SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 1998

[ ] 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 0-23669

SHOE PAVILION, INC.
(Exact name of Registrant as Specified in its Charter)

Delaware 94-3289691
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)

3200-F REGATTA BOULEVARD, RICHMOND, CALIFORNIA 94804
(Address of principal executive offices) (Zip Code)

(510) 970-9775
(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 [ ].

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Common Stock outstanding as of November 6, 1998 was 6,800,000 shares

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
provides a "safe harbor" for these types of statements. These forward-looking
statements are subject to risks and uncertainties that could cause the Company's
actual results to differ materially from management's current expectations.
These factors include, without limitation, competitive pressures in the footwear
industry, changes in the level of consumer spending on or preferences in
footwear merchandise, the Company's ability to purchase attractive name brand
merchandise at desirable discounts and the availability of desirable store
locations and management's ability to negotiate acceptable lease terms and open
new stores in a timely manner. Other risk factors are detailed in the Company's
Prospectus dated February 23, 1998, filed with the Securities and Exchange
Commission. The Company assumes no obligation to update forward-looking
statements.

SHOE PAVILION, INC.
INDEX TO FORM 10-Q

PART I
FINANCIAL INFORMATION

Item 1 Condensed Consolidated Financial Statements (Unaudited): Page
----

Balance Sheets......................................................... 3
Statements of Income................................................... 4
Statements of Cash Flows............................................... 5
Notes to Financial Statements.......................................... 6-7
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 8-10
Item 3 Quantitative and Qualitative Disclosures about Market Risk............. 11

PART II
OTHER INFORMATION

Item 6 Exhibits and Reports on Form 8-K......................................... 12

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

The following financial statements and related financial information are filed
as part of this report:

Shoe Pavilion, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)

(In thousands, except share data) September 30 December 31 September 30
1998 1997 1997
------- ------- -------
ASSETS

Current assets

Cash ......................................................... $ 676 $ 395 $ 251
Inventories .................................................. 27,223 19,795 20,219
Prepaid expenses and other ................................... 371 73 297
------- ------- -------
Total current assets .................................. 28,270 20,263 20,767

Property and equipment, net ....................................... 3,116 2,075 2,017
Other assets ...................................................... 627 308 56
------- ------- -------
Total assets .......................................... $32,013 $22,646 $22,840
======= ======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable ............................................. $ 6,982 $ 5,921 $ 7,573
Accrued expenses ............................................. 995 843 1,029
Line of credit ............................................... 6,800 7,387 7,087
Current portion of long-term obligations ..................... 21 68 74
------- ------- -------
Total current liabilities ............................. 14,798 14,219 15,763

Deferred rent ..................................................... 1,002 896 861
Long-term obligations, less current portion ....................... 69 203 123
------- ------- -------
Total liabilities ..................................... 15,869 15,318 16,747
------- ------- -------

Stockholders' equity

Common stock- $.001 par value: 15,000,000 shares authorized;
issued and outstanding; 6,800,000, 4,500,000, 4,500,000 ...... 7 4 4
Preferred stock- $.001 par value; 1,000,000 shares authorized;
no shares issued or outstanding .............................. -- -- --
Additional paid-in capital ................................... 14,453 812 812
Retained earnings ............................................ 1,684 6,512 5,277
------- ------- -------
Total stockholders' equity ............................ 16,144 7,328 6,093
------- ------- -------
Total liabilities and stockholders' equity ............ $32,013 $22,646 $22,840
======= ======= =======

See notes to condensed consolidated financial statements.

