per share on a fully diluted basis), respectively.  

On February 2, 2003, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations.  SFAS No. 143 addresses financial accounting and reporting of obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of this statement did not have an effect on the consolidated financial statements.

On February 2, 2003, we adopted the recognition and measurement provisions of Financial Accounting Standards Board Interpretation No. 45 (“FIN No. 45”) Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of SFAS No. 5, 57, and 107 and the rescission of FASB Interpretation No. 34, was issued. FIN No. 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to a guarantor’s accounting for, and

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GALYAN’S TRADING COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED

Note 4:  New Accounting Pronouncements (continued)
disclosure of, the issuance of certain types of guarantees. The disclosure requirements in this interpretation were adopted in fiscal 2002. We had no guarantees that were required to be disclosed in the consolidated financial statements.  The adoption of this statement did not have an effect on the consolidated financial statements.

On June 1, 2003, we adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.  SFAS 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity.  The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003.  The adoption of this statement did not have a material impact on the consolidated financial statements. 

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Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview
Galyan’s Trading Company, Inc. (referred to herein as the “Company” or in first person notations “we”, “us”, and “our”) isWe are a specialty retailer that offers a broad range of products appealing to consumers with active lifestyles, from the casual consumer to the serious sports enthusiast.  We sell outdoor and athletic equipment, apparel, footwear and accessories, as well as casual apparel and footwear.  OurWe have two primary store format and our merchandising strategy are targeted to appeal to consumers with active lifestyles, from the casual consumer to the serious sports enthusiast.  Aformats.  Our typical store built over the past several years has two shopping levels, ranges in size from approximately 80,000 to 100,000 gross square feet, and features an open, airy atmosphere with a fifty-fivefifty five foot high interior atrium, metal appointments and interactive elements, such as rock climbing walls and putting greens, that are designed to create an enjoyable and interactive shopping experience.experience appealing to both the casual consumer and the serious sports enthusiast.  Our one-level stores, which are generally about 65,000 gross square feet, contain many of the same features as our two-level stores, including a thirty-foot climbing wall.  We intend to use both formats in the future, depending on many factors, including market size, available space, and store cost considerations.  As of NovemberMay 1, 2003,2004, we operated 4347 stores in 19 states and one clearance center.  The clearance center location21 states.

Our strategy is not includedto emphasize growth by maximizing performance in our existing stores and by adding new stores, primarily in existing markets. Specifically, we announced that we would slow future store count above as it is not partcommitments, so that we can focus on maximizing the performance of our long-term strategy.existing stores.  We are becoming more selective in opening new stores, and will concentrate new store growth primarily in existing markets because of the leveraging opportunities for marketing expense and also to provide additional shopping locations for the convenience of our customers.  We would also consider a few new markets, primarily where potential multiple store opportunities exist.

Critical Accounting Policies
Our critical accounting policies are summarized below.

Revenue recognition: We recognize retail sales upon the purchase of the merchandise by our customers, net of returns and allowances, which are based on estimates determined using historical customer returns experience. We use gift cards and store credits, the revenue of which is recognized upon redemption by the customer. We recognize markdowns associated with our preferred customer and private label credit card programs upon redemption in conjunction with a qualifying purchase.

Inventories: We state inventories at the lower of cost or market, on a first-in, first-out basis, utilizing the retail inventory method. Inherent in the retail inventory method calculation are certain significant management judgments and estimates including among others, markups, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. The methodologies utilized by us in applying the retail inventory method are consistent for all periods presented. Such methodologies include the development of the cost-to-retail ratios, development of shrinkage reserves and the accounting for price changes. We review our inventory levels to identify merchandise that may not sell at its currently ticketed price for reasons such as style, seasonal adaptation or competition and generally use markdowns to clear merchandise.

Property and Equipment: Our property and equipment is stated at cost. We compute depreciation and amortization of property and equipment on a straight-line basis over the estimated useful lives of the related assets. We amortize leasehold improvements over the shorter of the estimated useful life or term of the lease.

