**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark One)**

**x** ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the fiscal year ended****February 25, 2006**

**or**

**o** TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the transition period from                     to                     **

**Commission File Number:****000-51460**

****

**GOLFGALAXY, INC.**

(Exact name of registrantas specified in its charter)

| **Minnesota**                             |   | **41-1831724**       |
|-------------------------------------------|--------|----------------------|
| State or other  jurisdiction of           |   | (I.R.S. Employer     |
| incorporation or  organization            |   | Identification  No.) |
| **7275 Flying Cloud Drive**               |   |                 |
| **Eden  Prairie, Minnesota**              |   | **55344**            |
| (Address of  principal executive offices) |   | (Zip Code)           |

 

Registrant’s telephonenumber, including area code **(952) 941-8848**

Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant to Section 12(g) of the Act:

| Title of each class                          | ** ** | **Name of  exchange on which registered** |
|----------------------------------------------|------------|-------------------------------------------|
| **Common  stock, par value $0.01 per share** |       | **Nasdaq  National Market**               |

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. **Yes ****o****  ****No  ****x**

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. **Yes ****o****  ****No  ****x**

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K  **x**

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act). **Yes ****o****  ****No  ****x**

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Act.)  **Yes ****o****  ****No  ****x**

The aggregate market valueof the voting and non-voting common equity held by non-affiliates computed byreference to the price at which the common equity was last sold as of the lastbusiness day of the registrant’s most recently completed second fiscal quarterwas $95.8 million. (For purposes of this calculation all of the registrant’sdirectors and executive officers are deemed affiliates of the registrant.)

(APPLICABLE ONLY TOCORPORATE REGISTRANTS)

Indicate the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date. Common stock, par value $0.01 per share—10,954,893shares outstanding as of April 24, 2006.

 

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**GOLFGALAXY, INC.**

**ANNUALREPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 25, 2006**

**INDEX**
| PART I         |              |                                                                                                                |
|---------------------|-------------------|---------------------------------------------------------------------------------------------------------------------|
|                | Item 1.           | Business                                                                                                            | 3 |
|                | Item 1A.          | Risk Factors                                                                                                        | 21 |
|                | Item 1B.          | Unresolved Staff Comments                                                                                           | 28 |
|                | Item 2.           | Properties                                                                                                          | 28 |
|                | Item 3.           | Legal Proceedings                                                                                                   | 29 |
|                | Item 4.           | Submission of Matters to a  Vote of Security Holders                                                                | 29 |
|                |              | Executive officers of the  registrant.                                                                              | 30 |
| PART II        |              |                                                                                                                |
|                | Item 5.           | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities | 33 |
|                | Item 6.           | Selected Financial Data                                                                                             | 35 |
|                | Item 7.           | Management’s Discussion and  Analysis of Financial Condition and Results of Operation.                         | 38 |
|                | Item 7A.          | Quantitative and Qualitative  Disclosures About Market Risk                                                         | 52 |
|                | Item 8.           | Financial Statements and  Supplementary Data                                                                        | 53 |
|                | Item 9.           | Changes in and Disagreements  With Accountants on Accounting and Financial Disclosure                               | 72 |
|                | Item 9A.          | Controls and Disclosures                                                                                            | 72 |
|                | Item 9B.          | Other Information.                                                                                                  | 72 |
| PART III       |              |                                                                                                                |
|                | Item 10.          | Directors and Executive  Officers of the Registrant                                                                 | 73 |
|                | Item 11.          | Executive Compensation                                                                                              | 76 |
|                | Item 12.          | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters.                    | 79 |
|                | Item 13.          | Certain Relationships and  Related Transactions                                                                     | 84 |
|                | Item 14.          | Principal Accounting Fees  and Services                                                                             | 85 |
| PART IV        |              |                                                                                                                |
|                | Item 15.          | Exhibits, Financial  Statement Schedules                                                                            | 86 |
| SIGNATURES          | 89                |
| Exhibit Index: |              |                                                                                                                |
|                | Exhibit 21.1 |                                                                                                                |   |
|                | Exhibit 23.1 |                                                                                                                |   |
|                | Exhibit 31.1 |                                                                                                                |   |
|                | Exhibit 31.2 |                                                                                                                |   |
|                | Exhibit 32.1 |                                                                                                                |   |
|                | Exhibit 32.2 |                                                                                                                |   |
|                     |                   |                                                                                                                     |  |  |

 

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**PART I**

**Item 1.        Business.**

**Our Company**

We are a leading golf specialty retailer offering adistinctive combination of competitively priced merchandise from the leadingnational brands in golf equipment and apparel, together with non-commissionedsales assistance and pro shop services. We operate 59 superstores, generallyranging from 13,000 to 18,000 selling square feet, located in 24 states, aswell as eCommerce Internet sites. Our “*Everythingfor the Game.**®*” core strategy is to provide avidand casual golfers, as well as gift purchasers, a category dominant selectionof leading national brand products, expert sales assistance and professionalservices, the combination of which is generally not available elsewhere. Weoffer our customers an exciting, interactive environment that comparesfavorably with the shopping experience at smaller independent golf stores,on-course pro shops and the golf departments of general sporting goodsretailers.

Key to our strategy is our focus on the leadingnational brands in golf, with non-commissioned sales associates and PGAprofessionals offering customers knowledgeable advice and expertise. We believethis selling strategy is distinctive and builds a trust relationship that iscritical to creating long-term customer loyalty and encouraging word of mouthreferrals. We employ a consultative selling approach that focuses on maximizingeach customer relationship for the long-term by delivering the best solutionfor each golfer. We also build customer loyalty and stimulate sales throughexclusive Advantage Club member in-store events, email offers and direct mailpromotions.

Our stores feature full-time PGA professionals whooffer customers a specialized level of expertise and service. Our value-addedpro shop services, directed by our in-store PGA professionals, utilizestate-of-the-art technology and facilities, including golf lessons featuringdigital video swing analysis. Our store-in-store concept, The GolfWorks, featuresgolf club components, club making tools and supplies, and technicalinformation, and highlights our expertise and capabilities in club repair andupgrade services. Our PGA professionals provide custom club and ball fitting includingfittings using high-speed ball launch monitors. We believe our PGAprofessionals and highly trained “GETfit Experts” offer customers a highquality, custom club fitting experience.

We staff our stores with golf enthusiasts who embodyour brand personality—approachable, fun, passionate and knowledgeable. Ourprofessionally designed “superstore” format features a racetrack layouthighlighting broad product offerings along with many interactive features, suchas an artificial bent grass putting green and golf simulators. The friendly,no-pressure selling approach of our non-commissioned sales staff encouragescustomers to spend time exploring the store and testing the products beforemaking a purchase decision.

Our extensive selection ofproducts and services positions our stores as the “pro shop for the publicgolfer” and also appeals to private club golfers and gift purchasers. Webelieve our combination of leading national brands, a commitment to superiorcustomer service, and interactive store features, together with our guaranteedlow prices, provides a distinctive superstore concept which will enable us toachieve our objective of becoming the nation’s leading golf specialty retailer.

**Our Industry**

According to the National Golf Foundation (NGF), anindependent industry research firm, the aggregate size of the U.S. golf marketwas estimated at $24.3 billion in 2002 (the last year reported), whichincluded spending on greens fees, equipment and accessories, and food andbeverages. Golf clubs, balls, bags, gloves and footwear represented$4.7 billion of this total. The golf market, as defined by the NGF, doesnot include certain products that we sell such as pre-owned clubs, golf andcasual apparel, and golf-

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related gifts, noveltiesand services. We estimate the total golf market we serve, including theseadditional products and services, is over $7.5 billion.

Over the past30 years, the golf industry has experienced significant growth inparticipation and popularity. According to the NGF, the number of Americans whoplay golf has increased from 11.2 million in 1970 to 27.3 million in2004. The industry has also experienced long-term increases in the number ofrounds played per year, increasing from 266.0 million in 1970 to495.0 million in 2003. According to the NGF, from 1994 to 2002, theoff-course golf specialty store channel gained market share among avid golfersfrom the general sporting goods stores and mass merchants. In addition,according to the NGF’s 2002 survey, the off-course golf specialty storechannel is the number one golf retail channel for clubs and balls among avidgolfers and customers spending at least $1,000 per year on golf-relatedpurchases.

**Our History**

Our company was co-founded in December 1995 byRandall K. Zanatta, our Chief Executive Officer, and Gregory B. Maanum, ourChief Operating Officer. Our co-founders are experienced retail executives whosaw the opportunity to bring proven superstore retailing strategies andexecution to the golf equipment and apparel market. We opened our first storein April 1997 in Bloomington, Minnesota, and have grown to 59 storestoday. We funded our early growth and development through private equitysponsorship. During the second quarter of fiscal 2006, we completed the initialpublic offering of our common stock, raising net proceeds of $37.9 million,after issuance costs.

We continue to further refine and enhance our storemodel economics through intense focus on merchandising, execution andefficiency. In addition, we have added both a database direct marketing programand eCommerce Internet sites, positioning our company to become a golf industryleader in multi-channel, integrated retailing. Using our refined store modeland leveraging our infrastructure investments, we are executing an expansionstrategy that we believe will help us achieve our objective of becoming thenation’s leading golf specialty retailer.

In March 2006, weacquired all of the outstanding shares of Ralph Maltby Enterprises, Inc.a/k/a The GolfWorks (The GolfWorks). The purchase price, excluding direct costsof the acquisition, consisted of $3.7 million in cash ($500,000 of which hasbeen deposited into an indemnification escrow); 250,862 shares of our commonstock valued at $4.8 million based on the average closing price of our commonstock on the Nasdaq National Market during a five-day trading period beginningthree trading days prior to our announcement of the acquisition; and warrantsto purchase 150,000 shares of our common stock with a fair value of $1.4million, determined using the Black-Scholes option pricing model. The warrantshave an exercise price of $17.94 per share and are exercisable for a 10-yearterm. In addition, we assumed $5.4 million in debt from The GolfWorks. Founded in1976, The GolfWorks is one of the golf industry’s most complete sources for golf club components, clubmaking tools and supplies, and technical information. The GolfWorks isprimarily a direct marketer with product offerings that include a complete complement of proprietary clubheads,as well as a full selection of name brand shafts and grips, sold throughits catalogs and its Internet site at *www.GolfWorks.com*.The Golfworks also manufactures a proprietary line of club components and clubmaking tools and supplies for sale to our customers. In addition, The GolfWorksassembles finished clubs for sale under the *Maltby* and *Maltby Design* brands, as well as for sale by others undertheir brands.

**CompetitiveStrengths**

We believe that a combination of the following factorscreates a distinctive retail concept that distinguishes us from our competitorsand is key to our continuing success.

***Extensive Selectionof Leading National Brands.******  ***We believethat our focus on a broad and deep assortment of the leading national brands ingolf equipment, including *TaylorMade*,*Callaway*, *Cleveland*, 

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*Cobra*,*Titleist*, *MacGregor, PING*, *NIKE Golf*, *Odyssey*, *Mizuno, Adams,Wilson, Ben Hogan, Top-Flite, US kids, Sonartec, Bridgestone, Tommy Armour*and *Ram,* differentiates us fromour competitors. In clubs, for instance, many of our competitors offer alimited assortment of the leading national brands and some also focus onprivate label and lesser-known brands. We believe that most golfers, andespecially avid golfers who, according to the NGF, represented 23% of allgolfers and were responsible for 57% of all golf equipment purchases in theU.S. in 2002, prefer the leading national brands. Our extensive selection ofgolf equipment includes substantially all of the leading national brands.

We believe our extensive apparel assortments,experienced apparel sales associates and high quality presentations of appareldifferentiate us from our competitors. As a result, we have access to theleading national brands of golf apparel and footwear, including *FootJoy*, *NIKEGolf*, *Ashworth*, *adidas*, *GregNorman*, *Callaway*, *Liz Golf*, *TommyBahama, Ecco* and *Ben Hogan*.

The golf industry has experienced significantconsolidation in vendors. According to Golf Datatech, in 2005, the top six golfclub brands represented more than 70% of off-course golf club sales inthe U.S. We focus our selling strategy on offering an extensive selection ofthe leading national brands in golf clubs. We believe this selling strategyresults in higher market share for our stores, greater customer loyalty andsatisfaction and, therefore, more repeat business.

Our recent acquisition of The GolfWorks provides uswith a new line of clubs under the *Maltby* and *Maltby Design* brands. These clubs offer outstanding valueand performance, are priced below the premium national brands, and are targetedat the beginning, occasional and value-conscious golfers. We believe thesegolfers will be attracted to the enhanced playability and value of the*Maltby* and *Maltby Design* clubs.

***Pre-owned Clubs.******  ***We purchase pre-owned clubsin exchange for in-store credit and resell the higher quality pre-owned clubsat all of our stores. We emphasize our pre-owned club business with the “*We Take Trades!*” message in all of our stores and online. Webelieve this increases our new club business by reducing the cost of new clubsfor many customers. Additionally, the resale of pre-owned clubs is complementaryto our product offering, allowing value-conscious customers to buy highquality, leading national brand clubs at prices considerably lower than pricesfor comparable new clubs.

***Commitment toSuperior Customer Service.******  ***A key elementof our competitive strategy is to provide a compelling shopping experiencebased on a superior level of customer service, golf expertise and value-addedPGA services. We staff our stores with knowledgeable and enthusiasticassociates who love golf as much as our customers. We supplement our salesassociates’ personal golf knowledge and experience with proprietary trainingprograms. We employ a non-commissioned sales approach that we believe is key toproviding a superior level of customer service and knowledgeable advice. Tosupport our commitment to superior customer service, we developed all of oursales channels to be fully integrated. Products purchased in-store or onlinethrough our Internet site, *www.GolfGalaxy.com*,may be returned through either channel. This commitment to superior customerservice is at the core of our company culture.

***In-store PGAProfessionals.******  ***A critical element of our strategythat differentiates us from our competition is our in-store PGA professionals.All of our stores employ and feature full-time PGA professionals, all of whomare Class A PGA professionals and receive certification by majormanufacturers, including *Callaway*,*TaylorMade*, *NIKE Golf*and *PING*, to custom fit theirproducts. We use state-of-the-art technology and facilities to provide ourcustomers with specialized services directed by our PGA professionals. Our PGAprofessionals are part of the store management team and assist our salesassociates in selling our products.

Our PGA services include golf lessons featuringdigital video swing analysis, as well as club and ball fittings usinghigh-speed ball launch monitors. We believe that our focus on custom fittingleading national brand clubs, combined with our automated special orderprocess, offers customers a superior shopping 

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experience and positionsus as experts with the golf consumer. Together, our PGA professionals andhighly trained “GETfit Experts,” position us to deliver our customers acomplete custom club fitting experience.

***Interactive SuperstoreFormat.******  ***Our golf superstores, which generallyrange in size from 13,000 to 18,000 selling square feet, offer a distinctivecombination of extensive product assortments and golf-related services in a funand interactive setting. Our store design highlights our key categories ofproducts and services and incorporates interactive features, including anartificial bent grass putting green, golf simulators for club trial, in-storelessons from PGA professionals and a highly visible club repair and upgrade servicesarea. Our interactive store design and equipment displays encourage customersto test our products before making a purchase decision.

***The GolfWorksStore-in-Store.***   The GolfWorks store-in-storehas been included in all of our stores opened since October 2005. Wecurrently have The GolfWorks store-in-store in 27 of our 59 stores, includingthe nine stores already opened in fiscal 2007, with plans to retrofit the remainingstores in the second half of fiscal 2007. These departments add golf clubcomponents, a new product category for us, without requiring additional squarefootage. The golf club components, along with the associated tools andsupplies, are targeted to the do-it-yourself club builder. We offer weekly clubbuilding clinics to introduce club building to our customers. The addition ofThe GolfWorks store-in-store has helped brand our in-store, full-service clubrepair and upgrade services.

***DistinctiveMarketing Program.******  ***We use a combination of print, television,direct mail, e-mail and in-store events to keep our brand top of mind withcustomers. We market directly to our customers through our complimentaryAdvantage Club customer loyalty program, which provides members with advancenotice of special in-store events, exclusive offers and information. We believeour Advantage Club gives us a significant advantage over our competitors byhelping us to identify the most desirable customers and, in turn, allowing usto provide those customers with targeted offers. Launched in March 2003,the Advantage Club had over 900,000 members as of May 1, 2006. We alsopromote store visits and sales with in-store events including playerappearances, clinics, special event nights and tech van appearances.

In March 2004, we launched our eCommerce Internetsite, *www.GolfGalaxy.com*,designed to provide another point of contact for our customers, a marketingopportunity and a new sales channel. Frequently visited pages on the siteinclude the store locator, bargain bunker and list of upcoming in-store events.Our eCommerce site has enabled us to expand our assortment of merchandisewithout increasing inventory at the store level. Customers may access thiswider assortment from our eCommerce site on the Internet or in our stores fromone of the in-store Internet kiosks.

The acquisition of The GolfWorks increases ourcapabilities in the direct to consumer channel. The GolfWorks facilitiesinclude a contact center; distribution center; research, design and assemblyfacilities, and a school for club builders. All of these operations are locatedin Newark, Ohio, just outside of Columbus. We believe The GolfWorks facilitiesare well-positioned to support our combined eCommerce operations and direct toconsumer catalog businesses. In April 2006, we combined our Golf Galaxy customercontact center with The GolfWorks contact center to create a more efficient andlower-cost operation.

***Guaranteed LowPrices.******  ***We are committed to offering ourcustomers the best price everyday. Our “*LowPrices. Everyday. Guaranteed.*” policy extends 30 days beyondthe purchase date to protect our customers in the event they find a lower priceeither before or after the sale. We feature this guarantee prominently in ouradvertisements with our “*Never Undersold.Period.*” message. We also have a comprehensive competitive shoppingprogram that monitors in-store pricing at local competitors. When we find alower price, we adjust our price. Our systems allow us to match any lower priceon a store-by-store basis. We seek price parity with local competition, whichinstills confidence in our store staffs and validates our value proposition toour customers.

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***Management Team with Extensive Superstore and GolfIndustry Experience.******  ***Our Chief Executive Officer andour Chief Operating Officer, who co-founded our company, and our ChiefFinancial Officer, have extensive retail management experience at Best Buy Co., Inc.Our Chief Marketing Officer and our Senior Vice President—Sales and Operationshave, collectively, held executive positions with Callaway Golf Company, Nike, Inc.and Select Comfort Corporation. The newest members of our senior managementteam, our Senior Vice President—Chief Technology Officer, Research andDevelopment and our Senior Vice President—CEO of The GolfWorks, both haveextensive experience in the golf industry. See “Management” elsewhere in thisReport for additional information about our management team.

**Growth Strategy**

Our long-term objectives are to build the Golf Galaxybrand and to become the nation’s leading golf specialty retailer. Over the pastfew years, we have made significant investments in our infrastructure,including information systems and experienced management, to support our growthstrategy. To achieve our goal, we plan to expand our store base by openingstores in both new and existing markets, continue to leverage our efficientdistribution process, grow our comparable store sales and store profitability,and expand sales in new channels.

***Expand Our StoreBase and Leverage our Efficient Distribution Process.******  ***We believe ourdistinctive retail concept has broad appeal to customers and that there aresignificant opportunities to continue profitable new store expansion throughthe opening of new stores. We opened 16 new stores during fiscal 2006 and weplan to open 14 to 16 new stores in fiscal 2007. We estimate there areapproximately 250 locations in the U.S. suitable for our prototype store,which generally ranges from 13,000 to 18,000 selling square feet. Our flexiblestore size and our efficient direct-to-store distribution model increase thenumber of potential markets and store sites that are suitable for our concept,which we believe will provide us adequate locations to meet our expansion plan.We believe there is ample availability of real estate at reasonable occupancycosts to accommodate our future growth in both new and existing markets. We mayalso consider strategic acquisitions from time to time.

Our store model has attractive unit level economics,producing positive cash flow in the first full year of operation inpredominantly all of our stores. We believe that our record of successful newmarket entries, based on store profitability, and our management’s experiencein other high growth retail concepts provide a foundation for continuedprofitable growth.

Our efficient direct-to-store distribution modeleliminates the need to support store growth with costly warehouse facilities,systems and related inventory. Since substantially all store inventories aredrop-shipped directly from our vendors to our stores, we are not dependent onregional distribution centers and we can take advantage of real estateopportunities in any market without needing to expand only into geographicallycontiguous states.

To enhance our distribution process, in fiscal 2003 weintroduced an electronic data interchange, or EDI, system to establishelectronic trading with most of our key suppliers, accelerating ourreplenishment time, increasing our in-stock position and automating invoiceprocessing. In fiscal 2005, we implemented an Internet-based specialorder system with our key vendors at all of our stores. All of our systems arescalable and were designed to support our growth strategy.

***Grow Comparable StoreSales and Store Profitability.******  ***We arepursuing a number of initiatives to continue to grow comparable store sales andincrease store profitability. We plan to continue to grow our comparable storesales and profitability by aggressively supporting the growth of our AdvantageClub customer loyalty program, which we believe will increase store visitfrequency and more efficiently deploy our advertising expenditures. We alsoplan to continue to increase gross profit as a percentage of net sales throughpurchasing leverage, continued focus on inventory management, improved sellingstrategies that focus on margin enhancement opportunities, by raising thepercentage of sales from higher margin 

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pre-owned clubs,apparel, accessories and private label clubs and by building sales of PGAservices and club fitting services which we believe will help further driveequipment sales and build customer loyalty.

***Expand Sales in New Channels.******  ***In March 2004,we launched our eCommerce operations supported by our in-house fulfillment andcustomer contact center. With the addition of this direct fulfillmentcapability, we have begun to develop our direct sales online. In addition, ouracquisition of The GolfWorks supports our effort to develop the direct toconsumer channel. We plan to grow our sales in these channels by leveraging ourstrong brand awareness through several methods such as in-store promotions,inclusion in our integrated marketing messages, inclusion in our Advantage Clubcommunications, joint media promotions and potential relationships with otherparties in the golf industry.

**Merchandising**

The key elements ofour merchandising approach that support our “*Everythingfor the Game.*” core strategy are:

·       Anextensive selection of the leading national brands of golf products;

·       Highlyvisible PGA services and interactive store features that reinforce ourexpertise and encourage testing our products;

·       TheGolfWorks store-in-store highlights our technical expertise and in-store,full-service club repair and upgrade services, along with an extensiveselection of golf club components, clubmaking tools and supplies, and technicalinformation for the do-it-yourself club builder;

·       Compellingclub fitting facilities and expertise supported by our PGA professionals andour highly trained “GETfit Experts;”

·       Knowledgeableadvice from our trained non-commissioned sales associates and PGAprofessionals;

·       Professionally-designedstores that are easy to shop and inviting to golfers of all skill levels, andproduct displays that communicate category dominant assortments and compellingvalue;

·       Aggressivepromotion of new products and technology, supported by deep in-stock positions;

·       Tailoredproduct assortments by store based on demographic, regional or seasonaldifferences;

·       Anextensive selection of pre-owned clubs;

·       Specialpurchase items and exclusive items from key suppliers that communicate value andbuild margin; and

·       Guaranteedlow prices backed by an active competitive shopping program.

***Extensive offeringof products and services.******  ***We offer abroad and deep assortment of clubs, equipment, club components and tools,apparel, footwear, accessories, as well as golf themed art and gifts to meetthe needs of golfers at all skill levels. We carry virtually all of the leadingnational brands in golf, including some not available to other golf specialtyretailers and general sporting goods stores. We are frequently among the firstretailers to market with new product introductions due to our strong vendorrelationships and high sales volume per store. We are often among the firstretailers to receive access from our key suppliers to deeply discountedcloseout, pre-owned and exclusive products that enhance our value propositionand improve our gross profit as a percentage of net sales.

While we focus on the leading national brands in golf,we have developed two proprietary brands: *Outward9* for equipment and *Rae’s Creek*for apparel. These proprietary brands are positioned at lower price pointswhere the leading national brands do not have products. In addition, as aresult of our acquisition of The GolfWorks, we have proprietary clubs under the*Maltby* and *MaltbyDesign* brands.

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Our categories ofproducts and services are:

***·******      ***Clubs.***  ***Golf Clubsis our largest category, representing more than half of our net sales for eachof the past three fiscal years. We carry a broad and deep selection of woods,irons, wedges, putters and specialty clubs for golfers of every skill level. Wealso have extensive club selections for often underserved customer segmentssuch as women, juniors and left-handed players. Our deep in-stock position ofvarious loft, flex and shaft options enables us to provide customers animmediate opportunity to acquire clubs specifically fit to their particularneeds.

The key brands ofclubs that we carry include *TaylorMade, Callaway,Cleveland, Cobra, Titleist, MacGregor, PING, NIKE Golf, Odyssey, Mizuno, Adams,Wilson, Ben Hogan, Top-Flite, US kids, Sonartec, Bridgestone, Tommy Armour*and *Ram.*

We also purchase pre-owned clubs in exchange forin-store credit and resell the high quality pre-owned clubs at all of ourstores. Clubs taken in trade that we do not resell in our stores are sold to athird party. We promote our “*We Take Trades!*”message prominently in our marketing. We believe this increases our new clubbusiness by reducing the cost of new clubs for many customers. Additionally,the resale of pre-owned clubs is complementary to our product offering,allowing value-conscious customers to buy high quality, leading nationalbrand clubs at prices considerably lower than prices for comparable new clubs.

·       ***Bags, Balls, Gloves and Accessories.  ***Thiscategory includes bags, balls, carts, gloves, tees, training aids and hundredsof miscellaneous accessory items. We also offer golf themed art, homefurnishings, books, videos, gifts, novelty items, sunglasses, watches, briefcases, pens and travel accessories. These products offer us incremental salesand gross profit opportunities while enhancing the shopping experience withinteresting and distinctive items.

·       ***Apparel and Footwear.  ***We believe thatthe extensive assortments, experienced apparel sales associates and highquality presentations in our Apparel and Footwear category differentiate usfrom our competition. We carry leading national brands in both apparel andfootwear including *FootJoy*, *NIKE Golf*, *Ashworth*, *adidas*,*Greg Norman*, *Callaway*, *LizGolf*, *Tommy Bahama, Ecco*and*Ben Hogan*.

We feature our merchandisein department store quality presentations, with mannequins and displays thatfeature the quality and selection of our offerings, organized by brand. Wecustomize our apparel and footwear assortments to the local market. Wemerchandise apparel in the center of the store to highlight this high margincategory. We promote and merchandise this category under our tag line “*Golf. Life. Style.*” We also offer non-golfcasualwear.

·       ***PGA Services.  ***According to the NGF, in2002, 79% of all golfers did not belong to a private club. These public golfersplayed a variety of courses and did not have regular access to PGAprofessionals. Our PGA services position us as the “pro shop for the publicgolfer.” Our PGA services are directed by our in-store PGA professionals, allof whom are Class A professionals, and are key to our “*Everything for the Game.*” strategy.Although PGA services represented only a small percentage of our net sales infiscal 2006, the availability of these services and the PGA professionals inour stores contribute significantly to the fitting and sale of our clubs. Ourin-store PGA services provided by our on-staff PGA professionalsdistinguish us from our primary off-course competitors.

The in-store PGAservices that we offer under the supervision of our PGA professionals include:

**Lessons—****We**offer indoor golflessons with PGA professionals using a state-of-the-art digital video swinganalysis system. Two cameras simultaneously capture the golf swing digitally, 

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allowing the PGAprofessional to isolate and correct swing faults. We record the entire lesson,including the PGA professional’s comments, for customers to review at home.

**Ball launch monitorfitting—****This**tool allows us to fit customerswith the best performing driver and ball for their swing characteristics. Highspeed cameras capture the club face and ball at the moment of impact andmeasure several variables including launch angle, speed and spin rate, the keysto maximizing distance. This system is a proven technology used by tour prosand has great benefit for most players.

**Putter fitting****—**Using a proprietaryputter fitting system developed and produced by The GolfWorks, we offer customputter fitting in all of our stores. This system measures five key variables inorder to identify the best fit for each golfer.

Our PGA professionals are responsible for the trainingand certification in our “GETfit Experts” program that qualifies other storeassociates to custom fit clubs. All of our PGA professionals receive factorytraining and certification by major manufacturers, including *Callaway*, *TaylorMade*, *NIKEGolf* and *PING,*to custom fit their products.

·       ***The GolfWorks Store-in-Store—***TheGolfWorks presents an extensive selection of golf club components, clubmakingtools and supplies, and technical information for the do-it-yourself clubbuilder. This store-in-store also highlights our in-store expertise andcapability in technical services including:

**Club repair and regripping—****We**offer completerepair and regripping for clubs in a highly visible on-site repair center. Weguarantee 24-hour turnaround time on regripping. We stock all of the mostpopular grips from *Winn*, *Golf Pride*, *Lamkin* and others.

**Club upgrade****—**We offer completeupgrade services to enhance the performance of customers’ current equipment.The recent trend to high performance, aftermarket shafts has created anopportunity to sell both a new shaft and the installation service. We stock allof the leading after-market shafts from *Graffaloy*,*True Temper*, *UST*, *Aldila*,*Fujikura* and others.

***Interactive StoreDesign.******  ***We designed our stores to deliver onour “*Everything for the Game.*”strategy and create an exciting and interactive shopping environment thathighlights our extensive product assortments and value-added PGAservices. Interactive areas, such as an artificial bent grass putting green andgolf simulators, add to the entertainment value of the shopping experience. Ourstore design and equipment displays encourage customers to test our productsbefore making a purchase decision. Our highly visible service areas reinforcethe expertise available from our staff.

Our professionally designed superstores are bright andcolorful, featuring open ceilings painted blue to emulate the sky with aracetrack layout main aisle circling the interior of the store. Equipment islocated on the outside of the racetrack, with apparel offered in the center. Webulk and mass display deep product offerings in key areas to encourage impulsepurchasing and add-on sales. The store layout and display fixtures are highlyflexible and allow us to expand and adjust our merchandise offerings by seasonand market.

***Pricing.******  ***Maintaining aprice leadership position in our markets is a key element of our merchandisingstrategy. Our pricing strategy is to maintain every day low prices that arecompetitive with all local competitors and national direct catalog and Internetretailers. We monitor all forms of media and change prices promptly to matchany lower priced offers. In addition, we have a comprehensive competitiveshopping program that monitors in-store pricing at local competitors. When wefind a lower price, we adjust our price. Our systems allow us to match anylower price on a store-by-store basis. We seek price parity with localcompetition, which instills confidence in our store staffs and validates ourvalue 

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proposition to ourcustomers. We also offer a 30-day low price guarantee to protect ourcustomers in the event they find lower pricing either before or after a sale.

We achieve priceleadership through a variety of programs including:

·       In-storesignage and staff training of our “*LowPrices. Everyday. Guaranteed.*” offer, which includes our 30-dayguaranteed price protection;

·       Advertisementsthat reinforce our low price commitment with our aggressive “*Never Undersold. Period.*” message;

·       Regularcompetitive shopping of key competitors and proactive price adjustments tomatch the competition; and

·       Promotion of specialcloseout buys, opportunistically purchased and often exclusive to us, both inadvertising and in-store that reinforce the value and low price message.

**Marketing andAdvertising**

Our marketing communicates our “*Everything for the Game.*” strategy and isdesigned to position us as the branded industry leader in selection, serviceand expertise. Our mass-media messages are designed to communicate ouroutstanding value while enhancing our brand.

Although the demographic profile of our core customeris a male who is 30 to 61 years old and has a high disposable income, ourmarketing messages are designed to appeal to four major golf customer segments,namely: (i) avid golfers, who play 25 plus rounds of golf per year, visitus multiple times, and are early adopters, wealthy, well educated and brandconscious; (ii) recreational/value golfers, who make economically drivenpurchase decisions as a result of income limitations or an inability to commitmuch time to the game of golf; (iii) female golfers, who represent anincremental opportunity for us and are the subject of increasingly focusedmarketing initiatives; and (iv) junior golfers, who are important becausethey may be lifetime customers and their parents represent additional potentialcustomers.

We use a combination of print, television, directmail, e-mail and in-store events to drive awareness of our brand andcommunicate our message during the key selling seasons. Our marketing planincludes newspaper advertisements, national cable television advertisingincluding sponsorship of programming on The Golf Channel, direct mail catalogs,e-mail offers, and local golf tournament sponsorship.

In March 2003, we launched Advantage Club, ourcustomer loyalty program, designed to create a direct relationship with ourcustomers using advance notice of special in-store events, exclusive offers andinformation. Membership in our Advantage Club is free. As of May 1, 2006,we had registered over 900,000 Advantage Club members. We track membertransactions and, in fiscal 2006, sales to Advantage Club members accounted fornearly half of our total sales. We target our direct mail catalogs and e-mailoffers to this group of customers who generate above average response rates,thus enhancing our marketing efficiency. We believe our Advantage Club gives usa significant advantage over our competitors by helping us to identify the mostdesirable customers and, in turn, allowing us to provide those customers withtargeted offers. It also allows the marketing communication to be relevant toeach of the different customer segments, or other identified groups ofcustomers such as those with low handicaps (0-10) or uniquepurchasing patterns and those who are loyal to particular brands.

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In addition to moretraditional price and item advertising, our marketing strategy includes thepromotion of a variety of special in-store events of interest to customers. Ourmarketing events are highly customized. We have an extensive effort to promotestore visits and sales through event marketing, which in the past haveincluded:

***·******      ***Player Appearances**—*****interactive***in-store events with such PGA tour players as John Daly, Ernie Els, CharlesHowell III and Hank Kuehne, NBC golf analyst Johnny Miller and LPGA star AnnikaSorenstam.

·       ***Tech Van Appearances*—**vendor tour trailerswhere representatives discuss products and offer club fitting and custom builtclubs on site. Participating vendors have included *Callaway*, *TaylorMade*,*PING*, *Cleveland, Wilson, Cobra* and *NIKE Golf*.

·       ***Event****Nights***—*****special***eventssuch as brand nights, Accomplished Player Nights and Women’s Nights. Our annualWomen’s Night in all of our stores features a ladies only theme and is supportedby The Executive Woman’s Golf Association and the Susan G. Komen Breast CancerFoundation’s Golf for the Cure. Approximately 8,500 women attended the Women’sNight event in April 2006.

·       ***Free Clinics*—**conducted by our PGAprofessionals throughout the year. These clinics are promoted in-store andthrough e-mail to Advantage Club members. Past clinics focused on ball launchmonitor fitting, etiquette, women, juniors and beginners.

In March 2004, we launched our eCommerce Internetsite, *www.GolfGalaxy.com*. Our Internetsite provides another point of contact for our customers, as well as amarketing opportunity and a new sales channel. Frequently visited pages onour Internet site include the store locator, bargain bunker and list ofupcoming in-store events.

In March 2005, we launched multi-purposeInternet kiosks in all of our stores. The kiosks can be used for *www.GolfGalaxy.com*sales, Advantage Club new member sign-ups, and marketing messages to supportour marketing programs.

The GolfWorks is primarily a direct marketer,distributing to its core customers its approximately 200 page catalog twotimes a year and its approximately 50 page supplemental catalog six timesa year.

We developed all of oursales channels to be fully integrated. Products purchased in-store or online through*www.GolfGalaxy.com* may be returnedthrough either channel. Our marketing materials promote the option of shoppingat our stores, using our in-store Internet kiosks, online or through atoll-free telephone number. We are committed to offering our customers a highlevel of convenience and flexibility by offering a quality experience throughwhatever point of contact the customer prefers.

**Purchasing andDistribution**

During fiscal 2006, our five largest vendorsrepresented approximately 60% of our purchases. Three of our vendors thatprovide multiple golf brands, namely Acushnet Company (*Titleist*, *FootJoy*and *Cobra*), Taylor Made GolfCompany (*TaylorMade*, *adidas* and *Maxfli*) and Callaway Golf Company (*Callaway*, *Odyssey*,*Top-Flite* and *Ben Hogan*), each represented more than 10%of our purchases. While we have a centralized purchasing model, all productshipments are delivered by our vendors direct to each store. Ourdirect-to-store distribution eliminates the need for distribution facilities,resulting in faster replenishment to stores and lower distribution costs. Ourdirect-to-store distribution model is a key element of our real estatestrategy. This model has many positive economic benefits and eliminates theneed to support store growth with costly distribution facilities, systems andexcess inventory. We can be highly opportunistic in seeking locations in newmarkets. Since our store inventories are drop-shipped directly from themanufacturer to the stores and, therefore, we are not dependent on regionaldistribution centers, we can 

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take advantage of the bestreal estate opportunities in any market as they occur independent of anydistribution-related constraints.

Our management information system generates suggestedorders using auto-replenishment logic based on historical sales activity, salesforecasts and current inventory levels. Our merchandise planning and controldepartment reviews the system-generated orders and then transmitspurchase orders electronically to our vendors. We implemented a scalable EDIsystem to exchange orders and invoices with our key vendors, which automatesand accelerates replenishment, improves accuracy and reduces costs.