Shoe Pavilion, Inc.
Condensed Consolidated Statements of Income
(Unaudited)

(In thousands, except per share and number of stores)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997

Net sales ................................... $14,638 $11,856 $39,476 $32,185
Cost of sales and related occupancy expenses 9,258 7,807 25,491 20,678
------- ------- ------- -------
Gross profit ........................ 5,380 4,049 13,985 11,507
Selling, general and administrative expenses 3,980 3,350 10,617 8,769
------- ------- ------- -------
Income from operations ............. 1,400 699 3,368 2,738
Interest and other, net ..................... 100 99 268 339
------- ------- ------- -------
Income before taxes ......................... 1,300 600 3,100 2,399
Income taxes ................................ 500 42 1,077 169
------- ------- ------- -------
Net Income .................................. $ 800 $ 558 $ 2,023 $ 2,230
======= ======= ======= =======

Earnings per share:
Basic ....................................... $ 0.12
Diluted ..................................... $ 0.12

Weighted average shares outstanding:
Basic ....................................... 6,800
Diluted ..................................... 6,803

PRO FORMA
Historical income before taxes on income .. $ 600 $ 3,100 $ 2,399
Pro forma provision for income taxes ...... 226 1,194 905
------- ------- -------
Pro forma net income ...................... $ 374 $ 1,906 $ 1,494
======= ======= =======

Pro forma earnings per share
Basic ....................................... $ 0.29
Diluted ..................................... $ 0.29

Pro forma weighted average shares outstanding
Basic ....................................... 6,597
Diluted ..................................... 6,617

Stores Open at end of period ................ 62 56

See notes to condensed consolidated financial statements.

Shoe Pavilion, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

(In thousands)

Nine Months Ended
September 30
------------
1998 1997

Operating activities:

Net income ...................................... $ 2,023 $ 2,230
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation .................................. 566 442
Effect of changes in:
Inventories ................................ (7,428) (6,733)
Prepaid expenses and other current assets .. (298) (42)
Accounts payable ........................... 1,061 1,878
Accrued expenses ........................... 152 256
Other assets ............................... 166 (229)
Deferred rent .............................. 106 424
-------- --------
Net cash used by operating activities ... (3,652) (1,774)

Investing activities-
Purchase of property and equipment, net ...... (1,607) (1,083)

Financing activities:
Net proceeds from initial public offering .... 14,107 --
Borrowings (repayments) on line of credit .... (587) 3,687
Principal payments on capital leases ......... (180) (77)
Distributions paid to stockholder ............ (7,800) (704)
-------- --------
Net cash provided by financing activities 5,540 2,906
-------- --------
NET INCREASE IN CASH ............................ 281 49
CASH, BEGINNING OF PERIOD ....................... 395 202
-------- --------
CASH, END OF PERIOD ............................. $ 676 $ 251
======== ========

See notes to condensed consolidated financial statements.

NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

GENERAL - The accompanying unaudited condensed consolidated financial statements
have been prepared from the records of the Company without audit, and in the
opinion of management, include all adjustments necessary to present fairly the
financial position at September 30, 1998 and 1997 and the interim results of
operations for the three and nine months then ended and cash flows for the nine
months then ended. The balance sheet as of December 31, 1997, presented
herein, has been derived from the audited financial statements of the Company
for the year then ended.

Accounting policies followed by the Company are described in Note 2 to the
audited consolidated financial statements for the year ended December 31, 1997,
included in the Company's prospectus dated February 23, 1998. Certain
information and disclosures normally included in notes to financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted for purposes of the condensed consolidated interim
financial statements. The condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements,
including the notes thereto, for the year ended December 31, 1997.

The results of operations for the three-month and nine-month periods presented
herein are not necessarily indicative of the results to be expected for the full
year.

FIXED ASSETS- As of September 30, 1998, the fixed assets include approximately
$600,000 in costs related to the implementation of the Company's new management
information systems.

PUBLIC OFFERING - On February 27, 1998, the Company sold 2,300,000 shares of its
common stock for net proceeds of $14,106,862. In connection with the offering,
the Company terminated its status as an S corporation and recorded deferred
taxes of $485,000 with a corresponding adjustment to paid-in capital.