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Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Critical Accounting Policies (continued)
Long-Lived Assets: We review our long-lived assets for possible impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable and annually when no such event has occurred. We review assets held and used on a store basis, which is the lowest level of assets for which there are identifiable cash flows. An impairment of long-lived assets exists when the undiscounted cash flows estimated to be generated by those assets is less than the carrying value of those assets. If any impairment is determined as a result of our assessment, the impairment loss is recorded in selling, general and administrative expenses. During the ninethree month periods ended NovemberMay 1, 20032004 and November 2, 2002,May 3, 2003, no impairment was recorded as a result of our assessment.recorded.  Assumptions and estimates used to estimate cash flows in the evaluation of impairment and the fair values used to determine the impairment are subject to a degree of judgment and complexity. Any changes to the assumptions and estimates resulting from changes in actual results or market conditions from those anticipated, may affect the carrying value of long-lived assets and could result in an impairment charge.

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Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED

Critical Accounting Policies (continued)
Income Taxes: We follow SFAS No. 109, Accounting for Income Taxes, which requires the use of the liability method in accounting for income taxes. Deferred tax assets and liabilities are recognized based on the difference between the consolidated financial statement carrying value of existing assets and liabilities and their respective tax bases. Inherent in the measurement of these deferred balances are certain judgments and interpretations of existing tax law and other published guidance as applied to our operations. Nooperations and our ability to realize deferred assets. During the fourth quarter of fiscal 2003, we established a $715,000 valuation allowance hasagainst our capital loss carryforwards that we do not expect to utilize before it expires.  No additional valuation allowances have been provided for deferred tax assets, since we fully anticipate that thefull amount of these assets should be realized in the future. Our effective tax rate considers our judgment of expected tax liabilities in the various taxing jurisdictions within which we are subject to tax.

Results of Operations
The following table sets forth our statement of operations data as a percentage of net sales for the periods indicated.

(1) due to rounding, columns may not add

Net Sales
Net sales increased by 13.8%21.7%, or $17.9$28.1 million, to $147.7$157.7 million forin the thirdfirst quarter of fiscal 20032004 from $129.8$129.6 million in the same quarter last year.  When comparing the thirdfirst quarter of fiscal 20032004 with the same quarter last year, net sales decreased by $6.7$1.8 million, or 5.7%1.4%, at comparable stores, increased by $18.3$5.0 million at the four stores opened during fiscal 2004 and increased by $24.9 million at stores opened during fiscal 2003 and increased by $6.3 million at stores opened during fiscal 2002 that had not yet entered the comparable store sales base.  The unseasonably warm weatherdecrease in October negatively impacted sales in outdoor and casual apparel and outdoor equipment for the third quarter of fiscal 2003.  

Net sales for the nine month period ended November 1, 2003 increased by 14.4%, or $55.4 million, to $440.9 from $385.6 million in the same period last year.  When comparing the nine month period ended November 1, 2003 with the same period last year, net sales decreased by $24.0 million, or 6.6%, at comparable stores, increased by $33.9 million at stores opened during fiscal 2003 and increased by $45.4 million at stores opened during fiscal 2002 that had not yet entered the comparable store sales base.  We believe the sluggish economy, a highly promotional retail environment,was due primarily to weaker results in our outdoor equipment, outdoor apparel and unseasonable warm weatheraccessories categories, which were partially offset by stronger results in October negatively impacted stores sales for the nine month period ended November 1, 2003.athletic equipment, athletic apparel and footwear.

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Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED

Net Sales (continued)
Our former Greenwood, Indiana location was closed on September 20, 2002 as a result of a tornado. For purposes of comparison to the current fiscal period, we have treated net sales for the third quarter and first nine months of fiscal 2002 at that location as non-comparable store sales.  On April 25, 2003, we reopened our former Greenwood, Indiana location as a clearance center.  Because the clearance center is not part of our long-term strategy, we have included sales at this location as non-comparable store sales.continued

Gross Profit
Gross profit increased by 1.8%27.8%, or approximately $640,000,$9.3 million, to $36.6$43.0 million in the thirdfirst quarter of fiscal 20032004 from $35.9$33.6 million in the same quarter last year.  Gross profit as a percentage of net sales was 24.8%27.3% in the thirdfirst quarter of fiscal 20032004 compared to 27.7% for26.0% in the same quarter last year.  This decrease as a percentage of net sales was primarily the result of higher markdowns and higher store occupancy costs.