Our store receiving associates count and scandeliveries. We receive products at our stores directly from vendors, minimizinghandling and freight costs. The vendors’ established distribution systemssupport direct store deliveries, which enables us to respond efficiently tochanges in customer product demand and special order requests, as well as toopen stores in geographically separated markets.

We focus on maintaining a current assortment of thelatest golf equipment and apparel from the leading national brands. We are ableto tailor our merchandise assortment at the store level and to respond quicklyto changing customer demands and regional preferences. We used ourauto-replenishment system, electronic order and invoicing and analytical toolsto reduce average store inventory by 10% over the past five years whileimproving our in-stock position.

We operate a distributioncenter in Newark, Ohio that primarily serves The GolfWorks direct to consumer business,but also supports all of our stores with grips, shafts, clubheads and otherclub building supplies. Additionally, we intend to use this distribution centerfor store shipments of merchandise acquired through bulk purchase programsoffered by our vendors, such as “power buys” of prior year’s models or volumediscount purchases.

**Retail Stores andMarkets**

We generally locate our stores in metropolitan areas,targeting key suburban shopping areas with a high concentration of our targetgolf customers. We attempt to open the optimal number of stores in new marketsas quickly as possible to gain advertising efficiency and to achieve theleading market share. We strive to achieve the leading share of the golfspecialty retail market in each of our markets. Our store model is based on aprototype store, which generally ranges from 13,000 to 18,000 selling squarefeet. Our flexible real estate strategy enables us to vary our store size basedon market characteristics, demographics and the availability of suitable sites.Our sophisticated assortment planning and replenishment process allows us toaccommodate varying store sizes, as well as to customize product presentationsto the local market.

***Site Selection.******  ***We selectgeographic markets and store sites on the basis of demographic information,quality of adjacent tenants, store visibility and lease economics. Keydemographics include population density, income levels and golf participationrates in the market. Our internal real estate group, with the assistance oflocal brokers and our sales management team, identify our new storeopportunities. We also have used independent third parties to evaluate marketsand trade areas and to develop first year store sales projections. Generally,we seek to locate our new stores in high traffic retail areas near otherspecialty retailers, such as Bed, Bath and Beyond, Best Buy, Guitar Center andMichaels.

Our store format is highly adaptable, which gives usthe flexibility to lease both second use facilities and build-to-suit locationsas the market dictates. We believe there is ample availability of real estateat reasonable occupancy costs to accommodate our future growth. Also, based onthe demographic profile of our core customer, many national landlords arepursuing us as a tenant.

Our growth strategy is to open stores in both new andexisting markets. In existing markets, we plan to fill in stores, whereappropriate, to take advantage of economies of scale in advertising, promotionand sales management costs.

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***Store Construction.******  ***Typically, ournew store construction costs range from $800,000 to $950,000 for leaseholdimprovements, store fixtures and technology. Often these costs are partiallyoffset by tenant allowance funds we receive. For some new stores, however, wemay receive no tenant allowance funds. Costs to build future stores may varydepending on the costs of construction within a particular market, the initialcondition of the space when we take possession, or changes we may make in thelayout or fixtures within our store.

Generally, it takesapproximately 90 days to open a new store from the date we take possessionof the property. Prior to and during that time, we finalize the architecturaldrawings and receive construction permits, complete the leasehold improvements,install the store fixtures and technology, merchandise the store withinventory, and hire and train new employees.

**Retail StoreOperations**

We design our hiring, training and compensationprograms to reinforce our focus on superior customer service and honest, expertadvice. We designate our sales associates as “Player’s Assistants” and ourcorporate headquarters is named the “Retail Support Office” to emphasize ourfocus on the customer.

***Store Staffing.******  ***We staff eachof our stores with a store general manager, a PGA professional, either two orthree assistant store managers depending on store size and a receivingassociate. In addition, we generally employ 20 to 30 sales associates in ourstores who assist our customers with their purchases. Approximately 25% of thestore staff is full-time, with the remainder part-time or seasonal.

***Regional and StoreManagement.******  ***Our store operations are divided intosix districts having seven to ten stores each. We operate our stores on adecentralized basis, pushing decisions as close to the customer as possible. Wehave one regional sales manager who has responsibility for three districtswithin the region, each of which is managed by a district manager. The regionalsales manager and the three other district managers report directly to ourSenior Vice President-Sales and Operations. District managers are located inthe markets and have significant authority and control over their business.Store general managers are responsible for the successful operation of theirstore, including profitability, and have significant input on marketing andproduct assortments in coordination with our centralized operations in thecorporate headquarters. The store general managers are also responsible formaintaining competitive pricing in their market.

***Hiring and Training.  ***Weattempt to recruit and hire store associates who share our passion for golf.Our extensive product assortments, interactive store format, non-commissionselling strategy and positive culture appeal to a wide range of potentialcandidates and allow us to attract and retain high quality, experienced storeassociates and PGA professionals. Our turnover rate in fiscal 2006 forfull-time store associates was approximately 20%, significantly below theretail industry average of approximately 60% as reported by the National RetailFederation and adjusted for similarly staffed stores.

We supplement our sales associates’ personal golfknowledge and experience with several training programs. We designed ourproprietary DVD-based sales training program to teach selling skills and createa consistent approach in all stores. Our vendors conduct product training usingin-store seminars and one-on-one sessions. We train and test our hardlinessales associates so that they may earn our exclusive “GETfit Expert” designation,which identifies those associates who have the technical expertise to customfit customers and elevates their pay scale. We offer a similar program to trainour Club Tech technicians to provide club repair and upgrade services. Further,the PGA professional, hardlines manager and store general manager from each ofour stores are required to complete a one-week components training program atThe GolfWorks.

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Our in-store PGA professionals are all fully trainedas defined by the PGA. Additionally, we send our PGA professionals to themanufacturers’ factories for extensive product and club-fitting training andfor certification with several key club manufacturers, including *Callaway*, *TaylorMade*, *NIKE Golf*and *PING*. Our PGA professionalsare responsible for supervision of our in-house club fitting certificationprogram.

We are committed to creating an environment ofopportunity for our associates that we believe fosters a motivated andenthusiastic culture. We have promoted over 90% of our current store generalmanagers from within the organization. We provide management training to ourexisting and future store general managers regularly at our corporate headquarters.In addition, we have developed and implemented a comprehensive training programfor our sales associates. The training, emphasizing customer service andproduct knowledge, uses custom videos and printed materials for consistencyacross our store base.

***Compensation.******  ***We compensateour store teams with competitive salaries and hourly wages. We believe that ournon-commissioned sales approach is key to providing a superior level ofcustomer service and knowledgeable advice. In addition to a base salary, thestore general managers, assistant store managers and PGA professionals havemonthly bonus opportunities based on the sales and gross profit budgets andcontrollable expenses of their respective stores. Our district managers receivea base salary and are eligible for an annual bonus based on our achievingannual corporate profitability goals. All of our store managers, PGAprofessionals and district managers also participate in our stock incentiveplans. We also have monthly, team-based contests and bonus incentives, which webelieve create a team selling approach that delivers a positive shoppingexperience for our customers.

***Hours.******  ***Our stores areopen seven days a week, generally from 10:00 a.m. until 9:00 p.m.Monday through Friday, 9:00 a.m. to 8:00 p.m. on Saturday, and 10:00 a.m.to 6:00 p.m. on Sunday, except during the year-end holiday season when weextend our hours of operation. In some markets, we vary the hours slightlybased on local conditions or seasonality.

**Information Systems**

Our information systemsprovide corporate management and store general managers with daily informationon sales, gross profit rate and inventory levels. Our point of sale system andcore management information system is a fully integrated solution from RetailPro, a provider of inventory control/POS software for small to mid-tierretailers. We have developed additional functionality utilizing informationprocessing tools from third party providers. We have implemented EDI and otherelectronic order transmission and invoicing with most of our key productvendors. Our eCommerce Internet site is hosted by a third party and isintegrated with our core Retail Pro system. We also have a third party databasemanagement relationship to support our Advantage Club and automated specialorder processes. We believe our systems are scaleable and have the capacity tohandle our growth plans.

**Our Industry andCompetition**

***Industry.  ******According to the NGF, anindependent industry research firm, the aggregate size of the U.S. golf marketwas estimated at $24.3 billion in 2002 (the last year reported), whichincluded spending on greens fees, equipment and accessories, and food andbeverages. Golf clubs, balls, bags, gloves and footwear represented$4.7 billion of this total. The golf market, as defined by the NGF, doesnot include certain products that we sell such as pre-owned clubs, golf andcasual apparel, and golf-related gifts, novelties and services. We estimate thetotal golf market we serve, including these additional products and services,is over $7.5 billion.***

Over the past 30 years, the golf industry hasexperienced significant growth in participation and popularity. According tothe NGF, the number of Americans who play golf has increased from11.2 million in 1970 to 27.3 million in 2004. However, the number ofadult Americans who played golf in the years 2000 through 2004 was relativelyflat, and the number of golfers actually decreased from 28.4 million in 2003 to

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27.3 million in 2004. TheNGF study of the number of golfers in 2004 has a margin of error of plus orminus 1.1 million golfers.

Theindustry also has experienced long-term increases in the number of roundsplayed per year, increasing from 266.0 million in 1970 to495.0 million in 2003. According to the NGF, after many years of growth inrounds played, the number of rounds played declined slightly from 2001 to 2003due, we believe, to a number of factors including a decline in the stockmarket, a weak economy, reduced leisure travel and unseasonable weather. TheNGF reported in 2006 that, using a measure of rounds played based on same coursesales, rounds played increased by 0.7% in 2004 over rounds played in 2003, andstayed relatively flat with a 0.1% decrease in 2005 compared to 2004. Accordingto the NGF, from 1994 to 2002, the off-course golf specialty store channelgained market share among avid golfers from the general sporting goods storesand mass merchants. In addition, according to the NGF’s 2002 survey, the off-coursegolf specialty store channel is the number one golf retail channel for clubsand balls among avid golfers and customers spending at least $1,000 per year ongolf-related purchases.
| **GOLF PARTICIPATION RATE****(1)**                                                                                                                                                                                                                                                                                         |   | **ROUNDS PLAYED**(1)                                                                                              |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                            |   |                                                                                                                   |
| Source: National  Golf Foundation                                                                                                                                                                                                                                                                                          |   | Source: National Golf Foundation                                                                                  |
|                                                                                                                                                                                                                                                                                                                       |   |                                                                                                              |
| (1)     Prior to 1990,  the NGF included everyone five years of age or older that played one round or  more on a regulation-length course. However, from 1990 to 2004, the NGF  limited the study to those golfers age 18 and older and included golfers who  played one or more rounds on any course. |   | (1)     The most recent  available data on total rounds played was published in 2003.

  |

 

***Growth Drivers.******  ***We believe thepopularity of golf and the sale of golf equipment, apparel and accessories, isinfluenced by, among other things, the following factors:

·       ***Growth in golf course facilities.  ***Accordingto the NGF, the number of golf course facilities has grown by 1,978 facilitiesover the last ten years, from 14,074 in 1995 to 16,052 in 2005, although thegrowth trend has slowed in recent years. Most of this growth is attributable tonew public or daily fee courses, which in 2005 represented approximately 73% ofall golf course facilities, significantly improving access to the game.

·       ***Favorable demographic trends.  ***The agingof the sizable baby boomer population segment should continue to have apositive impact on golf equipment spending as those golfers ages 45 to 64 spendmore than the average golfer. According to the NGF, in 2002, 45- to 64-yearolds accounted for approximately 38% of golf equipment spending though theyrepresented only 32% of golfers. Given the expected 30% increase in populationfor this age demographic from 2000 to 2010, sales of golf equipment may bepositively affected.

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| **DISTRIBUTION OF GOLFERS BY AGE AND** | ** ** | **POPULATION SHIFTS BY AGE (2000-2010)** |
|----------------------------------------|------------|------------------------------------------|
| **SPENDING  IN 2002**                  | ** ** |                                     |
| ** **                             | ** ** |                                     |
| **Age**                                | ** ** | ** **                               | ** ** | **Number of  Golfers** | ** ** | **Equipment  Spending** | ** ** |  |
| 18-29                                  |       |                                     | 22 | % |   |   | 16 | % |   |
| 30-44                                  |       |                                     | 34 | % |   |   | 36 | % |   |
| 45-64                                  |       |                                     | 32 | % |   |   | 38 | % |   |
| 65+                                    |       |                                     | 12 | % |   |   | 10 | % |   |
| **Total**                              | ** ** | ** **                               | **100** | **%** | ** ** | ** ** | **100** | **%** | ** ** |
| ** **                             | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Source: National Golf Foundation       | ** ** |
| ** **                             | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | Source:  U.S. Census Bureau |

 

·       ***Industry initiatives.  ***Over the past fewyears, there have been numerous initiatives supported by the PGA, LPGA, USGA,World Golf Foundation and others to increase golf participation. These includeprograms designed to introduce golf to juniors, programs offering discounted orfree introductory lessons to beginning golfers, and numerous programs designedto attract, develop and retain golfers.

·       ***Increased visibility.  ***We believe thevisibility of golf and golf equipment has been enhanced by increased mediacoverage of professional and other golf tournaments and events, greaterexposure on television including The Golf Channel, an increased number of tourand special events and outings, and the emergence of superstars such as TigerWoods, Annika Sorenstam and Michelle Wie. In addition, we believe advertisingand promotions by equipment manufacturers have increased, and high profilesporting goods manufacturers, such as *Nike*,have entered the golf equipment market.

·       ***Significant technological advances in golf equipment.  ***Overthe past ten years, there have been significant technological advances in clubhead and shaft construction, design and materials. The continuous introductionof this improved technology, together with advertising and promotions byequipment manufacturers emphasizing the importance of equipment to one’s game,has encouraged golfers to change equipment frequently and made golf moreenjoyable for the average player.

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***Retail Channels ofDistribution.******  ***The retail channel for golf-relatedequipment, apparel and accessories is highly competitive and fragmented.According to the NGF, in 2003, there were 6.0 million avid golfers—golferswho played more than 25 rounds per year. Avid golfers represented 23% of allgolfers and were responsible for 57% of all golf equipment purchases in theU.S. in 2002. In addition, according to the NGF, avid golfers purchased moreclubs and balls in 2002 through the off-course specialty retail channel thanthrough any other channel. The off-course specialty retail channel also has gainedmarket share from the other channels.

**SPENDING BY CHANNEL IN 2002***
| **Channel of Distribution** | ** ** | ** ** | ** ** | **Clubs** | ** ** | **Balls** | ** ** |
|---------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|
| Off-Course  Specialty                 |       |       | 53         | %         |       |      | 42         | % |   |
| On-Course                             |       |       | 32         | %         |       |      | 24         | % |   |
| Sporting Goods                        |       |       | 3          | %         |       |      | 15         | % |   |
| Mass Merchant                         |       |       | 2          | %         |       |      | 8          | % |   |
| Mail Order                            |       |       | 2          | %         |       |      | 1          | % |   |
| Internet                              |       |       | 2          | %         |       |      | 1          | % |   |
| Warehouse Club                        |       |       | 2          | %         |       |      | 4          | % |   |
| Other                                 |       |       | 4          | %         |       |      | 5          | % |   |
| Total:                                |       |       | 100        | %         |       |      | 100        | % |   |

----

Source:National Golf Foundation

*                    Includesavid golfers and customers spending at least $1,000 per year on golf-relatedpurchases.

***Competition.******  ***The golfretail industry is highly competitive. Our stores compete against other off-coursespecialty retail chains, franchise and independent golf retailers, on-coursepro shops, general sporting goods retailers, mass merchants, catalog andInternet-based retailers and warehouse clubs. General sporting goodsretailers and mass merchants continue to increase their assortments of golfclubs, balls and accessories, particularly in low end, high turnovermerchandise. Similarly, department stores and apparel specialty stores areexpanding their assortments of golf apparel.

We compete principally on the basis of breadth anddepth of product selection, brands, customer service, shopping experience,store location and pricing. We believe our extensive selection of leadingnational brands and high quality pre-owned clubs, commitment to superiorcustomer service, in-store PGA professionals, The GolfWorks store-in-store, interactivesuperstore format, distinctive marketing program, guaranteed low prices andexperienced management team position us to meet current and future competitivechallenges. See “Business—Competitive Strengths.”

Our principalcompetitors include the following:

·       ***Off-course golf specialty retail chains*—**suchas Golfsmith, Edwin Watts and 2nd Swing

·       ***Franchise and independent golf retailers*—**suchas Nevada Bob’s, Pro Golf Discount and Golf USA

·       ***On-course pro shops*—**found at country clubs,public golf courses and other golf facilities

·       ***General sporting goods*—**such as Dick’sSporting Goods and The Sports Authority

·       ***Mass merchants and warehouse clubs*—**such asWal-Mart, Target and Costco

·       ***Catalogs and Internet-based retailers—***suchas Golfsmith, Edwin Watts and The Golf Warehouse

***Off-course golfspecialty retail chains*****—*****These***stores vary greatly in size and strategy, as well asgeographic location. Some also employ large format stores and some focus onprivate label brands and 

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components for the clubbuilder market. Most of these competitors do not have PGA professionals andservices or demonstration and trial facilities. Most of these stores offerlimited apparel and have limited access to the leading national brands of golfapparel.

***Franchise******and independent golf retailers—******These***are generallysmall stores from 2,000 to 5,000 square feet, positioned in secondarylocations. We believe these stores often offer a more limited selection anddepth of inventory. Many promote sales of their private label or lesser-knownbrands with a commissioned sales staff and have no PGA professionals andservices or demonstration and trial facilities.

***On-course pro shops—******These***retailersare located at golf courses or other golf facilities such as driving ranges.They stock very little inventory in clubs or equipment, instead focusing theirmerchandising on the apparel category. These shops generally have PGAprofessionals on-staff but many do not have video lessons, ball launch monitorsor club repair facilities.

***General******sporting goods*****—**These stores are typically 20,000 to 100,000 squarefeet and offer a broad selection of sporting goods merchandise covering avariety of categories, including golf. These stores seek to combine numerousspecialty shops under one store format. Prices at these stores are generallycompetitive; however, we believe the amount of space devoted to golf productslimits the extent of their offering. These retailers often do not have accessto certain of the leading national brands in both clubs and apparel. Most donot have PGA professionals and services or demonstration and trial facilities.

***Massmerchants and warehouse clubs*****—**These stores typicallyrange in size from 50,000 to over 200,000 square feet. Golf products representa very small portion of their retail square footage and their total sales. Webelieve that their product selection and access to the leading national brandsare more limited than in our stores and that these stores offer minimal levelsof customer service.

***Catalog******and Internet-based retailers*****—**These retailers sell a broad selection of merchandisethrough the use of catalogs and the Internet. The products are competitivelypriced and the direct channel offers relative convenience to customers.However, catalog and Internet retailers are not able to provide the hands-onproduct testing, fitting or face-to-face customer service and support offeredin our retail stores. Since fiscal 2004, we have been able to compete directlywith these retailers through our interactive eCommerce Internet site, *www.GolfGalaxy.com*, which features our low-price guarantee.In addition, we believe our recent acquisition of The GolfWorks will strengthenour competitive position in the direct channel. The GolfWorks, with over30 years of experience as a direct marketer, offers products that include a complete complement of proprietary clubheaddesigns, as well as a full selection of name brand shafts and grips, soldprimarily through its eCommerce Internet site, *www.GolfWorks.com*,and catalogs.

**Golf Town Canada**

Golf Town Canada Inc., founded in 1998, is a golfspecialty retailer operating stores across Canada and employing a salesstrategy similar to ours. In 1998, we entered into a consulting agreement withGolf Town Canada, then privately held, pursuant to which, among other things,we received common stock in Golf Town Canada. In October 2004, we amendedthe consulting agreement to clarify several restrictive covenants. We agreednot to provide consulting services in Canada, enter into any franchiseagreement in Canada, or open a retail store in Canada until 2008, and Golf TownCanada agreed that it will not advertise outside of Canada until 2008, competewith us except in Canada until 2010, or open any retail stores in the UnitedStates until 2013. In connection with our acquisition of The GolfWorks and itsCanadian business, we may be in violation of our noncompete obligations to GolfTown Canada. However, the amount of affected business is an immaterial amountof The GolfWorks’ net sales. Neither we nor Golf Town Canada will solicit theemployees of the other until 2010.

In November 2004,Golf Town Canada reorganized through a newly formed income trust as part of itsinitial public offering as a Canadian income fund. In connection with thattransaction, we sold all our 

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sharesof Golf Town Canada for approximately $8.4 million and terminated our formalrelationship with Golf Town Canada other than the previously described,on-going restrictions in the amended consulting agreement.

**Employees**

As of February 25,2006, we had approximately 1,460 employees, of whom approximately 440, or 30%,were employed on a full-time basis. Our remaining employees are part-time andseasonal employees, working primarily as sales associates. We consider ourrelationship with all of our employees to be good. None of our employees iscovered under a collective bargaining agreement.

**Proprietary Rights**

We have registered ourGolf Galaxy logo and each of *Golf Galaxy*, *Everything for the Game.*, *Outward 9*and *Rae’s Creek* as a service mark ortrademark, as applicable, with the United States Patent and Trademark Office. Inaddition, The GolfWorks has registered various trademarks and service marks inthe U.S., including *The GolfWorks*, *Maltby* and *Maltby Design*,  and *The GolfWorks*has also been registered in Canada, Japan and the U.K.

**Seasonality**

Our business is subject toseasonal fluctuation, with the highest sales activity occurring during ourfirst and second fiscal quarters, the spring and summer golf seasons, whichinclude the Father’s Day weekend, our biggest weekend of the year. We alsoexperience increased demand in our fourth fiscal quarter, during the holidayseason. Our customers’ demand for our products and, therefore, our sales, canbe significantly impacted by unseasonable weather conditions that affectoutdoor activities.

**Customers**

We do not have asignificant concentration of sales with any individual customer and, therefore,the loss of any one customer would not have a material impact on our business.No single customer has accounted for 10% or more of our business.

**Availableinformation**

We are subject to the reporting requirements of theSecurities Exchange Act of 1934 (Exchange Act) and its rules andregulations. The Exchange Act requires us to file reports, proxy statements andother information with the United States Securities and Exchange Commission(SEC). Copies of these reports, proxy statements and other information can beread and copied at:

SEC Public Reference Room450 Fifth Street, N.W.Washington, D.C. 20549

Information on the operation of the Public Reference Room maybe obtained by calling the SEC at 1-800-SEC-0330.

The SEC maintains an Internet site that containsreports, proxy and information statements, and other information regardingissuers that file electronically with the SEC. These materials may be obtainedelectronically by accessing the SEC’s Internet site (*http://www.sec.gov*).

We make available, free of charge on our Internetwebsite, our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to these reports filed orfurnished pursuant to Section 13(a) or 15(d) of the ExchangeAct, as soon as reasonably practicable after we 

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electronically file suchmaterial with, or furnish it to, the SEC. These documents are posted on ourInternet website at *www.GolfGalaxy.com*—under“Investors,” select the “SEC Filings” link.

We also make available, free of charge on our Internetwebsite, the charters of the Audit Committee, Compensation Committee and theNominating and Governance Committee. These documents are posted on our Internetwebsite at*www.GolfGalaxy.com*—under“Investors,” select the “Corporate Governance” link.

Copies of any ofthe above-referenced information will also be made available, free of charge,by calling (952) 252-1339, by sending an email to *investor@golfgalaxy.com* or upon writtenrequest to:

Investor RelationsGolf Galaxy, Inc.7275 Flying Cloud DriveEden Prairie, MN 55344

**Item 1A.**                RiskFactors.

This Report contains forward-looking statements thatare based on our beliefs, assumptions and expectations of future events takinginto account the information currently available to us. All statements otherthan statements of historical fact contained in this Report are forward-lookingstatements. These statements involve known and unknown risks, uncertainties andother factors that may cause our actual results, performances, financialcondition or achievements to differ materially from the expected futureresults, performances, financial condition or achievements as expressed orimplied in any forward-looking statements. In some cases forward-lookingstatements can be identified by terms such as “anticipates,” “believes,” “estimates,”“expects,” “intends,” “plans,” “seeks,” “predicts,” “projects,” “strives,” “potential,”“objective,” “may,” “could,” “should,” “would,” “will” and similar expressionsintended to identify forward-looking statements. Forward-looking statementsreflect our current views with respect to future events, are based on ourassumptions and are subject to risks and uncertainties. Given theseuncertainties, readers should not place undue reliance on these forward-lookingstatements.

Our forward-looking statements speak only as of thedate of this Report. We assume no obligation to update or revise anyforward-looking statements publicly, or to update the reasons actual resultscould differ materially from those anticipated in any forward-lookingstatements, even if new information becomes available in the future.

Our business is subject tonumerous risks as discussed more fully below. If any of the following risksactually occur, our business, financial condition, operating results or cashprovided by operations could be materially harmed. The following factors, amongothers, could cause our actual financial performance to differ materially fromthat expressed in any forward-looking statement.

**A decline in the popularity of golf or the market forgolf-related products and services could materially adversely affect our netsales and profitability.**

We generate substantiallyall of our net sales from the sale of golf-related equipment, apparel andservices. The demand for our products and services is directly related to thepopularity of golf, including the number of golf participants, the number ofrounds of golf being played by these participants, and television viewership ofand attendance at professional and other golf tournaments and events. Accordingto the NGF, the number of golf rounds played declined slightly from 2001 to2003 due, we believe, to a number of factors including a decline in the stockmarket, a weak economy, reduced leisure travel and unfavorable weather. Further,according to the NGF, rounds played increased by 0.7% from 2003 to 2004 anddeclined 0.1% in 2005. If golf participation or golf rounds playedsignificantly decreases, sales of our products and services could be materiallyadversely affected. We depend on the exposure of the brands we sell toreinforce the quality of the products we sell. Any significant reduction intelevision coverage of 

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professionalor other golf tournaments and events, or any other significant decreases ineither attendance at golf tournaments or viewership of golf tournaments, willreduce the visibility of the brands we sell and could materially adverselyaffect our net sales and profitability.

**If our key suppliers limit the amount or variety ofproducts they sell to us or provide us less favorable pricing, allowances orother terms, our sales and profitability could be materially adverselyaffected.**

We rely on a limitednumber of suppliers of the leading national brands in golf for a majority ofour sales. During fiscal 2006, we purchased approximately 60% of our merchandisefrom our five largest suppliers. Three of our suppliers that provide multiplegolf brands, namely Acushnet Company (*Titleist*,*FootJoy* and *Cobra*), Taylor Made Golf Company (*TaylorMade*, *adidas* and *Maxfli*)and Callaway Golf Company (*Callaway*,*Odyssey*, *Top-Flite* and *Ben Hogan*), each represented more than 10% of our purchases.Our extensive assortment of leading national brand merchandise is one of ourkey competitive strengths. Our customers expect to find the leading nationalbrands and the newest products in the market in our stores. We are also subjectto risks, such as the unavailability of raw materials, labor disputes, unionorganizing activity, strikes, inclement weather, natural disasters, war andterrorism, and adverse general economic and political conditions, as well asthe high demand for popular products, that might limit our suppliers’ abilityto provide us with quality merchandise on a timely basis. Due to our extensivepurchases of merchandise, we benefit from vendor pricing allowances and marketingsupport in the ordinary course of business. We have no long-termcontractual arrangements providing for continued supply, pricing, allowances orother terms from our key suppliers and our suppliers may discontinue selling tous, or may alter pricing, allowances or other terms at any time. If oursuppliers refuse to distribute their products to us, limit the amount orvariety of products they distribute to us, or provide us with less favorablepricing, allowances or other terms, our sales and profitability may bematerially and adversely affected.

**Our sales and profitability could be materiallyadversely affected if our suppliers fail to develop and introduce new productsor if the introduction of new products results in excessive close-outs ofexisting inventories.**

Our future success willdepend, in part, upon our suppliers’ continued ability to develop and introduceinnovative products in the golf equipment market that appeal to our customers.The success of new products depends in part upon the various subjectivepreferences of golfers, including a golf club’s “look and feel,” and the levelof acceptance that the golf product has among professional and recreationalgolfers. The subjective preferences of purchasers of golf products aredifficult to predict and may be subject to rapid and unanticipated changes. Ifour suppliers fail to successfully develop and introduce innovative and popularproducts on a timely basis, then our net sales and profitability may bematerially adversely affected. If our suppliers introduce new products toorapidly, however, it could result in close-outs of existing inventories.Close-outs can result in reduced margins on the sale of older products, as wellas reduced sales of new products given the availability of older products atlower prices. These reduced margins and sales may materially adversely affectour results of operations.

**Our operating results are subject to seasonalfluctuations which could cause the market price of our common stock to decline.**

Our business is highlyseasonal. Our sales during our first two fiscal quarters of each year, whichinclude Father’s Day, and our sales during the year-end holiday selling season,have historically contributed and are expected to continue to contribute adisproportionate percentage of our net sales. Our occupancy costs, which areincluded in cost of sales, and a significant portion of our store operatingexpenses and general and administrative expenses, do not vary proportionatelywith fluctuations in net sales. As a result, all our income from operations hasbeen generated during the first two fiscal quarters of the year, and we expectthis seasonality to continue. In addition, we expect quarterly fluctuations inour operating results to continue as a result of seasonal demand in ourmarkets. Such patterns may change, 

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however,as a result of entering new markets. We also make decisions regardingmerchandise well in advance of the season in which it will be sold,particularly for Father’s Day and the year-end holiday selling season. We incursignificant additional expenses in our first two fiscal quarters and the December holidayseason in anticipation of higher sales in those periods, including acquiringadditional inventory, preparing and mailing our direct mail pieces, advertising,creating in-store promotions and hiring additional employees. This seasonalitymay result in volatility or have an adverse effect on the market price for ourcommon stock.

**Ourprofitability may be materially adversely affected due to weather conditions inour markets.**

The golf season and thenumber of rounds played in the markets in which our stores are locatedfluctuate based on, among other things, the weather. In the event ofunseasonable weather in our markets, our net sales may be lower. In addition,if our net sales during our peak seasons are lower than we expect for anyreason as a result of weather or otherwise, we may not be able to adjust ourexpenses and inventory in a timely fashion. As a result, our profitability maybe materially adversely affected.

**Ourcurrent concentration of stores makes us highly susceptible to adverse conditions inthese regions, including unseasonable weather, which could materially adverselyaffect our sales and profitability.**

Most of our stores arelocated in midwestern and northeastern states. As a result, our operationscould be more susceptible to regional factors than the operations of moregeographically diversified competitors. These factors include regional economicand weather conditions, natural disasters, and demographic and populationchanges in the states in which we operate. If these regions were to suffer aneconomic downturn, unseasonable weather or other adverse event, our operatingresults could be materially adversely affected.

**If wecannot successfully implement our growth strategy, the profitability of ourcompany as a whole couldbe materially adversely affected.**

Our growth strategy willrequire the deployment of a significant amount of capital and may not beprofitable. We opened no new stores in fiscal 2003. During fiscal 2004, weopened four new stores. During fiscal 2005, we opened ten new stores andprepared to open eleven new stores in the first quarter of fiscal 2006. Duringfiscal 2006 we opened 16 new stores and prepared to open 11 new stores in thefirst quarter of fiscal 2007, nine of which have already been opened.

Our average net cashexpenditure needed to open a new store is approximately $1.2 million, whichincludes the cost of fixed assets, inventory and preopening expenses, and thereductions from landlord allowances and vendor accounts payable. We plan toopen a total of 14 to 16 new stores in fiscal 2007, of which nine have alreadybeen opened. In addition, we plan to open 16 to 18 new stores in fiscal 2008.These amounts are estimates and actual store opening costs may vary.

Theability to open new stores, the related opening costs and the profitability ofour new stores are subject to various contingencies, some of which are beyondour control. These contingencies include our ability to:

·       locatesuitable store sites;

·       negotiateacceptable lease terms;

·       buildout or refurbish sites on a timely and cost-effective basis;

·       hire,train and retain skilled managers and PGA professionals;

·       hiresales associates;

·       obtainadequate capital resources; and

·       integratenew stores into existing operations successfully.

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We intend to open additional stores in some of ourexisting markets. Because our stores typically draw customers from their localareas, a new store may draw customers away from nearby existing stores and maycause sales performance and customer counts at those existing stores todecline, which may materially adversely affect our overall operating results.

We also intend to open stores in new markets. Therisks associated with entering a new market include difficulties in attractingcustomers due to a reduced level of customer familiarity with our brand, ourlack of familiarity with local customer preferences, seasonal differences inthe market, and difficulties in hiring a sufficient number of qualified storeassociates. In addition, entry into new markets may bring us into competitionwith new, unfamiliar competitors or with existing competitors with a large,established market presence. We cannot assure you that we will be successful inoperating our stores in new markets on a profitable basis. If we are not, thenthe profitability of our company as a whole may be materially adverselyaffected.

In addition to these risksand uncertainties, our new stores may add strain on our management informationsystems and may divert our management’s attention from existing operations. Wecannot assure you that our new stores will be a profitable deployment of ourcapital resources. If any of our new stores are not profitable, then theprofitability of our company as a whole may be materially adversely affected.

**Competition in the golf and sporting goods retailindustry and from prospective competitors could materially adversely affect oursales and profitability.**

The retail market forgolf-related products and services is highly fragmented and competitive. Ourcurrent and prospective competitors include companies that have substantiallygreater market presence, name recognition, and financial, marketing and otherresources than we do and may be able to devote greater resources to sourcing,promoting and selling their products. We compete with the following categoriesof companies: other golf specialty retailers, on-course pro shops, catalog andInternet retailers, franchise and independent golf retailers, general sportinggoods retailers and mass merchants. Traditional and golf specialty retailersare expanding more aggressively in marketing leading national brand golfequipment, thereby competing directly with us for products, customers andlocations. In addition, some of our key suppliers have begun to operate retailstores or Internet sites that sell directly to consumers and may compete withus and reduce our sales. Pressure from our competitors could require us toreduce our prices or increase our spending for advertising and promotion whichwould erode our margins. As a result of this competition, we may experiencelower sales or greater operating costs, such as marketing costs, which wouldhave a material adverse effect on our profitability.

**A declinein discretionary consumer spending could harm our operating results.**

Our products are recreational in nature and,therefore, are discretionary purchases for consumers. Consumers are generallymore willing to make discretionary purchases of golf-related products andservices during favorable economic conditions. Discretionary spending isaffected by many factors, including, among others, general business conditions,interest rates, inflation, consumer debt levels, the availability of consumercredit, taxation, stock market performance, unemployment trends, terroristattacks and acts of war and other matters that influence consumer confidenceand spending.

Our customers’ purchasesof discretionary items, including our products and services, could declineduring periods when disposable income is lower or periods of actual or perceivedunfavorable economic conditions. If this occurs, our operating results may bematerially adversely affected.

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**The growth of our business will be dependent uponthe availability of adequate capital.**

The growth of our businesswill depend on the availability of adequate capital, which in turn will dependin large part on cash flow generated by our business and the availability ofequity and debt financing. We cannot assure you that our operations willgenerate positive cash flow or that we will be able to obtain equity or debtfinancing on acceptable terms or at all. Our credit facility containsprovisions that restrict our ability to incur additional indebtedness or makesubstantial asset sales that might otherwise be used to finance our expansion.The security interests in our inventory and financial assets that secure ourobligations under the credit facility may further limit our access to certaincapital markets or lending sources. The actual availability of funds under ourcredit facility is limited to specified percentages of our eligible inventory.Accordingly, opportunities for increasing our cash on hand through sales ofinventory would be partially offset by reduced availability under our creditfacility. As a result, we cannot assure you that we will be able to finance ourcurrent expansion plans.

**We may be subject to product warranty claims, productrecalls and disruption in the supply of component parts used inThe GolfWorks manufacturing operations that could harm our results ofoperations.**

The GolfWorks manufactures a proprietary line of clubcomponents and club making tools and supplies for sale to our customers. Italso assembles finished clubs for sale under the *Maltby*and *Maltby Design* brands, as well as forsale by others under their brands. We may be subject to additional risks,including product liability claims, product recalls and disruption in thesupply of parts used in the manufacture and assembly of these products, whichcould have a material adverse impact on our results of operations. In addition,while we believe there are sufficient alternative sources to manufacture ourgolf club components, if any of our current suppliers were to become unable tosupply us products, we could experience delays in our ability to secure a replacementsupplier which could materially adversely affect our financial performance.

**If we lose the services of key members of ourmanagement team, we may not be able to manage our operations and implementour growth strategy effectively.**

Our future success depends,in large part, on the efforts and abilities of our executive management team,including our Chief Executive Officer and co-founder, Randall K. Zanatta; ourChief Operating Officer and co-founder, Gregory B. Maanum; our Chief FinancialOfficer, Richard C. Nordvold; our Chief Marketing Officer, Michael W.McCormick; our Senior Vice President—Sales and Operations, Ronald G. Hornbaker;our Senior Vice President—Chief Technology Officer, Research andDevelopment, Ralph D. Maltby and our Senior Vice President—CEO of TheGolfWorks, Mark R. McCormick. Our executive management team may terminate theiremployment with us and are precluded from competing with us for only six monthsafter such termination (although in connection with our acquisition of TheGolfWorks, Mr. Maltby and Mr. Mark R. McCormick agreed not to compete withus for five years). We do not maintain key person insurance on any employeesexcept for Messrs. Zanatta and Maanum. If we lose the services of one ormore of our key executives, we may not be able to manage our businesssuccessfully or achieve our growth objectives. As our business grows, we willneed to attract and retain additional qualified management personnel in atimely manner.