NEW ACCOUNTING PRONOUNCEMENT - The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income during the
quarter ended March 31, 1998. SFAS 130 requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources. As the Company has no changes in net assets from
nonowner sources, comprehensive income and net income are the same.

In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities, which
requires costs of start-up activities and organization costs to be expensed as
incurred. The SOP requires entities to expense as incurred all start-up and
preopening costs that are not otherwise captializable as long-lived assets. The
SOP will be effective for fiscal years beginning after December 15, 1998. The
Company's adoption of the new accounting standard will involve the recognition
of the cumulative effect of the change in accounting principle required by the
SOP as a one-time charge against earnings, net of any related income tax effect,
retroactive to the beginning of the fiscal year of adoption. The Company has not
completed the process of assessing the impact of this statement.

RECLASSIFICATION- The 1997 financial statements have been reclassified to
conform to the 1998 presentation.

2. PRO FORMA INFORMATION

The objective of the pro forma information is to show what the significant
effects on the historical information might have been had the Company not been
treated as an S Corporation for tax purposes prior to the February 23, 1998, the
effective date of the Company's initial public offering.

INCOME TAXES - The pro forma information presented on the condensed consolidated
statements of income reflects a provision for income taxes at an effective rate
of 38.5% for the nine months ended September 30, 1998 and 37.7% for the quarter
and nine months ended September 30, 1997.

PRO FORMA NET INCOME PER SHARE - Pro forma basic net income per share is based
on the weighted average number of shares of common stock outstanding during the
period plus the estimated number of shares offered by the Company (1,271,722
shares) which were necessary to fund the $7,800,000 distribution paid to the
Company's stockholder upon termination of the Company's status as an S
Corporation. Pro forma diluted net income per share is calculated using the
number of shares used in the basic calculation plus the dilutive effect of stock
options outstanding during the period.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

Shoe Pavilion is the largest independent off-price footwear retailer on the West
Coast that offers a broad selection of women's and men's designer label and name
brand merchandise. The Company operated 62 retail stores in California,
Washington and Oregon as of September 30, 1998 compared to 56 stores as of
September 30, 1997.

RESULTS OF OPERATIONS

Net sales increased 23.5% to $14.6 million for the third quarter ended September
30,1998 from $11.9 million for the third quarter of 1997. Net sales for the nine
months ended September 30, 1998 were $39.5 million, a 22.7% increase from sales
of $32.2 million for the nine months ended September 30, 1997. The increase in
net sales was attributable to a 7.8% and 5.9% increase in comparable store sales
for the three and nine months ended September 30, 1998, respectively, and sales
of newly opened stores.

Gross profit increased 32.9% to $5.4 million for the third quarter ended
September 30, 1998 from $4.0 million for the third quarter of 1997, and
increased as a percentage of net sales to 36.8% from 34.2%. Gross profit for the
nine months ended September 30, 1998 increased 21.5% to $14.0 million from $11.5
million for the nine months ended September 30, 1997 and decreased slightly as a
percentage of net sales to 35.4% from 35.8% for the comparable period in 1997.
The increase in gross profit as a percentage of net sales for the third quarter
ended September 30, 1998 was primarily attributable to the Company's ability to
purchase merchandise in larger quantities at a lower cost per unit. The slight
decrease in gross profit as a percentage of net sales for the nine months ended
September 30, 1998 was primarily attributable to the liquidation of the Standard
Shoe inventory during the nine months ended September 30, 1997.

Selling expenses consist of payroll and related costs, advertising and
promotional expenses. General and administrative expenses consist primarily of
corporate and administrative expenses, including payroll, employee benefits and
warehousing costs. Selling, general and administrative expenses increased 18.8%
to $4.0 million for the third quarter ended September 30, 1998 from $3.4 million
for the third quarter of 1997, and decreased as a percentage of net sales to
27.2% from 28.3%. Selling, general and administrative expenses for the nine
months ended September 30, 1998 increased 21.1% to $10.6 million from $8.8
million for the nine months ended September 30, 1997 and decreased as a
percentage of net sales to 26.9% from 27.2% for the nine months ended September
30, 1997. The decrease in selling, general and administrative expenses as a
percentage of net sales was primarily attributable to a decrease in warehouse
payroll expense. In addition, the nine months ended September 30, 1997 included
approximately $163,000 in expenses relating to the relocation of the Company's
headquarters.

