**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON,D.C. 20549

**FORM 10-Q**

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED JULY 29, 2006.**

**Commission File Number:  000-50659**

**GANDER MOUNTAIN COMPANY**

(Exact name of Registrantas Specified in its Charter)

| **Minnesota**                    |   | **41-1990949**       |
|----------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of |   | (I.R.S. Employer     |
| Incorporation or  Organization)  |   | Identification  No.) |

 

**180 East Fifth Street, Suite 1300**

**Saint Paul, Minnesota 55101**

**(651) 325-4300**

(Address, including zip code,and telephone number, including area code,

ofRegistrant’s Principal Executive Offices)

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  x   No  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. check one o  largeaccelerated filer   x  acceleratedfiler   o  non-acceleratedfiler

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes  o   No  x

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: Common Stock, $.01 par value; 14,308,274 shares outstanding as ofSeptember 1, 2006.

 

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**GANDER MOUNTAIN COMPANY**

**QUARTERLY PERIOD ENDED JULY 29,2006**

**Index**
|                                | ** ** | **Page**                                                                                    |
|--------------------------------|------------|---------------------------------------------------------------------------------------------|
|                           |       |                                                                                        |
| PART I. FINANCIAL  INFORMATION |       |                                                                                        |
|                           | Item 1.    | Unaudited Financial  Statements                                                             |   | 3 |
|                           |       | Statements of  Operations                                                                   |   | 3 |
|                           |       | Balance Sheets                                                                              |   | 4 |
|                           |       | Statements of  Cash Flows                                                                   |   | 5 |
|                           |       | Notes to  Unaudited Financial Statements                                                    |   | 6 |
|                           | Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 12 |
|                           | Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                 |   | 21 |
|                           | Item 4.    | Controls and  Procedures                                                                    |   | 21 |
|                           |       |                                                                                        |   |   |
| PART II. OTHER  INFORMATION    |       |                                                                                        |
|                           | Item 1.    | Legal Proceedings                                                                           |   | 21 |
|                           | Item  1A.  | Risk  Factors                                                                               |   | 22 |
|                           | Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   | 22 |
|                           | Item 3.    | Defaults Upon  Senior Securities                                                            |   | 22 |
|                           | Item 4.    | Submission of  Matters to a Vote of Security Holders                                        |   | 22 |
|                           | Item 5.    | Other Information                                                                           |   | 22 |
|                           | Item  6.   | Exhibits                                                                                    |   | 23 |
| SIGNATURES                     |       | 24                                                                                          |

 

2

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**PART I.FINANCIAL INFORMATION**

**ITEM1.  FINANCIAL STATEMENTS**

**Gander Mountain Company**

**Statements of Operations - Unaudited**

**(In thousands, except per share data)**
| ** **                                 | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **July 29,**            | ** ** | **July 30,**            | ** ** | **July 29,** | ** ** | **July 30,** | ** ** |
| ** **                                 | ** ** | **2006**                     | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                       |       |                         |       |                         |       |   |   |   |   |
| Sales                                      |       | $                            | 182,482    |                         | $          | 173,787 |   | $ | 338,062 |   | $ | 309,046 |   |
| Cost of goods sold                         |       | 138,408                      |       | 132,931                      |       | 266,996 |   | 242,880 |   |
| Gross profit                               |       | 44,074                       |       | 40,856                       |       | 71,066 |   | 66,166 |   |
|                                       |       |                         |       |                         |       |   |   |   |   |
| Operating expenses:                        |       |                         |       |                         |       |   |   |   |   |
| Store operating  expenses                  |       | 36,472                       |       | 38,133                       |       | 72,327 |   | 70,703 |   |
| General and  administrative expenses       |       | 9,606                        |       | 9,738                        |       | 18,959 |   | 18,122 |   |
| Gain on contract  settlement               |       | —                       |       | —                       |       | — |   | (2,500 | ) |
| Pre-opening  expenses                      |       | 708                          |       | 1,017                        |       | 1,473 |   | 3,776 |   |
| Loss from operations                       |       | (2,712                       | )          | (8,032                       | )          | (21,693 | ) | (23,935 | ) |
| Interest expense, net                      |       | 4,847                        |       | 2,349                        |       | 8,833 |   | 4,014 |   |
| Loss before income  taxes                  |       | (7,559                       | )          | (10,381                      | )          | (30,526 | ) | (27,949 | ) |
| Income tax provision                       |       | —                       |       | —                       |       | — |   | — |   |
| Net loss                                   |       | $                            | (7,559     | )                            | $          | (10,381 | ) | $ | (30,526 | ) | $ | (27,949 | ) |
|                                       |       |                         |       |                         |       |   |   |   |   |
| Basic and diluted loss  per share          |       | $                            | (0.53      | )                            | $          | (0.73 | ) | $ | (2.14 | ) | $ | (1.96 | ) |
|                                       |       |                         |       |                         |       |   |   |   |   |
| Weighted average common shares outstanding |       | 14,293                       |       | 14,258                       |       | 14,289 |   | 14,247 |   |

 

See accompanying notes to unaudited financialstatements.