**We rely heavily on our management information andother systems for inventory management, distribution and other functions. Ifour systems fail to perform these functions adequately or if we experience aninterruption in their operation or security, our business and results ofoperations could be materially adversely affected.**

The efficient operation of our business is dependenton our management information systems. We rely heavily on our management informationsystems to manage order entry, order fulfillment, point-of-sale and inventoryreplenishment processes. The failure of our management information systems toperform as we anticipate could disrupt our business and could result indecreased sales, increased 

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overhead costs, excessinventory and product shortages, causing our business and results of operationsto be materially adversely affected.

In addition, ourmanagement information systems are vulnerable to damage or interruption from:

·       earthquake,fire, flood and other natural disasters; and

·       powerloss, computer systems failure, Internet and telecommunications or data networkfailure.

Any such interruptioncould have a material adverse effect on our business.

**If we areunable to protect the confidential information provided by our eCommercecustomers, our sales and profitability may be materially adversely affected.**

The success of oureCommerce operations depends on the secure transmission of confidentialinformation over public networks. There can be no assurance that advances incomputer capabilities, new discoveries in the field of cryptography, or otherevents or developments will not result in a compromise or breach of thealgorithms we use to protect customer transactions and personal data containedin our customer databases. If any such compromise of our security were tooccur, it could have a material adverse effect on our reputation, business,operating results and financial condition and may cost us additional expense toprotect against such security breaches.

**A disruption in or failure to expand our systemssupporting our eCommerce operations, particularly as our eCommerce sales grow,may materially adversely affect our results of operations.**

Our eCommerce sales willdepend on the number of visitors who shop on our Internet sites and the volumeof orders we can fill on a timely basis. We rely on several third partyproviders to host our Internet sites and support our electronic datainterchange (EDI) system. Technical problems either we or our third partyservice providers experience with our Internet sites or order fulfillmentsystems could materially reduce the volume of goods sold and the attractivenessof purchasing our merchandise through our Internet sites. Also, we or our thirdparty service providers may be required to further expand and upgrade ourtechnology, transaction processing systems and network infrastructure if thereis a substantial increase in the volume of traffic on our Internet sites or thenumber of orders placed by our customers. We cannot assure you that we will beable to project accurately the rate or timing of increases, if any, or be ableto negotiate with our third party providers, to expand and upgrade our systemsand infrastructure to accommodate such increases on a timely basis.

**The adoption of a new GAAP accounting standard foremployee stock options will have a significant adverse effect on the reportingof our results of operations.**

In December 2004, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standards(SFAS) No. 123(R), *Share-Based Payment*,a revision to SFAS No. 123, *Accountingfor Stock-Based Compensation*. SFASNo. 123(R) requires the calculation of the fair value of stock-basedcompensation, estimation of future forfeitures and income taxes, andrecognition of the fair value as a non-cash expense over the vesting period ofthe underlying instruments. SFAS No. 123(R) eliminates the ability toaccount for stock-based compensation transactions using the footnotedisclosure-only provisions of Accounting Principles Board (APB) OpinionNo. 25, *Accounting for Stock Issued toEmployees*, and instead requires that such transactions be recognizedand reflected in financial statements using a fair-value-based method. Weimplemented the provisions of SFAS No. 123(R) effective as ofFebruary 26, 2006 and expect to record substantial non-cash compensationexpenses as a result. Recording these compensation expenses in our financialstatements will have a significant adverse impact on our results of operations.

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**If we donot anticipate and respond to the changing preferences of our customers, wecould be required to take significant markdowns in inventory and our salescould materially decline.**

Our success depends, inlarge part, on our ability to identify and anticipate the changing preferencesof our customers and stock our stores with a wide selection of qualitymerchandise that appeals to their preferences. Our customers’ preferences formerchandise and particular brands vary from location to location, and may varysignificantly over time. We cannot guarantee that we will accurately identifyor anticipate the changing preferences of our customers or stock our storeswith merchandise that appeals to them. If we do not accurately identify andanticipate our customers’ preferences, we may lose sales, which may in turncause us to lose volume purchasing allowances from vendors, or we may overstockmerchandise, which may require us to take significant markdowns on ourinventory. In either case, our sales could significantly decline and ourbusiness and financial results may be materially adversely affected.

**A disruption in the services of our primary commoncarriers or increases in fuel or other charges may decrease our profitability.**

One of our key strategiesis that most of our suppliers distribute their products directly to our retailstores, enabling us to more effectively control the level and mix of inventoryat our stores. We use common carriers for substantially all of our groundshipments of products sold in our stores. Any significant interruption in commoncarrier services due to strikes, terrorism, inclement weather or otherwise,would impede our ability to receive merchandise on a timely basis and maintainappropriate inventory levels and product mixes in our stores. This impedimentcould cause us to lose sales and customers. In the event of such aninterruption, we may not be able to engage appropriate alternatives todistribute our products in a timely manner on equally favorable terms. If weincur higher shipping costs as a result of higher fuel charges or otherwise, wemay be unable to pass these costs on to our customers, which could materiallydecrease our profitability.

**If we areunable to enforce our intellectual property rights, or if we are accused ofinfringing on a third party’s intellectual property rights, our sales andprofitability may be materially adversely affected.**

Our exclusive right to use our trademarks, servicemarks and patents in the U.S. has helped establish our market share. The lossor reduction of any of our significant proprietary rights could hurt ourability to distinguish our stores from our competitors’ stores, causing us tolose significant market share. If we lose market share, our sales andprofitability may be materially adversely affected.

Additionally, thirdparties may assert claims against us alleging infringement, misappropriation orother violations of patent, trademark or other proprietary rights, whether ornot such claims have merit. Such claims can be time consuming and expensive todefend and could require us to cease using and selling the allegedly infringingproducts, which may have a significant impact on our sales and cause us toincur significant litigation costs and expenses.

**We may pursue strategic acquisitions, which couldhave a material adverse impact on our business.**

In March 2006, wecompleted the acquisition of The GolfWorks, an important strategic addition toour business. While we are not currently considering any other acquisitions, wemay from time to time acquire additional complementary businesses, products ortechnologies. Acquisitions may result in difficulties in assimilating acquiredcompanies, and may result in the diversion of our capital and our management’sattention from other business issues and opportunities. We may not be able tosuccessfully integrate companies that we acquire, including their personnel,financial systems, distribution, operations and general store operating procedures.If we fail to successfully integrate acquired companies, our business andfinancial results could suffer. In addition, the integration of any acquiredcompany, and its financial results, into ours may materially adversely affectour operating results.

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**Our net income in fiscal 2004 and fiscal 2005 waspositively impacted by non-recurring items which might cause investors tooverestimate our future net income.**

Our net income in fiscal2005 included a one-time gain on the sale of our Golf Town Canada Inc.stock which increased net income by $5.0 million, after taxes, and our netincome for fiscal 2004 included a non-cash income tax benefit totaling$6.2 million resulting from the reversal of a previously establishedincome tax valuation allowance. These non-recurring items might cause investorsto overestimate net income results in future years if the non-recurring itemsare not fully considered.

**We will be exposed to risks relating to evaluationsof controls required by Section 404 of the Sarbanes-Oxley Act of2002.**

We have commenced a formalevaluation of our internal controls systems to allow management to report on,and our independent auditors to attest to, our internal control over financialreporting. We will be performing the system and process evaluation and testing(and any necessary remediation) required to comply with the managementcertification and auditor attestation requirements of Section 404 of theSarbanes-Oxley Act of 2002. We are required to comply with Section 404by the end of fiscal 2007, other than with respect to The GolfWorks, for whichwe will be required to comply by the end of fiscal 2008. However, we cannot becertain as to the timing of completion of our evaluation, testing andremediation actions or the impact of the same on our operations. Furthermore,upon completion of this process, we may identify control deficiencies ofvarying degrees of severity under applicable SEC and Public Company AccountingOversight Board rules and regulations that remain unremediated. As apublic company, we are required to report, among other things, controldeficiencies that constitute a “material weakness” or changes in internalcontrols that, or are reasonably likely to, materially affect our internalcontrol over financial reporting. A “material weakness” is a significantdeficiency, or combination of significant deficiencies, that results in morethan a remote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected. If we fail to implementthe requirements of Section 404 in a timely manner, we might be subject tosanctions or investigation by regulatory authorities such as the SEC or theNasdaq National Market, and if we fail to remedy any material weakness, ourfinancial statements may be inaccurate, we may face restricted access to thecapital markets and our stock price may be adversely affected.

**Theprice of our common stock may be volatile.**

The stock market ingeneral, and the market for stocks of some retailers, have been highly volatileand, as a result, the trading price of our common stock may fluctuatesubstantially. Investors in our common stock may experience a decrease, whichcould be substantial, in the value of their stock depending on many factors,some of which are beyond our control and may not be related to our operatingperformance. The factors that could cause fluctuations include, but are notlimited to, the following:

·  price and volume fluctuations in the overallstock market from time to time;

·  significant volatility in the market price andtrading volume of the stock of golf specialty, sporting goods and other retailcompanies;

·  actual or anticipated changes in our netincome, fluctuations in our operating results or the failure to meet theexpectations of financial market analysts and investors;

·  investor perceptions of the golf and sportinggoods industry and retail industries in general and our company in particular;

·  the operating and stock performance ofcomparable companies and our competitors;

·  the opening of new stores and the closing ofexisting stores;

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·  general economic conditions and trends;

·  major catastrophic events;

·  changes in accounting standards, policies,guidance, interpretation or principles;

·  unseasonable weather conditions in ourmarkets;

·  loss of external funding sources;

·  adverse events affecting our key suppliers;

·  sales of large blocks of our stock or sales byinsiders; and

·  departures of key personnel.

**Item 1B.**               UnresolvedStaff Comments.

Not applicable.

**Item2.**                        Properties.

**Store Locations**

We currentlyoperate 59 stores in 24 states. All of our stores are leased. We lease all butone of our store facilities from unaffiliated third parties. Initial leaseterms are generally 10 to 15 years and most leases contain multiple five-yearrenewal options and rent escalation provisions.

**Stores Open or Announced As of May 1,2006**

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| **Golf Galaxy Store Locations**        |   | **Nebraska**                             |   | **Oklahoma**                           |
|----------------------------------------|--------|------------------------------------------|--------|----------------------------------------|
| (opening date by fiscal  month;        |   | Omaha (November 2005)               |   | Tulsa (November 2005)             |
| *announced future stores in  italics*) |   | **Nevada**                               |   | Oklahoma City (April 2006)        |
| **Colorado**                           |   | Las Vegas Metropolitan Area              |   | **Oregon**                             |
| ·Park  Meadows                    |   | ·Summerlin  (April 2006)       |   | Portland Metropolitan Area             |
| (November 2005)                   |   | **New Jersey**                           |   | ·Beaverton (November 2003)   |
| **Delaware**                           |   | Philadelphia Metropolitan Area           |   | **Pennsylvania**                       |
| Philadelphia Metropolitan Area         |   | ·Mount  Laurel (March 2005)    |   | Philadelphia Metropolitan Area         |
| ·Christiana  (November 2005) |   | New York City Metropolitan Area          |   | ·Devon  (March 2004)         |
| **Illinois**                           |   | ·Paramus  (March 2006)         |   | Pittsburgh Metropolitan Area           |
| Chicago Metropolitan Area              |   | ·Woodbridge  (April 2006)      |   | ·Robinson  Towne Center           |
| ·Downers  Grove (April 2000) |   | **New York**                             |   | (March 2006)                      |
| ·Naperville  (April 2000)    |   | Rochester (November 2003)           |   | **Tennessee**                          |
| ·Orland  Park (June 2000)    |   | Buffalo (November 2004)             |   | Nashville (November 2004)         |
| ·Schaumburg  (June 2000)     |   | Syracuse (March 2006)               |   | Memphis (April 2006)              |
| ·Vernon  Hills (April 2001)  |   | New York City Metropolitan Area          |   | **Texas**                              |
| ·Gurnee (December 2004)      |   | ·*Westbury (May 2006)*         |   | Dallas Metropolitan Area               |
| ·Skokie  (March 2006)        |   | **North Carolina**                       |   | ·Lewisville  (March 2005)    |
| **Indiana**                            |   | Charlotte (April 2005)              |   | ·Plano  (March 2005)         |
| Indianapolis Metropolitan Area         |   | Raleigh/Durham Metropolitan Area         |   | ·North  Park (April 2005)    |
| ·Castleton  (November 1999)  |   | ·Cary  (March 2005)            |   | Houston Metropolitan Area              |
| **Iowa**                               |   | ·Durham (March 2005)           |   | ·Baybrook  (March 2005)      |
| West Des Moines (November 1998)   |   | **Ohio**                                 |   | ·Willowbrook  (April 2005)   |
| **Kansas**                             |   | Dayton (February 1999)              |   | ·Galleria  (May 2005)        |
| Kansas City Metropolitan Area          |   | Columbus Metropolitan Area               |   | ·Woodlands  (March 2006)     |
| ·Overland  Park (March 2005) |   | ·Tuttle  Crossing (March 1999) |   | San Antonio (February 2005)       |
| **Kentucky**                           |   | Cincinnati Metropolitan Area             |   | **Utah**                               |
| Louisville (November 2004)        |   | ·Eastgate  (April 1999)        |   | Salt Lake City (March 2001)       |
| **Michigan**                           |   | ·Tri County (April 1999)       |   | **Virginia**                           |
| Grand Rapids (June 1998)          |   | Cleveland Metropolitan Area              |   | Virginia Beach (March 2004)       |
| **Minnesota**                          |   | ·Mayfield  Heights  (November  |   | Richmond (May 2004)               |
| Minneapolis/St. Paul Metropolitan Area |   | 1999)                                    |   | Newport News (February 2006)      |
| ·Bloomington  (April 1997)   |   | ·North Olmsted (May 2000)      |   | **Wisconsin**                          |
| ·Roseville  (March 1998)     |   | Akron (March 2003)                  |   | Milwaukee Metropolitan Area            |
| ·Plymouth (July 1998)        |   | *Toledo (May 2006)*                 |   | ·Greenfield  (May 1998)      |
| **Missouri**                           |   |                                     |   | ·Brookfield  (February 2000) |
| St. Louis Metropolitan Area            |   |                                     |   | Appleton (April 2004)             |
| ·Chesterfield  (March 2003)  |   | * *                                 |   |                                   |
| ·Brentwood (March 2004)      |   | ** **                               |   |                                   |

 

Our corporate headquartersis located in Eden Prairie, Minnesota, where we lease from an unaffiliated thirdparty approximately 25,000 square feet of office space, as well asapproximately 23,000 square feet of warehouse space to support our eCommerceoperations. The term of the lease ends in January 2010, subject to afive-year renewal at our option.

The GolfWorks utilizesnearly 80,000 square feet in facilities, including a retail outlet, located on40 acres we own in Newark, Ohio. The GolfWorks also leases a 5,300 square-footfacility, including a retail outlet, in Ontario, Canada to support theoperations of its Canadian subsidiary. The term of the lease ends in October 2010.

**Item 3.**                        LegalProceedings.

Although we are subject tolitigation or other legal proceedings from time to time in the ordinary courseof our business, we are not a party to any pending legal proceedings that webelieve is reasonably likely to have a material impact on our business or ourresults of operations or financial condition.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders.

Not applicable.

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**Executive officersof the registrant**

Thefollowing table sets forth the name, age and positions of each of our executiveand other officers and directors as of May 1, 2006.

| **Name**              | ** ** | ** ** | ** ** | **Age**                                                                        | ** ** | **Position** |
|-----------------------|------------|------------|------------|--------------------------------------------------------------------------------|------------|--------------|
| Randall K. Zanatta*   |       | 48         |       | President, Chief Executive Officer and Chairman                                |
| Gregory B. Maanum*    |       | 44         |       | Chief Operating Officer and Director                                           |
| Richard C. Nordvold*  |       | 35         |       | Chief Financial Officer                                                        |
| Michael W. McCormick* |       | 43         |       | Chief Marketing Officer                                                        |
| Ronald G. Hornbaker*  |       | 47         |       | Senior Vice President—Sales and Operations                                |
| Ralph D. Maltby*      |       | 62         |       | Senior Vice President—Chief Technology Officer,  Research and Development |
| Mark R. McCormick*    |       | 48         |       | Senior Vice President—CEO of The GolfWorks                                |
| Dana J. Busch         |       | 42         |       | Vice President—Merchandising                                              |
| Peter M. Harding      |       | 45         |       | Vice President—Real Estate                                                |
| Scott H. Kurtz        |       | 47         |       | Vice President—Finance and Controller                                     |
| Mary L. Forby         |       | 43         |       | Vice President—Information Technology                                     |
| Jay D. Spencer        |       | 40         |       | Vice  President—Strategic Planning                                        |

----

*                    ExecutiveOfficer

**RandallK. Zanatta** is our President, Chief Executive Officer andChairman of our board of directors. Mr. Zanatta co-founded our companywith Mr. Maanum in December 1995. Before co-founding our company, Mr. Zanattaspent 17 years with Best Buy Co., Inc., a consumer electronicsretailer, from 1979 through 1995, most recently as senior vice president—marketingand merchandising. During Mr. Zanatta’s tenure at Best Buy Co., Inc.,Mr. Zanatta also served on the executive committee, which was the primaryguiding body of the organization.

**GregoryB. Maanum** is our Chief Operating Officer and a director ofour company. Mr. Maanum co-founded our company with Mr. Zanatta in December 1995.Mr. Maanum directly oversees our merchandising and inventory planningfunctions. He also directs our real estate selection process, store design andconstruction activities. In addition, Mr. Maanum has overallresponsibility for our retail sales and operations. Before co-founding ourcompany, Mr. Maanum spent 12 years with Best Buy Co., Inc. from1982 through 1995, most recently as vice president—visual merchandising afterfounding Best Buy’s visual merchandising department.

**RichardC. Nordvold** is our Chief Financial Officer. Mr. Nordvoldjoined our company in March 2004 after spending five years with Best BuyCo., Inc., most recently as director—corporate finance, and six years withArthur Andersen, LLP, an accounting firm, most recently as manager in audit andbusiness advisory services. Mr. Nordvold oversees our finance, accounting,information systems, human resources and administrative functions.

**MichaelW. McCormick** is our Chief Marketing Officer. Mr. McCormickjoined our company in January 2003 after spending three years withCallaway Golf Company, a manufacturer of golf products, as executive vicepresident—global sales, and nine years with Nike, Inc., a manufacturer ofathletic equipment, shoes and apparel, as director—national sales. Mr. McCormickdirectly oversees our marketing, advertising, PGA services and eCommercefunctions. Mr. McCormick is the brother of Mark R. McCormick,our Senior Vice President—CEO of The GolfWorks.

**RonaldG. Hornbaker** is our Senior Vice President—Sales andOperations. Mr. Hornbaker oversees our retail store sales, operations andtraining functions. Mr. Hornbaker joined our company in May 2000after spending six years at Select Comfort Corporation, a manufacturer ofpremium, adjustable-firmness beds, most recently as vice president—operationsand training. During Mr. Hornbaker’s tenure at Select Comfort, Mr. Hornbakerdirected store operations, sales and product training for 341 stores and 

31

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developedthe field infrastructure for multi-store management including sevenregional and 50 district sales managers. Mr. Hornbaker also spent13 years in various sales management positions with Tandy Name BrandRetail Group, a subsidiary of RadioShack Corporation, a consumer electronicsretailer.

**RalphD. Maltby** has been our Senior Vice President—Chief TechnologyOfficer, Research and Development since March 2006. Prior to joining ourcompany, Mr. Maltby founded and spent over 29 years as Chairman ofthe Board of Ralph Maltby Enterprises, Inc. a/k/a The GolfWorks.Mr. Maltby is a leading authority on club design and repair, havingpublished several industry books and articles. In addition, he has been a PGAinstructor for 28 years.

**MarkR. McCormick** has been our Senior Vice President—CEO of TheGolfWorks since March 2006. From June 2001 until joining our company,Mr. McCormick was the Chief Executive Officer of Ralph Maltby Enterprises, Inc.a/k/a The GolfWorks. Mr. McCormick also spent over 10 years in executivepositions with multi-channel retailers including Vice President of Musician’sFriend, Inc. Vice President of Golfsmith International and Vice President ofLas Vegas Golf & Tennis, Inc. Mr. McCormick is the brother ofMichael W. McCormick, our Chief Marketing Officer.

**DanaJ. Busch** is our Vice President—Merchandising, having beenpromoted to the position of Vice President in November 2003. Mr. Buschjoined our company in March 1998 as our Director—Merchandise Planning.Prior to joining our company, Mr. Busch spent 11 years with TheAthletic Fitters, Inc. where he was responsible for retail operations andinformation systems for 97 locations.

**PeterM. Harding** has been our Vice President—Real Estate since April 2004.Mr. Harding joined our company in January 1998 serving as ourDirector—Design and Construction and our Director—Real Estate before beingpromoted to his present position. Prior to joining our company, Mr. Hardingspent seven years with Best Buy Co., Inc., most recently in the positionsof purchasing manager and store planning manager.

**ScottH. Kurtz** has been our Vice President—Finance and Controllersince October 2003. Mr. Kurtz joined our company as Controller in February 1998.Prior to joining our company, Mr. Kurtz spent 11 years in variousfinancial accounting positions with Target Corporation and County Seat Stores, Inc.Mr. Kurtz also had previous experience in public accounting with Deloitte &Touche LLP.

**MaryL. Forby** has been our Vice President—Information Technologysince June 2005. Prior to joining our company, from 2004 to 2005, Ms. Forbywas the director of technical support at ShopNBC.com, a commercial internetsite operated by ValueVision Media, Inc. Prior to that, from 2000 to 2004,Ms. Forby was employed by Travelers Express MoneyGram, a subsidiaryoperation of MoneyGram International, Inc., where she was a manager ofserver systems, director of infrastructure, and, most recently, the director ofproduction control. From 1998 to 2000, Ms. Forby was employed by ConsecoFinance Corp.

**Jay D.Spencer** has been our Vice President-Strategic Planning since February 2006.Mr. Spencer joined us in January 2003 as Senior Financial Analyst andbecame our Director of Financial Planning and Analysis in July 2004. Prior tojoining our company, Mr. Spencer was with eFunds Corporation, where fromMarch 2002 to January 2003 he was a Finance Manager, and fromNovember 1999 to March 2002, he was a Senior Financial Analyst. Priorto that, Mr. Spencer held various finance and accounting positions with DeluxeCorporation and County Seat Stores, Inc. Mr. Spencer also hasprevious experience in public accounting with KPMG LLP.

 

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**PART II**

**Item 5.**                        Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of EquitySecurities.

(a) Market price of anddividends on the registrant’s common equity and related stockholder matters.

*Market information—*

We completed our initial public offering on August 3,2005. Shares of our common stock began trading on the Nasdaq National Marketunder the ticker symbol “GGXY” on July 29, 2005.

Thetable below sets forth the high and low sales prices of our common stock on theNasdaq National Market during the periods indicated.

| ** **                                                                    | ** ** | **Sales Price** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------|------------|
| **Fiscal 2006**                                                          | ** ** | ** **           | ** ** | **High** | ** ** | **Low** | ** ** |
| Second Fiscal  Quarter (commencing July 29, 2005 - August 27, 2005) |       |                 | $          | 22.11 |   |   | $ | 17.00 |   |
| Third Fiscal  Quarter (August 28, 2005 - November 26, 2005)         |       |                 | 21.20      |   |   | 12.65 |   |
| Fourth Fiscal Quarter  (November 27, 2005 - February 25, 2006)      |       |                 | 19.30      |   |   | 15.51 |   |
|                                                                               |            |                      |            |  |  |  |  |  |  |  |  |

 

*Holders—*

As of April 24, 2006,there were 44 holders of record of Golf Galaxy, Inc. common stock.

*Dividends*

We have never declared orpaid any cash dividends on shares of our common stock. We currently intend toretain any future earnings for use in the operation and expansion of ourbusiness and do not anticipate paying any cash dividends on shares of ourcommon stock in the foreseeable future. Any payment of cash dividends on sharesof our common stock in the future will be at the discretion of our board ofdirectors and will depend upon our results of operations, earnings, capitalrequirements, financial condition, future prospects, future financingagreements and other factors deemed relevant by our board of directors. Inaddition, our credit facility restricts our ability to pay cash dividends orother distributions on any shares of our common stock. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Liquidityand Capital Resources” for additional information regarding our creditfacility.

*Securitiesauthorized for issuance under equity compensation plans.*

The information requiredto be disclosed pursuant to Item 201(d) of Regulation S-K is included inItem 12, *Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters*, ofthis Report.

*Recent sales ofunregistered securities*

During our fiscal year ended February 25, 2006,we did not sell any securities that were not registered under the SecuritiesAct of 1933, as amended (the Act). However, in connection with our acquisitionof The GolfWorks (the Merger), which was completed on March 16, 2006, weissued 250,862 shares of our common stock and warrants to purchase an aggregateof up to 150,000 shares of common stock. The shares of common stock and thewarrants were issued in reliance upon the exemption from the registrationrequirements under the Act, pursuant to Section 4(2) thereof. Theshares of common stock and the shares of common stock issuable upon exercise ofthe warrants have not been registered under the Act or applicable statesecurities laws and may not be offered or sold in the United States absentregistration under the Act and applicable state securities laws or an 

33

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applicable exemption fromregistration requirements. The Company may be required to register these sharesunder the Act pursuant to the terms of the Merger and the registration rightsagreement executed in conjunction therewith.

(b) Report of offering ofsecurities and use of proceeds therefrom.

*Use of Proceeds.*

On August 3, 2005, we completed an initial publicoffering of our common stock pursuant to a registration statement on Form S-1(File No. 333-125007) that was declared effective by the Securitiesand Exchange Commission on July 28, 2005 (Effective Date). The managingunderwriters of our offering were Piper Jaffray & Co., William Blair &Company, L.L.C., Wedbush Morgan Securities Inc. and A.G. Edwards &Sons, Inc. Our common stock began trading on the Nasdaq National Marketunder the ticker symbol “GGXY” on July 29, 2005. The initial publicoffering consisted of 4,542,500 shares of common stock, including theunderwriters’ over-allotment option of 592,500 common shares, all of which weresold at an offering price of $14.00 per share. Of the shares of common stocksold in the initial public offering, we sold 3,000,000 shares and sellingshareholders sold 1,542,500 shares. Concurrent with the completion of our offering,all of the outstanding preferred stock converted into 5,752,467 shares of ourcommon stock.

Theaggregate gross proceeds of the shares offered and sold by us totaled$42.0 million and the aggregate gross proceeds to the selling shareholderstotaled $21.6 million. We did not receive any proceeds from the sale ofshares by the selling shareholders. In connection with the offering, we paid$2.9 million in underwriting discounts and commissions. Expenses in connectionwith the issuance and distribution of shares of our common stock, other thanunderwriting discounts and commissions, are set forth below.

| SEC registration  fees              |   | $       | 7,036     |   |
|-------------------------------------|--------|---------|-----------|--------|
| NASD filing fee                     |   | 6,860   |      |
| Nasdaq National  Market listing fee |   | 100,000 |      |
| Legal fees and  expenses            |   | 578,482 |      |
| Accounting fees  and expenses       |   | 178,800 |      |
| Printing and  engraving expenses    |   | 199,966 |      |
| Blue sky fees and  expenses         |   | 14,730  |      |
| Transfer agent  fees and expenses   |   | 7,300   |      |
| Miscellaneous  expenses             |   | 63,638  |      |
| Total                               |   | $       | 1,156,812 |   |

 

After deducting the underwriting discounts and commissionsand the offering expenses described above, we received net proceeds from ourinitial public offering of $37.9 million, of which $19.6 million was used topay our preferred shareholders all of the accrued and unpaid dividends due uponconversion of their shares of preferred stock into shares of our common stock.The remainder was used to fund capital investments at new stores and theacquisition of The GolfWorks, including the repayment of The GolfWorks’ debttotaling $5.4 million.

(c) Purchases of equity securities by the issuer andaffiliated purchasers.

Not applicable.

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**Item 6.        Selected Financial Data.**

You should read theselected financial data presented below in conjunction with the financialstatements and related notes and**Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included elsewhere in this Report.The selected financial data presented below under the heading “Statementof Operations Data” for the fiscal years ended February 25, 2006, February 26,2005 and February 28, 2004, and the selected financial data presentedbelow under the heading “Balance Sheet Data” as of February 25, 2006 and February 26,2005, have been derived from our audited financial statements includedelsewhere in this Report. The selected financial data presented below under theheading “Statement of Operations Data” for the fiscal years ended March 1,2003 and March 2, 2002, and the selected financial data presented belowunder the heading “Balance Sheet Data” as of February 28, 2004, March 1,2003 and March 2, 2002, have been derived from our audited financialstatements that are not included in this Report. The unaudited selectedfinancial data presented below under the headings “Other Financial Data” and “StoreData” for all periods presented, have been derived from our internal records ofour operations, except with respect to gross profit as a percentage of netsales for all periods, which is derived from our audited financial statementsincluded elsewhere in this Report or from our audited financial statements thatare not included in this Report. The pro forma financial data presented belowunder the heading “Statement of Operations Data” gives effect to the eventsdescribed in footnote 4 below and is derived from our audited financialstatements included elsewhere in this Report. The pro forma data does notpurport to represent what our financial results would have been if such events hadoccurred at the dates indicated, and such pro forma information is notnecessarily indicative of our financial results for any future periods.Historical results are not necessarily indicative of the results of operationsto be expected for future periods. See Note 2 of “Notes to FinancialStatements” for a description of the method used to compute basic and dilutednet income (loss) per share applicable to the holders of our common stock.

| ** **                                           | ** ** | **Fiscal Year Ended**(1)                                 | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **March 2,  2002**                                            | ** ** | **March 1,  2003** | ** ** | **February 28,  2004** | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
| ** **                                           | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statement of Operations Data**                     | ** ** |                                                               | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net sales                                            |       |                                                               | $          | 88,889 |   |   |   | $ | 85,213 |   |   |   | $ | 99,630 |   |   |   | $ | 133,080 |   |   |   | $ | 200,130 |   |   |
| Cost of sales                                        |       |                                                               | 67,909     |   |   |   | 63,745 |   |   |   | 72,403 |   |   |   | 93,964 |   |   |   | 141,392 |   |   |
| Gross profit                                         |       |                                                               | 20,980     |   |   |   | 21,468 |   |   |   | 27,227 |   |   |   | 39,116 |   |   |   | 58,738 |   |   |
| Operating expenses:                                  |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Store operating                                      |       |                                                               | 16,887     |   |   |   | 15,223 |   |   |   | 16,677 |   |   |   | 24,382 |   |   |   | 37,512 |   |   |
| General and  administrative                          |       |                                                               | 6,803      |   |   |   | 4,709 |   |   |   | 6,876 |   |   |   | 8,372 |   |   |   | 10,033 |   |   |
| Preopening                                           |       |                                                               | 260        |   |   |   | 113 |   |   |   | 1,065 |   |   |   | 2,095 |   |   |   | 2,923 |   |   |
| Income (loss) from  operations                       |       |                                                               | (2,970     | ) |   |   | 1,423 |   |   |   | 2,609 |   |   |   | 4,267 |   |   |   | 8,270 |   |   |
| Other income                                         |       |                                                               | —     |   |   |   | — |   |   |   | — |   |   |   | 8,410 | (2) |   |   | — |   |   |
| Interest income  (expense), net                      |       |                                                               | (153       | ) |   |   | (109 | ) |   |   | (177 | ) |   |   | (4 | ) |   |   | 439 |   |   |
| Income (loss)  before income taxes                   |       |                                                               | (3,123     | ) |   |   | 1,314 |   |   |   | 2,432 |   |   |   | 12,673 |   |   |   | 8,709 |   |   |
| Income tax  (expense) benefit                        |       |                                                               | —     |   |   |   | — |   |   |   | 5,145 | (3) |   |   | (5,135 | ) |   |   | (3,443 | ) |   |
| Net income (loss)                                    |       |                                                               | (3,123     | ) |   |   | 1,314 |   |   |   | 7,577 |   |   |   | 7,538 |   |   |   | 5,266 |   |   |
| Less preferred  stock dividends                      |       |                                                               | (7,546     | ) |   |   | (3,169 | ) |   |   | (3,430 | ) |   |   | (3,696 | ) |   |   | (1,721 | ) |   |
| Net income (loss)  applicable to common shareholders |       |                                                               | $          | (10,669 | ) |   |   | $ | (1,855 | ) |   |   | $ | 4,147 |   |   |   | $ | 3,842 |   |   |   | $ | 3,545 |   |   |
| Net income (loss) per  share:                        |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                |       |                                                               | $          | (6.03 | ) |   |   | $ | (1.03 | ) |   |   | $ | 2.29 |   |   |   | $ | 2.06 |   |   |   | $ | 0.51 |   |   |
| Diluted                                              |       |                                                               | $          | (6.03 | ) |   |   | $ | (1.03 | ) |   |   | $ | 0.99 |   |   |   | $ | 0.98 |   |   |   | $ | 0.47 |   |   |
| Weighted average  basic shares outstanding           |       |                                                               | 1,771      |   |   |   | 1,800 |   |   |   | 1,814 |   |   |   | 1,866 |   |   |   | 6,993 |   |   |
| Weighted average  diluted shares outstanding         |       |                                                               | 1,771      |   |   |   | 1,800 |   |   |   | 7,691 |   |   |   | 7,721 |   |   |   | 7,542 |   |   |
| Pro forma net income per share  (unaudited)(4)       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Pro forma net  income                                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   | $ | 2,504 |   |   |   | $ | 5,266 |   |   |
| Pro-forma net income per  share:                     |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   | $ | 0.24 |   |   |   | $ | 0.49 |   |   |
| Diluted                                              |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   | $ | 0.23 |   |   |   | $ | 0.47 |   |   |
| Pro-forma weighted  average shares outstanding:      |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   | 10,618 |   |   |   | 10,648 |   |   |
| Diluted                                              |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   | 10,721 |   |   |   | 11,197 |   |   |

 

35

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| ** **                                         | ** ** | **Fiscal Year Ended**(1) | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|
| ** **                                         | ** ** | **March 2,  2002**            | ** ** | **March 1,  2003** | ** ** | **February 28,  2004** | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
| ** **                                         | ** ** | **($ in thousands)**     | ** ** |
| **Balance  Sheet Data**                            |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                         |       |                               | $          | 344 |   |   |   | $ | 4,173 |   |   |   | $ | 4,943 |   |   |   | $ | 3,245 |   |   |   | $ | 11,075 |   |   |
| Inventories, net                                   |       |                               | 19,292     |   |   |   | 15,274 |   |   |   | 25,564 |   |   |   | 30,415 |   |   |   | 45,278 |   |   |
| Total assets                                       |       |                               | 34,323     |   |   |   | 31,742 |   |   |   | 51,527 |   |   |   | 65,137 |   |   |   | 106,547 |   |   |
| Accounts payable                                   |       |                               | 10,516     |   |   |   | 8,201 |   |   |   | 16,568 |   |   |   | 15,826 |   |   |   | 23,224 |   |   |
| Borrowings under  the credit agreement             |       |                               | 267        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Redeemable  convertible preferred stock            |       |                               | 30,293     |   |   |   | 30,900 |   |   |   | 30,900 |   |   |   | 30,900 |   |   |   | — |   |   |
| Accumulated,  undeclared preferred stock dividends |       |                               | 7,546      |   |   |   | 10,715 |   |   |   | 14,145 |   |   |   | 17,841 |   |   |   | — |   |   |
| Total  shareholders’ equity (deficit)         |       |                               | (23,986    | ) |   |   | (26,378 | ) |   |   | (21,917 | ) |   |   | (17,936 | ) |   |   | 54,693 |   |   |
| **Other  Financial Data**                          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit as a  percentage of net sales         |       |                               | 23.6       | % |   |   | 25.2 | % |   |   | 27.3 | % |   |   | 29.4 | % |   |   | 29.3 | % |   |
| Adjusted EBITDA(5)                                 |       |                               | $          | (334 | ) |   |   | $ | 3,821 |   |   |   | $ | 5,010 |   |   |   | $ | 7,496 |   |   |   | $ | 13,409 |   |   |
| **Store  Data**                                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comparable store  sales increase (decrease)(6)     |       |                               | 0.1        | % |   |   | (2.4 | )% |   |   | 5.6 | % |   |   | 6.7 | % |   |   | 7.3 | % |   |
| Number of stores  at end of period                 |       |                               | 20         |   |   |   | 20 |   |   |   | 24 |   |   |   | 34 |   |   |   | 50 |   |   |
| Selling square  feet at end of period(7)           |       |                               | 328,257    |   |   |   | 328,257 |   |   |   | 382,169 |   |   |   | 516,551 |   |   |   | 738,615 |   |   |
| Average inventory per  store(8)                    |       |                               | $          | 925 |   |   |   | $ | 870 |   |   |   | $ | 863 |   |   |   | $ | 872 |   |   |   | $ | 893 |   |   |

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(1)      Ourfiscal year ends on the Saturday closest to the end of February, resulting infiscal years of 52 or 53 weeks in length. Fiscal 2002, 2003, 2004, 2005 and2006 represent the fiscal years ended March 2, 2002, March 1, 2003, February 28,2004, February 26, 2005 and February 25, 2006. Based on thisschedule, all fiscal years presented were 52-week years. Fiscal 2007,ending March 3, 2007, will be a 53-week fiscal year.