Gross profit for the nine month period ended November 1, 2003 increased by 4.0%, or $4.4 million, to $114.7 million from $110.3 millionincrease in the same period last year.  Grossgross profit as a percentage of net sales was 26.0%due primarily to a higher adjustment for the nine month period ended November 1, 2003 comparedEmerging Issues Task Force (“EITF 02-16”), Accounting for Cash Consideration Received from a Vendor and to 28.6% for the same period last year.  This decreasea reduction of distribution cost as a percentage of net sales was primarilycompared to the result of higher markdowns and higher store occupancy costs.same quarter last year.

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by 10.9%31.9%, or $4.1$12.0 million, to $42.1$49.4 million in the thirdfirst quarter of fiscal 20032004 from $37.9$37.5 million in the same quarter last year.  Selling, general and administrative expenses forin the thirdfirst quarter of fiscal 2003 decreased2004 increased to 28.5%31.4% of net sales compared to 29.2% for28.9% in the same quarter last year.  The percentage decrease to net salesincrease was due primarily to lower payrollincreased marketing and depreciation costs, expenses associated with the leveragingresignation of corporate overheadour former CEO and the recognitionChairman of the final insurance proceeds from last year’s tornado loss at our prior Greenwood, Indiana store, partially offset by higher expenses for depreciationCompany and higher pre-opening expenses for marketing primarily resulting fromrelated to opening four new stores in the adoptionfirst quarter of EITF 02-16.

Selling, general and administrative expenses for the nine month period ended November 1, 2003 increased by 17.1%, or $18.1 million,fiscal 2004 compared to $123.6 million from $105.5 millionopening two new stores in the same periodquarter last year.  Selling, general and administrative expenses for the nine month period ended November 1, 2003 increased to 28.0% of net sales compared to 27.4% for the same period last year.  The percentage increase of net sales was due primarily to higher expenses for depreciation and higher expenses for marketing primarily resulting from the adoption of EITF 02-16, partially offset by lower payroll costs and the recognition of the final insurance proceeds from the loss at our prior Greenwood, Indiana store.

Operating (Loss) IncomeLoss
OurThe operating (loss) forloss in the thirdfirst quarter of fiscal 2003 was ($5.5)2004 increased by $2.6 million to a loss of $6.4 million compared to an operating (loss)a loss of ($2.0)$3.8 million forin the same quarter last year.  The negative impact on operating results forin the thirdfirst quarter of fiscal 20032004 compared to the same quarter last year was the result of higher markdowns, higher store occupancyincreased marketing and depreciation costs, higher expenses for depreciation,associated with the resignation of our former CEO and Chairman of the Company and higher marketing expense primarily resulting frompre-opening expenses related to opening four new stores in the adoptionfirst quarter of EITF 02-16,fiscal 2004 compared to opening two new stores in the same quarter last year, partially offset by the recognitiona higher adjustment for EITF 02-16 and to a reduction of the final insurance proceeds from the loss at our prior Greenwood, Indiana store.

Our operating (loss) for the nine month period ended November 1, 2003 was ($8.9) million, compared to operating incomedistribution cost as a percentage of $4.7 million for the same period last year.  The negative impact on operating results for the nine month period ended November 1, 2003net sales compared to the same periodquarter last year was the result of higher markdowns, higher store occupancy costs, higher expenses for depreciation, and to higher marketing expenses resulting primarily from the adoption of EITF 02-16, partially offset by the recognition of the final insurance proceeds from the loss at our prior Greenwood, Indiana store.

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Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUEDyear.

Interest Expense
Interest expense, net of interest income of $17,000,$81,000, was $614,000 for$973,000 in the thirdfirst quarter of fiscal 2003,2004 compared to interest expense, net of $27,000 of interest income of $514,000 for$22,000, was $445,000 in the same quarter last year. This increase was due primarily to interest expense on our financing obligations and higher average outstanding balances on our revolving line of credit.

Interest expense, net of interest income of $57,000, was $1.7 million for the nine month period ended November 1, 2003, compared to interest expense, net of $180,000 of interest income, of $1.3 million for the same period last year.  This increase was due primarily to higher average outstanding balances on our revolving line of credit.