3

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**GanderMountain Company**

**Balance Sheets**

**(In thousands)**
| ** **                                                                                                              | ** ** | **July 29,** | ** ** | **January 28,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                                                                              | ** ** | **2006**          | ** ** | **2006**             | ** ** |
| ** **                                                                                                              | ** ** | **(Unaudited)**   | ** ** | ** **           | ** ** |
| **Assets**                                                                                                              |       |              |       |                 |       |
| Current assets:                                                                                                         |       |              |       |                 |       |
| Cash and cash  equivalents                                                                                              |       | $                 | 1,263      |                 | $          | 1,580 |   |
| Accounts  receivable                                                                                                    |       | 16,652            |       | 7,215                |       |
| Inventories                                                                                                             |       | 334,885           |       | 308,395              |       |
| Prepaids and  other current assets                                                                                      |       | 4,650             |       | 4,557                |       |
| Total current assets                                                                                                    |       | 357,450           |       | 321,747              |       |
| Property and equipment,  net                                                                                            |       | 134,957           |       | 132,447              |       |
| Other assets, net                                                                                                       |       | 5,850             |       | 4,736                |       |
| Total assets                                                                                                            |       | $                 | 498,257    |                 | $          | 458,930 |   |
|                                                                                                                    |       |              |       |                 |       |
| **Liabilities and shareholders’  equity**                                                                          | ** ** | ** **        | ** ** | ** **           | ** ** |
| Current liabilities:                                                                                                    |       |              |       |                 |       |
| Borrowings under  credit facility                                                                                       |       | $                 | 215,798    |                 | $          | 174,936 |   |
| Accounts payable                                                                                                        |       | 57,365            |       | 35,465               |       |
| Accrued and  other current liabilities                                                                                  |       | 41,123            |       | 41,082               |       |
| Current  maturities of long term debt                                                                                   |       | 1,003             |       | 697                  |       |
| Total current  liabilities                                                                                              |       | 315,289           |       | 252,180              |       |
|                                                                                                                    |       |              |       |                 |       |
| Unsecured convertible  note payable                                                                                     |       | 20,000            |       | 20,000               |       |
| Long term debt                                                                                                          |       | 16,196            |       | 10,953               |       |
| Other long term  liabilities                                                                                            |       | 26,745            |       | 25,972               |       |
|                                                                                                                    |       |              |       |                 |       |
| Shareholders’ equity:                                                                                              |       |              |       |                 |       |
| Preferred stock  ($.01 par value, 5,000,000 shares authorized; no shares issued and  outstanding)                       |       | —            |       | —               |       |
| Common stock  ($.01 par value, 100,000,000 shares authorized; 14,308,274 and 14,285,287  shares issued and outstanding) |       | 143               |       | 143                  |       |
| Additional  paid-in-capital                                                                                             |       | 192,985           |       | 192,257              |       |
| Notes receivable  from shareholders                                                                                     |       | (4,100            | )          | (4,100               | )          |
| Accumulated  deficit                                                                                                    |       | (69,001           | )          | (38,475              | )          |
| Total shareholders’  equity                                                                                        |       | 120,027           |       | 149,825              |       |
|                                                                                                                    |       |              |       |                 |       |
| Total liabilities and shareholders’ equity                                                                         |       | $                 | 498,257    |                 | $          | 458,930 |   |

 

See accompanying notes to unaudited financial statements.

4

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**GanderMountain Company**

**Statementsof Cash Flows - Unaudited**

**(Inthousands)**
| ** **                                                                   | ** ** | **26 Weeks Ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                   | ** ** | **July 29,**            | ** ** | **July 30,** | ** ** |
| ** **                                                                   | ** ** | **2006**                     | ** ** | **2005** | ** ** |
| **Operating  activities**                                                    | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                            | (30,526    | ) | $ | (27,949 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                         |       |   |   |
| Depreciation and amortization                                                |       | 10,889                       |       | 8,039 |   |
| Stock-based compensation expense                                             |       | 595                          |       | — |   |
| Loss on disposal of property and equipment                                   |       | 618                          |       | 1,160 |   |
| Change in operating assets and liabilities:                                  |       |                         |       |   |   |
| Accounts receivable                                                          |       | (7,901                       | )          | (7,509 | ) |
| Inventories                                                                  |       | (26,490                      | )          | (58,030 | ) |
| Prepaid expenses and other assets                                            |       | (1,619                       | )          | (2,613 | ) |
| Accounts payable and other liabilities                                       |       | 22,714                       |       | 47,529 |   |
| Net cash used in  operating activities                                       |       | (31,720                      | )          | (39,373 | ) |
| ** **                                                                   | ** ** | ** **                   | ** ** | ** ** | ** ** |
| **Investing  activities**                                                    | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Purchase of  property and equipment, net                                     |       | (17,241                      | )          | (32,767 | ) |
| Proceeds from  sale of property and equipment                                |       | 2,100                        | ** ** | **—** | ** ** |
| Net cash used in  investing activities                                       |       | (15,141                      | )          | (32,767 | ) |
|                                                                         |       |                         |       |   |   |
| **Financing  activities**                                                    | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Borrowings under  credit facility, net                                       |       | 40,862                       |       | 72,254 |   |
| Proceeds from  long term debt                                                |       | 5,946                        |       | — |   |
| Reductions in  long term debt                                                |       | (397                         | )          | (174 | ) |
| Proceeds from  exercise of stock options and stock sales                     |       | 133                          |       | 380 |   |
| Net cash  provided by financing activities                                   |       | 46,544                       |       | 72,460 |   |
|                                                                         |       |                         |       |   |   |
| Net  increase/(decrease) in cash                                             |       | (317                         | )          | 320 |   |
| Cash, beginning  of period                                                   |       | 1,580                        |       | 1,033 |   |
|                                                                         |       |                         |       |   |   |
| Cash, end of period                                                          |       | $                            | 1,263      |   | $ | 1,353 |   |

 

See accompanying notes to unaudited financial statements.