(2)      Representsthe gain realized on the sale of our equity investment in Golf Town Canada Inc.See “Business—Golf Town Canada”elsewhere in this Report for more information.

(3)      Theincome tax benefit in fiscal 2004 is due to the reversal of an income taxvaluation allowance against our net deferred tax assets generated in priorfiscal years, partially offset by the fiscal 2004 income tax provision. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”, and the “Notes toFinancial Statements” elsewhere in this Report for more information.

(4)      Pro-forma net income per share ispresented as if our IPO had occurred immediately prior to the beginning of eachof fiscal 2005 and fiscal 2006, including a significant increase in commonshares outstanding, the conversion of our preferred stock into shares of commonstock, and the elimination of the accrual of preferred stock dividends. Inaddition, pro forma net income per share for fiscal 2005 excludes thenon-recurring after-tax gain of $5.0 million realized on the sale of our equityinvestment in Golf Town Canada Inc. stock. See“Management’s Discussion and Analysisof Financial Condition and Results of Operations” for additional information.

We believe pro forma net income and pro forma netincome per share is useful to an investor in evaluating our financial resultsbecause it helps investors more meaningfully evaluate and compare the netfinancial results from period to period by removing the impact of completingour IPO in the second quarter of fiscal 2006 and the non-recurring gainrecorded in fiscal 2005.

Pro forma net income per share is considered afinancial measure that does not comply with GAAP and is not in accordance with,or preferable to the ratio determined in accordance with GAAP. Pro forma netincome per share is intended to be a supplement to, but not a substitute for,financial information prepared in accordance with GAAP. Further, pro forma netincome per share, as we define it, may not be comparable to a similarly titledmeasure used by other companies. The most directly comparable GAAP financialmeasure to pro forma net income per share is net income applicable to commonshareholders. The most directly comparable GAAP financial measure to pro formanet income is net income applicable to common shareholders.

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Thefollowing table presents a reconciliation of the numerator and denominator usedin the calculation of pro forma net income per share:

| ** **                                                                              | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                              | ** ** | **February 26,  2005**     | ** ** | **February 25,  2006** | ** ** |
| ** **                                                                              | ** ** | **(In thousands)**         | ** ** |
| Net income  applicable to common shareholders                                           |       |                            | $          | 3,842 |   |   |   | $ | 3,545 |   |   |
| Adjusted for:                                                                           |       |                            |       |   |   |   |   |   |   |
| Gain on sale of Golf Town Canada Inc. stock, net of  tax                                |       |                            | (5,034     | ) |   |   | — |   |   |
| Preferred stock dividends                                                               |       |                            | 3,696      |   |   |   | 1,721 |   |   |
| Pro forma net  income                                                                   |       |                            | $          | 2,504 |   |   |   | $ | 5,266 |   |   |
| ***Basic***                                                                             | * *   |                            |       |   |   |   |   |   |   |
| Weighted average  basic shares outstanding                                              |       |                            | 1,866      |   |   |   | 6,993 |   |   |
| Adjusted for:                                                                           |       |                            |       |   |   |   |   |   |   |
| Weighted average additional shares issued upon  conversion of preferred stock to common |       |                            | 5,752      |   |   |   | 2,402 |   |   |
| Weighted average additional shares issued in IPO                                        |       |                            | 3,000      |   |   |   | 1,253 |   |   |
| Pro forma weighted  average basic shares outstanding                                    |       |                            | 10,618     |   |   |   | 10,648 |   |   |
| ***Diluted***                                                                           |       |                            |       |   |   |   |   |   |   |
| Weighted average  diluted shares outstanding                                            |       |                            | 7,721      |   |   |   | 7,542 |   |   |
| Adjusted for:                                                                           |       |                            |       |   |   |   |   |   |   |
| Weighted average additional shares issued upon  conversion of preferred stock to common |       |                            | —     |   |   |   | 2,402 |   |   |
| Weighted average additional shares issued in IPO                                        |       |                            | 3,000      |   |   |   | 1,253 |   |   |
| Pro forma weighted  average diluted shares outstanding                                  |       |                            | 10,721     |   |   |   | 11,197 |   |   |

 

(5)      AdjustedEBITDA consists of net income (loss), before the effect of net interest expenseor income, income tax expense or benefit, non-operating income anddepreciation and amortization. This term, as we define it, may not be comparableto a similarly titled measure used by other companies and is not a measure ofperformance presented in accordance with GAAP. We use Adjusted EBITDA as ameasure of operating performance, but we do not use it as a measure ofliquidity. Adjusted EBITDA should not be used as a measure of liquidity orconsidered as a substitute for net income (loss), net cash provided by or usedin operations, or other financial data prepared in accordance with GAAP.

We believe AdjustedEBITDA is useful to an investor in evaluating our operating performancebecause:

·   it measures our operating performance without regard toitems such as depreciation and amortization, which can vary depending uponaccounting methods, the book value of assets, and the method by which assetswere acquired;

·   it helps investors more meaningfully evaluate andcompare the results of our operations from period to period by removing theimpact of our capital structure, primarily net interest expense from our creditfacility, and our non-operating income; and

·   it helps investors more meaningfully evaluate andcompare the results of our operations from period to period by removing theimpact of income tax expense or benefit, which can vary over time based onchanges in management’s estimates and assumptions related to current and futureoperating results, income tax rates and income tax laws.

Our management uses Adjusted EBITDA:

·   as a measurement of operating performance because itassists us in comparing our performance on a consistent basis, as it removesfrom our operating results the impact of:

·   our asset base, including the impact of depreciationand amortization of our assets, which can vary depending on the book value andmethod of acquisition of the assets;

·   income tax expense or benefit, which can varysignificantly based on management’s estimates and assumptions related tocurrent and future operating results, tax rates and regulations;

·   our capital structure, including the impact of interestexpense from our credit facility and interest income on invested funds; and

·   our non-operating income; and

·   in presentations to the members of our board ofdirectors to enable our board to have the same consistent measurement basis ofoperating performance used by management.

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Thefollowing table provides a reconciliation of net income (loss) to AdjustedEBITDA.

| ** **                     | ** ** | **Fiscal Year Ended** | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **March 2,  2002**         | ** ** | **March 1,  2003** | ** ** | **February 28,  2004** | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
| ** **                     | ** ** | **($ in thousands)**  | ** ** |
| Net income (loss)              |       |                            | $          | (3,123 | ) |   |   | $ | 1,314 |   |   |   | $ | 7,577 |   |   |   | $ | 7,538 |   |   |   | $ | 5,266 |   |   |
| Adjusted for:                  |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax expense (benefit)   |       |                            | —     |   |   |   | — |   |   |   | (5,145 | ) |   |   | 5,135 |   |   |   | 3,443 |   |   |
| Interest (income) expense, net |       |                            | 153        |   |   |   | 109 |   |   |   | 177 |   |   |   | 4 |   |   |   | (439 | ) |   |
| Other income                   |       |                            | —     |   |   |   | — |   |   |   | — |   |   |   | (8,410 | ) |   |   | — |   |   |
| Depreciation and amortization  |       |                            | 2,636      |   |   |   | 2,398 |   |   |   | 2,401 |   |   |   | 3,229 |   |   |   | 5,139 |   |   |
| Adjusted EBITDA                |       |                            | $          | (334 | ) |   |   | $ | 3,821 |   |   |   | $ | 5,010 |   |   |   | $ | 7,496 |   |   |   | $ | 13,409 |   |   |

 

(6)      A newor relocated store is included in the comparable store base after it has beenin operation for 12 full fiscal months following the month of the store’s grandopening weekend. A store that is closed for remodel or repair is excluded fromthe comparable store sales calculation during the period of closure and thecomparable period of the succeeding year. Sales from our eCommerce operationsare not included in the comparable store sales calculation. Comparable storeresults for a 53-week fiscal year are presented on a 52/52 week basis.

(7)      Wedefine selling square feet to include all space where we conduct retail activitieswith our customers, including the PGA services/The GolfWorks store-in-storeservice area, hitting nets, golf simulators and check-out areas. Sellingsquare feet excludes our receiving and back room storage areas, managementoffice space, employee breakrooms, restrooms and vacant space.

(8)      Averageinventory per store represents the 12 fiscal month average inventory for storesopen through the full fiscal year excluding our eCommerce operations. Inventoryincludes inventory at average cost, before adjustments for shrink,obsolescence, capitalized freight and vendor funding.

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operation.

**Overview**

We have built our business around our “*Everything for the Game*.” strategy byoffering our customers a broad and deep assortment of golf equipment, accessories,apparel and footwear, as well as non-commissioned sales assistance and pro shopservices, all at guaranteed low prices. We carry the leading national brands ingolf, including *Callaway*, *TaylorMade*, *Titleist*, *NIKE Golf*,*PING*, *Cleveland, Cobra, Odyssey, Top Flite* and *Mizuno*. Each of our stores employs atleast one full-time PGA professional to provide our customers with specialized,value-added services. Our growth strategy entails opening new stores,increasing comparable store sales and profitability, and expanding sales in newchannels.

We opened our first retail store in Bloomington,Minnesota in April 1997, creating what we believe is an exciting,interactive superstore targeting consumers of golf-related products andservices. Based upon the success of our first store, we were able to raise$30.9 million of private equity financing to supplement the$1.9 million of start up capital that we had raised through a privateplacement financing. The additional financing provided us the capital to opensix new stores in each of fiscal 1999, fiscal 2000 and fiscal 2001. Since 1997,we have expanded our store base to 59 stores in 24 states. In March 2004,we launched our eCommerce operations with our Internet site, *www.GolfGalaxy.com*.

On August 3, 2005, we completed an IPO of ourcommon stock. We sold 3,000,000 shares of our common stock at an offering priceof $14.00 per share resulting in gross proceeds to us of $42.0 million. Afterdeducting the underwriting discounts and commissions, and other offering expenses,we received net proceeds from our IPO of $37.9 million. As part of theoffering, all of the then outstanding preferred stock converted into 5,752,467shares of our common stock, of which 1,542,500 were also sold in the IPO forthe benefit of holders of such shares, resulting in a total offering of4,542,500 shares. We used $19.6 million of our net proceeds to pay all of theaccrued and unpaid preferred stock dividends due upon conversion of thepreferred stock into shares of our common stock. The remainder was usedprimarily to finance capital investments in new stores and the acquisition of The GolfWorks.

In March 2006, we acquiredall of the outstanding shares of The GolfWorks. The purchase price,excluding direct costs of the acquisition, consisted of $3.7 million in cash($500,000 of which has been deposited into an indemnification escrow); 250,862shares of our common stock valued at $4.8 million based on the average closingprice of our common stock on the Nasdaq National Market during the five-daytrading period beginning three trading days prior to our announcement of theacquisition; and warrants to purchase 150,000 shares of our common stock with afair value of $1.4 million, determined using the Black-Scholes option pricingmodel. The warrants have an execise price of $17.94 per share and a 10-yearterm expiring on March 16, 2016. In addition, we assumed $5.4 million in debtfrom The GolfWorks. Founded in 1976, TheGolfWorks is one of thegolf industry’s most complete sources for golf club components, clubmakingtools and supplies, and technical information. The GolfWorks isprimarily a direct marketer with product offerings that include a complete complement of proprietary clubheads, as well as a full selection of name brand shafts and grips, sold throughits catalogs and its Internet site at *www.GolfWorks.com*.In addition, The GolfWorks manufactures a proprietary line of club components andclub making tools and supplies, and assembles finished clubs for sale under *Maltby, Maltby Design* and other brands. The GolfWorks operates as our wholly ownedsubsidiary. The acquisition is being accounted for using the purchase method ofaccounting from the date of acquisition. Therefore, the financial statementsincluded in this Report exclude the results of The GolfWorks for all periodspresented.

***Strategic******Initiatives.******  ***Over the pastseveral years, we have focused on strategic initiatives to improve ourinventory management and supply chain discipline, refine our store operatingmodel and improve our retail site selection process. More recently, we havedeveloped new product and service offerings, implemented new marketingstrategies and channels of distribution, and greatly accelerated our retail 

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store growth. All of theseinitiatives have been focused on our goals of improving our profitability andbuilding a solid foundation for future growth.

We improved our inventory management and supply chaindiscipline by implementing an EDI system that enabled us to automate andaccelerate our purchasing and replenishment cycle with most of our key vendors.We also refined our product assortment while focusing on improving our in-stocklevels of higher-demand merchandise and analyzed and modified our storeoperating model to improve our store profitability. We reduced the averageannual payroll per store by refining our in-store labor model, focusingparticularly on store management and the staffing of our in-store servicesarea, and revised our advertising program to improve our return on advertisingexpenditures. In addition, we have made significant investments in our corporateinfrastructure to facilitate the future growth of our business and haveassembled an executive management team with high growth retail and golfindustry experience. We expect that our current infrastructure will support ouraccelerated store opening program, which we believe will enable us to leverageour general and administrative expenses further.

To market directly to our best customers, we launchedour complimentary Advantage Club customer loyalty program in March 2003.The Advantage Club provides members with exclusive in-store events, emailoffers and direct mail promotions. Advantage Club membership has grown to over900,000 members as of May 1, 2006.

In March 2004, we launched our eCommerce Internetsite, *www.GolfGalaxy.com*, providing a newsales channel with online access for our customers, additional marketingopportunities and information for existing and new customers. Our eCommercemarketing is fully integrated with our in-store marketing plans.

A key initiative over the past two years has been toincrease the visibility of our in-store PGA professionals and to expand ourservices offering. Each of our stores has at least one PGA professional whooffers our customers lessons, and club and ball fittings. We have invested incurrent technology such as ball launch monitors, fitting equipment, simulatorsand video swing analysis to assist our PGA professionals in providing expert,value added service to our customers. In addition, we have developed andimplemented a comprehensive training program for our sales associates. Thetraining, emphasizing customer service and product knowledge, uses customvideos and printed materials for consistency across our store base.

We have continued to emphasize the growth of ourpre-owned club business with the “*We Take Trades!*”message in all of our stores and online. Pre-owned clubs have continued toincrease as a percentage of our net sales and they generally provide higherretail margins than new club sales. Clubs taken in trade help to encourage thepurchase of new clubs for many of our customers. We re-sell the highest qualitypre-owned clubs through our stores and our Internet site, *www.GolfGalaxy.com,*and sell the remainder to a third party.

We opened ten new stores during fiscal 2005 and 16 newstores during fiscal 2006, building on the improved financial performance thatresulted from the initiatives described above. We used the insights we hadgained from the performance of our existing store base to refine our siteselection criteria to improve a new store’s anticipated economic performance.Identifying appropriate new store sites is essential to our growth strategy.Our direct-to-store distribution allows us to be opportunistic in entering newmarkets, unencumbered by the need to have our own distribution infrastructure.Further, we believe our flexible real estate strategy, utilizing our storeprototype which generally ranges from 13,000 to 18,000 selling square feet,provides us with increased opportunities to find optimal real estate locationsat terms that meet our financial objectives. In fiscal 2007, we plan to open atotal of 14 to 16 new stores, of which nine have already been opened.

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In March 2006, we completed the acquisition ofThe GolfWorks, a leading catalog and internet retailer of golf club components,club making tools and supplies, and technical information for thedo-it-yourself club builder, based in Newark, Ohio. The GolfWorks also operatesin Canada through its wholly owned Canadian subsidiary, Criterion GolfTechnology Inc. a/k/a The GolfWorks Canada. Weintend to grow The GolfWorks brand through an expanded store-in-store servicearea in our stores. The service area prominently features The GolfWorks brandto highlight our technical expertise in club repair and upgrade services.The store-in-store also features a wideassortment of golf club components, tools, shafts and grips for customersinterested in building or servicing their own equipment. We believe TheGolfWorks brand provides another opportunity to differentiate us from ourretail competitors. We have included The GolfWorks store-in-store in all of ournew stores opened since October 2005, and retrofitted 13 existing storesthrough May 1, 2006. We plan to retrofit our remaining stores in thesecond half of fiscal 2007.

The acquisition of The GolfWorks also increases ourcapabilities in the direct to consumer channel. The GolfWorks facilitiesinclude a contact center; distribution center; research, design and assemblyfacilities, and a school for club builders. All of these operations are locatedin Newark, Ohio, just outside of Columbus. In April 2006, we combined our GolfGalaxy customer contact center with The GolfWorks contact center to create amore efficient and lower-cost operation. 

***Key******Financial Measures.******  ***We measure ourtotal company performance using the following key operating statistics:comparable store sales, comparable store gross profit, gross profit as apercentage of net sales and store operating expenses as a percentage of netsales. We also track total store contribution, which is calculated by deductingour total store operating expenses from our total gross profit, and total storecontribution margin, which is total store contribution expressed as apercentage of total net sales. The total store contribution margin measures theoverall profitability of our retail operations, before deducting corporateoverhead expenses.

We also measure general and administrative expenses,in absolute dollars and as a percentage of net sales, in an effort to track oursuccess in achieving operating leverage by growing the profitability of ourstore base faster than the growth in our general and administrative expenses.Finally, we measure income from operations in order to determine our overalloperating profitability after deducting the costs of corporate overhead.

At the store level, we measure net sales, gross profitas a percentage of net sales and store contribution, which we use to evaluatethe profitability of each store before deducting corporate overhead expenses.We focus on managing controllable expenses at the store level such as payrolland supplies expenses in an effort to promote efficient store operations. Wealso measure in-store traffic levels, average sales dollars per transaction,items per transaction and close rate (i.e., the percentage of our storevisitors who make a purchase) at each store in order to measure theeffectiveness of our sales techniques in each store.

We believe thatincreased purchasing volumes resulting from our projected growth will enable usto improve our gross profit as a percentage of net sales through purchasingleverage and achieving greater vendor support throughout our supply chain. Ourgross profit as a percentage of net sales also is influenced by the relativemix of merchandise in our total sales. As we continue sales and store growth, anumber of other factors may impact, positively or negatively, our gross profitas a percentage of net sales, including:

·       theintroduction of new products;

·       changesin our merchandise and services mix;

·       changesin the geographic mix of our stores;

·       pricecompetition; and

·       theeffectiveness of our inventory management.

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The most significant store operating expenses arestore associate payroll and related employee benefits, advertising anddepreciation. We believe that a combination of increased sales volume andimproved labor management disciplines within our stores will allow us to betterleverage payroll expenses over time. Our store employees are compensated on anon-commissioned basis, which affords us the opportunity to benefit from theleverage associated with growing store sales at a rate faster than the growthin store payroll, which is largely fixed. We also monitor advertising costs asa percentage of net sales. These costs are largely variable which allows us todirect and control them to facilitate achieving our store sales, gross profitrate and store contribution objectives.

We also focus on our balance sheet disciplines bymeasuring the amount of capital invested in our retail locations, includinginventory and property and equipment. We measure inventory efficiency byanalyzing the average inventory per store and inventory turns, or the number oftimes store inventory turns over in a given period. Inventory turns are basedon the cost of sales and the trailing thirteen fiscal month average inventoryfor the applicable period. In merchandise categories that experience slowerinventory turns, we continue to work with vendors to increase our trade creditterms to reduce our investment in owned inventory. We also measure the amountsof owned inventory in an effort to reduce the amount of working capitalinvested in our stores.

We make our most significant investments in propertyand equipment at the time we open a store. We make a decision on whether or notto open a new store by analyzing the store’s projected return compared with theinitial investment required. We gather market and store-specificperformance data for each location from a combination of internal and externalsources and use that data to project the anticipated return on investment forthe proposed store. We then compare the projected return on investment to ourpre-determined return on investment criteria in order to make our decision onwhether or not to proceed with a proposed store location. Once a store hasopened, we measure each store’s ongoing return on invested capital to ensurethat each store is generating acceptable returns on the working capital andfixed capital invested in each store.

***Factors******affecting comparability.******  ***Set forthbelow are selected factors that we believe have had, or are expected to have, asignificant effect on the comparability of recent or future results ofoperations:

***Impact of Income Tax Valuation Allowance.***

In the period from our inception through fiscal 2002,we incurred significant operating losses that resulted in a net operating losscarryforward for tax purposes and net deferred tax assets. Through fiscal 2003,we provided a 100% valuation allowance for all net deferred tax assets due touncertainty regarding our ability to utilize the tax assets in future periods.

In fiscal 2004, wedetermined it was more likely than not that the deferred tax assets would befully utilized. As a result, in accordance with Statement of FinancialAccounting Standards (SFAS) No. 109, *Accountingfor Income Taxes*, all of the valuation allowance applied to netdeferred tax assets was reversed during the year ended February 28, 2004.Reversal of the valuation allowance resulted in a non-cash income tax benefittotaling $6.2 million, which accounted for 82% of our net income of$7.6 million for fiscal 2004.

***Non-Operating Income from Sale of Golf Town CanadaStock.***

Other income for the yearended February 26, 2005 represents an $8.4 million non-recurring pre-taxgain from the sale of our equity investment in Golf Town Canada Inc.

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***Stock Option Expense.***

In December 2004, the Financial AccountingStandards Board (FASB) issued a revision to SFAS No. 123, *Accounting for Stock-Based Compensation*,which requires the calculation of the fair value of stock-basedcompensation, estimation of future forfeitures and income taxes, andrecognition of the fair value as a non-cash expense over the vesting period ofthe underlying instruments. SFAS No. 123(R), *Share-Based Payment*, eliminates the ability to accountfor stock-based compensation transactions using the footnotedisclosure-only provisions of Accounting Principles Board (APB) Opinion No. 25,*Accounting for Stock Issued to Employees*,and instead requires that such transactions be recognized and reflected in ourfinancial statements using a fair-value-based method.

Effective February 26,2006, under SFAS No. 123(R), we are recognizing an expense forcompensation costs related to stock-based payment arrangements, includingstock options. Through fiscal 2006, we accounted for stock-based paymentsusing APB Opinion No. 25’s intrinsic value method and, as such, werecognized no compensation cost for stock options issued at fair market value.Accordingly, the adoption of SFAS No. 123(R)’s fair-value-based methodwill have a significant adverse impact on our results of operations, althoughit will have no impact on our overall cash flow. We expect to incurapproximately $1.1 million, net of tax, in non-cash stock-based compensationexpense during fiscal 2007. The amount of compensation expense recognizeddepends on numerous factors and estimates, including the number and vestingperiod of option grants, the publicly traded price of the common stock,estimated volatility of the stock price, estimates of the timing and volume ofexercises and forfeitures of the options and fluctuations in future interestand income tax rates.

***Effects of Initial Public Offering.***

In the second quarter of fiscal 2006, we completed ourIPO of common stock (see “Overview” and “Liquidity and Financial Resources”elsewhere in this “Management’s Discussion and Analysis of Financial Conditionand Results of Operations’’). As part of the IPO, we issued 3,000,000 shares ofcommon stock and received net proceeds of $37.9 million. Also, all of ourthen-outstanding convertiblepreferred stock, which was not included in shareholders’ equity in our balancesheet, converted to 5,752,467 shares of common stock, of which a portion wassold in the IPO, and accrued dividends aggregating $19.6 million were paid fromour net proceeds from the IPO. The immediate result of the IPO was asignificant increase in cash and shareholders’ equity on the balance sheet, andthe elimination of the accrual of dividends on the preferred stock. In addition,common stock outstanding increased significantly because of the conversion ofthe preferred stock and issuance of common shares. As a result, the basis forthe calculation of net income per share on both a basic and diluted basis haschanged significantly. We illustrate the pro forma effect of these changes infootnote 4 to the table in “Selected Financial Information.’’

***Public Company Expense.***

Upon consummation of ourIPO, we became a public company and our shares of common stock began trading onthe Nasdaq National Market. As a result, we are now subject to certain laws,regulations and requirements that were not required as a private company,including certain provisions of the Sarbanes-Oxley Act of 2002, relatedregulations of the SEC and the requirements of the Nasdaq National Market.Compliance with the requirements of being a public company has required us toincrease our general and administrative expenses in order to pay our employees,legal counsel, accountants and service providers to assist us in, among otherthings, instituting and monitoring a more comprehensive compliance and boardgovernance function, documenting and testing our internal control overfinancial reporting in accordance with Section 404 of the Sarbanes-OxleyAct of 2002, and preparing and distributing periodic reports in compliance withour obligations under the federal securities laws. In addition, the IPO hasincreased our cost of director 

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andofficer liability insurance. We estimate our annual incremental cost of being apublic company was $460,000 in fiscal 2006 and will be $1.3 million in fiscal2007.

***The GolfWorks Acquisition.***

In March 2006, The GolfWorks became ourwholly-owned subsidiary. The operating results of The GolfWorks from the dateof acquisition, after eliminating inter-company activity and balances, will beincluded as part of our consolidated financial results beginning with the firstquarter of fiscal 2007. As a result, net sales and operating expenses will behigher in comparison to prior reported periods, and certain measurements as apercentage of net sales may vary.  Netsales for The GolfWorks for the fiscal year ended December 31, 2005 were $24.5million.

The application of the purchase method of accounting requiresthe purchase price to be allocated to the assets and liabilities of an acquiredcompany based on their estimated fair values. As a result, the assets andliabilities of the consolidated company will increase in comparison to prioryears and may include certain assets and liabilities that could affect netincome in the future. We anticipate that net income will be affected in futureperiods for the amortization of intangible and long-lived assets acquired inour acquisition of The GolfWorks. We are currently evaluating the estimatedfair market value of the acquired assets and liabilities and cannot reasonablyestimate the results of the purchase accounting adjustments at this time.

***Fiscal******Year.******  ***Our fiscalyear ends on the Saturday closest to the end of February, resulting in fiscalyears of 52 or 53 weeks in length. Fiscal 2004, 2005 and 2006 represent the 52-weekperiods ended February 28, 2004, February 26, 2005 and February 25,2006, respectively. Fiscal 2007, ending March 3, 2007, will be a 53-weekfiscal year.

**Results ofOperations**

Thefollowing table presents selected items in our statements of operations as apercentage of net sales for each of the last three fiscal years.

| **Fiscal Year**                 | ** ** | ** ** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                            |       | 100.0      | %          | 100.0    | %          | 100.0    | %          |
| Cost of sales                        |       | 72.7       | %          | 70.6     | %          | 70.7     | %          |
| Gross profit                         |       | 27.3       | %          | 29.4     | %          | 29.3     | %          |
| Store operating  expenses            |       | 16.7       | %          | 18.3     | %          | 18.7     | %          |
| General and  administrative expenses |       | 6.9        | %          | 6.3      | %          | 5.0      | %          |
| Preopening  expenses                 |       | 1.1        | %          | 1.6      | %          | 1.5      | %          |
| Income from  operations              |       | 2.6        | %          | 3.2      | %          | 4.1      | %          |
| Other income                         |       | —     |       | 6.3      | %          | —   |       |
| Interest (expense)  income, net      |       | (0.2       | )%         | —   |       | 0.2      | %          |
| Income before  income taxes          |       | 2.4        | %          | 9.5      | %          | 4.3      | %          |
| Income tax  benefit (expense)        |       | 5.2        | %          | (3.8     | )%         | (1.7     | )%         |
| Net income                           |       | 7.6        | %          | 5.7      | %          | 2.6      | %          |
| Pro-forma net income(1)              |       |       |       | 1.9      | %          | 2.6      | %          |

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(1)                Pro-forma netincome as a percentage of net sales is presented as if our IPO had occurredimmediately prior to the beginning of each of fiscal 2005 and fiscal 2006. Inaddition, pro-forma net income as a percentage of net sales for fiscal 2005excludes the non-recurring after-tax gain of $5.0 million realized on the saleof our equity investment in Golf Town Canada Inc. stock. See footnote 4 to the table in “Selected Financial Information’’ for areconciliation of pro forma net income to net income applicable to commonshareholders.

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Net sales consist of sales, net of returns, fromcomparable stores and new stores, as well as sales from our eCommerceoperations, which we launched in March 2004. A store is included incomparable store results after it has been in operation for 12 full fiscalmonths following the month of the store’s grand opening weekend, typically astore’s 13th full month of operations. Sales from our eCommerce operations arenot included in comparable store results. New store sales include all salesfrom stores that have not yet become comparable stores.

Cost of sales includes the cost of merchandise soldnet of certain vendor allowances, direct costs of services, freight, inventoryshrinkage, other inventory valuation adjustments and store occupancy costs.Vendor allowances include promotional support, rebates and volume discounts.Store occupancy costs include rent, real estate taxes and common areamaintenance charges.

Store operating expenses primarily include storeassociate payroll and related employee benefits, advertising and depreciation.Store operating expenses also include maintenance, utilities, insurance, bankand credit card charges, other store level expenses, as well as expensesassociated with the operation of our eCommerce Internet site.

General and administrative expenses include allexpenses associated with operating our corporate headquarters.

Preopening expensesconsist primarily of occupancy, payroll, recruiting and other costs incurredprior to a new store opening as well as incremental advertising in conjunctionwith the store opening.

**FiscalYear Ended February 25, 2006 (52 weeks) compared with Fiscal Year Ended February 26,2005 (52 weeks)**

***Net Sales.******  ***Net salesincreased by $67.0 million, or 50.3%, to $200.1 million for fiscal 2006 from$133.1 million for fiscal 2005. The increase in net sales resulted primarilyfrom $54.8 million in net sales from new stores opened during fiscal 2006or fiscal 2005, before becoming comparable stores, and a comparable store salesgain of $9.2 million, or 7.3%. The comparable store sales gain was primarilyattributable to increased sales of clubs, which was driven by several newproduct introductions. An increased merchandising focus on sales of golf ballsand apparel, as well as improvements in retail training and expanded directmarketing, also contributed to the comparable store sales gain.

***Gross Profit.******  ***Gross profitincreased by $19.6 million, or 50.1%, to $58.7 million for fiscal 2006from $39.1 million for fiscal 2005. Our gross profit rate decreased by0.1% of net sales to 29.3% of net sales for fiscal 2006, compared with 29.4% ofnet sales for the prior fiscal year. The modest decline in our gross profitrate was due primarily to higher freight costs and adjustments to inventoryreserves, and was partially offset by higher retail margins achieved in certaincategories, primarily in golf balls and services.

***Store OperatingExpenses.******  ***Store operating expenses increased by$13.1 million, or 53.7%, to $37.5 million for fiscal 2006 from$24.4 million for fiscal 2005. Our store operating expenses rate increasedto 18.7% of net sales for fiscal 2006, from 18.3% of net sales for the priorfiscal year. The increase in store operating expenses as a percentage of netsales was due primarily to new stores opened in the current or prior fiscalyear. New stores generally have higher operating expenses as a percentage ofnet sales in comparison to mature stores due to the impact of a partial year ofsales in the year opened and because mature stores generally have higher salesvolumes.

***General andAdministrative Expenses.******  ***General andadministrative expenses increased by $1.6 million, or 19.0%, to$10.0 million for fiscal 2006, compared with $8.4 million for fiscal 2005.The increase was driven primarily by additional payroll to support ourincreasing store base and the incremental costs of operating as a publiccompany. The general and administrative expenses rate decreased to 5.0% of netsales for fiscal 2006 from 6.3% of net sales for fiscal 2005. The reduction inthe general and administrative expenses rate was due primarily to a reductionin performance-based compensation expense and leverage 

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from net sales increasingat a faster rate than the growth of our payroll and payroll-related costs,partially offset by the impact of additional costs related to operating as apublic company.

***Preopening Expenses.******  ***Preopeningexpenses of $2.9 million for fiscal 2006 were due to the opening of 16 newstores during that period and preparations to open 11 stores during the firstquarter of fiscal 2007. Preopening expenses of $2.1 million for the priorfiscal year represented the costs related to ten new store openings duringfiscal 2005 and 11 new stores opened during the first quarter of fiscal 2006.

***Other income.******  ***We recorded no otherincome in fiscal 2006. Other income of $8.4 million for fiscal 2005represents the non-recurring pre-tax gain realized on the sale of our entireequity investment in Golf Town Canada Inc. See“Business—Golf Town Canada.”

***Interest Income(Expense).******  ***Net interest income was $439,000 forfiscal 2006, compared with net interest expense of $4,000 for fiscal 2005. The improvementwas due primarily to interest income earned on our net proceeds from our IPO.

***Income Tax Expense.******  ***We recorded anincome tax provision of $3.4 million for fiscal 2006, compared with$5.1 million for fiscal 2005. Our effective income tax rate decreased to39.5% for fiscal 2006, down from 40.5% for fiscal 2005. The change in theeffective income tax rate for fiscal 2006 was due primarily to fluctuations inthe impact of state income taxes.

***Net Income.******  ***Net income was $5.3 millionfor fiscal 2006, compared with $7.5 million for fiscal 2005. As discussedabove, net income for fiscal 2005 included the $5.0 million after-tax gain onthe sale of our equity investment in Golf Town Canada Inc. stock. Excluding theimpact of the non-recurring gain, net income in fiscal 2005 would have been$2.5 million. For a reconciliation of net income, excluding the effect ofnon-recurring items to net income, see “Fiscal Year Ended February 25, 2005 (52weeks) compared with Fiscal Year Ended February 28, 2004 (52 weeks)-NetIncome,” below.

**Fiscal Year Ended February 26, 2005 (52 weeks)compared with Fiscal Year Ended February 28, 2004 (52 weeks)**

***Net Sales.******  ***Net salesincreased by $33.5 million, or 33.6%, to $133.1 million for fiscal2005 from $99.6 million for fiscal 2004. The increase in net salesresulted primarily from $25.5 million in net sales from new stores openedduring fiscal 2005 or fiscal 2004, before becoming comparable stores, and anincrease in comparable store sales of $6.5 million, or 6.7%. The increasein comparable store sales was primarily attributable to increased sales ofclubs, apparel and golf balls due principally to new product introductions ineach of these product groups, improvements in retail training, and expandedtargeted marketing.

***Gross Profit.******  ***Gross profitincreased by $11.9 million, or 43.8%, to $39.1 million for fiscal2005 from $27.2 million for fiscal 2004. The gross profit rate increasedby 2.1% of net sales to 29.4% of net sales for fiscal 2005 from 27.3% of netsales for fiscal 2004. The increase was due primarily to higher marginsachieved on the sales of clubs and apparel as our vendor allowances continuedto increase and the increased sales in those product groups. To a lesserdegree, the gross profit rate also benefited from a lower cost of services andoccupancy as a percentage of net sales.

***Store OperatingExpenses.******  ***Store operating expenses increased by$7.7 million, or 46.1%, to $24.4 million for fiscal 2005 from$16.7 million for fiscal 2004. The store operating expense rate increasedto 18.3% of net sales for fiscal 2005 from 16.7% of net sales for 2004. Theincrease in store operating expenses as a percentage of net sales resultedpartially from the cost of new stores opened during the fiscal year. New storesgenerally have higher operating expenses as a percentage of net sales incomparison to mature stores due to the impact of a partial year of sales andbecause mature stores generally have higher sales volumes. The store operatingexpense rate also reflected a higher level of advertising to establish our newmarkets and increased promotional spending overall.

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***General andAdministrative Expenses.******  ***General andadministrative expenses increased by $1.5 million, or 21.7%, to$8.4 million for fiscal 2005 from $6.9 million for fiscal 2004. Theincrease was principally due to $1.1 million in additional payroll expenseat our corporate headquarters primarily associated with an accrual forperformance-based bonuses and additional personnel to support our storeexpansion. The general and administrative expense rate decreased to 6.3% of netsales for fiscal 2005 from 6.9% of net sales for fiscal 2004. The reduction inthe general and administrative expense rate is primarily attributable to areduction in payroll expenses as a percentage of net sales.

***Preopening Expenses.******  ***Preopeningexpenses of $2.1 million for fiscal 2005 were due to the ten stores openedin that period and stores to be opened in the first quarter of fiscal 2006.Preopening expenses of $1.1 million for fiscal 2004 represented the costsof opening four stores in that period and costs related to stores opened in thefirst quarter of fiscal 2005.

***Other Income.******  ***Other incomeof $8.4 million represents the pre-tax gain realized on the sale of ourentire equity investment in Golf Town Canada Inc. See “Business—Golf Town Canada.”