Income Taxes
Our effective income tax rate was 40% for39.6% in the three and nine month periods ended November 1, 2003first quarter of fiscal 2004 compared to 41% for40.0% in the same periodsquarter last year.  The current year’sThis rate reflects the effect of the anticipated federal tax rate and aggregated state tax rates based on the expected mix of net sales in the various states in which we conduct business.

Net (Loss) IncomeLoss
As a result of the foregoing factors, our net (loss) for the third quarter of fiscal 2003 was ($3.6) million, compared to a net (loss) of ($1.5) million for the same quarter last year.

As a result of the foregoing factors, the net (loss) forloss in the nine month period ended November 1, 2003 was ($6.4)first quarter of fiscal 2004 increased by $1.9 million to a net loss of $4.5 million compared to a net incomeloss of $2.0$2.6 million forin the same periodquarter last year.

Liquidity and Capital Resources
Our principal liquidity and capital requirements have been to fund new store construction, working capital and general corporate needs. For the ninethree month period ended NovemberMay 1, 2003,2004, these capital and liquidity requirements were primarily funded from funds available under our revolving credit facility, proceeds from the sale leaseback financing transaction and cash and cash equivalents on hand at the beginning of the period.  Cash flows from operating, investing and financing activities for the ninethree month periods ended NovemberMay 1, 20032004 and November 2, 2002May 3, 2003 are summarized below.

Net cash used in operating activities was $23.3 million for the nine month period ended November 1, 2003, compared to cash used in operating activities of $8.4 million for the same period last year. The increase in cash used in operating activities was due primarily to the decrease in accounts payable and accrued expenses and our net loss, partially offset by higher depreciation and amortization expense.11

Net cash used in investing activities was $61.1 million for the nine month period ended November 1, 2003, compared to $55.9 million for the same period last year.  The increase was due primarily to an increase in capital expenditures, partially offset by an increase in related net accounts payable for capital expenditures, used primarily for new store construction and fixturing, and the insurance proceeds from the loss last year at our prior Greenwood, Indiana store.

Net cash provided by financing activities was $80.9 million for the nine month period ended November 1, 2003, compared to $35.5 million for the same period last year.  The increase was due primarily to an increase in net borrowings from the revolving credit facility, the proceeds from the sale leaseback transaction and an increase in proceeds from the sale of common stock through the exercise of related options, partially offset by payments of financing costs.

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Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUEDcontinued

Liquidity and Capital Resources (continued)
On April 25, 2003, we entered intoNet cash used in operating activities was $10.8 million in the first quarter of fiscal 2004 compared to $22.4 million in the same quarter last year. The decrease in cash used in operating activities was due primarily to changes in working capital and higher depreciation and amortization expense, partially offset by a higher net loss.  The change in working capital was due primarily to a lower increase in merchandise inventories in the first quarter of 2004 compared to the same quarter last year.

Net cash used in investing activities was $4.1 million in the first quarter of fiscal 2004 compared to $23.7 million in the same quarter last year.  The decrease was due primarily to an amendedincrease in net accounts payable for capital expenditures used primarily for new store construction and restatedfixturing and a decrease in capital expenditures.

Net cash provided by financing activities was $17.5 million in the first quarter of fiscal 2004 compared to $41.5 million in the same quarter last year.  The decrease was due primarily to a decrease in net borrowings from the revolving credit agreement with JPMorgan Chase Bank, as administrative agent,facility resulting from a lower increase in merchandise inventories and lower capital expenditures for the syndicationfirst quarter of participating banks, which matures2004 compared to the same period last year, partially offset by a decrease in principal payments on April 24, 2008.  Under this agreement, ourlong-term debt and by a decrease in payments for financing costs.