5

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**GanderMountain Company**

**Notes to Unaudited Financial Statements**

**Quarterly Period Ended July 29, 2006**

**1. Basis of Presentation**

The accompanying unaudited financialstatements of Gander Mountain Company (“we” or “us”) have been prepared inaccordance with the requirements for Form 10-Q and do not include all thedisclosures normally required in annual financial statements prepared inaccordance with U.S. generally accepted accounting principles. The interimfinancial information as of July 29, 2006 and for the 13 and 26 weeks endedJuly 29, 2006 and July 30, 2005, is unaudited and has been prepared on the samebasis as the audited annual financial statements. In the opinion of management,this unaudited information includes all adjustments necessary for a fairpresentation of the interim financial information. All of these adjustments areof a normal recurring nature. These interim financial statements filed on thisForm 10-Q and the discussions contained herein should be read in conjunctionwith the annual financial statements and notes included in our Annual Report onForm 10-K for the fiscal year ended January 28, 2006, as filed with theSecurities and Exchange Commission, which includes audited financial statementsfor our three fiscal years ended January 28, 2006.

Our business is seasonal in nature andinterim results may not be indicative of results for a full year. Historically,we have realized more of our sales in the latter half of our fiscal year, whichincludes the hunting and holiday seasons. Our business is also impacted by thetiming of new store openings. Both variation in seasonality and new storeopenings impact the analysis of the results of operations and financial conditionfor comparable periods.

**2. Stock-Based Compensation**

Effective January 29, 2006, we adopted thefair-value recognition provisions of the Financial Accounting Standards Board’sStatement No. 123 (revised 2004), *Share-BasedPayment* (“SFAS 123R”), which requires the measurement andrecognition of compensation expense for all stock-based payment awards made toemployees and directors including employee stock option awards and employeestock purchases made under our employee stock purchase plan. We adopted the provisionsof SFAS 123R, using the modified-prospective transition method. Under thistransition method, stock-based compensation expense was recognized in thefinancial statements for the 13 and 26 weeks ended July 29, 2006, for granted,modified or settled stock options and for expense related to the employee stockpurchase plan. The provisions of SFAS 123R apply to new stock options and stockoptions outstanding, but not yet vested, on the effective date ofJanuary 29, 2006. Results for prior periods have not been restated, inaccordance with the modified-prospective transition method.

We previously applied the provisions ofAccounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB No. 25”) and relatedinterpretations and provided the required pro forma disclosures in the notes tothe financial statements pursuant to Statement No. 123, *Accounting for Stock-Based Compensation.*Prior to fiscal 2006, generally no stock-based compensation expense wasrecognized in our statements of operations for employee stock options, as theexercise price was equal to the market price of our stock on the date of grant.

***Share******-basedawards***- InFebruary 2004, we adopted the 2004 Omnibus Stock Plan, which currentlyauthorizes the granting of stock-based awards covering up to 4,000,000 sharesof common stock. Under this plan, awards may be made to employees, directors,and consultants.  The types of awardsthat may be granted under the plan include restricted and unrestricted stock,incentive and nonstatutory stock options, stock appreciation rights and otherstock awards. Under this plan, as of July 29, 2006, there were 2,994,756options to purchase common stock outstanding, of which 1,844,632 areexercisable.  These vested options have aweighted-average exercise price of $13.76 per share, a weighted-averageremaining life of 8.8 years and an intrinsic value of approximately $10,000 atJuly 29, 2006. The options granted under this plan, for which vesting was notaccelerated in fiscal year 2005, primarily vest in three equal annualincrements from the date of grant.

6

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In February 2002, we implemented the 2002 Stock OptionPlan, a compensatory nonqualified stock option plan for certain store andoffice management personnel. As of July 29, 2006, there were 151,548 optionsoutstanding under this plan to purchase common stock with the ability toexercise being contingent upon the attainment of a $32.06 per share price forour common stock as of the end of a fiscal year based upon the higher of theclosing price on the last day of the fiscal year or a five-day trailing averagestock price taken at that time.  Theseoptions have a 10-year life with vesting subject to our meeting the targetedstock price of $32.06 per share at a fiscal year end.  The exercise price is $4.47 per share. We areno longer authorized to grant any awards under the 2002 Stock Option Plan.

We have also granted other options to certain membersof our management team on several dates prior to fiscal year 2005. The exerciseprice in all cases was the fair value of the underlying common stock on thedate of grant, with exercise periods of up to ten years. As of July 29, 2006,there were 897,352 options to purchase common stock outstanding under thesegrants, all of which are fully vested and exercisable. These vested optionshave a weighted-average exercise price of $9.33 per share, a weighted-averageremaining life of 5.3 years and an intrinsic value of approximately $173,000 atJuly 29, 2006.