***Interest (Expense)Income.******  ***Net interest expense was $4,000 forfiscal 2005, compared with $177,000 for fiscal 2004. The decrease wasattributable primarily to our positive cash position through fiscal 2005,resulting in interest income substantially offsetting the minimal interestexpense and costs of maintaining a revolving credit facility during the period.

***Income Tax Benefit(Expense).******  ***We recorded an income tax provision of$5.1 million for fiscal 2005, compared to an income tax benefit of$5.1 million for fiscal 2004. The income tax expense for fiscal 2005represents our estimated effective federal and state income tax rates appliedto income before income taxes. The income tax benefit for fiscal 2004 consistedof an income tax provision of $1.1 million offset by a $6.2 millionincome tax benefit from the reversal of a previously established valuationallowance. Prior to the fourth quarter of fiscal 2004, all of our deferred taxassets were fully reserved and not presented on the balance sheet due touncertainty regarding our ability to utilize the deferred tax assets in futureperiods. During the fourth quarter of fiscal 2004, we determined it was morelikely than not that the deferred tax assets would be fully realized.

***Net Income.******  ***Net income was$7.5 million for fiscal 2005, compared with $7.6 million for fiscal2004. As discussed above, net income for fiscal 2005 included the non-recurringgain on the sale of our Golf Town Canada Inc. stock, which increased netincome by $5.0 million, after taxes. In addition, net income for fiscal2004 included the $6.2 million reversal of a previously established incometax valuation allowance. Exclusive of these items, net income would have been$2.5 million for fiscal 2005 and $1.4 million for fiscal 2004.

Net income, excluding the effect of non-recurringitems, represents net income for each of fiscal 2005 and fiscal 2004, withoutthe impact of the sale in fiscal 2005 of our equity investment in Golf TownCanada Inc. and the one-time reversal of the valuation allowance againstour net deferred tax assets in fiscal 2004, net of taxes. This term, as wedefine it, is not a measure of performance presented in accordance with GAAP.We use net income, excluding the effect of non-recurring items, as asupplement, but not as a substitute for net income or other financial dataprepared in accordance with GAAP.

We believe that netincome, excluding the effect of non-recurring items, is an importantmeasurement of our financial results because:

·       thenon-recurring items in fiscal 2005 and fiscal 2004 make net income forthose years difficult to compare relative to results for prior years; and

·       thenon-recurring items might cause users of our financial statements tooverestimate net income results in future years if the non-recurringitems are not fully considered.

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Our management uses net income, excluding the effectof non-recurring items, to provide a consistent measure of profitabilityafter taxes, excluding non-recurring, non-operating factors.

Thefollowing table provides a reconciliation of net income, as reported, to netincome, excluding the effect of non-recurring items ($ in millions):

| ** **                                                             | ** ** | **Fiscal Year** | ** ** |
|------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                             | ** ** | **2004**             | ** ** | **2005** | ** ** |
| Net income, as  reported                                               |       | $                    | 7.6        |   | $ | 7.5 |   |
| Less: Other  income, net of tax(1)                                     |       | —               |       | (5.0 | ) |
| Less: reversal of  valuation allowances against deferred tax assets(2) |       | (6.2                 | )          | — |   |
| Net income, excluding  the effect of non-recurring items               |       | $                    | 1.4        |   | $ | 2.5 |   |

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(1)      Otherincome of $5.0 million represents the after-tax gain realized on the saleof our equity investment in Golf Town Canada Inc.

(2)      In fiscal 2004, we reverseda valuation allowance of $6.2 million against our deferred tax assets becausemanagement determined it was more likely than not that the deferred tax assetswould be fully realized.

**Liquidity andCapital Resources**

**Summary**

Our primary capital requirements are related to thegrowth of the business. New stores require capital for inventory, capitalexpenditures, such as tenant improvements and fixtures, and preopeningexpenses. In addition, capital may be required for strategic growthopportunities, such as the acquisition of The GolfWorks in the first quarter offiscal 2007, and to remodel existing stores to updated formats. Periodically,capital resources may be needed for systems or facility improvements to supportour growth. Sources of capital to fund our growth have included proceeds fromour equity financings, cash generated from operations and cash proceeds fromthe sale of our Golf Town Canada Inc. stock.

Our working capital liquidity needs changesignificantly from quarter to quarter due to the impact of seasonality, thetiming of new store openings and the timing of inventory purchases. Our primarysource of working capital liquidity is cash provided by operations. We alsohave available borrowing capacity under our revolving credit facility, ifneeded.

We ended fiscal 2006 with$11.1 million in cash and cash equivalents, an increase from $3.2 million atthe end of fiscal 2005. Working capital, the excess of current assets overcurrent liabilities, increased to $26.4 million at the end of fiscal 2006,compared with $13.1 million at the end of fiscal 2005. We completed the IPO ofour common stock on August 3, 2005, selling 3,000,000 shares at anoffering price of $14.00 per share which resulted in gross proceeds to us of$42.0 million. After deducting the underwriting discounts and commissions, andother offering expenses, we received net proceeds of $37.9 million, of which$19.6 million was immediately used to pay accumulated and outstanding dividendsto the holders of our then outstanding preferred stock. As part of our IPO, allof the outstanding preferred shares were converted into 5,752,467 shares ofcommon stock, of which 1,542,500 were sold as part of the offering.

**Cash Flows**

***OperatingActivities.******  ***Netcash provided by operating activities was $5.6 million, $1.2 million and $4.8 millionin fiscal 2006, 2005 and 2004, respectively. Working capital used forinventory, net of related accounts payable, utilized $7.5 million, $5.6 millionand $1.9 million, respectively, of cash generated from operations in theseperiods. Net inventory requirements increased as we added 16, 10 and four newstores, respectively, in these years.

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***InvestingActivities.******  ***Netcash used in investing activities was $16.2 million, $2.9 million and$4.1million in fiscal 2006, 2005 and 2004, respectively. Capital expendituresfor new stores, including the purchase of leaseholds, fixtures and operatingequipment, utilized $16.2 million, $11.4 million and $4.1 million,respectively, in these periods as we opened 16, 10 and four new stores,respectively, in these periods. Capital expenditures in fiscal 2005 weresubstantially offset by $8.4 million in cash proceeds from the sale of our GolfTown Canada Inc. stock.

***FinancingActivities.******  ***Netcash provided by financing activities was $18.5 million in fiscal 2006,resulting from net proceeds from our IPO after issuance costs and the paymentof accumulated dividends to the holders of our then-outstanding preferredstock. There was no significant cash provided by, or used in, financingactivities in fiscal 2005 or 2004.

***Sourcesof Liquidity*.****   In addition to cash provided by operations,we maintain a revolving credit facility as an additional source of short-termliquidity and working capital, if needed. The credit facility has a term endingOctober 2008 and provides for revolving loans in the aggregate of up to$15.0 million, of which up to $5.0 million may be in the form ofletters of credit. At our option, the credit facility can be expanded to$20.0 million. Borrowings under the credit facility are secured by ourinventories, accounts receivable, and financial and intangible assets.Availability under the credit facility is calculated on the basis of eligibleinventory and accounts receivable, net of specified reserves, and less anyoutstanding letters of credit. Interest on any outstanding indebtedness underour credit facility accrues at the prime lending rate or an adjusted LIBOR asdefined in the agreement for the credit facility. There were no outstandingborrowings on our credit facility as of February 25, 2006 or February 26,2005.**

**Capital Resources**

Our future capitalrequirements will primarily depend on the number and timing of new storesopened and capital needed for strategic growth opportunities, such as theacquisition of The GolfWorks in the first quarter of fiscal 2007. In fiscal2007, we expect our capital expenditures to be approximately $18 millionto $21 million, the majority of which will be used for  planned store openings in fiscal 2007 and thefirst quarter of fiscal 2008. The acquisition of The GolfWorks was financedthrough a combination of cash from the IPO, common stock and warrants topurchase common stock. In addition, we assumed approximately $5.4 million ofexisting debt from The GolfWorks, which we refinanced with our remainingavailable cash and short-term borrowings under our revolving credit facility. Inaddition, the growth of our business may also require additional capitalinvestments in our infrastructure to support a larger store base. Additionalcapital may also be needed in the future to remodel or relocate existingstores. Based on our current plans, we expect to fund our capital requirementsthrough cash provided by operations, our revolving credit facility and theproceeds of this offering.

**Impact of Inflationand Changing Prices**

The impact of inflation andchanging prices has not been material to our results of operations in any ofthe last three fiscal years. We cannot assure you that inflation will not havean adverse impact on our operating results and financial condition in futureperiods.

**Off-Balance-SheetArrangements and Contractual Obligations**

We lease our retail storelocations, office space and certain office equipment primarily throughoperating leases and, to a much lesser degree, capital leases for certaintechnology equipment. Our liquidity is not dependent on the use of off-balancesheet financing arrangements other than in connection with our operatingleases.

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**ContractualObligations**

The following table contains supplemental informationregarding our total contractual obligations as of February 25, 2006.

| ** **                      | ** ** | **Payments due by period** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                      | ** ** | **(dollars in thousands)**      | ** ** |
| Capital Lease  Obligations      |       | $                                         | 70         |   |   | $ | 32 |   |   | $ | 37 |   | $ | 1 |   |   | $ | — |   |   |
| Operating Lease  Obligations(1) |       | 140,258                                   |       |   | 15,340 |   |   | 32,932 |   | 28,799 |   |   | 63,187 |   |   |
| Purchase  Obligations(2)        |       | 24,823                                    |       |   | 24,823 |   |   | — |   | — |   |   | — |   |   |
| Total                           |       | $                                         | 165,151    |   |   | $ | 40,195 |   |   | $ | 32,969 |   | $ | 28,800 |   |   | $ | 63,187 |   |   |

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(1)                Operating leaseobligations represent future minimum lease payments associated with our retailstore locations and corporate headquarters. In addition to future minimum leasepayments, our store leases typically require us to pay additional costs whichtypically include real estate taxes, common area maintenance charges, insuranceand percentage rent. The amounts in the table do not include additional costs.Additional costs represented approximately 28% of our minimum lease payments infiscal 2006.

(2)                Ourpurchase obligations as of February 25, 2006 represent open purchaseorders with our vendors as well as future purchase and other agreements weentered into in the normal course of business. To operate our businesseffectively, we provide purchase forecasts to certain vendors to obtain theappropriate quantities and mix of inventory for a selling season. We believethat certain of these commitments could be modified or cancelled withoutpenalty, but there are currently no intentions to do so.

**Critical AccountingPolicies and Use of Estimates**

Our financial statements are prepared in accordancewith GAAP. In connection with the preparation of the financial statements, weare required to make assumptions, estimates and judgments that affect thereported amounts of assets, liabilities, net sales, cost of sales, expenses andthe related disclosures. We base our assumptions, estimates and judgments onhistorical experience, current trends and other factors that we believe to berelevant at the time our financial statements are prepared. On a regular basis,we review our accounting policies, assumptions, estimates and judgments toensure that our financial statements are presented fairly and in accordancewith GAAP. However, because future events and their effects cannot bedetermined with certainty, actual results could differ from our assumptions andestimates, and such differences could be material.

Our significant accounting policies are discussed inNote 2 of “Notes to Financial Statements” included elsewhere in thisReport. We believe that the followingaccounting policies involve our more significant judgments and estimates usedin the preparation of our financial statements and are the most critical to aidin fully understanding and evaluating our reported financial results.Management has reviewed these critical accounting policies and relateddisclosures with the Audit Committee of our Board of Directors.

***Inventory Valuation.******  ***We maintaininventory at the lower of cost or market. We reduce inventory costs for vendorallowances, such as rebates, volume allowances and vendor marketing funds.Inventory valuation reserves are established based primarily on forecastedconsumer demand, inventory aging and obsolescence. If our estimates regardingconsumer demand are inaccurate or other changes impact demand for certainproducts in an unforeseen manner, we may be exposed to losses in excess of ourestablished reserves that could be material.

We also establish reserves for inventory shrinkage.Physical inventory counts are taken semi-annually to ensure the amountsreflected in our financial statements are properly stated. During the interimperiod 

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between physical inventorycounts, we accrue for anticipated physical inventory losses on alocation-by-location basis, based on a number of factors, including historicalresults. If our estimates regarding inventory losses are inaccurate, we may beexposed to losses in excess of our established reserves that could be material.

***Insurance.******  ***We retain aportion of the risk related to certain general liability, workers’compensation, property loss and our portion of employee-related health carebenefits. Liabilities associated with these risks are recorded at our estimateof their ultimate cost based on claims filed and estimates of claims incurredbut not yet reported. Our estimate of claims incurred but not yet reported isbased upon analysis of historical data and insurance industry trends. Ourreserves for such claims are based on estimates and the ultimate costs maydiffer from the amounts accrued.

***Valuation ofLong-Lived Assets.******  ***Long-lived assets and certainidentifiable intangibles are reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of the assets to future net cash flowsexpected to be generated by these assets. If such assets are considered to beimpaired, the impairment to be recognized is the amount by which the carryingamount of the assets exceeds the fair value of the assets.

Our impairment loss calculation contains uncertaintybecause management must estimate future cash provided by operations and usejudgment to forecast estimated fair values and to determine the useful lives ofthe assets. If actual results are not consistent with our assumptions andestimates regarding these factors, we may be exposed to losses that could bematerial.

***Costs Associatedwith Exit Activities.******  ***We are not aware of any events orchanges in circumstances at this time that would indicate to us that we need toconsider closing any of our existing stores. However, if events or changes incircumstances indicated that we need to close a store prior to the expirationof the related lease, we would record an expense for the difference between ourfuture remaining lease payments and related costs (e.g., real estate taxes andcommon area maintenance) from the date of closure through the end of theremaining lease term, net of expected future sublease rental income. The calculationof a location closing liability would require us to make assumptions and toapply judgment regarding the timing and duration of future vacancy periods, theamount and timing of future lump sum settlement payments and the amount andtiming of potential future sublease income.

When making these assumptions, we consider a number offactors, including historical settlement experience, the owner of the property,the location and condition of the property, the terms of the underlying lease,the specific marketplace demand and general economic conditions. If actualresults are not consistent with our assumptions and judgments, we may beexposed to additional charges that could be material.

***Income Taxes.******  ***We account forincome taxes in accordance with SFAS No. 109, *Accountingfor Income Taxes* which prescribes the use of the asset and liabilitymethod to compute the differences between the tax bases of assets andliabilities and the related financial amounts, using currently enacted taxlaws. Valuation allowances are established, when necessary, to reduce deferredtax assets to the amount that more likely than not will be realized.Realization of the deferred tax assets, net of deferred tax liabilities, isprincipally dependent upon achievement of projected future taxable incomeoffset by deferred tax liabilities. We exercise significant judgment indetermining our provisions for income taxes, our deferred tax assets andliabilities and our future taxable income for purposes of assessing our abilityto utilize any future tax benefit from our deferred tax assets. Although webelieve that our tax estimates are reasonable, the ultimate tax determinationinvolves significant judgments that could become subject to examination by taxauthorities in the ordinary course of business. We periodically assess thelikelihood of adverse outcomes resulting from these examinations to determinethe impact on our deferred taxes and income tax liabilities and the adequacy ofour provision for income taxes. Changes in income tax 

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legislation, statutoryincome tax rates, or future taxable income levels, among other things, couldmaterially impact our valuation of income tax assets and liabilities and couldcause our income tax provision to vary significantly among financial reportingperiods.

Prior to fiscal 2004, we had provided a valuationallowance for all net deferred tax assets. Because we achieved our secondconsecutive year of pre-tax book income in fiscal 2004 and expected to beprofitable in future years, we concluded that it was more likely than not thatall of our net deferred tax assets would be realized. As a result, inaccordance with SFAS No. 109, the valuation allowance applied to such netdeferred tax assets of $6.2 million at March 1, 2003, was reversedduring the fourth quarter of fiscal 2004.

***Vendor Allowances.*****  **We receiveallowances from certain vendors in various forms including promotional support,rebates and volume discounts. We establish a receivable for the vendorallowance that is earned but not yet received from our vendors. This receivableis based on provisions of the programs in place, and is computed by estimatingthe point at which we have completed our performance under the programs and theamount is earned. We use projected purchase volumes to estimate the amountearned, validate those projections based on actual purchase trends and applythose rates to actual purchase volumes to determine the receivable from thevendor. If actual results are not consistent with the assumptions and estimatesused, we could be exposed to additional adjustments that could positively ornegatively impact gross profit and inventory.

In 2002, the EmergingIssues Task Force (EITF) reached a consensus on Issue No. 02-16, *Accounting by a Customer (Including a Reseller) forCertain Consideration Received From a Vendor* (EITF No. 02-16).Effective for agreements entered into after December 31, 2002, EITF No. 02-16directs that consideration received from a vendor is presumed to be a reductionin the cost of inventory purchased and is recognized as a reduction of cost ofsales when the related inventory is sold. Vendor allowances received as areimbursement for specific, incremental and identifiable costs incurred topromote a vendor’s products are recorded as a reduction in advertising expense.

**Impact of RecentAccounting Pronouncements**

In December 2004, the FASB issued SFAS No. 123(revised), *Share-Based Payment*(SFAS No. 123(R)). SFAS No. 123(R) which requires compensationexpense to be measured based on the grant-date fair value of the award andrecognized over the requisite service period for awards that vest. SFAS No. 123(R) alsorequires a change in the classification of the benefits of tax deductions inexcess of recognized compensation cost from our operating cash flow to afinancing cash flow in periods after adoption. We adopted SFAS No. 123(R) effectiveFebruary 26, 2006. Pursuant to the transition requirements of SFAS No. 123(R) fora newly public entity, we are applying the modified prospective method only to unvestedawards that were granted on or after we became a public entity. Theunrecognized compensation cost relating to those awards will be recognized inour financial statements over the remaining requisite service period subsequentto our adoption of SFAS No. 123(R). We will apply the prospective transition method to unvestedawards granted prior to becoming a public company. The unrecognizedcompensation cost relating to those awards will continue to be recognized inour financial statements subsequent to our adoption of SFAS No. 123(R) usingthe intrinsic value method under APB Opinion No. 25.Accordingly, other than the stock optionsgranted in May 2005, no compensation expense will be recognized onunvested stock options granted prior to our IPO unless such awards aresubsequently modified. We expect net incomefor fiscal 2007 to include approximately $1.1 million, or $0.09 per dilutedshare, in non-cash stock-based compensation expense. The amount of compensationexpense recognized depends on numerous factors and estimates, including thenumber and vesting period of option grants, the publicly traded price of thecommon stock, the estimated volatility of the stock price, estimates of thetiming and volume of exercises and forfeitures of the options, and fluctuationsin future interest and income tax rates.

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In March 2005, the FASB issued Interpretation(FIN) No. 47, *Accounting forConditional Asset Retirement Obligations*. FIN No. 47 clarifies thatthe term “conditional asset retirement obligation,” as used in SFAS No. 143,*Accounting for Asset Retirement Obligations*,refers to a legal obligation to perform an asset retirement activity in whichthe timing and (or) method of settlement are conditional on a future event thatmay or may not be within the control of the company. FIN No. 47 was effectiveno later than the end of fiscal years ending after December 15, 2005. Theadoption of FIN No. 47 did not have an impact on our net income, cash flows orfinancial position.

In May 2005, the FASB issued SFAS No. 154*, Accounting Changes and Error Corrections, aReplacement of APB Opinion No. 20 and FASB Statement No. 3*.This statement changes the requirements for the accounting for and reporting ofa change in accounting principle. Rather than recognizing in net income acumulative effect adjustment, this statement generally requires retrospectiveapplication of a change in accounting principle to prior periods’ financialstatements. This statement is effective for accounting changes and correctionsof errors made in fiscal years beginning after December 15, 2005.

In June 2005, the EITF reached a consensus onIssue No. 05-6, *Determining theAmortization Period for Leasehold Improvements Purchased after Lease Inceptionor Acquired in a Business Combination* (EITF No. 05-6). EITFNo. 05-6 requires leasehold improvements in operating leases thatare either acquired after the beginning of the initial lease term or acquiredas the result of a business combination to be amortized over the shorter of theassets’ useful life or a term that includes the original lease term plus anyrenewals that are reasonably assured at the date the leasehold improvements arepurchased. EITF No. 05-6 was effective for reporting periodsbeginning after June 29, 2005. The adoption of EITF No. 05-6did not have a material impact on our net income, cash flows or financialposition.

In October 2005, theFASB issued FASB Staff Position (FSP) 13-1, *Accounting for Rental Costs Incurred During a Construction Period*.FSP 13-1 requires that rental costs associated with ground or buildingoperating leases that are incurred during a construction period be recognizedas rental expense. FSP 13-1 is effective for the first reporting periodbeginning after December 15, 2005. We have historically expensed rentalcosts incurred during a construction period. Accordingly, the adoption of FSP 13-1will not have an impact on our net income, cash flows or financial position.

**Item 7A.     Quantitative and Qualitative DisclosuresAbout Market Risk.**

Historically, we have borrowed under our revolvingcredit facility for seasonal liquidity needs. We had no borrowings under thecredit facility during fiscal 2006. To the extent we borrow under our revolvingcredit facility, which bears interest at floating rates based either on theprime rate or LIBOR, we are exposed to market risk related to changes ininterest rates. At February 25, 2006 and February 26, 2005, we didnot have any borrowings outstanding under our credit facility, although anyborrowings would have had an interest rate of 7.5% and 5.5% per annum,respectively. As we did not have any outstanding borrowings at February 25,2006 and February 26, 2005, there would have been no effect on our incomebefore income taxes if interest rates were to increase by 100 basis points. Weare not a party to any derivative financial instruments.

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**Item 8.        Financial Statements and SupplementaryData.**

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and ShareholdersGolf Galaxy, Inc.

We have audited the accompanying balance sheets ofGolf Galaxy, Inc. (the Company) as of February 25, 2006, and February 26,2005, and the related statements of operations, shareholders’ equity (deficit),and cash flows for each of three years in the period ended February 25,2006. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Golf Galaxy, Inc. at February 25,2006, and February 26, 2005, and the results of its operations and itscash flows for each of the three years in the period ended February 25,2006, in conformity with U.S. generally accepted accounting principles.
| /s/ ERNST &  YOUNG LLP |
|---------------------------------|
| Minneapolis, Minnesota          |
| March 31, 2006             |

 

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**GOLF GALAXY, INC.BALANCE SHEETS(In Thousands, Except Share and Per Share Amounts)**

| ** **                                                                                                                                   | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                   |       |                        |       |                        |       |   |   |   |   |
| Current assets:                                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                    |       |                        | $          | 3,245                       |       |   |   | $ | 11,075 |   |   |
| Accounts receivable, net of allowances of $50 and  $70, respectively                                                                         |       |                        | 3,455      |                        |       |   | 4,523 |   |   |
| Inventories, net                                                                                                                             |       |                        | 30,415     |                        |       |   | 45,278 |   |   |
| Deferred tax assets                                                                                                                          |       |                        | 2,219      |                        |       |   | 2,275 |   |   |
| Prepaid expenses and other                                                                                                                   |       |                        | 1,291      |                        |       |   | 2,921 |   |   |
| Total current  assets                                                                                                                        |       |                        | 40,625     |                        |       |   | 66,072 |   |   |
| Property and  equipment, net                                                                                                                 |       |                        | 21,832     |                        |       |   | 35,218 |   |   |
| Deferred tax  assets                                                                                                                         |       |                        | 2,272      |                        |       |   | 4,700 |   |   |
| Other assets                                                                                                                                 |       |                        | 408        |                        |       |   | 557 |   |   |
| Total assets                                                                                                                                 |       |                        | $          | 65,137                      |       |   |   | $ | 106,547 |   |   |
| **Liabilities and shareholders’  equity (deficit)**                                                                                     |       |                        |       |                        |       |   |   |   |   |
| Current liabilities:                                                                                                                         |       |                        |       |                        |       |   |   |   |   |
| Accounts payable                                                                                                                             |       |                        | $          | 15,826                      |       |   |   | $ | 23,224 |   |   |
| Accrued liabilities                                                                                                                          |       |                        | 11,675     |                        |       |   | 16,453 |   |   |
| Total current  liabilities                                                                                                                   |       |                        | 27,501     |                        |       |   | 39,677 |   |   |
| Deferred rent  credits and other                                                                                                             |       |                        | 6,831      |                        |       |   | 12,177 |   |   |
| Commitments and  contingencies *(Note 11)*                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Redeemable convertible  preferred stock, including accumulated undeclared preferred stock dividends:                                         |       |                        |       |                        |       |   |   |   |   |
| Preferred Series A, par value $1.00, Authorized  shares—80,000, Issued and outstanding shares—80,000 and 0, respectively |       |                        | 14,054     |                        |       |   | — |   |   |
| Preferred Series B, par value $1.00, Authorized  shares—35,000, Issued and outstanding shares—35,000 and 0, respectively |       |                        | 5,746      |                        |       |   | — |   |   |
| Preferred Series C, par value $1.00, Authorized  shares—100,000, Issued and outstanding shares—100,000 and 0, respectively    |       |                        | 15,623     |                        |       |   | — |   |   |
| Preferred Series D, par value $1.00, Authorized  shares—150,000, Issued and outstanding shares—94,000 and 0, respectively     |       |                        | 13,318     |                        |       |   | — |   |   |
|                                                                                                                                         |       |                        | 48,741     |                        |       |   | — |   |   |
| Shareholders’ equity  (deficit):                                                                                                        |       |                        |       |                        |       |   |   |   |   |
| Common stock, par  value $0.01 per share:                                                                                                    |       |                        |       |                        |       |   |   |   |   |
| Authorized shares—40,000,000                                                                                                            |       |                        |       |                        |       |   |   |   |   |
| Issued and outstanding shares—1,883,969 and  10,671,803, respectively                                                                   |       |                        | 19         |                        |       |   | 107 |   |   |
| Additional paid-in capital                                                                                                                   |       |                        | —     |                        |       |   | 68,961 |   |   |
| Accumulated deficit                                                                                                                          |       |                        | (17,955    | )                           |       |   | (14,375 | ) |   |
| Total  shareholders’ equity (deficit)                                                                                                   |       |                        | (17,936    | )                           |       |   | 54,693 |   |   |
| Total liabilities and  shareholders’ equity (deficit)                                                                                   |       |                        | $          | 65,137                      |       |   |   | $ | 106,547 |   |   |

 

See accompanying notes.

 

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**GOLFGALAXY, INC.STATEMENTS OF OPERATIONS(In Thousands, Except Share and Per Share Amounts)**

| ** **                                      | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **February 28,  2004**     | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
| Net sales                                       |       | $                               | 99,630     |   | $ | 133,080 |   | $ | 200,130 |   |
| Cost of sales                                   |       | 72,403                          |       | 93,964 |   | 141,392 |   |
| Gross profit                                    |       | 27,227                          |       | 39,116 |   | 58,738 |   |
| Operating expenses:                             |       |                            |       |   |   |   |   |
| Store operating                                 |       | 16,677                          |       | 24,382 |   | 37,512 |   |
| General and administrative                      |       | 6,876                           |       | 8,372 |   | 10,033 |   |
| Preopening                                      |       | 1,065                           |       | 2,095 |   | 2,923 |   |
| Total operating  expenses                       |       | 24,618                          |       | 34,849 |   | 50,468 |   |
| Income from  operations                         |       | 2,609                           |       | 4,267 |   | 8,270 |   |
| Other income* *                            |       | —                          |       | 8,410 |   | — |   |
| Interest income  (expense), net                 |       | (177                            | )          | (4 | ) | 439 |   |
| Income before  income taxes                     |       | 2,432                           |       | 12,673 |   | 8,709 |   |
| Income tax  (expense) benefit                   |       | 5,145                           |       | (5,135 | ) | (3,443 | ) |
| Net income                                      |       | 7,577                           |       | 7,538 |   | 5,266 |   |
| Less preferred  stock dividends                 |       | (3,430                          | )          | (3,696 | ) | (1,721 | ) |
| Net income  applicable to common shareholders   |       | $                               | 4,147      |   | $ | 3,842 |   | 3,545 |   |
| Net income per share:                           |       |                            |       |   |   |   |   |
| Basic                                           |       | $                               | 2.29       |   | $ | 2.06 |   | $ | 0.51 |   |
| Diluted                                         |       | $                               | 0.99       |   | $ | 0.98 |   | $ | 0.47 |   |
| Weighted average number  of shares outstanding: |       |                            |       |   |   |   |   |
| Basic                                           |       | 1,814,046                       |       | 1,865,928 |   | 6,993,088 |   |
| Diluted                                         |       | 7,691,169                       |       | 7,721,333 |   | 7,542,385 |   |

 

See accompanying notes.

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**GOLFGALAXY, INC.STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)(In Thousands, Except Share Amounts)**

| ** **                                       | ** ** | **Common Stock**   | ** ** | **Additional** | ** ** | ** **           | ** ** | ** **               | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------------|------------|----------------------|------------|--------------------------|------------|
| ** **                                       | ** ** | **Shares  Outstanding** | ** ** | **Par  Value** | ** ** | **Paid-In  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total** | ** ** |
| Balance at  March 1, 2003                   |       | 1,804,266               |       | $              | 18         |                 |       | $                        | —     |   |   |   | $ | (26,396 | ) |   | $ | (26,378 | ) |
| Stock options and  warrants exercised            |       | 57,679                  |       | 1              |       |                 | 313        |                     |       |   | — |   |   | 314 |   |
| Accrual of  preferred stock dividends            |       | —                  |       | —         |       |                 | (313       | )                        |       |   | (3,117 | ) |   | (3,430 | ) |
| Net income                                       |       | —                  |       | —         |       |                 | —     |                     |       |   | 7,577 |   |   | 7,577 |   |
| Balance at  February 28, 2004               |       | 1,861,945               |       | 19             |       |                 | —     |                     |       |   | (21,936 | ) |   | (21,917 | ) |
| Unregistered sale  of stock                      |       | 20,000                  |       | —         |       |                 | 126        |                     |       |   | — |   |   | 126 |   |
| Stock options and  warrants exercised            |       | 2,024                   |       | —         |       |                 | 13         |                     |       |   | — |   |   | 13 |   |
| Accrual of  preferred stock dividends            |       | —                  |       | —         |       |                 | (139       | )                        |       |   | (3,557 | ) |   | (3,696 | ) |
| Net income                                       |       | —                  |       | —         |       |                 | —     |                     |       |   | 7,538 |   |   | 7,538 |   |
| Balance at  February 26, 2005               |       | 1,883,969               |       | 19             |       |                 | —     |                     |       |   | (17,955 | ) |   | (17,936 | ) |
| Accrual of  preferred stock dividends            |       | —                  |       | —         |       |                 | (35        | )                        |       |   | (1,686 | ) |   | (1,721 | ) |
| Shares sold in  initial public offering          |       | 3,000,000               |       | 30             |       |                 | 37,873     |                     |       |   | — |   |   | 37,903 |   |
| Conversion of  preferred stock into common stock |       | 5,752,467               |       | 58             |       |                 | 30,843     |                     |       |   | — |   |   | 30,901 |   |
| Stock options and  warrants exercised            |       | 35,367                  |       | —         |       |                 | 173        |                     |       |   | — |   |   | 173 |   |
| Stock-based  compensation                        |       | —                  |       | —         |       |                 | 107        |                     |       |   | — |   |   | 107 |   |
| Net income                                       |       | —                  |       | —         |       |                 | —     |                     |       |   | 5,266 |   |   | 5,266 |   |
| Balance at February 25,  2006               |       | 10,671,803              |       | $              | 107        |                 |       | $                        | 68,961     |   |   |   | $ | (14,375 | ) |   | $ | 54,693 |   |

 

See accompanying notes.

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**GOLF GALAXY, INC.STATEMENTS OF CASH FLOWS(In Thousands)**

| ** **                                                                                             | ** ** | **Fiscal Year Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                             | ** ** | **February 28,  2004**     | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
| **Operating activities**                                                                               |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                             |       |                            | $          | 7,577 |   |   |   | $ | 7,538 |   |   |   | $ | 5,266 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities:                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Realized gain on Golf Town Canada Inc. stock                                                      |       |                            | —     |   |   |   | (8,410 | ) |   |   | — |   |   |
| Depreciation and amortization                                                                          |       |                            | 2,401      |   |   |   | 3,229 |   |   |   | 5,139 |   |   |
| Loss on disposal of property and equipment                                                             |       |                            | 21         |   |   |   | 179 |   |   |   | 38 |   |   |
| Amortization of debt issuance costs                                                                    |       |                            | 29         |   |   |   | 20 |   |   |   | 14 |   |   |
| Deferred income taxes                                                                                  |       |                            | (5,340     | ) |   |   | 849 |   |   |   | (2,484 | ) |   |
| Stock-based compensation                                                                               |       |                            | 198        |   |   |   | 1 |   |   |   | 107 |   |   |
| Change in  operating assets and liabilities:                                                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                                                                    |       |                            | (374       | ) |   |   | (1,750 | ) |   |   | (1,068 | ) |   |
| Inventories                                                                                            |       |                            | (10,290    | ) |   |   | (4,851 | ) |   |   | (14,863 | ) |   |
| Prepaid expenses and other                                                                             |       |                            | (132       | ) |   |   | (519 | ) |   |   | (1,630 | ) |   |
| Accounts payable                                                                                       |       |                            | 8,367      |   |   |   | (742 | ) |   |   | 7,398 |   |   |
| Accrued liabilities and other                                                                          |       |                            | 2,319      |   |   |   | 5,623 |   |   |   | 7,667 |   |   |
| Net cash provided  by operating activities                                                             |       |                            | 4,776      |   |   |   | 1,167 |   |   |   | 5,584 |   |   |
| **Investing activities**                                                                               |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Purchases of  property and equipment                                                                   |       |                            | (4,121     | ) |   |   | (11,364 | ) |   |   | (16,220 | ) |   |
| Proceeds from  sale of Golf Town Canada Inc. stock                                                |       |                            | —     |   |   |   | 8,416 |   |   |   | — |   |   |
| Net cash used in  investing activities                                                                 |       |                            | (4,121     | ) |   |   | (2,948 | ) |   |   | (16,220 | ) |   |
| **Financing activities**                                                                               |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Proceeds from  initial public offering, net                                                            |       |                            | —     |   |   |   | — |   |   |   | 37,903 |   |   |
| Proceeds from the  sale of unregistered stock                                                          |       |                            | —     |   |   |   | 126 |   |   |   | — |   |   |
| Proceeds from the  exercise of stock options and warrants                                              |       |                            | 115        |   |   |   | 12 |   |   |   | 125 |   |   |
| Credit facility  issuance costs                                                                        |       |                            | —     |   |   |   | (55 | ) |   |   | — |   |   |
| Payment of  preferred stock dividends                                                                  |       |                            | —     |   |   |   | — |   |   |   | (19,562 | ) |   |
| Net cash (used  in) provided by financing activities                                                   |       |                            | 115        |   |   |   | 83 |   |   |   | 18,466 |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                  |       |                            | 770        |   |   |   | (1,698 | ) |   |   | 7,830 |   |   |
| Cash and cash  equivalents, beginning of year                                                          |       |                            | 4,173      |   |   |   | 4,943 |   |   |   | 3,245 |   |   |
| Cash and cash  equivalents, end of year                                                                |       |                            | $          | 4,943 |   |   |   | $ | 3,245 |   |   |   | $ | 11,075 |   |   |
| **Supplemental disclosure of cash  flow information**                                                  |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Cash paid during the  year for:                                                                        |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Interest                                                                                               |       |                            | $          | 127 |   |   |   | $ | 2 |   |   |   | $ | 2 |   |   |
| Taxes                                                                                                  |       |                            | $          | 131 |   |   |   | $ | 4,268 |   |   |   | $ | 6,761 |   |   |
| **Supplemental disclosure of  non-cash investing and financing activities**                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Purchases of  property and equipment awaiting processing for payment, included in accrued  liabilities |       |                            | $          | 1,329 |   |   |   | $ | 2,417 |   |   |   | $ | 4,760 |   |   |
| Conversion of preferred  stock into common stock                                                       |       |                            | —     |   |   |   | — |   |   |   | $ | 30,900 |   |   |

 

See accompanying notes.

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**GOLF GALAXY, INC.**

**NOTESTO FINANCIAL STATEMENTS**

**1.**                 Descriptionof Business and Basis of Presentation

Golf Galaxy, Inc. (the Company), a Minnesotacorporation, is a leading golf specialty retailer offering “*Everything for the Game.*” The Companyfeatures a distinctive combination of competitively priced merchandise from theleading national brands in golf equipment and apparel, together with expertnon-commissioned sales assistance and pro shop services, all in an interactivesuperstore format. The Company opened its first store in April 1997 and,as of February 25, 2006, it owned and operated 50 stores in 23 statesand an eCommerce Internet site. The Company’s initial growth was fundedsubstantially through institutional preferred equity financing (see Note 9)and was replaced during fiscal 2006 by the net proceeds raised through itsinitial public offering (IPO) (see Note 3).