Our revolving credit facility maximum borrowing capacity is $250.0 million of which $30.0 million may be used for the issuance of letters of credit.  The revolving credit facility is an asset basedasset-based loan with a borrowing base calculated on certain percentages of eligible inventory, eligible accounts receivables, and certain real property as defined in the agreement.  The revolving credit facility bears interest, at our election, at either an adjusted prime rate or an adjusted LIBOR, in each case plus additional interest, which varies depending on our availability level or EBITDA measured at each quarter end.  Availability is defined as the lesser of the monthly borrowing base or $250.0 million;million, minus the total borrowings, including letters of credit.  We pay an annual commitment fee on the unused portions of the revolving credit facility at a variable amount based on utilization of the total facility.  As of NovemberMay 1, 2003,2004, the commitment fee rate was 0.425%.  We will not be subject to any financial covenants, provided we maintain a minimum of $35.0 million of availability.   If availability is less than $35.0 million for more than five consecutive days we will be subject to a minimum EBITDA covenant.  The revolving credit facility contains certain other covenants, including covenants that restrict our ability to incur indebtedness or to create various liens, and restrict our ability to engage in mergers or acquisitions, sell assets, or make junior payments, including cash dividends. As of the date of this Report,May 1, 2004, we were in compliance with all applicable covenants. The revolving credit facility is secured by a first priority security interest in our cash, inventory, intellectual property, and certain real estate if the real estatethat is included in the borrowing base.  Our subsidiaries have guaranteed, and any future subsidiaries will be required to guarantee, our obligations under the revolving credit facility. As of May 20, 2004, we had $55.4 million in outstanding borrowings and an availability of $54.7 million, net of $5.6 million used in support of letters of credit, under our revolving credit facility.

During fiscal 2003, we sold our interest in buildings and leasehold improvements for two store locations for approximately $12.0 million and simultaneously entered into lease agreements for these two store locations. The transaction included our store locations in Buffalo, New York, and Greenwood, Indiana.  Although we leased back the properties, this transaction was accounted for as a financing obligation, with the future lease payments classified as a liability in our financial statements and quarterly lease payments classified as payments of principal and interest expense relating to a financing obligation.  The net proceeds from this transaction were used to repay borrowings under our revolving credit facility.  As of May 20, 2004, we had an outstanding obligation of $11.7 million, with a fixed interest rate of 10.6% and with a maturity date in 2024.

During fiscal 2001, we entered into a $6.0 million line of credit agreement with a bank to be used for the construction of a new store building.  On May 1, 2003, we paid all remaining outstanding principal and interest on this loan.

On August 8, 2003 we sold our interest in buildings12

Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Liquidity and leasehold improvements for three store locations, for approximately $21.0 million to CPA®:15, a member of the W.P. Carey Group and simultaneously entered into lease agreements for these three store locations.  The sale included our store locations in Buffalo, New York, and Greenwood, Indiana, as well as a future store location in Freehold, New Jersey that is scheduled to open in the summer of 2004.  Approximately $9.0 million of the $21.0 million total is attributable to the future store location in Freehold, New Jersey, and will not be funded fully until that store opens.  This transaction was accounted for as a financing obligation and the related lease payments are classified as a liability in our financial statements. The net proceeds from this transaction were used to repay current borrowings under our revolving credit facility.  As of November 1, 2003, we had an outstanding obligation of $11.7 million, with a fixed interest rate of 10.6% that matures in 2024.

Capital Resources (continued)
Our net working capital at NovemberMay 1, 20032004 was $89.4$77.1 million, compared to $54.3$67.9 million at February 1, 2003.January 31, 2004.  Net working capital is calculated as the difference between current assets (excluding cash)cash and cash equivalents) and current liabilities (excluding current portion of long-term debt).  The increase in working capital for the nine month period ended November 1, 2003 was due primarily to an increase in merchandise inventories for new store openingsstores opened during fiscal 2003 and a decrease in accrued expenses,the first quarter partially offset by an increase in accounts payable.  As of November 1, 2003, we had $76.0 million in outstanding borrowings and a remaining availability of $62.1 million net of $4.6 million used in support of letters of credit under our revolving credit facility.  As of November 1, 2003, the average interest rate on outstanding borrowings was 3.23%.