As of July 29, 2006, there were a total of 4,043,656options to purchase common stock outstanding, under all of our stock optionplans and non-plan stock options, with a weighted average exercise price of$10.29 and a weighted average remaining life of 7.9 years.  These options vest in equal incrementsprimarily over periods of three years from the date of grant, although certaingrants have been made with shorter vesting schedules and the vesting of certainstock options was accelerated in fiscal 2005. The following table summarizesstock-based payment award activity for the 26 weeks ended July 29, 2006:
|                                                                                                      | ** ** | **Number of  Shares  Under  Option** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| Outstanding -  January 28, 2006                                                                      |       | 3,680,804                                 |       | $                                       | 10.84      |   |
| Granted                                                                                              |       | 395,767                                   |       | 6.45                                    |       |
| Exercised                                                                                            |       | —                                    |       | —                                  |       |
| Forfeited                                                                                            |       | (118,909                                  | )          | 10.89                                   |       |
| Outstanding  -April 29, 2006                                                                         |       | 3,957,662                                 |       | $                                       | 10.40      |   |
| Granted                                                                                              |       | 138,100                                   |       | 7.82                                    |       |
| Exercised                                                                                            |       | —                                    |       | —                                  |       |
| Forfeited                                                                                            |       | (52,106                                   | )          | 12.09                                   |       |
| Outstanding  -July 29, 2006                                                                          |       | 4,043,656                                 |       | $                                       | 10.29      |   |
|                                                                                                 |       |                                      |       |                                    |       |
| Weighted-average  Black-Scholes fair value of options granted during the quarter ended July 29,  006 |       |                                      |       | $                                       | 3.86       |   |

 

In February 2005, our board ofdirectors approved the establishment of an employee stock purchase plan (“ESPP”)that enables substantially all fulltime employees to purchase common stock bycontributions through payroll deductions. Purchases of common stock are madefrom accumulated employee contributions at the end of designated six-monthpurchase periods. Pursuant to the terms of the ESPP, we have currentlyestablished a 10% discount from the stock price on the designated purchasedate. Since the purchase discount exceeds the amount allowed under SFAS 123Rfor non-compensatory treatment, we recorded expense of $8,000 and $14,000 forthe ESPP in the 13 weeks and 26 weeks ended July 29, 2006. As of July 29, 2006,51,349 shares had been issued under the ESPP and 448,651 shares were availablefor issuance.

7

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**The stock options outstanding andexercisable for share-based payment awards as of July 29, 2006 were in thefollowing exercise price ranges:**
|                            | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|----------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | ** **              | ** ** | **Weighted-**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **              | ** ** | **Average**             | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                 | ** ** | ** **              | ** ** | **Remaining**           | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**               | ** ** | **Number**              | ** ** | **Contractual**         | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Exercise Prices**        | ** ** | **Outstanding**         | ** ** | **Life**                | ** ** | **Price** | ** ** | **Outstanding** | ** ** | **Price** | ** ** |
| $  4.47 -  7.99  |       | 1,226,906               |       | 9.0 Years               |       | $ | 5.84 |   | 10,000 |   | $ | 5.00 |   |
| 8.00 - 11.99               |       | 1,826,322               |       | 7.2 Years               |       | 9.74 |   | 1,741,556 |   | 9.74 |   |
| 12.00 - 15.99              |       | 77,100                  |       | 8.3 Years               |       | 12.90 |   | 77,100 |   | 12.90 |   |
| 16.00 - 19.99              |       | 739,378                 |       | 7.7 Years               |       | 16.00 |   | 739,378 |   | 16.00 |   |
| 20.00 - 23.99              |       | 133,950                 |       | 8.0 Years               |       | 21.45 |   | 133,950 |   | 21.45 |   |
| 24.00 - 24.40              |       | 40,000                  |       | 7.7 Years               |       | 24.40 |   | 40,000 |   | 24.40 |   |
| $  4.47 -  24.40 |       | 4,043,656               |       | 7.9 Years               |       | $ | 10.29 |   | 2,741,984 |   | $ | 12.31 |   |

 

***Impact of the adoption ofStatement 123R*** - The amount of compensation expense forstock-based awards to be recognized during a period is based on the portion ofthe awards that are ultimately expected to vest. We estimate option forfeituresat the time of grant and revise those estimates in subsequent periods if actualforfeitures differ significantly from those estimates. Cost is recognized usinga straight-line amortization method over the requisite service period**,**which typically is the vesting period. As a result ofadopting SFAS 123R, our loss from operations and net loss for the 13 and 26weeks ended July 29, 2006 are $295,000 and $531,000 higher, respectively, thanif we had continued to account for share-based compensation under APB No. 25.Basic and diluted loss per share for the 13 and 26 weeks ended July 29, 2006 are$.02 and $.04 higher, respectively, than under APB No. 25.  There was no impact on cash flows.

At July 29, 2006, there was approximately $3,400,000of total unrecognized stock-based compensation expense related to unvestedoption awards. Unrecognized stock-based compensation is expected to berecognized over a weighted-average period of 2.5 years.

We also recorded expense of $65,000 and $78,000 forthe 13 and 26 week periods ended July 29, 2006, respectively, for options topurchase stock issued to non-employees prior to fiscal year 2006.