Interest expense and other increased 1.0% to $100,000 for the third quarter
ended September 30, 1998 from $99,000 for the third quarter of 1997. Interest
expense and other for the nine months ended September 30, 1998 decreased $71,000
or 20.9% to $268,000 from $339,000 for the nine months ended September 30,
1997. The decrease for the nine months ended September 30, 1998 was attributable
to lower average borrowings on the Company's revolving line of credit. During
the quarter ended March 31, 1998, $6.0 million of the Company's line of credit
was repaid with the proceeds from the initial public offering.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has funded its cash requirements primarily through
cash flow from operations and borrowings under its credit facility, and
beginning in February 1998, proceeds from its initial public offering. Net cash
used by operating activities for the nine months ended September 30, 1998 was
$3.7 million resulting primarily from a $7.4 million increase in inventory
offset by net income of $2.0 million and a $1.1 million increase in accounts
payable. The increase in inventory was primarily attributable to the opening of
new stores and expansion of the inventory selection. Net cash used in investing
activities was $1.6 million for the purchase of property and equipment,
including the Company's new management information systems. Net cash provided by
financing activities was $5.5 million for the nine months ended September 30,
1998, primarily from $14.1 million raised in the Company's initial public
offering offset by a $7.8 million payment for an S corporation distribution and
a $587,000 reduction on the Company's line of credit net of borrowings.

Capital expenditures for the nine months ended September 30, 1998 were $1.6
million primarily for the build-out of nine new stores opened through September
30, 1998, plus construction-in-progress of three additional stores and the
Company's new management information systems. The Company's primary cash
requirements have been related to capital expenditures for new stores including
merchandise inventory for such stores and leasehold improvements. During the
next 12 months, the Company anticipates that cash will be used primarily for
merchandise inventory and capital expenditures. The Company estimates that the
cost of capital expenditures for fiscal 1998, excluding the cost of any possible
acquisitions, will total approximately $2.0 million, primarily for the build-out
of approximately 10 to 15 new stores and replacement of the Company's management
information systems. During the first nine months of 1998, the Company
experienced delays in the timing of opening certain new stores. While these
delays were largely caused by factors outside the Company's control, they
shifted the timing of the revenue contribution of certain new stores to a later
quarter from the one that was planned.

The Company has a credit facility agreement with a commercial bank, which
includes a revolving line of credit for $10.0 million expiring on April 30, 1999
along with a $500,000 term line available for the purchase or lease of
equipment. As of September 30, 1998, the unused and available portion of the
credit facility was approximately $3.2 million. The Company believes that
operating cash flow and borrowings under its credit facility will be sufficient
to complete the Company's 1998-store expansion program and to satisfy the
Company's other capital requirements through fiscal 1998.

IMPACT OF YEAR 2000

The Company is currently in the process of addressing a problem that is
facing all users of automated information systems. The "Year 2000 Issue" is the
result of computer programs being written using two digits rather than four to
define the applicable year. Computer programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
situation could result in a system failure or miscalculations causing
disruptions to operations, including, among other things, a temporary inability
to process transactions, send payments, or engage in similar normal business
activities.

State of Readiness. Beginning in early 1998, the Company began an overall
assessment of its computer systems, including Year 2000 readiness. The Company
determined that certain of its software was not Year 2000 compliant. In mid-
1998, the Company, with the guidance of outside consultants, implemented a plan
to replace its existing information systems primarily in response to business
demand and growth. The new systems are designed to replace the Company's
information systems for order processing, warehousing, finance and point-of-sale
on a fully integrated enterprise-wide basis. These systems will replace
existing software that is not Year 2000 compliant.