In the first quarter offiscal 2007, the Company completed its acquisition of Ralph Maltby Enterprises, Inc.a/k/a The GolfWorks (The GolfWorks) (see Note 13). The GolfWorks will beoperated as a wholly owned subsidiary of the Company. The financial statementsand accompanying notes exclude the results of The GolfWorks for all periodspresented.

**2.**                 Summaryof Significant Accounting Policies

**Use of Estimates**

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of net sales and expenses during the reporting period. Ultimate resultscould differ from those estimates.

**Fiscal Year**

The Company’s fiscal yearends on the Saturday closest to the end of February, resulting in fiscal yearsof 52 or 53 weeks in length. Fiscal 2004, 2005 and 2006 present the results ofoperations for the 52-week periods ended February 28, 2004, February 26,2005, and February 25, 2006, respectively. Fiscal 2007 will be a 53-weekperiod ending March 3, 2007.

**Cash and CashEquivalents**

Cash and cash equivalentsconsist primarily of balances in bank operating accounts and short-term liquidinvestments with maturities of less than 90 days.

**Accounts Receivable**

Accounts receivableconsist primarily of vendor and credit card receivables, net of an allowancefor doubtful accounts. The allowance is based on historical experience andgeneral economic and industry conditions.

**Inventories**

Inventories are stated atthe lower of cost or estimated market value. Cost is determined by the weightedaverage cost method. Inventories consist of the direct cost of merchandiseincluding freight, net of reserves for estimated shrinkage and valuationadjustments, and certain vendor discounts and allowances.

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**Property andEquipment**

Property and equipment are recorded at cost.Depreciation is computed on a straight-line basis over the estimated usefullives. Depreciable lives range from three to ten years for fixtures andequipment and the lesser of ten years or the minimum lease term for leaseholdimprovements. Assets held under capital leases are included in property andequipment at the present value of the future minimum lease payments and aredepreciated over the terms of the related leases. Construction in processconsists of leaseholds, fixtures and equipment to be placed in service as newstores open.

The Company evaluates itslong-lived assets in accordance with Statement of Financial AccountingStandards (SFAS) No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*. The carryingvalue of long-lived assets is reviewed periodically for impairment andrecoverability, including the consideration of any changes in circumstancesrelated to the assets. The carrying value of long-lived assets is compared tothe estimated future undiscounted cash flows associated with those assets.Based on the Company’s evaluation, no write-down of the carrying value of itslong-lived assets was recorded during fiscal 2004, 2005 or 2006.

**Other Assets**

Other assets include debtissuance costs, which are amortized over the term of the debt agreement, anddeposits on leased properties. As of February 26, 2005 and February 25,2006, other assets are presented net of accumulated amortization of $5,000 and$19,000, respectively. In fiscal 2005, certain debt issuance costs were removedwhen they became fully amortized.

**FinancialInstruments**

The carrying amounts forall financial instruments approximate fair value due to the short-term natureof these instruments.

**Stock-BasedCompensation**

The Company has stock-based employeecompensation plans, which are described more fully in Note 10. The Companyhas elected to apply the disclosure-only provisions of SFAS No. 123, *Accounting for Stock-Based Compensation,*as amended by SFAS No. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB Statement No. 123*.Accordingly, the Company accounts for stock-based compensation using theintrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25,*Accounting for Stock Issued to Employees*,and related interpretations. Compensation cost for stock options is measured asthe excess, if any, of the fair value of the Company’s common stock at the dateof grant over the stock option exercise price and is recognized ratably overthe vesting period.

Other than the stock options granted in May 2005,all stock options granted under the plans had an exercise price equal to thefair value of the common stock at the time of grant, resulting in nocompensation expense recorded for the issuance of stock options.

In May 2005, the Company’s Board of Directorsgranted incentive stock options to purchase 138,000 shares of common stockat an exercise price of $8.00 per share based on an independently appraisedvalue as of the most recent fiscal year-end. In addition to the Company’sfinancial results and growth prospects, the appraisal considered other factors,including the Company’s capital structure as a private company and the relativesubordination of the common stock in relation to the preferred stock at thedate of the appraisal.

Since the exercise price of the stock options grantedin May 2005 was below the then-anticipated price range of the Company’sproposed IPO, the Company is recognizing compensation expense ratably over the 

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four-year vesting periodof the options based on the difference between the mid-point of the anticipatedIPO price range at the time of grant and the exercise price of the options. The Company recorded pre-tax compensation expenseof $107,000 during fiscal 2006 related to the stock options granted in May 2005.

The Company recorded pre-tax compensation expense of$198,000 and $1,000 in connection with the disposition of certain sharesrelated to the exercise of certain stock options in fiscal 2004 and fiscal2005, respectively.

If theCompany had elected to apply the fair value recognition provisions under SFAS No. 123,the Company’s net income would have been adjusted to the following pro formaamounts (in thousands, except per share amounts):

| ** **                                                                                                  | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                  | ** ** | **February 28,  2004**     | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
| Net income  applicable to common shareholders                                                               |       |                            | $          | 4,147 |   |   |   | $ | 3,842 |   |   |   | $ | 3,545 |   |   |
| Add stock-based  compensation expense, net of tax                                                           |       |                            | 104        |   |   |   | 1 |   |   |   | 64 |   |   |
| Deduct total  stock-based compensation determined under fair-value-based  method for all awards, net of tax |       |                            | (110       | ) |   |   | (140 | ) |   |   | (381 | ) |   |
| Pro forma net  income                                                                                       |       |                            | $          | 4,141 |   |   |   | $ | 3,703 |   |   |   | $ | 3,228 |   |   |
| Net income per share:                                                                                       |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Basic—as reported                                                                                      |       |                            | $          | 2.29 |   |   |   | $ | 2.06 |   |   |   | $ | 0.51 |   |   |
| Basic—pro forma                                                                                        |       |                            | $          | 2.28 |   |   |   | $ | 1.98 |   |   |   | $ | 0.46 |   |   |
| Diluted—as reported                                                                                    |       |                            | $          | 0.99 |   |   |   | $ | 0.98 |   |   |   | $ | 0.47 |   |   |
| Diluted—pro forma                                                                                      |       |                            | $          | 0.98 |   |   |   | $ | 0.96 |   |   |   | $ | 0.43 |   |   |
| Weighted Average  Assumptions:                                                                              |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Risk-free interest rate                                                                                     |       |                            | 3.0        | % |   |   | 3.4 | % |   |   | 4.2 | % |   |
| Expected dividends                                                                                          |       |                            | —     |   |   |   | — |   |   |   | — |   |   |
| Estimated average life                                                                                      |       |                            | 6 years    |   |   |   | 6 years |   |   |   | 5 years |   |   |
| Volatility                                                                                                  |       |                            | —     |   |   |   | — |   |   |   | 50 | % |   |

 

The fair value of eachoption was estimated on the date of grant using the weighted averageassumptions provided above. Prior to the Company’s IPO, fair value wasestimated using the minimum value method. Subsequent to the IPO, the Companyestimates the fair value of each option on the grant date using theBlack-Scholes option-pricing model. Based on these assumptions, the estimatedweighted average fair value of the options granted in fiscal 2004, 2005 and2006 was $1.02, $1.14 and $6.54, respectively. Because of the limited historyof market trading in the Company’s common stock, estimated volatility for theoptions granted after the IPO was based on an average of the volatilityreported by a peer group of publicly traded companies. Options granted prior tothe IPO were measured with an estimated volatility of 0%.

**Revenue Recognition**

The Company recognizes netsales at the time goods are delivered or services are provided to a customer,net of customer returns. Services comprised less than 4% of net sales for eachyear presented.

**Gift Cards**

Receipts from the sales ofgift cards are deferred and recognized as net sales when redeemed by thecustomer. The Company’s gift cards do not expire; any gift card presentedin-store or on the Company’s eCommerce Internet site is honored for its fullremaining value. The Company regularly reviews its liability for gift cardobligations considering the age, amount and activity on the outstanding cards,as well as 

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overallredemption trends. The Company adjusts the liability when the likelihood of thegift card being redeemed by the customer is remote and determines that it doesnot have a legal obligation to remit the unredeemed gift cards as unclaimedproperty. Adjustments to the liability are included in store operating expensesand have not been material to the Company’s net income.

**Customer Incentives**

The Company offers certainincentives to its customers to promote additional sales. Incentives includediscounts, coupons and other offers that permit a customer to receive areduction in the price of a product or service. The incentives are not earnedby the customer on the basis of previous purchases and the reduction in netsales is recognized at the time the product or service is sold.

**Cost of Sales**

Cost of sales includes thecost of merchandise sold net of certain vendor allowances related toadvertising; freight; inventory shrinkage; store occupancy costs; customershipping and handling charges; and direct costs related to providing servicesincluding depreciation of service equipment. Store occupancy costs includerent, real estate taxes and common area maintenance charges, and exclude storedepreciation and other facility costs, which are considered to be part of storeoperating expenses.

**Vendor Allowances**

The Company receivesallowances from certain vendors in various forms including promotional support,rebates and volume discounts. In 2002, the Emerging Issues Task Force (EITF)reached a consensus on Issue No. 02-16, *Accountingby a Customer (Including a Reseller) for Certain Consideration Received From aVendor*. Effective for agreements entered into after December 31,2002, EITF Issue No. 02-16 directs that consideration received from avendor is presumed to be a reduction in the cost of inventory purchased and isrecognized as a reduction of cost of sales when the related inventory is sold.Vendor allowances received as a reimbursement for specific, incremental andidentifiable costs incurred to promote a vendor’s products are recorded as areduction in advertising expense.

**Operating Leases**

The Company recognizesrent expense for its store leases on a straight-line basis over the initiallease term, excluding any lease renewal option periods. Rent expense begins onthe earlier of the commencement date of the lease or the date when the Companytakes possession of the property. Allowances and incentives received from thelandlord are classified as deferred rent credits and are recorded as areduction to rent expense over the same initial lease term.

**Advertising Costs**

Advertising costs are expensedas incurred. Certain third-party preparation costs related to producingthe Company’s direct mail pieces and television advertising are deferred andare fully expensed when the mail pieces are distributed or when the televisionspots are first aired. Advertising costs were $4,451,000, $6,628,000 and$9,694,000 for fiscal 2004, 2005 and 2006, respectively. Advertising productioncosts of $304,000 and $430,000 were included in prepaid expenses at February 26,2005 and February 25, 2006, respectively. There were no vendor allowancesrecorded as an offset to advertising expense for any periods presented. See “VendorAllowances” above.

**Income Taxes**

The Company provides forincome taxes utilizing the liability approach. The liability approach requiresrecognition of deferred tax liabilities and assets for the expected futureconsequences of 

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temporarydifferences between the financial reporting basis and the tax basis of assetsand liabilities at current tax rates. A valuation allowance is recorded when itis more likely than not that some portion or all of the deferred income taxassets will not be realized.

**Store PreopeningCosts**

The Company expenses allstore preopening costs as incurred, including certain occupancy, payroll,supplies, incremental advertising and other costs incurred in the preparationand opening of new retail locations.

**Store Closing Costs**

In accordance with SFAS No. 146,*Accounting for Costs Associated with Exit orDisposal Activities*, the present value of costs associated withlocation closings, if they occur, will be charged to general and administrativeexpense when a location is closed. Costs associated with location closings mayinclude lease obligations, disposals of property and equipment, employeecompensation and other related closing costs.

**Net Income PerShare**

Basic earnings per share is computed based on theweighted average number of common shares outstanding. Diluted earnings pershare is computed based on the weighted average number of common sharesoutstanding adjusted by the number of additional shares that would have beenoutstanding had potentially dilutive common shares been issued. Potentiallydilutive shares of common stock include certain common stock options, warrantsand convertible preferred stock, depending on the estimated fair market valueof the common stock and amount of net income (loss) for the period measured.Net income per diluted share for the fiscal year ended February 25, 2006excludes the following potentially dilutive securities because they were anti-dilutive:61,900 outstanding common stock options and 2,402,129 weighted-average commonshares arising from the convertible preferred stock for the period prior to theIPO. The excluded shares could potentially dilute basic earnings per share infuture periods.

Thefollowing table presents a reconciliation of the numerators and denominators ofbasic and diluted earnings per common share:

| ** **                                           | ** ** | **Year Ended**         | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **February 28,  2004** | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
| Numerator:                                           |       |                        |       |   |   |   |   |
| Net income applicable to shareholders, as reported   |       | $                           | 4,147,000  |   | $ | 3,842,000 |   | $ | 3,545,000 |   |
| Add accrued preferred stock dividends                |       | 3,430,000                   |       | 3,696,000 |   | — |   |
| Numerator for  diluted earnings per share            |       | $                           | 7,577,000  |   | $ | 7,538,000 |   | $ | 3,545,000 |   |
| Denominator:                                         |       |                        |       |   |   |   |   |
| Weighted average number of common shares outstanding |       | 1,814,046                   |       | 1,865,928 |   | 6,993,088 |   |
| Effect of  dilutive securities:                      |       |                        |       |   |   |   |   |
| Outstanding stock options and warrants               |       | 124,656                     |       | 102,938 |   | 549,298 |   |
| Convertible preferred stock                          |       | 5,752,467                   |       | 5,752,467 |   | — |   |
| Denominator for  diluted earnings per share          |       | 7,691,169                   |       | 7,721,333 |   | 7,542,385 |   |
| Net income per share:                                |       |                        |       |   |   |   |   |
| Basic—as reported                               |       | $                           | 2.29       |   | $ | 2.06 |   | $ | 0.51 |   |
| Diluted—as  reported                            |       | $                           | 0.99       |   | $ | 0.98 |   | $ | 0.47 |   |

 

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**Recently IssuedAccounting Standards**

In December 2004, the FASB issued SFAS No. 123(revised), *Share-Based Payment*(SFAS No. 123(R)). SFAS No. 123(R) will require thatcompensation expense be measured based on the grant-date fair value of theaward and recognized over the requisite service period for awards that vest.SFAS No. 123(R) also will require a change in the classification ofthe benefits of tax deductions in excess of recognized compensation cost froman operating cash flow to a financing cash flow in periods after adoption. Wewill adopt SFAS No. 123(R) at the beginning of 2007. Pursuant to thetransition requirements of SFAS No. 123 (R) for a newly publicentity, we are applying the modified prospective method only to unvested awardsthat were granted on or after we became a public entity. The unrecognizedcompensation cost relating to those awards will be recognized in the financialstatements over the remaining requisite service period subsequent to adoptingSFAS No. 123(R). Wewill apply the prospective transition method to unvested awards granted priorto becoming a public company. The unrecognized compensation cost relating tothose awards will continue to be recognized in the financial statementssubsequent to adoption of SFAS No. 123(R) using the intrinsic valuemethod under APB Opinion No. 25.Accordingly,other than the stock options granted in May 2005, no compensation expensewill be recognized on unvested stock options granted prior to the IPO unlesssuch awards are subsequently modified. Weexpect net income for fiscal 2007 to include approximately $1.1 million, or$0.09 per diluted share, in non-cash stock-based compensation expense. Theamount of compensation expense recognized depends on numerous factors andestimates, including the number and vesting period of option grants, thepublicly traded price of the common stock, estimated volatility of the stockprice, estimates of the timing and volume of exercises and forfeitures of theoptions and fluctuations in future interest and income tax rates.

In March 2005, the FASB issued Interpretation(FIN) No. 47, *Accounting forConditional Asset Retirement Obligations*. FIN 47 clarifies that theterm “conditional asset retirement obligation,” as used in SFAS No. 143, *Accounting for Asset Retirement Obligations*,refers to a legal obligation to perform an asset retirement activity in whichthe timing and (or) method of settlement are conditional on a future event thatmay or may not be within the control of the Company. FIN 47 was effective nolater than the end of fiscal years ending after December 15, 2005. Theadoption of FIN 47 did not have an impact on our net income, cash flows orfinancial position.

In May 2005, the FASB issued SFAS No. 154*, Accounting Changes and Error Corrections, aReplacement of APB Opinion No. 20 and FASB Statement No. 3*.This statement changes the requirements for the accounting for and reporting ofa change in accounting principle. Rather than recognizing in net income acumulative effect adjustment, this statement generally requires retrospectiveapplication of a change in accounting principle to prior periods’ financialstatements. This statement is effective for accounting changes and correctionsof errors made in fiscal years beginning after December 15, 2005.

In June 2005, the EITF reached a consensus onIssue No. 05-6, *Determining the AmortizationPeriod for Leasehold Improvements Purchased after Lease Inception or Acquiredin a Business Combination* (EITF No. 05-6). EITFNo. 05-6 requires leasehold improvements in operating leases thatare either acquired after the beginning of the initial lease term or acquiredas the result of a business combination to be amortized over the shorter of theassets’ useful life or a term that includes the original lease term plus anyrenewals that are reasonably assured at the date the leasehold improvements arepurchased. EITF No. 05-6 was effective for reporting periodsbeginning after June 29, 2005. The adoption of EITF No. 05-6did not have a material impact on the Company’s net income, cash flows orfinancial position.

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In October 2005, theFASB issued FASB Staff Position (FSP) 13-1, *Accounting for Rental Costs Incurred During a Construction Period*.FSP 13-1 requires that rental costs associated with ground or buildingoperating leases that are incurred during a construction period be recognizedas rental expense. FSP 13-1 is effective for the first reporting periodafter December 15, 2005. We have historically expensed rental costsincurred during a construction period; therefore, the adoption of FSP 13-1will not have an impact on our net income, cash flows or financial position.

**3.**                 InitialPublic Offering

The Company completed its IPO, as of August 3,2005, issuing 3,000,000 common shares at an offering price of $14.00. As partof the IPO, all of the outstanding preferred stock was converted into 5,752,467shares of common stock, of which 1,542,500 were sold in the IPO, resulting in atotal offering of 4,542,500 common shares. The Company’s common stock trades onthe Nasdaq National Market under the symbol “GGXY.”

After issuance costs, the Company received netproceeds of $37.9 million, of which $19.6 million was used to pay preferredshareholders all of the accrued and unpaid dividends due upon the conversion oftheir shares of preferred stock into shares of the Company’s common stock. Theremainder of the net proceeds has been used primarily to fund capitalinvestments at new stores and the March 2006 acquisition of The GolfWorks (see Note 13).

The holders of theremaining unregistered shares of common stock resulting from the conversion ofthe preferred stock have defined demand registration rights.

**4.**                 GolfTown Canada Inc.

In 1998, the Company entered into a consultingagreement to assist in the development of Golf Town Canada Inc. (Golf TownCanada), a golf retailer based in Canada. Under the agreement, the Companyreceived payments in certain years related to consulting services and the useof certain advertising resources. The payments were not material to thefinancial results of the Company. In addition, the consulting agreementprovided the Company with a minority equity interest in Golf Town Canada and aposition on its Board of Directors. The equity interest was accounted for on acost basis and was not material to the Company’s financial statements.

During fiscal 2005, GolfTown Canada sold all of its assets to the newly formed Golf Town Canada IncomeFund as part of its initial public offering as a Canadian income fund. As partof the transaction, the Company surrendered its entire equity interest in GolfTown Canada for cash, resulting in a net realized gain before taxes of $8.4million. The Company has no further service obligations with regards to GolfTown Canada and no longer holds a position on its Board of Directors. As partof an agreement between the companies, there are restrictions on the Company’sability to open retail stores in Canada until 2008 and Golf Town Canada’sability to open retail stores in the United States until 2013.

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**5.**                 Propertyand Equipment

Majorclasses of depreciable assets are as follows (in thousands):

| ** **                                      | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Fixtures and  equipment                         |       |                        | $          | 16,141                      |       |   |   | $ | 24,755 |   |   |
| Leasehold  improvements                         |       |                        | 13,459     |                        |       |   | 19,831 |   |   |
| Construction in  process                        |       |                        | 6,329      |                        |       |   | 9,671 |   |   |
|                                            |       |                        | 35,929     |                        |       |   | 54,257 |   |   |
| Less accumulated  depreciation and amortization |       |                        | (14,097    | )                           |       |   | (19,039 | ) |   |
| Net property and  equipment                     |       |                        | $          | 21,832                      |       |   |   | $ | 35,218 |   |   |

 

**6.**                 AccruedLiabilities

Accruedliabilities consisted of the following (in thousands):

| ** **                                  | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Gift card and  customer deposit liabilities |       |                        | $          | 4,506                       |       |   |   | $ | 6,375 |   |   |
| Construction  costs                         |       |                        | 2,417      |                        |       |   | 4,760 |   |   |
| Payroll and  related benefits               |       |                        | 2,112      |                        |       |   | 1,409 |   |   |
| Taxes, other than  income taxes             |       |                        | 984        |                        |       |   | 1,193 |   |   |
| Occupancy                                   |       |                        | 507        |                        |       |   | 1,031 |   |   |
| Other                                       |       |                        | 1,149      |                        |       |   | 1,685 |   |   |
|                                        |       |                        | $          | 11,675                      |       |   |   | $ | 16,453 |   |   |

 

**7.**                 RevolvingCredit Facility

In October 2004, the Company entered into arevolving credit facility agreement (Credit Agreement) with a commercial bankthat provides borrowing capacity for working capital financing and funding forother general corporate purposes through October 2008. The commitmentunder the Credit Agreement provides for borrowings up to $15 million, including$5 million in letters of credit. At the Company’s option, the facility can beexpanded to a borrowing capacity of $20 million. Borrowings under the CreditAgreement are secured by the Company’s inventories, accounts receivable andfinancial and intangible assets.

The Credit Agreement includes reporting requirementsto the lender and certain restrictions on the Company’s ability to change itscapital structure, incur additional debt or pay dividends. In addition, theCredit Agreement requires the Company to maintain a minimum availability of 10%of the commitment under the credit facility at all times. The Company was incompliance with all covenants related to the Credit Agreement at February 26,2005 and February 25, 2006.

Availability under the Credit Agreement is limited tocertain percentages of eligible inventory and receivables, as defined, and was$15 million at February 26, 2005 and February 25, 2006, respectively.The interest rate on borrowings under the credit facility is based on the primelending rate or an adjusted LIBOR rate as defined in the Credit Agreement. TheCredit Agreement provides for administrative fees, letter of credit commitmentfees and fees of 0.25% applied to the unused facility commitment. There were noborrowings outstanding at February 26, 2005 or February 25, 2006.

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Interestexpense and other costs related to the revolving credit facility are presentednet of interest income earned on the Company’s cash and cash equivalents. Netinterest income (expense) is comprised of the following (in thousands):

| ** **                      | ** ** | **Year Ended**         | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **February 28,  2004** | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
| Interest  (expense)             |       |                        | $          | (256 | ) |   |   | $ | (114 | ) |   |   | $ | (65 | ) |   |
| Interest income                 |       |                        | 79         |   |   |   | 110 |   |   |   | 504 |   |   |
| Interest income  (expense), net |       |                        | $          | (177 | ) |   |   | $ | (4 | ) |   |   | $ | 439 |   |   |

 

**8.**                 IncomeTaxes

Theincome tax expense (benefit) provision is comprised of the following (inthousands):

| ** **                        | ** ** | **Year Ended**         | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **February 28,  2004** | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
| Current:                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Federal                           |       |                        | $          | 100 |   |   |   | $ | 3,209 |   |   |   | $ | 5,051 |   |   |
| State                             |       |                        | 95         |   |   |   | 1,077 |   |   |   | 876 |   |   |
| Deferred                          |       |                        | 845        |   |   |   | 849 |   |   |   | (2,484 | ) |   |
| Total                             |       |                        | 1,040      |   |   |   | 5,135 |   |   |   | 3,443 |   |   |
| Change in  valuation allowance    |       |                        | (6,185     | ) |   |   | — |   |   |   | — |   |   |
| Net income tax expense  (benefit) |       |                        | $          | (5,145 | ) |   |   | $ | 5,135 |   |   |   | $ | 3,443 |   |   |

 

Reconciliations of the U.S. federal statutoryincome tax rate to the effective tax rate are as follows:

| ** **                                            | ** ** | **February 28,  2004** | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| U.S. federal  statutory income tax rate               |       |                        | 34.0       | %                           |       |                        | 34.0       | % |   |   | 34.2 | % |   |
| State income  taxes, net of federal income tax effect |       |                        | 6.0        |                        |       |                        | 6.8        |   |   |   | 5.3 |   |   |
| Other adjustments  to taxable income                  |       |                        | 2.7        |                        |       |                        | (0.3       | ) |   |   | — |   |   |
| Change in  valuation allowance                        |       |                        | (254.3     | )                           |       |                        | —     |   |   |   | — |   |   |
| Effective tax rate                                    |       |                        | (211.6     | )%                          |       |                        | 40.5       | % |   |   | 39.5 | % |   |

 

Deferred income taxes result from the net taxeffects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for incometax purposes. Significant components of the net deferred tax assets were asfollows (in thousands):

| ** **                                 | ** ** | **February 26,  2005** | ** ** | **February 25,  2006** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Deferred tax  assets:                      |       |                        |       |                        |       |   |   |   |   |
| Gift card and customer deposit liabilities |       |                        | $          | 1,712                       |       |   |   | $ | 549 |   |   |
| Rent expense                               |       |                        | 2,355      |                        |       |   | 4,463 |   |   |
| Inventory                                  |       |                        | 363        |                        |       |   | 1,350 |   |   |
| Depreciation                               |       |                        | 39         |                        |       |   | 531 |   |   |
| Other expenses                             |       |                        | 22         |                        |       |   | 82 |   |   |
| Net deferred taxes                         |       |                        | $          | 4,491                       |       |   |   | $ | 6,975 |   |   |

 

During fiscal 2005, theCompany utilized all of its remaining federal net operating loss carryforwardsfor income tax purposes. Prior to fiscal 2004, the Company had established avaluation allowance for the 

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fullvalue of the loss of carryforwards and other deferred tax assets because ofuncertainty regarding the Company’s ability to realize their value. Duringfiscal 2004, the Company reversed the remaining valuation allowance based onupdated estimates that it was more likely than not that the full value of thedeferred tax assets would be realized.

**9.**                 RedeemableConvertible Preferred Stock

Prior to fiscal 2002, the Company issued 309,000shares of redeemable convertible preferred stock in four series (together,Preferred Stock). Proceeds from the issuance of the Preferred Stock were usedprimarily to fund the opening of new stores and the funding of operating lossesduring the initial period of the Company’s expansion.

On May 16, 2005, the Company entered into aconversion agreement with the holders of the Preferred Stock (ConversionAgreement) to be effective upon the closing of the Company’s IPO. Pursuant tothe Conversion Agreement, such holders converted all of the Preferred Stockinto shares of common stock according to the defined conversion rates for each Series ofPreferred Stock. In addition, all accumulated and outstanding Preferred Stockdividends were paid to the holders of the Preferred Stock out of the netproceeds from the IPO. Pursuant to the Conversion Agreement, the holders of thePreferred Stock waived certain rights, including anti-dilution andpreemptive rights, defined registration and redemption rights, and rights todesignate or elect members of the Board of Directors. The holders of thePreferred Stock retain certain demand registration rights related to theunregistered common stock resulting from conversion.

ThePreferred Stock was converted into shares of common stock as follows:

| Series | ** ** | ** ** | ** ** | **Number of Preferred  Shares Prior to Conversion** | ** ** | **Conversion  Price Per Share** | ** ** | **Number of Common  Shares Issued Upon  Conversion** | ** ** |
|--------|------------|------------|------------|------------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| A      |       |       | 80,000     |                                                                         |       |                                      | $          | 4.35                                                                     |       |   |   | 1,839,079 |   |   |
| B      |       |       | 35,000     |                                                                         |       |                                      | 5.20       |                                                                     |       |   | 673,076 |   |   |
| C      |       |       | 100,000    |                                                                         |       |                                      | 5.72       |                                                                     |       |   | 1,748,249 |   |   |
| D      |       |       | 94,000     |                                                                         |       |                                      | 6.30       |                                                                     |       |   | 1,492,063 |   |   |

 

No shares of preferredstock were outstanding following the closing of the Company’s IPO. The Company’sarticles of incorporation permit it to issue up to 10,000,000 shares ofpreferred stock without shareholder approval.

**10.**          CommonStock

In fiscal 2005, the numberof common shares authorized was increased from 11,000,000 to 40,000,000 shareswith a par value of $0.01. Certain shares of the Company’s common stock,including the shares issued upon the conversion of the Preferred Stock andexercise of the warrant, are subject to registration rights, as defined.

***Stock Options***

The Company’s 1996 Stock Option and Incentive Plan and2004 Stock Incentive Plan (together, Plans) provide for the issuance ofincentive and non-qualified stock options. Options are granted at the fairmarket value as of the grant date, are exercisable ratably over variousperiods, and expire up to ten years after the date of grant.

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As of February 26,2005 and February 25, 2006, 2,000,000 common shares were authorized forissuance under the Plans. Stock option activity under the Plans was as follows:

| ** **                                      | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **February 28, 2004** | ** ** | **February 26, 2005** | ** ** | **February 25, 2006** | ** ** |
| ** **                                      | ** ** | **Shares**                      | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding,  beginning of  period              |       | 702,325                         |       |   | $ | 4.83 |   |   | 698,100 |   |   | $ | 5.21 |   |   | 915,275 |   |   | $ | 5.47 |   |   |
| Issued                                          |       | 129,500                         |       |   | 6.30 |   |   | 252,900 |   |   | 6.30 |   |   | 388,900 |   |   | 12.42 |   |   |
| Forfeited                                       |       | (47,475                         | )          |   | 5.78 |   |   | (32,075 | ) |   | 6.28 |   |   | (39,800 | ) |   | 8.31 |   |   |
| Exercised                                       |       | (86,250                         | )          |   | 3.43 |   |   | (3,650 | ) |   | 5.91 |   |   | (25,431 | ) |   | 4.90 |   |   |
| Outstanding, end  of period                     |       | 698,100                         |       |   | 5.21 |   |   | 915,275 |   |   | 5.47 |   |   | 1,238,944 |   |   | 7.58 |   |   |
| Exercisable, end  of period                     |       | 420,450                         |       |   | 4.52 |   |   | 525,706 |   |   | 4.86 |   |   | 643,999 |   |   | 5.48 |   |   |
| Weighted average fair  value of options granted |       | $                               | 1.02       |   |   |   |   |   | $ | 1.14 |   |   |   |   |   | $ | 6.54 |   |   |   |   |   |
|                                                 |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table summarizes information about stock options outstanding at February 25,2006:

| ** **                                                   | ** ** | **Total Options Outstanding** | ** ** | **Exercisable Options** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------|------------|
| **Range of  Exercise  Prices**                          | ** ** | ** **                              | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $  3.00  - $  5.72                       |       |                                    | 350,450    |                         |       |   | 2.3 years |   |   |   | $ | 4.25 |   |   |   | 350,450 |   |   |   | $ | 4.25 |   |   |
|     6.30  -     8.00 |       |                                    | 646,644    |                         |       |   | 7.7 years |   |   |   | 6.64 |   |   |   | 274,549 |   |   |   | 6.30 |   |   |
|   14.00  -   18.77                       |       |                                    | 241,850    |                         |       |   | 9.5 years |   |   |   | 14.92 |   |   |   | 19,000 |   |   |   | 16.26 |   |   |
|     3.00  -   18.77            |       |                                    | 1,238,944  |                         |       |   |   |   |   |   |   |   |   |   | 643,999 |   |   |   |   |   |   |
|                                                              |            |                                         |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Warrant**

A warrant to purchase14,921 shares of common stock with an exercise price of $6.30 per share, issuedin connection with the private offering of Series D Preferred Stock, wasexercised in full during September 2005. There were no warrantsoutstanding as of February 25, 2006.

**11.**          Commitmentsand Contingencies

**Operating LeaseCommitments**

The Company leases its retail store locations, officespace and certain office equipment under operating leases expiring through 2022with various renewal options. The operating leases require base monthly rentsplus executory costs such as real estate taxes, insurance and maintenance.Certain retail store location leases provide for additional contingent rentalsbased upon a percentage of sales at the respective locations. These contingentrental costs were not significant for the periods presented.

The Company records rent expense on a straight-linebasis for operating leases with increasing base rent terms. Landlord allowancesand incentives are deferred and amortized over the term of the lease. Rentexpenses under the operating leases, including executory costs, accrual ofdeferred rent credits and amortization of landlord allowance, wereapproximately $7,553,000, $9,891,000 and $14,781,000 in fiscal 2004, 2005 and 2006,respectively.

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Futureminimum operating lease payments, excluding executory costs, consist of thefollowing as of February 25, 2006 (in thousands):

| Fiscal year: |   |   |    |
|--------------|--------|--------|---------|
| 2007         |   | $      | 15,340  |   |
| 2008         |   | 16,619 |    |
| 2009         |   | 16,313 |    |
| 2010         |   | 15,160 |    |
| 2011         |   | 13,639 |    |
| Thereafter   |   | 63,187 |    |
|         |   | $      | 140,258 |   |

 

**Litigation**

The Company is not a partyto any legal proceedings outside of the normal course of business. Managementbelieves that the ultimate resolution of these matters will not have a materialadverse effect on the Company’s financial position or results of operations.

**Employment andRetention Agreements**

**TheCompany currently has employment and retention agreements with certainofficers, which provide for continuation of compensation and benefits for adefined period following termination under certain circumstances.**

**BusinessConsiderations**

The Company purchasesproducts from a number of distributors and manufacturers. During fiscal 2006,the Company purchased approximately 60% of its merchandise from its fivelargest suppliers, and 26.0% of the Company’s accounts receivable atFebruary 25, 2006, relate to those suppliers. The Company believes itsvendor relationships are satisfactory.

**12.   EmployeeBenefit Plan**

The Company has a definedcontribution 401(k) profit sharing plan (the Plan) for eligible employees,which is qualified under Sections 401(a) and 401(k) of the InternalRevenue Code of 1986, as amended. Employees are entitled to make tax-deferredcontributions of up to 75% of their eligible compensation. EffectiveJuly 1, 2005, the Company began matching 50% of the first 4% of eligiblecompensation contributed to the Plan by each participant. The Company’smatching contributions vest after four years of service, at age 591¤2regardless of service or upon the death of the employee. The Company’s matchingcontributions to the Plan for fiscal 2006 was $70,000. The Company did not makeany matching contributions to the Plan during fiscal 2004 or fiscal 2005. Futurematching contributions to the Plan are at the Company’s sole discretion.

**13.   SubsequentEvent—Acquisition of Ralph Maltby Enterprises, Inc. a/k/a The GolfWorks**

On March 16, 2006, the Company acquired all ofthe outstanding shares of Ralph Maltby Enterprises, Inc. a/k/a TheGolfWorks (The GolfWorks) for a combination of cash and stock. Founded in 1976,The GolfWorks is one of thegolf industry’s most complete sources for golf club components, club makingtools and supplies, and technical information. The GolfWorks isprimarily a direct marketer with product offerings that include a complete complement of proprietary clubheads,as well as a full selection of name brand shafts and grips, sold throughits catalogs and its Internet site at *www.GolfWorks.com*.In addition, The GolfWorks manufactures a proprietary line of club componentsand club making tools and 

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supplies. Following the close of the acquisition, The GolfWorks will operate as awholly owned subsidiary of the Company. 

The acquisition of The GolfWorks will be accounted forunder the purchase method of accounting. Accordingly, the results of TheGolfWorks will be included in the Company’s consolidated financial statementsas a wholly owned subsidiary beginning on March 16, 2006. The aggregatepurchase price, excluding direct costs of the acquisition, consisted of $3.7million in cash ($500,000 of which has been deposited into an indemnificationescrow); 250,862 shares of the Company’s common stock valued at $4.8 millionbased on the average closing price of the Company’s common stock on the NasdaqNational Market during a five-day trading period beginning three trading daysprior to the announcement of the acquisition; and warrants to purchase 150,000shares of the Company’s common stock with a fair value of $1.4 million,determined using the Black-Scholes option pricing model. The warrants have anexercise price of $17.94 per share and a 10-year term expiring on March 16,2016. The Company also assumed $5.4 million in debt from The GolfWorks.Following the acquisition, the Company repaid all outstanding debt of TheGolfWorks with a combination of available cash and borrowings under the Company’scredit facility.

The Company is in theprocess of obtaining third-party valuations of certain intangible and long-livedassets, thus the allocation of the purchase price to major asset and liabilitycaptions is currently being completed.