Our typical two-level and one-level new store,stores, if leased with a landlord construction contribution adequate to cover the cost of construction of the building, generally requiresrequire capital expenditures between $4.0$3.0 to $5.0 million for interior finish and fixtures depending on the size of the store, and an inventory investment of approximately $3.0between $2.5 to $4.0$3.5 million, net of vendor payables.payables, depending on the size of the store.  Pre-opening expense, consisting primarily of store set-up costs, training of new store employees and travel expenses, averages about $600,000 per storeapproximately $550,000 and is expensed as incurred.

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Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED

Liquidity and Capital Resources (continued)
Our future capital requirements will depend on the number and size of new stores we open, the timing of those openings within a given year and the extent of landlord construction contributions received.  For fiscal 2003,2004, we currently estimate our total capital expenditures to range between $81.0be approximately $36.0 to $83.0$40.0 million, net of agreed-upon landlord construction contributions.  In addition to this capital expenditures estimate, we currently anticipate approximately $4.6 million of non-capitalizable pre-opening costs for new stores. The capital expenditures estimate includes approximately $61.0$31.0 million for the nine new stores that we intend to open during fiscal 2004, including the four stores we opened duringin the first fiscal 2003.quarter of 2004.  The total capital expenditure estimate also includes an estimate for construction-in-progress disbursements for anticipated fiscal 20042005 openings.  The capital expenditures estimate also reflects the fact that threeall of our planned nine store opened inopenings for fiscal 2003 did not2004 have any landlord construction contributions as compared to eightsix of nine new stores in fiscal 2002 which2003 that had landlord construction contributions. SomeAlthough all of our fiscal 2004 new stores have landlord contributions, some potential store locations that we seek to develop in the future may not have landlord construction contributions available. The total capital expenditure estimate for fiscal 20032004 also includes approximately $10.0$9.0 million for remodeling and maintenanceimprovements relating to our existing stores.  The total capital expenditure estimate, includes an estimate forstores, our new principal executive offices, technology, upgradessupply chain initiatives and other corporate capital expenditures.  In addition to this capital expenditures estimate, we currently estimate a total of approximately $5.0 million of non-capitalizable pre-opening costs for the nine new stores opened during fiscal 2003.

We believe that developer or real estate investment company financing, longer term mortgage financing,cash flows from operations and funds available under our existing revolving credit facility and cash flows from operations will be sufficient to fund working capital and to finance capital expendituresexpenditure requirements over the next twelve months.

New Accounting Pronouncements
On January 1, 2003, we adopted Emerging Issues Task Force (“EITF”) 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor. This EITF addresses the classification of cash consideration received from vendors in a reseller’s consolidated financial statements. The guidance related to income statement classification is to be applied in annual and interim financial statements for agreements entered into, or modifications of existing agreements, after January 1, 2003. The consensus of the EITF establishes an overall presumption that cash received from vendors is a reduction in the price of vendor’s products and should be recognized accordingly as a reduction in cost of sales at the time the related inventory is sold. Some consideration could be characterized as a reduction of expense if the cash received represents a reimbursement of specific, incremental, identifiable costs incurred by the retailer to sell the vendor’s products.  For the three and nine month periods ended November 1, 2003, the adoption of this statement increased our operating loss by $442,000 ($265,000 net of income taxes or $0.02 per share on a fully diluted basis) and $1,252,000  ($751,000 net of income taxes or $0.04 per share on a fully diluted basis), respectively.  13

On February 2, 2003, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations.  SFAS No. 143 addresses financial accounting and reporting of obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of this statement did not have an effect on the consolidated financial statements.

On February 2, 2003, we adopted the recognition and measurement provisions of Financial Accounting Standards Board Interpretation No. 45 (“FIN No. 45”) Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of SFAS No. 5, 57, and 107 and the rescission of FASB Interpretation No. 34, was issued. FIN No. 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure requirements in this interpretation were adopted in fiscal 2002. We had no guarantees that were required to be disclosed in the consolidated financial statements.  The adoption of this statement did not have an effect on the consolidated financial statements.

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Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUEDcontinued

New Accounting PronouncementsLiquidity and Capital Resources (continued)
On June 1, 2003, we adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.  SFAS 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity.  The provisions of SFAS 150 are effective for financial instrumentsWe have entered into or modified after May 31, 2003agreements that create contractual obligations and to all instruments that existcommercial commitments.  These obligations and commitments will have an impact on future liquidity and capital resources. The tables set forth below present a summary of these obligations and commitments as of the beginning of the first interim financial reporting period beginning after June 15, 2003.  The adoption of this statement did not have a material impact on the consolidated financial statements. May 1, 2004.