The Company will utilize both internal and external resources to replace
and test its information systems software for Year 2000 compliance. An
Executive Oversight Steering Committee, consisting of internal executive
management, the Company's new information systems officer and various outside
third

parties, has been formed to supervise the replacement, implementation and
testing process. Installation of the new systems began in June 1998, and
Company personnel are currently being trained on the new systems. The Company
estimates that the installation of the new systems will be completed by the end
of the second quarter of 1999, and testing will be completed thereafter. The
Company expects to fully convert to the new, Year 2000 compliant information
systems no later than September 30, 1999.

The Company will begin the process of initiating formal communications with
significant suppliers to determine the extent to which the Company may be
vulnerable to a failure by any of these third parties to remediate their own
Year 2000 issues. The Company's exposure to supplier Year 2000 business
disruptions is reduced because it does not currently communicate electronically
with its suppliers. In addition to suppliers, the Company also relies upon
governmental agencies, utility companies, telecommunication service companies
and other service providers outside of the Company's control. There can be no
assurance that the Company's suppliers, governmental agencies or other third
parties will not suffer a Year 2000 business disruption that could have a
material adverse effect on the Company's business, financial condition and
operating results.

Costs to Address the Year 2000 Issue. The Company has incurred, through
September 30, 1998, approximately $600,000 relating to the implementation of the
new systems and addressing Year 2000 issues. The Company currently estimates
that the total costs for implementing the new systems will approximate $2
million. Included in the costs of implementing the new systems is the cost of
equipment which the Company presently plans to lease over 36 to 60 months. The
Company will capitalize and depreciate the new systems technology over their
estimated useful life and to the extent that Year 2000 costs do not qualify as
capital investments, the Company will expense such costs as incurred.

The costs of Year 2000 compliance and the date on which the Company
believes it will complete the project are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain third party resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, supplier compliance and
contingency actions, and similar uncertainties. The Company's total Year 2000
project costs do not include the estimated costs and time associated with
anticipated third party Year 2000 issues based on presently available
information. However, the Company does not believe that those costs are
significant due to the fact that the Company does not currently communicate
electronically with its suppliers.

Risks Presented by the Year 2000 Issue. The Company presently believes
that with the implementation of new systems and conversion to new software, the
Year 2000 Issue will not pose significant operational problems for its computer
systems. However, if such conversions are not made, or are not completed in a
timely manner, the Year 2000 Issue could have a material impact on the
operations of the Company. In addition, if any third parties who provide goods
or services essential to the Company's business activities fail to address
appropriately their Year 2000 issues, such failure could have a material adverse
effect on the Company's business, financial condition and operating results.
For example, a Year 2000 related disruption on the part of the financial
institutions which process the Company's credit card sales would have a material
adverse effect on the Company's business, financial condition and operating
results.

Contingency Plans. The Company's Executive Oversight Steering Committee
intends to develop contingency plans in the events that the Company has not
completed all of its remediation plans in a timely manner or any third parties
who provide goods or services essential to the Company's business fail to
appropriately address their Year 2000 issues. The committee expects to conclude
the development of these contingency plans by the end of the second quarter of
1999.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

PART II

OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits required to be filed by Item 601 of Regulation S-K:

27.1 Financial Data Schedule

(b) Reports on Form 8-K filed during the quarter ended September 30,
1998:

None.

SIGNATURES

Pursuant to the requirements 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 on the 6th day of November 1998.

SHOE PAVILION, INC., as Registrant

By /s/ Dmitry Beinus
------------------------
Dmitry Beinus
Chairman and Chief Executive Officer

By /s/ Gary A. Schwartz
------------------------
Gary A. Schwartz
Vice President and Chief Financial Officer

INDEX TO EXHIBITS

EXHIBIT NUMBER DESCRIPTION
- -------------- -----------

27.1 Financial Data Schedule