**14.   Supplementary Financial Information(Unaudited)**

*Selected quarterly financial data.*

The following tables setforth certain unaudited financial and operating data for each quarter of fiscal2005 and fiscal 2006. The accompanying unaudited financial and operating datahas been prepared in accordance with GAAP for interim financial information. Inthe opinion of management, the unaudited quarterly information reflects alladjustments, which include only normal and recurring adjustments, considerednecessary to present fairly the information shown.

| ** **                                 | ** ** | **Fiscal 2005**                                                                                    | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Quarter Ended  May 29, 2004**                                                          | ** ** | **Quarter Ended  August 28, 2004** | ** ** | **Quarter Ended  Nov. 27, 2004** | ** ** | **Quarter Ended  Feb. 26, 2005** | ** ** |
| ** **                                 | ** ** | **(in thousands, except per share data,  store data and selling square feet)** | ** ** |
| Net sales                                  |       |                                                                                                    | $          | 38,419 |   |   |   | $ | 47,540 |   |   |   | $ | 20,281 |   |   |   | $ | 26,840 |   |   |
| Gross profit                               |       |                                                                                                    | 11,563     |   |   |   | 14,875 |   |   |   | 5,089 |   |   |   | 7,589 |   |   |
| Gross profit as a  percentage of net sales |       |                                                                                                    | 30.1       | % |   |   | 31.3 | % |   |   | 25.1 | % |   |   | 28.3 | % |   |
| Store operating  expenses                  |       |                                                                                                    | 6,972      |   |   |   | 7,127 |   |   |   | 4,793 |   |   |   | 5,490 |   |   |
| General and  administrative expenses       |       |                                                                                                    | 2,147      |   |   |   | 1,842 |   |   |   | 2,520 |   |   |   | 1,863 |   |   |
| Preopening  expenses                       |       |                                                                                                    | 518        |   |   |   | 46 |   |   |   | 599 |   |   |   | 932 |   |   |
| Income (loss)  from operations             |       |                                                                                                    | 1,926      |   |   |   | 5,860 |   |   |   | (2,823 | ) |   |   | (696 | ) |   |
| Other Income(1)                            |       |                                                                                                    | —     |   |   |   | — |   |   |   | 8,410 |   |   |   | — |   |   |
| Income (loss)  before income taxes         |       |                                                                                                    | 1,890      |   |   |   | 5,864 |   |   |   | 5,598 |   |   |   | (679 | ) |   |
| Net income (loss)                          |       |                                                                                                    | $          | 1,125 |   |   |   | $ | 3,513 |   |   |   | $ | 3,351 |   |   |   | $ | (451 | ) |   |
| Basic net income  (loss) per share         |       |                                                                                                    | $          | 0.12 |   |   |   | $ | 1.39 |   |   |   | $ | 1.30 |   |   |   | $ | (0.74 | ) |   |
| Diluted net  income (loss) per share       |       |                                                                                                    | $          | 0.11 |   |   |   | $ | 0.46 |   |   |   | $ | 0.43 |   |   |   | $ | (0.74 | ) |   |
| Weighted average shares  outstanding:      |       |                                                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                      |       |                                                                                                    | 1,862      |   |   |   | 1,862 |   |   |   | 1,863 |   |   |   | 1,877 |   |   |
| Diluted                                    |       |                                                                                                    | 1,951      |   |   |   | 7,704 |   |   |   | 7,704 |   |   |   | 1,877 |   |   |
| Comparable store  sales increase(2)        |       |                                                                                                    | 7.4        | % |   |   | 5.9 | % |   |   | 9.9 | % |   |   | 4.8 | % |   |
| Stores opened  during the period           |       |                                                                                                    | 5          |   |   |   | — |   |   |   | 3 |   |   |   | 2 |   |   |
| Number of stores at  end of period         |       |                                                                                                    | 29         |   |   |   | 29 |   |   |   | 32 |   |   |   | 34 |   |   |
| Selling square feet at  end of period      |       |                                                                                                    | 450,370    |   |   |   | 450,370 |   |   |   | 486,737 |   |   |   | 516,551 |   |   |

 

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| ** **                                 | ** ** | **Fiscal 2006**                                                                                    | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Quarter Ended  May 28, 2005**                                                          | ** ** | **Quarter Ended  August 27, 2005** | ** ** | **Quarter Ended  Nov. 26, 2005** | ** ** | **Quarter Ended  Feb. 25, 2006** | ** ** |
| ** **                                 | ** ** | **(in thousands, except per share data,  store data and selling square feet)** | ** ** |
| Net sales                                  |       |                                                                                                    | $          | 58,570 |   |   |   | $ | 69,635 |   |   |   | $ | 31,800 |   |   |   | $ | 40,125 |   |   |
| Gross profit                               |       |                                                                                                    | 18,228     |   |   |   | 22,070 |   |   |   | 7,885 |   |   |   | 10,555 |   |   |
| Gross profit as a  percentage of net sales |       |                                                                                                    | 31.1       | % |   |   | 31.7 | % |   |   | 24.8 | % |   |   | 26.3 | % |   |
| Store operating  expenses                  |       |                                                                                                    | 10,932     |   |   |   | 10,773 |   |   |   | 7,594 |   |   |   | 8,213 |   |   |
| General and  administrative expenses       |       |                                                                                                    | 3,102      |   |   |   | 2,155 |   |   |   | 2,527 |   |   |   | 2,249 |   |   |
| Preopening  expenses                       |       |                                                                                                    | 1,310      |   |   |   | 40 |   |   |   | 662 |   |   |   | 911 |   |   |
| Income (loss)  from operations             |       |                                                                                                    | 2,884      |   |   |   | 9,102 |   |   |   | (2,898 | ) |   |   | (818 | ) |   |
| Income (loss)  before income taxes         |       |                                                                                                    | 2,899      |   |   |   | 9,202 |   |   |   | (2,726 | ) |   |   | (666 | ) |   |
| Net income (loss)                          |       |                                                                                                    | $          | 1,693 |   |   |   | $ | 5,447 |   |   |   | $ | (1,609 | ) |   |   | $ | (265 | ) |   |
| Basic net income  (loss) per share         |       |                                                                                                    | $          | 0.37 |   |   |   | $ | 0.98 |   |   |   | $ | (0.15 | ) |   |   | $ | (0.02 | ) |   |
| Diluted net  income (loss) per share       |       |                                                                                                    | $          | 0.21 |   |   |   | $ | 0.59 |   |   |   | $ | (0.15 | ) |   |   | $ | (0.02 | ) |   |
| Weighted average  shares outstanding:      |       |                                                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                      |       |                                                                                                    | 1,884      |   |   |   | 4,801 |   |   |   | 10,653 |   |   |   | 10,666 |   |   |
| Diluted                                    |       |                                                                                                    | 8,043      |   |   |   | 9,212 |   |   |   | 10,653 |   |   |   | 10,666 |   |   |
| Comparable store sales  increase(2)        |       |                                                                                                    | 10.5       | % |   |   | 7.4 | % |   |   | 6.7 | % |   |   | 2.5 | % |   |
| Stores opened  during the period           |       |                                                                                                    | 11         |   |   |   | — |   |   |   | 4 |   |   |   | 1 |   |   |
| Number of stores  at end of period         |       |                                                                                                    | 45         |   |   |   | 45 |   |   |   | 49 |   |   |   | 50 |   |   |
| Selling square feet at  end of period      |       |                                                                                                    | 671,953    |   |   |   | 671,953 |   |   |   | 727,112 |   |   |   | 738,615 |   |   |

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(1)                We sold our equityinvestment in Golf Town Canada Inc. during the third quarter of fiscal 2005 fora pre-tax gain of $8.4 million.

(2)                Anew or relocated store is included in the comparable store base after it hasbeen in operation for 12 full fiscal months following the month of thestore’s grand opening weekend. A store that is closed for remodel or repair isexcluded from the comparable store sales calculation during the period ofclosure and the comparable period of the succeeding year. Sales from oureCommerce operations are not included in the comparable store salescalculation.

Our business is subject to seasonal fluctuations, withthe highest sales activity and all income from operations occurring during thefirst and second quarters of our fiscal year. Many of our stores are located inmidwestern and northeastern states where late spring and summer represent thepeak of the golf season. It is possible the impact of seasonal fluctuationscould change as we continue to expand into additional geographic regions. TheFather’s Day holiday in June drives a significant seasonal sales increase,and sales also increase during the year-end holiday season, albeit to a lesserextent.

Our quarterly operating results may also fluctuatesignificantly because of other factors. Customers demand for our products andservices, and consequently our sales, can also be significantly impacted byweather conditions that affect outdoor activities like golf and the demand forgolf-related apparel, accessories, equipment and services. The timing of newstore openings and related expenses; the profitability of new stores; theimpact on store results during remodeling; changes in retail competition in ourmarkets; and general economic conditions, also affect our quarterly results.The fixed costs of our operations make our operating results sensitive tochanges, favorable and unfavorable, in demand for our products and services.Due to these factors, results for any particular quarter may not be indicativeof results to be expected for any other quarter or for a full fiscal year.

Our preopening expenseshave varied from quarter to quarter primarily due to the timing of storeopenings. We have historically opened the majority of our new stores in eitherthe first or third quarters of the fiscal year. Going forward, we anticipatethat store openings will occur predominantly in the first, third and fourthquarters of the fiscal year. We typically incur most preopening expenses for anew store during 

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thethree months immediately preceding its opening. In addition, our labor andoperating costs for a newly opened store are typically higher than a maturestore. Accordingly, the volume and timing of new store openings in any quarterhas had and is expected to continue to have a significant impact on quarterlypreopening costs and store labor and operating expenses.

**Item 9.**                        Changesin and Disagreements With Accountants on Accounting and Financial Disclosure.

Not applicable.

**Item 9A.**                Controlsand Procedures.

*Disclosure controlsand procedures.*

As of the end of theperiod covered by this report, we conducted an evaluation, under thesupervision and with the participation of our principal executive officer andprincipal financial and accounting officer, of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act). Based on this evaluation, the principal executive officerand principal financial officer concluded that our disclosure controls andprocedures are effective to ensure that information required to be disclosed byus in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms.

*Changes in internalcontrol over financial reporting.*

There was no change in ourinternal control over financial reporting identified in connection with theevaluation required by Rule 13a-15(d) and 15d-15(d) of theExchange Act that occurred during the period covered by this report that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

**Item 9B.**               OtherInformation.

Not applicable.

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**PART III**

**Item 10.      Directors and Executive Officers of theRegistrant.**

*Identification ofdirectors.*

Thefollowing table sets forth the name, age and position of each of our directorsas of May 1, 2006.

| **Name**             | ** ** | ** ** | ** ** | **Age** | ** ** | ** **                                       | **Position** | ** ** | ** ** |
|----------------------|------------|------------|------------|---------|------------|--------------------------------------------------|--------------|------------|------------|
| Randall K.  Zanatta  |       |       | 48         |    |       | President,  Chief Executive Officer and Chairman |         |
| Gregory B. Maanum    |       |       | 44         |    |       | Chief  Operating Officer and Director            |         |
| David E. Bloom       |       |       | 56         |    |       | Director                                         |         |
| Jack W. Eugster      |       |       | 60         |    |       | Director                                         |         |
| David S. Gellman     |       |       | 48         |    |       | Director                                         |         |
| Thomas C. Healy      |       |       | 44         |    |       | Director                                         |         |
| William C.  Mulligan |       |       | 52         |    |       | Director                                         |         |
| Gregg S. Newmark     |       |       | 47         |    |       | Director                                         |         |

** **

**RandallK. Zanatta**is our President, Chief Executive Officerand Chairman of our board of directors. Mr. Zanatta co-founded our companywith Mr. Maanum in December 1995. Before co-founding our company, Mr. Zanattaspent 17 years with Best Buy Co., Inc., a consumer electronicsretailer, from 1979 through 1995, most recently as senior vice president—marketingand merchandising. During Mr. Zanatta’s tenure at Best Buy Co., Inc.,Mr. Zanatta also served on the executive committee, which was the primaryguiding body of the organization.

**GregoryB. Maanum**is our Chief Operating Officer and adirector of our company. Mr. Maanum co-founded our company with Mr. Zanattain December 1995. Mr. Maanum directly oversees our merchandising andinventory planning functions. He also directs our real estate selectionprocess, store design and construction activities. In addition, Mr. Maanumhas overall responsibility for our retail sales and operations. Beforeco-founding our company, Mr. Maanum spent 12 years with Best Buy Co., Inc.from 1982 through 1995, most recently as vice president—visual merchandisingafter founding Best Buy’s visual merchandising department.

**DavidE. Bloom**has been a director of our company since February 1999.Mr. Bloom is the president and chief executive officer and serves on theboard of Le Gourmet Chef. From 1994 to 1998, he served as chief executiveofficer of Sneaker Stadium, an athletic shoe retail company that he founded.From 1984 to 1994, he served as president of two other retail companies, Herman’sWorld Sporting Goods and Record World. Mr. Bloom is a director ofEmergency Filtration Products, Inc., a publicly held manufacturer of masksand filters for medical devices.

**JackW. Eugster**has been a director of our company since October 2000.Mr. Eugster was the chairman of the board, president and chief executiveofficer of Musicland Stores Corporation, a pre-packaged music and movieretailer, when he retired in 2001. Mr. Eugster is a director of DonaldsonCompany, Inc., a manufacturer of filtration systems and replacement parts;a director of Graco, Inc., a manufacturer of pumps and spraying equipment;a director and former chairman of the board for ShopKo Stores, Inc., aregional retailer of a variety of goods and services; and a director of BlackHills Corp., an integrated power company based in Rapid City, South Dakota.

**DavidS. Gellman**has been a director of our company since July 1999.Since 1995, Mr. Gellman has been a managing director of F*d*G Associates, a private equity investmentfirm. From 1988 to 1995, he was an investment professional with AEAInvestors Inc., a private equity firm. Mr. Gellman also serves on theboards of directors of several privately held companies.

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**ThomasC. Healy**has been a director of our company since August 2004.Mr. Healy is executive vice president—Best Buy For Business of Best BuyCo., Inc., a consumer electronics retailer, where he has been employedsince 1990. He has served Best Buy in several capacities, including as a seniorvice president—segment lead from 2003 to 2004, and as president—Best BuyInternational from 2001 to 2003.

**WilliamC. Mulligan**has been a director of our company since January 1998.Mr. Mulligan has been a managing director of Primus Venture Partners, Inc.a private equity investment firm, since July 1985. Mr. Mulliganserves on the board of directors of Universal Electronics, Inc., apublicly held developer and manufacturer of universal remote controls. Mr. Mulliganalso serves on the boards of directors of several privately held companies.

**Gregg S. Newmark**hasbeen a director of our company since January 1998. Mr. Newmark hasbeen with William Blair Capital Partners, a private equity investment firm,since 1985, serving as managing director since 1995, and is a principal ofWilliam Blair & Company. Mr. Newmark’s principal responsibilitiesat William Blair Capital Partners include sourcing and managing investments. Mr. Newmarkalso serves on the boards of directors of several privately held companies.

*Identification ofexecutive officers.*

Information regarding ourexecutive and other officers is furnished in a separate item captioned *Executive officers of the registrant* andincluded in Part I of this Report.

*Familyrelationships.*

There are no familyrelationships among our directors. Mark R. McCormick, our Senior Vice President—CEOof The GolfWorks, is the brother of Michael W. McCormick, our Chief MarketingOfficer. Additional information concerning the nature of any familyrelationship between any director, executive officer or person nominated orchosen by the Company to become a director or executive officer is provided inItem 13, *Certain Relationships and RelatedParty Transactions*, of this Report.

*Audit committeefinancial expert and Identification of the audit committee.*

Our board of directors hasestablished an audit committee. Our audit committee acts under a writtencharter adopted and approved by the board of directors and is comprised ofthree individuals, Messrs. Newmark, Mulligan and Eugster, all of whom have been determined by our board ofdirectors to be independent directors in accordance with the rules of theNasdaq National Market and relevant securities laws and regulations. Thecommittee’s charter is posted on our Internet site at *www.GolfGalaxy.com*—under “Investors,” select the “CorporateGovernance” link. The audit committee assists our board of directors inmonitoring the integrity of our financial statements; the independent auditor’sperformance, qualifications and independence; the performance of our internalaudit function; and our compliance with legal and regulatory requirements. Allmembers of the committee meet the SEC definition of independence and financialliteracy for audit committee members. In addition, all three members of ouraudit committee have been determined by the board of directors to be financialexperts for purposes of the SEC rules.

*Director nominationprocess.*

The nominating andgovernance committee assists our board of directors in promoting our bestinterests and the best interests of our shareholders through the implementationof sound corporate governance principles and practices. In furtherance of thispurpose, the nominating and governance committee identifies individualsqualified to become members of our board of directors and recommends to ourboard the director nominees for the next regular meeting of shareholders. Italso reviews the qualifications and independence of the members of our board ofdirectors and its various committees on a regular basis and makes suchrecommendations the committee members may deem appropriate from time 

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to timeconcerning any recommended changes in the composition of our board of directorsand its committees. The nominating and governance committee also monitors theperformance of our board of directors and our compliance with any commitmentsmade to our regulators regarding changes in corporate governance practices.

*Compliance withsection 16(a) of the Exchange Act.*

***Section 16(a) BeneficialOwnership Reporting Compliance***

Section 16(a) ofthe Securities Exchange Act of 1934 requires that our directors, executiveofficers and shareholders who own more than 10% of our Common Stock fileinitial reports of ownership with the SEC. They must also file reports ofchanges in ownership with the SEC. In addition, they are required by SECregulations to provide us copies of all Section 16(a) reports thatthey file with the SEC. Based solely on our review of such Section 16(a) reports,management and the Board of Directors believe our directors, executive officersand owners of more than 10% of our outstanding equity securities complied withthe reporting requirements during the fiscal year ended February 25, 2006.

*Code of Ethics.*

Our board of directors has adopted our Code of Conductapplicable to our directors, executive officers, including our chief financialofficer and other of our senior financial officers, and employees, inaccordance with applicable rules and regulations of the SEC and the NasdaqNational Market. Our Code of Conduct is available at our Internet site at *www.GolfGalaxy.com*.

A copy of the Code of Conduct also may be obtainedupon request, without charge, by contacting our Investor Relations department by calling (952) 252-1339, by sending anemail to *investor@golfgalaxy.com*or upon written request to:

Investor RelationsGolf Galaxy, Inc.7275 Flying Cloud DriveEden Prairie, MN 55344

Any amendments or waiversof the Code of Conduct for directors or executive officers must be approved bythe board and must be disclosed to shareholders, along with the reasons for theamendment or waiver, in a Form 8-K within four business days of theamendment or waiver granted by the board. We intend to satisfy the disclosurerequirement under Item 5.05 of Form 8-K regarding an amendment to,or a waiver of a provision of, Code of Conduct that applies to our directors orexecutive officers, including our principal executive officer or principalfinancial and accounting officer, by disclosing the required information on ourInternet website within four business days following the date of the amendmentor waiver. Any such amendment or waiver can be accessed on our Internet website at *www.GolfGalaxy.com*.

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**Item 11.      Executive Compensation.**

*SummaryCompensation Table—*

Thefollowing table shows the cash and non-cash compensation for each of the lastthree fiscal years awarded to or earned during the period by our ChiefExecutive Officer and the four other most highly compensated executiveofficers.

|                                            | ** ** | ** **           | ** ** | ** **                   | ** ** | **Long Term  Compensation** | ** ** | ** **                                                                          | ** ** |
|--------------------------------------------|------------|----------------------|------------|------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | ** **           | ** ** | ** **                   | ** ** | ** **                       | ** ** | **Securities**                                                                      | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **           | ** ** | **Annual Compensation** | ** ** | **Underlying**                   | ** ** | **All other**                                                                  | ** ** |
| Name and principal position | ** ** | **Fiscal Year** | ** ** | **Salary**                   | ** ** | **Bonus**(1)                     | ** ** | **      Options      ** | ** ** | **compensation**(2) | ** ** |
| Randall K. Zanatta                         |       |                 | 2006       |                         |       | $                                | 256,923    |                                                                                |       | $ | — |   |   |   | 43,500 |   |   |   | $ | 4,793 |   |   |
| *President, Chief Executive*               |       |                 | 2005       |                         |       | 237,500                          |       |                                                                                | 118,750    |   |   |   | 10,000 |   |   |   | 4,777 |   |   |
| *Officer  and Chairman*                    |       |                 | 2004       |                         |       | 224,385                          |       |                                                                                | 112,192    |   |   |   | — |   |   |   | 4,608 |   |   |
| Gregory B. Maanum                          |       |                 | 2006       |                         |       | 236,923                          |       |                                                                                | —     |   |   |   | 43,500 |   |   |   | 4,793 |   |   |
| *Chief Operating  Officer*                 |       |                 | 2005       |                         |       | 217,692                          |       |                                                                                | 108,846    |   |   |   | 10,000 |   |   |   | 4,777 |   |   |
|                                       |       |                 | 2004       |                         |       | 205,231                          |       |                                                                                | 102,615    |   |   |   | — |   |   |   | 4,608 |   |   |
| Michael W. McCormick                       |       |                 | 2006       |                         |       | 227,231                          |       |                                                                                | —     |   |   |   | 45,000 |   |   |   | 4,793 |   |   |
| *Chief Marketing Officer*                  |       |                 | 2005       |                         |       | 209,692                          |       |                                                                                | 104,846    |   |   |   | 10,000 |   |   |   | 4,777 |   |   |
|                                            |       |                 | 2004       |                         |       | 200,000                          |       |                                                                                | 100,000    |   |   |   | 25,000 |   |   |   | 919 |   |   |
| Ronald G. Hornbaker                        |       |                 | 2006       |                         |       | 181,923                          |       |                                                                                | —     |   |   |   | 47,500 |   |   |   | 4,793 |   |   |
| *Senior  Vice President-Sales*             |       |                 | 2005       |                         |       | 163,269                          |       |                                                                                | 81,634     |   |   |   | 10,000 |   |   |   | 4,777 |   |   |
| *and  Operations*                          |       |                 | 2004       |                         |       | 148,731                          |       |                                                                                | 74,365     |   |   |   | — |   |   |   | — |   |   |
| Richard C. Nordvold                        |       |                 | 2006       |                         |       | 170,154                          |       |                                                                                | —     |   |   |   | 20,000 |   |   |   | 4,793 |   |   |
| *Chief Financial Officer*                  |       |                 | 2005       |                         |       | 147,692                          |       |                                                                                | 73,846     |   |   |   | 75,000 |   |   |   | 3,858 |   |   |
|                                            |       |                 | 2004       |                         |       | —                           |       |                                                                                | —     |   |   |   | — |   |   |   | — |   |   |
|                                            |            |                      |            |                              |            |                                  |            |                                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)                Earnedin respect of a fiscal year but paid in the following fiscal year.

(2)                Consistsof medical and dental health insurance premiums paid on behalf of the officerswhich are not available generally to all our employees.

*Option/SAR Grants Table.*

Thefollowing table summarizes the options granted to our Chief Executive Officerand the four other most highly compensated executive officers of Golf Galaxyduring the fiscal year ended February 25, 2006. The table also shows thevalue of all options held by these individuals at the end of fiscal 2006.

|                      | ** ** | **Individual Grants** | ** ** | ** **                       | ** ** |
|----------------------|------------|----------------------------|------------|----------------------------------|------------|
| ** **           | ** ** | **Number of**         | ** ** | **Percent of total**   | ** ** | ** ** | ** ** | ** ** | ** ** | **Potential realizable value at** | ** ** |
| ** **           | ** ** | **securities**             | ** ** | **options granted to** | ** ** | ** ** | ** ** | ** ** | ** ** | **assumed annual rates of** | ** ** |
| ** **           | ** ** | **underlying**             | ** ** | **employees in**            | ** ** | **Exercise** | ** ** | ** ** | ** ** | **appreciation for option term**(1) | ** ** |
| Name                 | ** ** | ** **                 | ** ** | **Options granted**         | ** ** | **fiscal year** | ** ** | **price** | ** ** | **Expiration date** | ** ** | **         5%         ** | ** ** | **         10%         ** | ** ** |
| Randall K. Zanatta   |       |                       | 22,500     |                             |       |   | 6.25 | % |   |   | $ | 8.00 |   |   |   | 5/3/2015 |   |   |   | $ | 113,201 |   |   |   | $ | 286,874 |   |   |
|                      |       |                       | 21,000     |                             |       |   | 5.83 | % |   |   | 14.00 |   |   |   | 7/28/2015 |   |   |   | 184,895 |   |   |   | 468,560 |   |   |
| Gregory B. Maanum    |       |                       | 22,500     |                             |       |   | 6.25 | % |   |   | 8.00 |   |   |   | 5/3/2015 |   |   |   | 113,201 |   |   |   | 286,874 |   |   |
|                 |       |                       | 21,000     |                             |       |   | 5.83 | % |   |   | 14.00 |   |   |   | 7/28/2015 |   |   |   | 184,895 |   |   |   | 468,560 |   |   |
| Michael W. McCormick |       |                       | 22,500     |                             |       |   | 6.25 | % |   |   | 8.00 |   |   |   | 5/3/2015 |   |   |   | 113,201 |   |   |   | 286,874 |   |   |
|                      |       |                       | 22,500     |                             |       |   | 6.25 | % |   |   | 14.00 |   |   |   | 7/28/2015 |   |   |   | 198,102 |   |   |   | 502,029 |   |   |
| Ronald G. Hornbaker  |       |                       | 32,500     |                             |       |   | 9.03 | % |   |   | 8.00 |   |   |   | 5/3/2015 |   |   |   | 163,513 |   |   |   | 414,373 |   |   |
|                 |       |                       | 15,000     |                             |       |   | 4.17 | % |   |   | 14.00 |   |   |   | 7/28/2015 |   |   |   | 132,068 |   |   |   | 334,686 |   |   |
| Richard C. Nordvold  |       |                       | 5,000      |                             |       |   | 1.39 | % |   |   | 8.00 |   |   |   | 5/3/2015 |   |   |   | 25,156 |   |   |   | 63,750 |   |   |
|                      |       |                       | 15,000     |                             |       |   | 4.17 | % |   |   | 14.00 |   |   |   | 7/28/2015 |   |   |   | 132,068 |   |   |   | 334,686 |   |   |
|                      |            |                            |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)      Inaccordance with the rules of the SEC, the amounts shown on this tablerepresent hypothetical gains that could be achieved for the respective optionsif exercised at the end of the option term. These gains are based on assumedrates of stock 

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appreciation of 5% and 10%,compounded annually, and do not reflect our estimates or projections of thefuture price of our common stock. These amounts represent assumed rates ofappreciation in the value of our common stock from the fair value of our commonstock as of the date of grant. The gains shown are net of the option exerciseprice, but do not include deductions for taxes or other expenses associatedwith the exercise. Actual gains, if any, on stock option exercises will dependon the future performance of our common stock, the option holder’s continuedemployment through the option period, and the date on which the options areexercised.

The price of one share ofGolf Galaxy Common Stock acquired at $8.00 and $14.00 would equal $13.03 and$22.80, respectively, when compounded at 5% over a 10-year term, and$20.75 and $36.31, respectively, when compounded at 10% over a 10-yearterm.

*Aggregatedoption/SAR exercises and fiscal year-end option/SAR value table.*

Thefollowing table sets forth information concerning exercisable and unexercisableoptions held by our Chief Executive Officer and the four other most highlycompensated executive officers at the end of fiscal 2006. The table alsoreports values for “in-the-money” options that represent the positive spreadbetween the exercise prices of outstanding options and the fair market value ofour common stock at the end of fiscal 2006.

| ** **            | ** ** | ** **           | ** ** | ** **   | ** ** | **Number of securities**           | ** ** | **Value of unexercised ** | ** ** |
|-----------------------|------------|----------------------|------------|--------------|------------|----------------------------------------------|------------|------------------------------------------|------------|
| ** **            | ** ** | **Shares**           | ** ** | ** **   | ** ** | **underlying unexercised options** | ** ** | **in-the-money options **      | ** ** |
| ** **            | ** ** | **acquired on** | ** ** | **Value**    | ** ** | **at fiscal year end**             | ** ** | **at fiscal year end**    | ** ** |
| **Name**              | ** ** | ** **           | ** ** | **exercise** | ** ** | **Realized**                                 | ** ** | **Exercisable   **        | ** ** | **Unexercisable** | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Randall K.  Zanatta   |       |                 | —     |         |       |                                         | $          | —                                   |       |   |   | 105,000 |   |   |   | 51,000 |   |   | $ | 1,569,350 |   |   | $ | 452,850 |   |   |
| Gregory B. Maanum     |       |                 | —     |         |       |                                         | —     |                                     |       |   | 105,000 |   |   |   | 51,000 |   |   | $ | 1,569,350 |   |   | $ | 452,850 |   |   |
| Michael W.  McCormick |       |                 | —     |         |       |                                         | —     |                                     |       |   | 71,250 |   |   |   | 83,750 |   |   | $ | 912,000 |   |   | $ | 860,500 |   |   |
| Ronald G.  Hornbaker  |       |                 | —     |         |       |                                         | —     |                                     |       |   | 37,500 |   |   |   | 57,500 |   |   | $ | 491,600 |   |   | $ | 565,250 |   |   |
| Richard C. Nordvold   |       |                 | —     |         |       |                                         | —     |                                     |       |   | 18,750 |   |   |   | 76,250 |   |   | $ | 240,000 |   |   | $ | 852,000 |   |   |
|                       |            |                      |            |              |            |                                              |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Compensation ofDirectors—*

Directors who are not executive officers of ourcompany are paid $20,000 per year, paid quarterly as a retainer, as well as $1,500per meeting for each of the quarterly board meetings they attend. Thesedirectors are also paid $500 per telephonic meeting, $750 per audit committeemeeting and $500 for all other committee meetings. In addition, the chairman ofthe audit committee is paid $2,000 annually as a retainer; other committeechairs are paid $1,000 annually as a retainer. Directors who are not executiveofficers are granted options to purchase 1,500 shares of our common stock eachyear. Newly appointed directors receive a one-time grant of options to purchase10,000 shares of our common stock. We also reimburse all of our directors forreasonable travel expenses incurred in attending our meetings. Employeedirectors are not compensated for their services as directors.

On July 28, 2005, inconjunction with our IPO, we granted Messrs. Bloom and Eugster each anoption under the 2004 Plan to purchase 10,000 shares of common stock at anexercise price of $14.00 per share. The options were 50% vested on the grantdate and the remaining 50% will vest on the first anniversary of the grantdate. On February 8, 2006, we granted each non-employee director, except Mr. Healy,who declined receipt of the option, an option under the 2004 Plan to purchase1,500 shares of common stock at an exercise price of $18.77 per share. Theoptions vested immediately upon grant.

*Employmentcontracts and termination of employment and change-in-control arrangements.*

We have employment agreements with all seven of ourexecutive officers. On December 31, 1997, we entered into employmentagreements with Mr. Zanatta and Mr. Maanum pursuant to which Mr. Zanattais serving as our President and Chief Executive Officer and Mr. Maanum isserving as our Chief Operating Officer. On January 6, 2003, we enteredinto an employment agreement with Michael W. McCormick pursuant to whichhe is serving as our Chief Marketing Officer. On March 15, 2004, weentered into an 

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employment agreement with Mr. Nordvoldpursuant to which he is serving as our Chief Financial Officer. On May 11,2005, we entered into an employment agreement with Mr. Hornbaker pursuantto which he is serving as our Senior Vice President—Sales and Operations. On March 16,2006, concurrent with the completion of our acquisition of The GolfWorks, weentered into employment agreements with each of Mr. Maltby, pursuant towhich he is serving as our Senior Vice President—Chief Technology Officer,Research and Development, and Mark R. McCormick, pursuant to which he isserving as our Senior Vice President—CEO of The GolfWorks.

Each employment agreement will continue in effectuntil either party terminates it. Pursuant to the terms of each employmentagreement, the executive officer receives, among other things, an annual basesalary as determined by the board of directors and a bonus from time to time atthe sole discretion of the board of directors. In the event we terminate theexecutive officer’s employment without cause or the executive officerterminates his employment with us for good reason, we must pay to the executiveofficer his then-current annual base salary for the six-month periodimmediately following his termination of employment, plus any bonuses that theexecutive officer would have received had he remained an employee during thesix-month period following his termination assuming all performance criteriahad been met. We must also continue for such six-month period to providebenefits to the executive officer at the same levels and with the expensesallocated as they were immediately before the executive officer’s termination.In addition, all options granted to the executive officer would immediatelyvest and become exercisable.

Additionally, pursuant to his employment agreement, Mr. MichaelW. McCormick received a grant of options to purchase 100,000 shares of ourcommon stock and reimbursement of relocation and moving expenses. Pursuant tohis employment agreement, Mr. Nordvold received a grant of options topurchase 75,000 shares of common stock. Upon his employment in May 2000, Mr. Hornbakerreceived a grant of options to purchase 20,000 shares of common stock. Pursuantto the terms of their respective employment agreements, Mr. Maltby and Mr. MarkR. McCormick each received a grant of options to purchase 100,000 shares ofcommon stock.

On December 31, 1997, we entered into retentionagreements with Mr. Zanatta and Mr. Maanum. In the event we terminatethe executive officer’s employment in connection with a change in control orwithin one year after a change in control, and other than for cause orinitiated by the executive officer for other than good reason, we must pay tothe executive officer his then-current annual base salary for the six-monthperiod immediately following his termination of employment, plus any bonusesthat the executive officer would have received had he remained an employeeduring the six-month period following his termination assuming all performancecriteria had been met. We must also continue for such six-month period toprovide benefits to the executive officer at the same levels and with theexpenses allocated as they were immediately before the executive officer’stermination. In addition, all options granted to the executive officer wouldimmediately vest and become exercisable. Each retention agreement may beterminated on August 31 of any year by the affirmative vote of a majorityof the board of directors prior to June 1 of that year and prior to theoccurrence or active consideration of a change in control.

Each executive officer hasagreed, for the period of his employment with us and for a period of six monthsthereafter, that he will not compete with us and he will not solicit ouremployees to terminate their employment with us. In addition, in connectionwith our acquisition of The GolfWorks in March 2006, we entered intorestrictive covenant agreements with each of Mr. Maltby and Mr. MarkR. McCormick. Pursuant to the restrictive covenant agreements, each of Mr. Maltbyand Mr. Mark R. McCormick has agreed, for a period of five years, that hewill not compete with us and he will not solicit our employees to terminatetheir employment with us. The noncompete obligations in Mr. Mark R.McCormick’s restrictive covenant agreement will expire in the event of a changein control.

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*Additional information with respect to CompensationCommittee Interlocks and Insider Participation in compensation decisions.*

***CompensationCommittee Interlocks and Insider Participation***

During fiscal 2006,Messrs. Bloom, Gellman and Newmark served as the members of ourcompensation committee. No executive officer currently serves, or in the pasthas served, on the compensation committee or the board of directors of anyother company of which any of the members of our compensation committee or anyof our directors is an executive officer.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related Stockholder Matters.

*Securitiesauthorized for issuance under equity compensation plans.*

*Stock IncentivePlans*

***1996 Stock Optionand Incentive Plan.******  ***Pursuant to our 1996 Stock Optionand Incentive Plan, as amended (1996 Plan), we have reserved 1,000,000 sharesof our common stock for issuance to persons who provide services to us or toour affiliates as an employee, consultant or other service provider. The typesof awards that may be granted under the 1996 Plan include incentive andnon-qualified stock options and restricted stock. Under the 1996 Plan, ourcompensation committee determines when and to whom awards will be granted, theform of each award, the amount of each award, and any other terms or conditionsof each award consistent with the terms of the 1996 Plan. Each award agreementspecifies the number and type of award, together with any other terms andconditions as determined by the compensation committee.

All stock options granted under the 1996 Plan willexpire no later than 121 months from the date the options were granted,and the exercise price for incentive stock options may not be less than 100% ofthe fair market value of the shares at the time the option is granted. Optionsgranted under the 1996 Plan may be designated as exercisable in one or moreinstallments, upon the happening of certain events, upon the fulfillment ofcertain conditions or upon such other terms and conditions as may be determinedupon grant.

Restricted stock awards granted under the 1996 Planentitle the holder to receive shares of our common stock, subject to forfeitureif specified conditions are not satisfied at the end of a specified period.During the period when the shares of our common stock are restricted, theholder will not be permitted to transfer the shares, but will have all of therights of a shareholder in our company with respect to such shares, includingthe right to vote the shares and receive dividends and other distributions withrespect to the shares.

***2004 StockIncentive Plan.******  ***In July 2004, ourshareholders approved our 2004 Stock Incentive Plan (2004 Plan), for which wehave reserved 1,000,000 shares of our common stock for issuance to directors,officers, employees, consultants and other service providers of our company andour affiliates. Like the 1996 Plan, the types of awards that may be grantedunder the 2004 Plan include incentive and non-qualified stock options andrestricted stock. Under the 2004 Plan, our compensation committee determineswhen and to whom awards will be granted, the form of each award, the amount ofeach award, and any other terms or conditions of each award consistent with theterms of the 2004 Plan.

All stock options granted under the 2004 Plan willexpire no later than ten years from the date the options were granted, and theexercise price for incentive stock options may not be less than 100% of thefair market value of the shares at the time the option is granted. Optionsgranted under the 2004 Plan may be designated as exercisable in one or moreinstallments, upon the happening of certain events, upon the 

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fulfillment of certainconditions or upon such other terms and conditions as may be determined upongrant.