***Valuation Assumptions***– We have estimated the fair value of all stock option awards as of thedate of the grant by applying the Black-Scholes Merton option pricing valuationmodel. The application of this valuation model involves assumptions that arejudgmental and sensitive in the determination of the resulting compensationexpense. The key assumptions used in determining the fair value of optionsgranted in the 26 week period ended July 29, 2006, and a summary of the methodologyapplied to develop each assumption are as follows: 
|                                      | ** ** | **26 Weeks Ended** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **July 29,**            | ** ** | **July 30,** | ** ** |
| ** **                           | ** ** | **2006**                     | ** ** | **2005** | ** ** |
| Average risk-free  interest rate (1) |       | 4.80                         | %          | 4.22 | % |
| Expected stock price  volatility (2) |       | 50                           | %          | 50 | % |
| Expected term (years)  (3)           |       | 5                            |       | 5 |   |
| Expected dividend yield  (4)         |       | 0.0                          | %          | 0.0 | % |

 

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*(1) Risk-Free Interest Rate*: This isthe U.S. Treasury zero-coupon rate, as of the grant date, for issues having aterm equal to the expected term of the stock option. An increase in the risk-freeinterest rate will increase compensation expense.

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*(2) Expected Stock Price Volatility*: Thisis a measure of the amount by which a stock’s price is expected to fluctuateduring the estimated expected life for an award. Due to lack of historical databecause of our short life as a public company, the volatility factor wasderived from considering volatility factors used by peers in our market sector.An increase in the expected stock price volatility will increase compensationexpense. 

*(3) Expected Term*: This is the period oftime over which granted stock options are expected to remain outstanding basedon historical experience. This is an estimate based on management’sconsideration of expected exercise behavior, past accelerations of vestingprovisions, life cycle of the company and the expected term factors used bypeers in our market sector.  An increasein the expected term will increase compensation expense.

*(4) Expected Dividend Yield*: Wehistorically have not made any dividend payments, nor do we expect to paydividends in the foreseeable future. An increase in the dividend yield willdecrease compensation expense.

***Pro forma Information for PeriodPrior to the Adoption of Statement 123R* -**All optionsgranted prior to 2004 were accounted for in accordance with APB No. 25 as thecompany was not publicly traded at that time. Our ESPP was deemed non-compensatory under the provisions of APB No.25.  Stock-based compensation costs werereflected in net earnings where the options granted under those plans had anexercise price that was less than the fair value of the underlying common stockon the date of grant. Previously reported amounts have not been restated. Thepro forma information for the 13 and 26 weeks ended July 30, 2005 was asfollows:
|                                                                                            | ** ** | **13 Weeks  Ended** | ** ** | **26 Weeks  Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                                 | ** ** | **July 30,  2005**  | ** ** | **July 30,  2005**  | ** ** |
| Net loss, as  reported                                                                     |       | $                        | (10,381    | )                        | $          | (27,949 | ) |
| Add: Stock-based  employee compensation expense in reported net loss                       |       | 242                      |       | 242                      |       |
| Deduct:  Stock-based employee compensation expense determined under the fair value  method |       | (699                     | )          | (7,864                   | )          |
| Pro forma net  loss                                                                        |       | $                        | (10,838    | )                        | $          | (35,571 | ) |
| Loss per common  share:                                                                    |       |                     |       |                     |       |
| Basic and diluted - as reported                                                            |       | $                        | (0.73      | )                        | $          | (1.96 | ) |
| Basic and  diluted - pro forma                                                             |       | $                        | (0.76      | )                        | $          | (2.50 | ) |

 

Duringfiscal 2005, our compensation committee of our board of directors acceleratedthe vesting for certain outstanding options to purchase common stock that hadexercise prices greater than the closing price of our common stock on the datesof approval. We accelerated the vesting of options to purchase a total ofapproximately 2,696,000 shares of common stock, on March 2, 2005 and November30, 2005. As a result of the accelerations, all of these options became fullyexercisable and remain exercisable through their respective termination dates,which vary, but do not extend past 2015. The pro-forma expense of $7,864,000reflected above for the 26 weeks ended July 30, 2005 is primarily a result ofthe March 2, 2005 vesting acceleration.

**3.****New Accounting Pronouncement**

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes* (“FIN 48”), an interpretation ofStatement of Financial Accounting Standards No. 109, *Accountingfor Income Taxes*.  FIN 48clarifies the accounting for uncertainty in income taxes by prescribing arecognition threshold for tax positions taken or expected to be taken in a taxreturn. FIN 48 is effective for fiscal years beginning after December 15,2006. We are currently evaluating the impact FIN 48 will have on our financialposition and results of operations.

In March 2006, the FASB’s EmergingIssues Task Force released Issue 06-3, *How Sales Taxes CollectedFrom Customers and Remitted to Governmental Authorities Should Be Presented inthe Income Statement* (“EITF 06-3”). A consensus was reached thatentities may adopt a policy of presenting sales taxes in the statement ofoperations on either a gross or net basis. If taxes are significant, an entityshould disclose its policy of presenting taxes and the amount of taxes ifreflected on a gross basis in the income statement. EITF 06-3 is effective forperiods beginning after December 15, 2006. We present sales net of sales taxesin our statement of operations and do not anticipate changing our policy as aresult of EITF 06-3.