Contractual Obligations:

Commercial Commitments:

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Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Seasonality and Inflation
Our business cycle is seasonal, with higher sales and profits generally occurring in the second and fourth fiscal quarters. In fiscal 2002,2003, our sales results were as follows: 19.0%18.7% in the first quarter, 23.8%23.7% in the second quarter, 21.7%21.4% in the third quarter and 35.5%36.2% in the fourth quarter.  In addition, weWe have significantly higher seasonal cash outlays in the fiscal fourth quarter fordue to higher purchase volumes staffing and marketing costs.increased staffing.

We do not believe inflation had a material effect on the unaudited consolidated financial statements for the periods presented. There can be no assurance, however, that our business will not be affected by inflation in the future.

Cautionary Note Regarding Forward-Looking Statements
We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained or incorporated by reference in this Quarterly Report on Form 10-Q (“Report”) or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” and similar expressions may identify forward-looking statements.   For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  The following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results and could cause actual results for 2003 and beyond to differ materially from those expressed or implied in anyAny such forward-looking statements included in this Report or otherwise made by our management:are subject to risks and uncertainties, including the following:

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Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED

Cautionary Note Regarding Forward-Looking Statements (continued)

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Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Cautionary Note Regarding Forward-Looking Statements (continued)
Other risks, uncertainties and factors could cause our actual results to differ materially from those projected in any forward-looking statements we make.  The list of factors that may affect future performance and the accuracy of forward-looking statements areis illustrative, but by no means exhaustive.  Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. We do not undertake to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

Galyan’s Website and Access to Filings
We post all of our periodic reports on Form 10-K and 10-Q and current reports on Form 8-K on our website at www.galyans.com as soon as reasonably practical after the reports are filed with or furnished to the Securities and Exchange Commission.  Access to these reports is free of charge.

Item 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk
Our exposure to interest rate risk consists primarily of borrowings under our revolving credit facility and our line of credit used for the construction of a new store which are benchmarked to U.S. and European short-term variable rates.  On May 1, 2003, we paid all remaining outstanding principal and interest on our line of credit used for the construction of a new store.  Borrowings outstanding on our line of credit agreement used for the construction of a new store as of February 1, 2003 were $6.0 million. Borrowings outstanding under our revolving credit facility as of NovemberMay 1, 20032004 and February 1, 2003January 31, 2004 were $76.0$55.0 million and $0,$37.8 million, respectively.  A hypothetical one percentage point interest rate change from those in effect during the ninethree month periods ended NovemberMay 1, 20032004 and November 2, 2002May 3, 2003 would have resulted in interest expense fluctuating by approximately $326,000$125,000 and $124,000,$66,000, respectively.  As of December 2, 2003, the balancesMay 20, 2004, borrowings outstanding under our revolving credit facility and our financing obligationobligations were $75.2$55.4 million and $11.7 million, respectively.

Item 4:  CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, as of the end of the period covered by this report, we evaluated the effectiveness of our “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  Based on anthis evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(c)) aswere effective for the purpose of November 1, 2003, our Chief Executive Officer and Chief Financial Officer have concludedensuring that our disclosure controls and procedures are effective in timely alerting our management to materialthe information required to be includeddisclosed in this Form 10-Q and otherthe reports that we file or submit under the Exchange Act filings.  There have beenwith the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.  In addition, based on our evaluation, no changes in our internal controlscontrol over financial reporting that occurred during

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Item 4:     CONTROLS AND PROCEDURES (continued)

the quarter ended NovemberMay 1, 20032004 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.

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Part II.  OTHER INFORMATION

Item 1:  LEGAL PROCEEDINGS

There are no material pending legal proceedings against us. We are, however, involved in routine litigation arising in the ordinary course of our business. We believe that the final outcome of such proceedings should not have a material adverse effect on our consolidated financial condition or results of operations.

Item 6:  EXHIBITS AND REPORTS ON FORM 8-K