Restricted stock awards granted under the 2004 Planentitle the holder to receive shares of our common stock, subject to forfeitureif specified conditions are not satisfied at the end of a specified period.During the period when the shares of our common stock are restricted, theholder will not be permitted to transfer the shares, but will have all of therights of a shareholder in our company with respect to such shares, includingthe right to vote the shares and receive dividends and other distributions withrespect to the shares.

The following tableprovides information about our common stock that may be issued under our equitycompensation plans as of February 25, 2006.

| **Plan Category**                                       | ** ** | ** ** | ** ** | **Number of securities to  be issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** **  | **Number of securities  remaining available for  future issuance under  equity compensation plans** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|-------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders |       |       | 1,238,944  |                                                                                                                                                 |       |                                                                                                        | $ 7.58 |                                                                                                                                        |       |   | 639,075 |   |   |
| Equity  compensation plans not approved by security holders  |       |       | N/A        |                                                                                                                                                 |       |                                                                                                        | N/A         |                                                                                                                                        |       |   | N/A |   |   |
| Total                                                        |       |       | 1,238,944  |                                                                                                                                                 |       |                                                                                                        | $ 7.58 |                                                                                                                                        |       |   | 639,075 |   |   |

 

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*Security ownership of certain beneficial owners andmanagement.*

The following tableprovides information about the number of shares of Golf Galaxy Common Stockbeneficially owned as of April 24, 2006, by our Chief Executive Officerand each of the four other most highly compensated executive officers duringthe most recent fiscal year. The table provides similar information on eachdirector, all directors and executive officers as a group, and each person weknow who beneficially owns more than 5% of the outstanding shares of GolfGalaxy Common Stock. Unless otherwise indicated in a footnote below, the listedbeneficial owner has sole voting power and investment power with respect tosuch shares. The mailing address for each person listed is 7275 Flying CloudDrive, Eden Prairie, Minnesota 55344, except as otherwise provided.

| **Name and address of beneficial owner**           | ** ** | ** ** | ** ** | **Amount and nature   of beneficial ownership** | ** ** | **Percent of Class** | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------|------------|--------------------------------|------------|
| Randall K. Zanatta                                                          |       |       | 813,125    | (1)                                                                      |       |                           | 7.3        | % |   |
| *President,  Chief Executive Officer and Chairman*                          | * *   |       |       |                                                                     |       |                           |       |   |   |
| Gregory B. Maanum                                                           |       |       | 613,125    | (2)                                                                      |       |                           | 5.5        | % |   |
| *Chief  Operating Officer*                                                  | * *   |       |       |                                                                     |       |                           |       |   |   |
| Michael W. McCormick                                                        |       |       | 92,125     | (3)                                                                      |       |                           | *          |   |   |
| *Chief Marketing Officer*                                                   | * *   |       |       |                                                                     |       |                           |       |   |   |
| Ronald G. Hornbaker                                                         |       |       | 53,125     | (4)                                                                      |       |                           | *          |   |   |
| *Senior Vice President-Sales and Operations*                                | * *   |       |       |                                                                     |       |                           |       |   |   |
| Richard C. Nordvold                                                         |       |       | 39,250     | (5)                                                                      |       |                           | *          |   |   |
| *Chief  Financial Officer*                                                  | * *   |       |       |                                                                     |       |                           |       |   |   |
| Ralph D. Maltby                                                             |       |       | 205,198    | (6)                                                                      |       |                           | 1.9        | % |   |
| *Senior  Vice President-Chief Technology Officer, Research and Development* |       |       |       |                                                                     |       |                           |       |   |   |
| Mark R. McCormick                                                           |       |       | 195,664    | (7)                                                                      |       |                           | 1.8        | % |   |
| *Senior  Vice President-CEO of The GolfWorks*                               |       |       |       |                                                                     |       |                           |       |   |   |
| David E. Bloom                                                              |       |       | 36,500     | (8)                                                                      |       |                           | *          |   |   |
| *Director*                                                                  | * *   |       |       |                                                                     |       |                           |       |   |   |
| Jack W. Eugster                                                             |       |       | 54,000     | (9)                                                                      |       |                           | *          |   |   |
| *Director*                                                                  | * *   |       |       |                                                                     |       |                           |       |   |   |
| 2655 Kelly Avenue                                                           | * *   |       |       |                                                                     |       |                           |       |   |   |
| Excelsior, Minnesota 55331                                                  | * *   |       |       |                                                                     |       |                           |       |   |   |
| David S. Gellman                                                            |       |       | 964,658    | (10)                                                                     |       |                           | 8.8        | % |   |
| *Director*                                                                  | * *   |       |       |                                                                     |       |                           |       |   |   |
| F*d*G  Associates                                                           | * *   |       |       |                                                                     |       |                           |       |   |   |
| 299 Park Avenue, 16th  Floor                                                |       |       |       |                                                                     |       |                           |       |   |   |
| New York, New York 10171                                                    |       |       |       |                                                                     |       |                           |       |   |   |
| Thomas C. Healy                                                             |       |       | 1,276,001  | (11)                                                                     |       |                           | 11.6       | % |   |
| *Director*                                                                  | * *   |       |       |                                                                     |       |                           |       |   |   |
| Best Buy Co., Inc.                                                          | * *   |       |       |                                                                     |       |                           |       |   |   |
| 7601 Penn Avenue South                                                      | * *   |       |       |                                                                     |       |                           |       |   |   |
| Richfield, Minnesota 55423                                                  | * *   |       |       |                                                                     |       |                           |       |   |   |
| William C. Mulligan                                                         |       |       | 740,553    | (12)                                                                     |       |                           | 6.8        | % |   |
| *Director*                                                                  | * *   |       |       |                                                                     |       |                           |       |   |   |
| Primus Venture Partners, Inc.                                               | * *   |       |       |                                                                     |       |                           |       |   |   |
| 5900 Landerbrook Drive, Suite 200                                           | * *   |       |       |                                                                     |       |                           |       |   |   |
| Cleveland, Ohio 44124                                                       | * *   |       |       |                                                                     |       |                           |       |   |   |
| Gregg S. Newmark                                                            |       |       | 1,233,255  | (13)                                                                     |       |                           | 11.3       | % |   |
| *Director*                                                                  | * *   |       |       |                                                                     |       |                           |       |   |   |
| William Blair Capital  Partners, LLC                                        | * *   |       |       |                                                                     |       |                           |       |   |   |
| 222 West Adams Street                                                       | * *   |       |       |                                                                     |       |                           |       |   |   |
| Chicago, Illinois 60606                                                     | * *   |       |       |                                                                     |       |                           |       |   |   |
| All executive officers  and directors, as a group                           |       |       | 6,316,579  | (14)                                                                     |       |                           | 54.6       | % |   |
| (13 individuals)                                                            |       |       |       |                                                                     |       |                           |       |   |   |

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| **Name and address of beneficial owner** | ** ** | ** ** | ** ** | **Amount and nature   of beneficial ownership** | ** ** | **Percent of Class** |   |
|-------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------|------------|--------------------------------|--------|
| Best Buy Co., Inc.                                                |       |       | 1,276,001  | (15)                                                                     |       |                           | 11.6   | % |   |
| 7601 Penn Avenue South                                            |       |       |       |                                                                     |       |                           |   |   |   |
| Richfield, MN 55423                                               |       |       |       |                                                                     |       |                           |   |   |   |
| William Blair Capital  Partners V LP                              |       |       | 1,231,755  | (16)                                                                     |       |                           | 11.2   | % |   |
| c/o William Blair Capital Management LLC                          |       |       |       |                                                                     |       |                           |   |   |   |
| 222 West Adams Street                                             |       |       |       |                                                                     |       |                           |   |   |   |
| Chicago, IL 60606                                                 |       |       |       |                                                                     |       |                           |   |   |   |
| FdG Capital Partners LLC                                          |       |       | 963,158    | (16)                                                                     |       |                           | 8.8    | % |   |
| c/o FdG Associates                                                |       |       |       |                                                                     |       |                           |   |   |   |
| 299 Park Avenue—16th Floor                                   |       |       |       |                                                                     |       |                           |   |   |   |
| New York, NY 10171                                                |       |       |       |                                                                     |       |                           |   |   |   |
| FdG-Chase Capital  Partners LLC                                   |       |       | 963,158    | (16)                                                                     |       |                           | 8.8    | % |   |
| c/o FdG  Associates                                               |       |       |       |                                                                     |       |                           |   |   |   |
| 299 Park Avenue—16th  Floor                                  |       |       |       |                                                                     |       |                           |   |   |   |
| New York, NY  10171                                               |       |       |       |                                                                     |       |                           |   |   |   |
| Primus Capital Fund IV LP                                         |       |       | 739,053    | (17)                                                                     |       |                           | 6.7    | % |   |
| c/o Primus Venture  Partners                                      |       |       |       |                                                                     |       |                           |   |   |   |
| 5900 Landerbrook Drive, Suite 200                            |       |       |       |                                                                     |       |                           |   |   |   |
| Cleveland, OH 44124                                               |       |       |       |                                                                     |       |                           |   |   |   |
| Primus Executive Fund LP                                          |       |       | 739,053    | (17)                                                                     |       |                           | 6.7    | % |   |
| c/o Primus Venture  Partners                                      |       |       |       |                                                                     |       |                           |   |   |   |
| 5900 Landerbrook Drive,  Suite 200                                |       |       |       |                                                                     |       |                           |   |   |   |
| Cleveland, OH 44124                                               |       |       |       |                                                                     |       |                           |   |   |   |
| The Northwestern Mutual  Life Insurance Company                   |       |       | 622,550    | (17)                                                                     |       |                           | 5.7    | % |   |
| 720 East Wisconsin Avenue                                         |       |       |       |                                                                     |       |                           |   |   |   |
| Milwaukee, WI 53202                                               |       |       |       |                                                                     |       |                           |   |   |   |
| Mazama Capital  Management, Inc.                             |       |       | 587,600    | (17)                                                                     |       |                           | 5.4    | % |   |
| One Southwest Columbia Street, Suite 1500                    |       |       |       |                                                                     |       |                           |   |   |   |
| Portland,  OR 97258                                               |       |       |       |                                                                     |       |                           |   |   |   |

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***                   **Less than 1%.

(1)                Thefigure represents (a) 700,000 outstanding shares owned by Mr. Zanattaand (b) options to purchase 113,125 shares, which he could exercise within60 days of April 24, 2006.

(2)                Thefigure represents (a) 500,000 outstanding shares owned by Mr. Maanumand (b) options to purchase 113,125 shares, which he could exercise within60 days of April 24, 2006.

(3)                Thefigure represents (a) 6,500 outstanding shares owned by Mr. McCormickand (b) options to purchase 85,625 shares, which he could exercise within60 days of April 24, 2006.

(4)                Thefigure represents (a) 2,500 outstanding shares owned by Mr. Hornbakerand (b) options to purchase 50,625 shares, which he could exercise within60 days of April 24, 2006.

(5)                Thefigure represents (a) 500 outstanding shares owned by Mr. Nordvoldand (b) options to purchase 38,750 shares, which he could exercisewithin 60 days of April 24, 2006.

(6)                Thefigure represents (a) 52,824 outstanding shares owned by Mr. Maltby; (b) 52,824outstanding shares owned by Mr. Maltby’s spouse; (c) a warrant to purchase49,775 shares, which he could exercise within 60 days of April 24, 2006; and(d) a warrant to purchase 49,775 shares owned by Mr. Maltby’s spouse, whichcould be exercised within 60 days of April 24, 2006.

(7)                Thefigure represents (a) 145,214 outstanding shares owned by Mr. McCormick and (b)a warrant to purchase 50,450 shares, which he could exercise within 60 days ofApril 24, 2006.

(8)                Thefigure represents options to purchase 36,500 shares, which Mr. Bloom couldexercise within 60 days of April 24, 2006.

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(9)                Thefigure represents (a) 37,500 outstanding shares owned by Mr. Eugsterand (b) options to purchase 16,500 shares, which he could exercise within60 days of April 24, 2006.

(10)           Thefigure represents (a) 892,679 shares held by FdG Capital Partners LLC (FdGCapital). The Managing Member of FdG Capital is FdG Capital Associates LLC (FdGAssociates). FdG Associates is managed by a board of managers, comprised offour members including Mr. Gellman, which has full voting power over theshares. The FdG Associates investment committee, comprised of three membersincluding Mr. Gellman, has full investment discretion over the shares. Nosingle member of the board of managers or investment committee has voting ordispositive authority over the shares. Consequently, Mr. Gellman hasdisclaimed beneficial ownership of the shares held by FdG Capital except to theextent of his pecuniary interest therein; (b) 70,479 shares held by FdGChase Capital Partners LLC (FdG Chase). The Managing Member of FdG Chase is FdGAssociates. FdG Associates is managed by a board of managers, comprised of fourmembers including Mr. Gellman, which has full voting power over theshares. The FdG Associates investment committee, comprised of three membersincluding Mr. Gellman, has full investment discretion over the shares. Nosingle member of the board of managers or investment committee has voting ordispositive authority over the shares. Consequently, Mr. Gellman hasdisclaimed beneficial ownership of the shares held by FdG Chase except to theextent of his pecuniary interest therein; and (c) options to purchase1,500 shares, which he could exercise within 60 days of April 24, 2006.

(11)           Thefigure represents 1,276,001 outstanding shares owned by Best Buy Co., Inc.While investment decisions of Best Buy Co., Inc. are made by investmentcommittees which do not include Mr. Healy, as an executive officer of BestBuy Co., Inc., Mr. Healy has legal power to vote and dispose of the sharesand thus may be deemed to beneficially own them. However, Best Buy Co., Inc.treats the shares as a corporate asset which is not beneficially owned by anyindividual employee and Mr. Healy disclaims any such beneficial ownership.The figure excludes options to purchase 1,500 shares, originally granted to Mr. Healyon February 8, 2006, and subsequently rescinded on March 28, 2006.

(12)           Thefigure represents (a) 709,491 shares held by Primus Capital Fund IV L.P.(PCF IV LP). The sole general partner of PCF IV LP is Primus Venture PartnersIV Limited Partnership (PVP IV LP). The sole general partner of PVP IV LP isPrimus Venture Partners IV, Inc. (PVP IV Inc.). Mr. Mulligan, adirector of PVP IV Inc., shares voting power and investment power with respectto the shares with four other directors of PVP IV Inc. Mr. Mulligandisclaims beneficial ownership of the shares held by PCF IV LP except to theextent of his pecuniary interest therein; (b) 29,562 shares held by PrimusExecutive Fund L.P. (PEF LP). The sole general partner of PEF LP is PVP IV LP.The sole general partner of PVP IV LP is PVP IV Inc. Mr. Mulligan, adirector of PVP IV Inc., shares voting power and investment power with respectto the shares with four other directors of PVP IV Inc. Mr. Mulligandisclaims beneficial ownership of the shares held by PEF LP except to theextent of his pecuniary interest therein; and (c) options to purchase1,500 shares, which he could exercise within 60 days of April 24,2006.

(13)           Thefigure represents (a) 1,231,755 shares held by William Blair CapitalPartners V, L.P. (WBCP LP). William Blair Capital Management, LLC (WBCM) is thegeneral partner of WBCP LP and, through a six person board of managers composedof certain of its members, has voting and investment power over the shares heldby WBCP LP. Mr. Newmark is a managing director of WBCM and has no voting orinvestment power over the shares. Consequently, Mr. Newmark disclaimsbeneficial ownership of the shares held by WBCP LP except to the extent of hispecuniary interest therein; and (b) options to purchase 1,500 shares,which he could exercise within 60 days of April 24, 2006.

(14)           Thefigure represents outstanding shares and options described in the precedingfootnotes.

(15)           Thefigure represents 1,276,001 outstanding shares owned by Best Buy Co., Inc.While investment decisions of Best Buy Co., Inc. are made by investmentcommittees which do not include Mr. Healy, as 

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an executiveofficer of Best Buy Co., Inc., Mr. Healy has legal power to vote anddispose of the shares and thus may be deemed to beneficially own them. However,Best Buy Co., Inc. treats the shares as a corporate asset which is notbeneficially owned by any individual employee and Mr. Healy disclaims anysuch beneficial ownership. 

(16)           Asreported on the owner’s Form 4 that reported beneficial ownership as of July 29,2005.

(17)           Asreported on the owner’s Schedule 13G that reported beneficial ownership as of December 31, 2005.

**Item 13.**                 CertainRelationships and Related Transactions.

***Acquisition of The GolfWorks.***

*In March 2006, we acquired all ofthe outstanding shares of The GolfWorks. Mark R. McCormick, our Senior VicePresident—CEO of The GolfWorks, was an executive officer of The GolfWorks priorto the acquisition and is the brother of Michael W. McCormick, our ChiefMarketing Officer. The purchase price, excluding direct costs of theacquisition, consisted of $3.7 million in cash ($500,000 of which has beendeposited into an indemnification escrow); 250,862 shares of our commonstock valued at $4.8 million based on the average closing price of ourcommon stock on the Nasdaq National Market during the five-day trading periodbeginning three trading days prior to our announcement of the acquisition; andwarrants to purchase 150,000 shares of our common stock with a fair value of$1.4 million, determined using the Black-Scholes option pricing model. Thewarrants have an exercise price of $17.94 per share and a 10-year term expiringon March 16, 2016. In addition, we assumed $5.4 million in debt fromThe GolfWorks. Of the purchase price, Mark R. McCormick received anallocation of $168,150 of the cash deposited in the indemnification escrow,145,214 shares of our common stock, and a warrant to purchase 50,450 shares ofour common stock.*

*Purchase ofInventory from The GolfWorks.*

Prior to our acquisitionof The GolfWorks in the first quarter of fiscal 2007, we purchased certaininventory from The GolfWorks. Our decision to conduct business with The GolfWorkswas based on both qualitative and quantitative factors including productofferings, pricing and customer service. Our Chief Executive Officer and ChiefOperating Officer reviewed our transactions with The GolfWorks, determined thatthe transactions were at arm’s-length and approved The GolfWorks as anongoing supplier of certain inventory. Total purchases from The GolfWorksduring fiscal 2004, 2005 and 2006 were $593,557, $727,573 and $1,352,374,respectively.

*Sublease ofProperty from Best Buy Co., Inc.*

On August 6, 2004, weentered into a sublease for our Gurnee, Illinois store with Best Buy Co., Inc.as sublessor. As of February 25, 2006, Best Buy owned 1,276,001 shares ofour common stock. Thomas C. Healy, Best Buy’s executive vice president-Best BuyFor Business, serves as a member of our board of directors. The terms of thesublease provide that from December 1, 2004 to January 31, 2010,minimum annual rent will be $232,499, or $19,375 per month. From February 1,2010 to January 31, 2015, minimum annual rent will be $243,727, or $20,311per month. The sublease will expire on January 31, 2015. We began makingrent payments on December 1, 2004. The total amount paid to Best Buy,including payments for real estate taxes and common area charges, was $88,663and $242,286 for fiscal 2005 and fiscal 2006, respectively.

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**Item 14.**                 PrincipalAccounting Fees and Services.

For the fiscal year ended February 25,2006, Ernst & Young LLP (E&Y) served as our independent registeredpublic accounting firm. The following table presents the aggregate fees billedfor audit and non-audit services rendered by E&Y during fiscal years 2005and 2006.

| **Service Type**  | ** ** | ** ** | ** **     | **Fiscal 2005** | ** ** | **Fiscal 2006** | ** **     |
|------------------------|------------|------------|----------------|----------------------|------------|----------------------|----------------|
| Audit Fees(1)          |       |       | $ 88,268  |                 |       |                 | $ 466,440 |   |   |
| Audit-Related  Fees(2) |       |       | 9,250          |                 |       |                 | 125,100        |   |   |
| Tax Fees(3)            |       |       | 48,785         |                 |       |                 | 20,305         |   |   |
| All Other Fees         |       |       | —         |                 |       |                 | —         |   |   |
| Total Fees Billed      |       |       | $ 146,303 |                 |       |                 | $ 611,845 |   |   |

----

(1)                Consistsof fees billed for professional services rendered in connection with the auditsof our annual financial statements for the fiscal years ended February 26,2005, and February 25, 2006; the audit of the consolidated financialstatements of Ralph Maltby Enterprises, Inc. for the year ended December 31,2005; the reviews of the financial statements included in our Quarterly Reportson Form 10-Q for the quarterly periods ended August 27, 2005, and November 26,2005, respectively; and consultation on accounting matters. The audit fees forfiscal 2006 include $178,800 for professional services rendered in connectionwith our registration statement on Form S-1 (File No. 333-125007)that was declared effective by the Securities and Exchange Commission on July 28,2005 (i.e., our initial public offering).

(2)                Consistsof fees billed for the audits of our defined contribution 401(k) profitsharing plan. The audit-related fees for fiscal 2006 include $112,100 for duediligence related to our acquisition of The GolfWorks.

(3)                Consistsof fees for tax advisory services in connection with the preparation of our taxreturns; claims for refund; tax planning; and tax audits and appeals.

Consistent with SEC rules regarding auditorindependence, our audit committee has responsibility for appointing, settingcompensation and overseeing the work of the independent registered publicaccounting firm. In recognition of this responsibility, and in accordance withSEC rules and the Listing Standards of the Nasdaq National Market, it isthe policy of the committee to pre-approve all audit, audit-related, tax andother permissible services proposed to be provided by the independentregistered public accounting firm. The fees listed above were pre-approved byour audit committee pursuant to the committee’s pre-approval policy.

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**PART IV**

**Item 15.      Exhibits, Financial Statement Schedules.**

(a)           The following documentsare filed as part of this Report:

(1)   Allfinancial statements

All financial statements as set forth under Item 8 ofthis Report.

(2)   Financialstatement schedules

Schedule II—Valuation and qualifying accounts.

 

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All other schedulesare omitted because they are not applicable or not required or because therequired information is shown in our financial statements or the notes thereto.

(3)   Exhibits

| Exhibit  No. | ** ** | **Description**                                                                                                                                                                                                                                                    | ** ** | **Method of  Filing** |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| 1            |       | Form of Underwriting Agreement                                                                                                                                                                                                                                |       | 4                     |
| 2.1          |       | Agreement and Plan of Reorganization, dated as of  February 15, 2006, by and among Golf Galaxy, Inc.; GolfWorks  Acquisition Corp.; Ralph Maltby Enterprises, Inc. a/k/a The GolfWorks;  and Ralph D. Maltby, Donna D. Maltby and Mark R. McCormick |       | 5                     |
| 3.1          |       | Amended and Restated Articles of Incorporation                                                                                                                                                                                                                     |       | 3                     |
| 3.2          |       | Amended and Restated Bylaws                                                                                                                                                                                                                                        |       | 3                     |
| 4.1          |       | Specimen of common stock certificate                                                                                                                                                                                                                               |       | 4                     |
| 4.2          |       | Stock Purchase Warrant dated as of October 3,  2000 by and between Piper Jaffray & Co. (formerly, U.S. Bancorp  Piper Jaffray Inc.) and the Registrant                                                                                               |       | 2                     |
| 4.3          |       | Amended and Restated Registration Rights Agreement  dated as of October 3, 2000 among the holders of preferred stock,  Randall K. Zanatta, Gregory B. Maanum and the Registrant                                                                     |       | 2                     |
| 4.4          |       | Conversion Agreement dated May 16, 2005 among  the holders of preferred stock and the Registrant                                                                                                                                                              |       | 3                     |
| 10.1         |       | Retention Agreement between the Registrant and  Randall K. Zanatta, dated December 31, 1997                                                                                                                                                              |       | 2                     |
| 10.2         |       | Retention Agreement between the Registrant and  Gregory B. Maanum, dated December 31, 1997                                                                                                                                                               |       | 2                     |
| 10.3         |       | Employment Agreement between the Registrant and  Randall K. Zanatta, dated December 31, 1997                                                                                                                                                             |       | 2                     |
| 10.4         |       | Employment Agreement between the Registrant and  Gregory B. Maanum, dated December 31, 1997                                                                                                                                                              |       | 2                     |
| 10.5         |       | Employment Agreement between the Registrant and  Michael W. McCormick, dated January 6, 2003                                                                                                                                                             |       | 2                     |
| 10.6         |       | Employment Agreement between the Registrant and  Richard C. Nordvold, dated March 15, 2004                                                                                                                                                               |       | 2                     |
| 10.7         |       | Employment Agreement between the Registrant and  Ronald G. Hornbaker, dated May 11, 2005                                                                                                                                                                 |       | 2                     |
| 10.8         |       | 1996 Stock Option and Incentive Plan, as amended and  restated                                                                                                                                                                                                     |       | 2                     |
| 10.9         |       | Form of Incentive Stock Option Agreement for  1996 Stock Option and Incentive Plan                                                                                                                                                                            |       | 2                     |
| 10.10        |       | 2004 Stock Incentive Plan                                                                                                                                                                                                                                          |       | 2                     |
| 10.11        |       | Form of Incentive Stock Option Agreement for  2004 Stock Incentive Plan                                                                                                                                                                                       |       | 2                     |
| 10.12        |       | Loan and Security Agreement dated as of  October 20, 2004 by and between Wells Fargo Retail Finance, LLC and the  Registrant                                                                                                                                  |       | 2                     |
| 10.13        |       | Form of Non-Qualified Stock Option Agreement  for 1996 Stock Option and Incentive Plan                                                                                                                                                                        |       | 3                     |
| 10.14        |       | Form of Non-Qualified Stock Option Agreement  for 2004 Stock Incentive Plan                                                                                                                                                                                   |       | 3                     |

 

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| Exhibit  No. | ** ** | **Description**                                                                                                                  | ** ** | **Method of  Filing** |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| 10.15        |       | Resolutions of shareholders approving an increase in  the number of shares subject to the 1996 Stock Option and Incentive Plan   |       | 4                     |
| 10.16        |       | Employment Agreement between the Registrant and  Ralph D. Maltby, dated March 16, 2006                                      |       | 6                     |
| 10.17        |       | Employment Agreement between the Registrant and Mark  R. McCormick, dated March 16, 2006                                    |       | 6                     |
| 21.1         |       | Subsidiaries of the registrant                                                                                                   |       | 1                     |
| 23.1         |       | Consent of Independent Registered Public Accounting  Firm                                                                        |       | 1                     |
| 31.1         |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |       | 1                     |
| 31.2         |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |       | 1                     |
| 32.1         |       | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |       | 1                     |
| 32.2         |       | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |       | 1                     |

----

1.                 Document is filedherewith.

2.                 Exhibit somarked was filed with the SEC on May 17, 2005, as an exhibit to the RegistrationStatement on Form S-1 (Registration No. 333-125007) ofGolf Galaxy, Inc., and is incorporated herein by reference and made a parthereof.

3.                 Exhibit somarked was filed with the SEC on June 28, 2005, as an exhibit to AmendmentNo. 1 of the Registration Statement on Form S-1 (Registration No. 333-125007)of Golf Galaxy, Inc., and is incorporated herein by reference and made apart hereof.

4.                 Exhibit somarked was filed with the SEC on July 15, 2005, as an exhibit to AmendmentNo. 2 of the Registration Statement on Form S-1 (Registration No. 333-125007)of Golf Galaxy, Inc., and is incorporated herein by reference and made apart hereof.

5.                 Exhibit somarked was filed with the SEC on February 21, 2006, as an exhibit to aCurrent Report on Form 8-K of Golf Galaxy, Inc., and isincorporated herein by reference and made a part hereof.

6.                 Exhibit somarked was filed with the SEC on March 21, 2006, as an exhibit to aCurrent Report on Form 8-K of Golf Galaxy, Inc., and isincorporated herein by reference and made a part hereof.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|          | GOLF GALAXY, INC. |
|----------|-------------------|
|     | (Registrant)      |
|     | By                | /s/ RANDALL K. ZANATTA |
| * * | * *          | Randall K. Zanatta |
| * * | * *          | *President, Chief Executive Officer and Chairman* |
|     |              | *(Principal Executive Officer)* |
|     |              | /s/ RICHARD C. NORDVOLD |
| * * | * *          | Richard C. Nordvold |
|     |              | *Chief Financial Officer* |
|     |              | *(Principal Financial and Accounting Officer)* |
|     | Date              | May 3, 2006 |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
|                          | **Signature** | ** **                                                 | ** ** |                  | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|--------------------------|---------------|------------------------------------------------------------|------------|------------------|-----------|------------|------------|--|----------|------------|
| /s/ RANDALL K.  ZANATTA  |          | President, Chief  Executive Officer, Chairman and Director |       |             |
| Randall  K. Zanatta      | * *      | *(Principal Executive Officer)*                            |       | May 3, 2006 |
| /s/ GREGORY B.  MAANUM   |          | Chief Operating  Officer and Director                      |       |             |
| Gregory  B. Maanum       |          |                                                       |       | May 3, 2006 |
| /s/ RICHARD C.  NORDVOLD |          | Chief Financial  Officer                                   |       |             |
| Richard  C. Nordvold     | * *      | *(Principal Financial and  Accounting Officer)*            |       | May 3, 2006 |
| /s/ GREGG S.  NEWMARK    |          | Director                                                   |       |             |
| Gregg  S. Newmark        |          |                                                       |       | May 3, 2006 |
| /s/ WILLIAM C.  MULLIGAN |          | Director                                                   |       |             |
| William  C. Mulligan     |          |                                                       |       | May 3, 2006 |
| /s/ DAVID E.  BLOOM      |          | Director                                                   |       |             |
| David  E. Bloom          |          |                                                       |       | May 3, 2006 |
| /s/ DAVID S.  GELLMAN    |          | Director                                                   |       |             |
| David  S. Gellman        |          |                                                       |       | May 3, 2006 |
| /s/ JACK W.  EUGSTER     |          | Director                                                   |       |             |
| Jack  W. Eugster         |          |                                                       |       | May 3, 2006 |
| /s/ THOMAS C.  HEALY     |          | Director                                                   |       |             |
| Thomas C. Healy          |          |                                                       |       | May 3, 2006 |

 

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**EXHIBIT INDEXTO FORM 10-K**
| 1     |   | Form of Underwriting Agreement                                                                                                                                                                                                                                |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1   |   | Agreement and Plan of Reorganization, dated as of  February 15, 2006, by and among Golf Galaxy, Inc.; GolfWorks  Acquisition Corp.; Ralph Maltby Enterprises, Inc. a/k/a The GolfWorks;  and Ralph D. Maltby, Donna D. Maltby and Mark R. McCormick |
| 3.1   |   | Amended and Restated Articles of Incorporation                                                                                                                                                                                                                     |
| 3.2   |   | Amended and Restated Bylaws                                                                                                                                                                                                                                        |
| 4.1   |   | Specimen of common stock certificate                                                                                                                                                                                                                               |
| 4.2   |   | Stock Purchase Warrant dated as of October 3,  2000 by and between Piper Jaffray & Co. (formerly, U.S. Bancorp  Piper Jaffray Inc.) and the Registrant                                                                                               |
| 4.3   |   | Amended and Restated Registration Rights Agreement  dated as of October 3, 2000 among the holders of preferred stock, Randall K.  Zanatta, Gregory B. Maanum and the Registrant                                                                     |
| 4.4   |   | Conversion Agreement dated May 16, 2005 among  the holders of preferred stock and the Registrant                                                                                                                                                              |
| 10.1  |   | Retention Agreement between the Registrant and  Randall K. Zanatta, dated December 31, 1997                                                                                                                                                              |
| 10.2  |   | Retention Agreement between the Registrant and  Gregory B. Maanum, dated December 31, 1997                                                                                                                                                               |
| 10.3  |   | Employment Agreement between the Registrant and  Randall K. Zanatta, dated December 31, 1997                                                                                                                                                             |
| 10.4  |   | Employment Agreement between the Registrant and  Gregory B. Maanum, dated December 31, 1997                                                                                                                                                              |
| 10.5  |   | Employment Agreement between the Registrant and  Michael W. McCormick, dated January 6, 2003                                                                                                                                                             |
| 10.6  |   | Employment Agreement between the Registrant and  Richard C. Nordvold, dated March 15, 2004                                                                                                                                                               |
| 10.7  |   | Employment Agreement between the Registrant and  Ronald G. Hornbaker, dated May 11, 2005                                                                                                                                                                 |
| 10.8  |   | 1996 Stock Option and Incentive Plan, as amended and  restated                                                                                                                                                                                                     |
| 10.9  |   | Form of Incentive Stock Option Agreement for  1996 Stock Option and Incentive Plan                                                                                                                                                                            |
| 10.10 |   | 2004 Stock Incentive Plan                                                                                                                                                                                                                                          |
| 10.11 |   | Form of Incentive Stock Option Agreement for  2004 Stock Incentive Plan                                                                                                                                                                                       |
| 10.12 |   | Loan and Security Agreement dated as of  October 20, 2004 by and between Wells Fargo Retail Finance, LLC and the  Registrant                                                                                                                                  |
| 10.13 |   | Form of Non-Qualified Stock Option Agreement  for 1996 Stock Option and Incentive Plan                                                                                                                                                                        |
| 10.14 |   | Form of Non-Qualified Stock Option Agreement  for 2004 Stock Incentive Plan                                                                                                                                                                                   |
| 10.15 |   | Resolutions of shareholders approving an increase in  the number of shares subject to the 1996 Stock Option and Incentive Plan                                                                                                                                     |
| 10.16 |   | Employment Agreement between the Registrant and  Ralph D. Maltby, dated March 16, 2006                                                                                                                                                                        |
| 10.17 |   | Employment Agreement between the Registrant and Mark  R. McCormick, dated March 16, 2006                                                                                                                                                                      |
| 21.1  |   | Subsidiaries of the registrant                                                                                                                                                                                                                                     |
| 23.1  |   | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                                                          |
| 31.1  |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                   |
| 31.2  |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                   |
| 32.1  |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                   |
| 32.2  |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                                                                                                   |

 

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**Report ofIndependent Registered Public Accounting Firm**

The Board of Directors and ShareholdersGolf Galaxy, Inc.

We have audited the financial statements of GolfGalaxy, Inc. as of February 25, 2006, and February 26, 2005, andfor each of the three years in the period ended February 25, 2006, andhave issued our report thereon dated March 31, 2006. Our audits alsoincluded the financial statement schedule listed in Item 15(a) ofForm 10-K. This schedule is the responsibility of the Company’smanagement. Our responsibility is to express an opinion based on our audits.

In our opinion, thefinancial statement schedule referred to above, when considered in relation tothe basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

/s/ Ernst & Young LLP

Minneapolis, MinnesotaMarch 31, 2006

 

 

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**GOLF GALAXY, INC.Schedule II—Valuation and Qualifying AccountsYears Ended February 25, 2006, February 26, 2005 and February 28,2004(In Thousands)**

| ** **                             | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions—  Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------|------------|------------------------------------------|------------|
| Accounts receivable  reserves:         |       |                                           |       |                                                           |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| **Year  ended February 28, 2004** |       |                                           |       |                                                           |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Bad debt reserve                       |       |                                           | 98         |                                                           |       |           | 34         |                                     |       |   | (82 | ) |   |   | 50 |   |   |
| **Year  ended February 26, 2005** |       |                                           |       |                                                           |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Bad debt reserve                       |       |                                           | 50         |                                                           |       |           | —     |                                     |       |   | — |   |   |   | 50 |   |   |
| **Year  ended February 25, 2006** |       |                                           |       |                                                           |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Bad debt reserve                       |       |                                           | 50         |                                                           |       |           | 20         |                                     |       |   | — |   |   |   | 70 |   |   |
| Inventory reserves:                    |       |                                           |       |                                                           |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| **Year  ended February 28, 2004** |       |                                           |       |                                                           |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Inventory reserve                      |       |                                           | 468        |                                                           |       |           | 242        |                                     |       |   | (208 | ) |   |   | 502 |   |   |
| **Year  ended February 26, 2005** |       |                                           |       |                                                           |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Inventory reserve                      |       |                                           | 502        |                                                           |       |           | 124        |                                     |       |   | (63 | ) |   |   | 563 |   |   |
| **Year  ended February 25, 2006** |       |                                           |       |                                                           |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Inventory reserve                      |       |                                           | 563        |                                                           |       |           | 416        |                                     |       |   | (147 | ) |   |   | 832 |   |   |
| Sales Returns Reserve:                 |       |                                           |       |                                                           |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| **Year  ended February 28, 2004** |       |                                           |       |                                                           |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Sales returns reserve                  |       |                                           | 31         |                                                           |       |           | 54         |                                     |       |   | (41 | ) |   |   | 44 |   |   |
| **Year  ended February 26, 2005** |       |                                           |       |                                                           |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Sales returns reserve                  |       |                                           | 44         |                                                           |       |           | 30         |                                     |       |   | (24 | ) |   |   | 50 |   |   |
| **Year  ended February 25, 2006** |       |                                           |       |                                                           |       |           |       |                                     |       |   |   |   |   |   |   |   |   |
| Sales returns  reserve                 |       |                                           | 50         |                                                           |       |           | 54         |                                     |       |   | (11 | ) |   |   | 93 |   |   |

 

 

93

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