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**4. Capital Stock**

Since the completion of our initial publicoffering on April 26, 2004, and the filing of our amended and restated articlesof incorporation in connection therewith, the authorized capital stock of ourcompany consists of 100,000,000 shares of common stock, par value $.01 pershare, and 5,000,000 shares of preferred stock, par value $.01 per share. As ofJuly 29, 2006, there were 14,308,274 shares of common stock and no shares of preferredstock outstanding.

**5.Credit Facility**

Our credit facility provides us with thecapital to fund the growth and operation of our business. Currently, therevolving credit facility provides availability of $275,000,000, which may befurther increased to $300,000,000 subject to certain conditions including theabsence of default. In addition to the existing $275,000,000 revolving creditfacilty, we have a $20,000,000 term loan for a total credit facility of$295,000,000. The credit facility has a maturity date of June 30, 2009.

Effective May 25, 2006, we amended our creditfacility to adjust the level of the EBITDA covenants for the months of April2006 through July 2006. As amended, testing of the EBITDA covenant is requiredwhen our availability is less than 10% of the lesser of (a) the revolvingcredit facility maximum on any given day or (b) the borrowing base, as definedand adjusted for certain reserves.  Thecredit facility also specifies quarterly testing of the operating cash flowcovenant. Other substantive terms of the agreement were not materially changedin the May 25, 2006 amendment. We are in compliance with all covenants of thecredit facility.

Outstanding borrowings under the creditfacility, including letters of credit, were $226.5 million and $192.9 millionas of July 29, 2006 and July 30, 2005, respectively.  Actual availability under the amended creditfacility is limited to specific advance rates on eligible inventory andaccounts receivable up to the $295,000,000 facility limit. Typically,availability will increase in the latter half of the fiscal year as inventorylevels and advance rates increase. Based on eligible inventory and accountsreceivable balances as of July 29, 2006 and July 30, 2005, our availableborrowing capacity under the credit facility, after subtracting letters ofcredit, was $16.7 million and $26.7 million, respectively, and wasapproximately $34 million as of September 1, 2006.

**6.Earnings Per Share**

Basic and diluted loss per share isbased upon the weighted average number of shares outstanding. All potentiallydilutive stock options have been excluded from the calculation of weightedaverage shares outstanding for all periods presented because their inclusionwould have an anti-dilutive effect on loss per share. In addition, we haveexcluded any potentially dilutive shares related to the outstanding convertibledebt from the calculation of weighted average shares outstanding because theirinclusion would have an anti-dilutive effect on loss per share. If the convertibledebt instrument was converted to common stock, these shares would amount to atleast 1,250,000 shares of stock, with additional shares issued depending on theamount of accrued interest at the time of conversion.  As of July 29, 2006 and July 30, 2005, therewere a total of 4,043,656 and 3,115,461 options to purchase common stockoutstanding, respectively.

**7. Contract Settlement**

In March 2005, we received $2,500,000relating to the termination of our contract with the former provider of ourco-branded credit card services in consideration of the lost opportunity. Wehave reclassified this item in our fiscal 2005 statement of operations from areduction of general and administrative expenses to a gain on contractsettlement in the 26 weeks ended July 30, 2005.

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**8.Selected Balance Sheet Information (in thousands)**
|                                                        | ** ** | **July 29,** | ** ** | **January 28,** | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| **Accrued and  other current liabilities consist of:** | ** ** | **2006**          | ** ** | **2006**             | ** ** |
| Gift cards and  gift certificate liabilities           |       | $                 | 16,145     |                 | $          | 23,413 |   |
| Payroll and related  fringe benefits                   |       | 3,898             |       | 4,183                |       |
| Sales, property  and use taxes                         |       | 6,571             |       | 3,436                |       |
| Lease related  costs                                   |       | 1,295             |       | 1,232                |       |
| Insurance  reserves and liabilities                    |       | 1,765             |       | 1,453                |       |
| Interest                                               |       | 1,813             |       | 1,235                |       |
| Due-to-related  parties                                |       | 20                |       | 89                   |       |
| Other accruals  and current liabilities                |       | 9,616             |       | 6,041                |       |
| Accrued and other current liabilities                  |       | $                 | 41,123     |                 | $          | 41,082 |   |
|                                                   |       |              |       |                 |       |

 
|                                  | ** ** | **July 29,** | ** ** | **January 28,** | ** ** |
|----------------------------------|------------|-------------------|------------|----------------------|------------|
| **Long term  debt consists of:** | ** ** | **2006**          | ** ** | **2006**             | ** ** |
| Capitalized  lease obligations   |       | $                 | 11,099     |                 | $          | 10,953 |   |
| Term note (1)                    |       | 5,097             |       | —               |       |
| Long term debt                   |       | $                 | 16,196     |                 | $          | 10,953 |   |
|                             |       |              |       |                 |       |

 
|                                              | ** ** | **July 29,** | ** ** | **January 28,** | ** ** |
|----------------------------------------------|------------|-------------------|------------|----------------------|------------|
| **Other  long-term liabilities consist of:** | ** ** | **2006**          | ** ** | **2006**             | ** ** |
| Deferred rent                                |       | $                 | 24,893     |                 | $          | 24,288 |   |
| Insurance  reserves and other liabilities    |       | 1,852             |       | 1,684                |       |
| Other long-term  liabilities                 |       | $                 | 26,745     |                 | $          | 25,972 |   |

 

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(1)          Represents long termportion of aircraft financing completed in July 2006. The note matures in 7years and has a 7.26% fixed annual interest rate. The note is collateralized bythe aircraft.

**9. Contingencies**

***Trademark Litigation* -**On July 2, 2004, we filed acomplaint in the U.S. District Court for the District of Minnesota seekingdeclaratory relief that the contingent trademark licensing provision of anoncompetition agreement dated May 16, 1996, made between our predecessor andCabela’s Incorporated, is invalid and unenforceable. Although thenoncompetition provisions of the noncompetition agreement expired in June 2003,Cabela’s contends that a contingent trademark licensing provision of thenoncompetition agreement now requires us to grant Cabela’s a license to certainof our trademarks that were in existence in 1996.

On August 18, 2005, the court ruled that thecontingent trademark licensing provision is not legally invalid as anoncompetition agreement and dismissed our complaint.  The court also acknowledged that it had notbeen asked at that point to determine, and was not determining, the scope ofthe contingent trademark license or the parties’ respective rightsthereunder.  In December 2005, the courtgranted our motion to file an amended reply to Cabela’s counterclaim, in whichwe raised multiple additional issues regarding the validity and enforceabilityof any trademark rights allegedly possessed by Cabela’s, and any limitationsupon our rights to engage in certain marketing activities under the trademarksat issue.  These issues remain before thecourt.  Discovery is currently underwayand the court has established a trial-ready date of May 1, 2007.

We are not able to predict the ultimate outcome ofsuch proceedings, but they may be costly and disruptive. The total costs maynot be reasonably estimated at this time. The outcome of this dispute mayimpact the manner in which we market our products in certain distributionchannels in the future. It is not expected to have any affect on themarketing of our products through our retail stores.

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##### ***Derivative Litigation***– As previouslyreported, our company, as a nominal defendant, and certain of our present andformer directors were named as defendants in a purported derivative action,*Kurt Haberle v. Mark R. Baker, et al*, that was filed onFebruary 11, 2005 in the U.S. District Court for the District ofMinnesota.   On August 30, 2005, thecourt issued an order dismissing the complaint without prejudice on the groundsthat plaintiff was required to make a pre-suit demand on our board of directorsand failed to do so. The plaintiff filed a motion to alter or amend thejudgment.  On May 16, 2006, the court entered judgment denying plaintiff’smotion and dismissed the case. The time period for appeal has expired withoutan appeal being filed, thus terminating this case.

***Other Legal Claims* -**Various claims and lawsuitsarising in the normal course of business may be pending against us from time totime. The subject matter of these proceedings typically relate to commercialdisputes and employment issues. As of the date of this report, we are not aparty to any legal proceedings that are expected, individually or in theaggregate, to have a material adverse effect on our financial condition orresults of operations.

***InvoluntaryConversion of Property and Equipment*******-**In June 2006, we incurred significant flooddamage to our Binghamton, New York store. The building was damaged and itscontents were essentially declared a total loss. We are adequately insured torecover our merchandise inventory and replace all of our property and equipmentthat was destroyed. We can not at this time accurately estimate the amount ofclaim proceeds we will receive, but we believe the settlement of the claim willnot result in a loss to our results of operations.

 As of July 29, 2006, we have included inaccounts receivable $3,800,000 in costs that represent the book value ofinventory and property and equipment to be recovered through the insuranceclaim, net of $1,000,000 in proceeds received from our insurance company.  Subsequent to July 29, 2006, we have receivedadditional insurance proceeds of $4,200,000. We expect to conclude the settlementof the claim before the end of our fiscal third quarter. We anticipatere-opening the store on or about October 1, 2006.

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**ForwardLooking Statements**

The following discussion may contain forward-lookingstatements regarding us, our business prospects and our results of operationsthat are subject to certain risks and uncertainties posed by many factors andevents that could cause our actual business, prospects and results ofoperations to differ materially from those that may be anticipated by suchforward-looking statements.  Factors thatcould cause or contribute to such differences include, but are not limited to,those described in the “Risk Factors” section of our Form 10-K and otherreports, as filed with the Securities and Exchange Commission.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the dateof this report.  We undertake noobligation to revise any forward-looking statements in order to reflect eventsor circumstances that may subsequently arise. Readers are urged to carefullyreview and consider the various disclosures made by us in this report and inour other reports filed with the Securities and Exchange Commission that adviseinterested parties of the risks and factors that may affect our business.

The interim financials statementsfiled on this Form 10-Q and the discussions contained herein should be read inconjunction with the annual financial statements and notes included in our Form10-K, as filed with the Securities and Exchange Commission, which includesaudited financial statements for our three fiscal years ended January 28, 2006.

**Overview**

Gander Mountain Company operates the nation’s largestretail network of stores specializing in hunting, fishing, camping, marine andoutdoor lifestyle products and services. We have expanded our store base from26 stores in 1997 to our current base of 100 conveniently located GanderMountain outdoor lifestyle stores, providing approximately 5.2 million squarefeet of retail space in 18 states — Arkansas, Colorado, Illinois, Indiana,Iowa, Kansas, Kentucky, Maryland, Michigan, Minnesota, New York, NorthCarolina, North Dakota, Ohio, Pennsylvania, Texas, Virginia and Wisconsin. We anticipateopening five additional new stores during the remainder of fiscal 2006 – LakeMary, Florida; Charleston, West Virginia; Knoxville, Tennessee; Huntsville,Alabama; and Winchester, Virginia.

Our core strategy and focus is to provide our targetcustomers with a unique combination of a broad assortment of outdoor equipment,accessories, related technical apparel and footwear; expert services;convenient locations and value pricing. Our stores feature an extensiveselection of leading national and regional brands as well as our company’sowned brands. We tailor our merchandise assortments to take advantage of ourcustomers’ seasonal and regional or local preferences. We seek to combine thisbroad product offering with superior customer service based on our storeassociates’ extensive product knowledge and outdoor-related experience.

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Since its origin in 1960, our brand name has had aheritage of strong appeal and relevance to consumers who participate in outdoorsports and recreation activities, based on our “We Live Outdoors” culture andtheme. From 1960 to 1996, our predecessor operated a nationwide catalogbusiness that, by 1996, included 17 retail stores. In 1996 and 1997, HolidayCompanies, which at the time owned and operated a group of retail sportinggoods stores, acquired these Gander Mountain retail stores, formed our companyand began to build a new outdoor lifestyle business. 

In March 2003, we began transforming our marketposition from a traditional specialty store to a large-format, category-focusedstore by opening new stores in a large format and increasing the selling spacewithin our original, small-format stores. Prior to March 2003, our typicalstore was approximately 31,000 square feet. Our large-format stores are over50,000 square feet and are typically located with convenient access to a majorhighway. They have a warehouse-style shopping environment characterized byconcrete floors, open-bar joist ceilings, high-density racking and wide aisles,which reinforces our overall value proposition to our customers and enables usto substantially increase the breadth and depth of our product and serviceofferings. Most of our large-format stores offer all-terrain vehicles (ATVs),and some carry an expanded assortment of fishing and recreational boats. Ourlarge-format stores offer unique features and specialized services, including afull-service gunsmith shop, a full-service archery pro shop, archery targetlanes, and a power shop performing repairs for ATVs, boats and other smallengines. Some of the large-format stores also include a bait shop that opensearly for the convenience of our customers. Nearly all of our stores have aGander Mountain Lodge, which is an in-store meeting room available for publicuse, where we provide hunter safety classes, outdoor-skills seminars and othercommunity-focused activities. We utilize outside selling areas adjacent to someof our large-format stores to display additional offerings of larger items suchas ATVs, boats, kayaks, trailers and canoes. These increase the efficiency ofour stores and also give those products greater visibility. Currently, 50 ofour 100 stores are large-format stores.

We are utilizing several strategic and operatinginitiatives aimed at improving our merchandise offerings, enhancingprofitability and expanding the number and geographic diversity of ourstores.  We measure performance using keyoperating statistics such as comparable store sales, sales per square foot,gross margin percentage and store operating expenses, with a focus on labor, asa percentage of sales.  

We also measure and evaluate investments in our retaillocations, including inventory and property and equipment. Inventoryperformance is primarily measured by inventory per square foot and by inventoryturns, or the number of times store inventory turns over in a given period, andamounts of owned inventory at various times based on payment terms from ourvendors. The most significant investments in property and equipment are made atthe time a store is opened by us. 

We believe that the overall growth of our businesswill allow us to generally maintain or increase our product gross margins.Increased merchandise volumes should enable us to improve our purchasingleverage and achieve greater support throughout the supply chain. The mix ofmerchandise in our total sales also influences our product gross margins. As wecontinue sales and store growth, a number of other factors may impact,positively or negatively, our product gross margin percentage, including: 

·      the introduction of new product categorieswith varying gross margin percentage characteristics, 

·      changes in the merchandise mix at ourcurrent locations, 

·      differences in merchandise mix bygeographic location, 

·      price competition,

·      clearance activities in connection withseasonal inventory management,

·      closeout sales in connection with storerelocations and consolidations,

·      sourcing of products from locationsoutside the United States,

·      vendor programs, and

·      supply chain enhancements.

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Inaddition, our gross margin is impacted by store occupancy and distributioncosts. We monitor these costs in absolute dollars and as a percentage of sales.

Themost significant store operating expenses are labor and related employeebenefits and advertising. We believe improved labor management within ourstores will allow us to better leverage payroll expenses over time. Ouremployee benefits include health insurance and workers compensation benefits,the costs of which continue to increase faster than the general rate ofinflation. We continually monitor these costs and review strategies toeffectively control increases, but we are subject to the overall trend ofincreases in these costs. Advertising costs are monitored as a percentage ofsales.  These costs are largely variable,which allows us to actively manage them to facilitate achieving our sales,gross margin percentage and store operating contribution objectives.

Storeoperating contribution, which is calculated by deducting a store’s operating expensesfrom its gross margin, is used to evaluate overall performance on an individualstore basis.

Generaland administrative expenses are monitored and controlled as a percentage ofsales.  We have made significantinvestments in infrastructure, including our information systems, distributioncapabilities and personnel. Our current infrastructure facilitates our plannedopening of stores, which we believe enables us to leverage our expenses.  Accordingly, we expect these expenses todecrease as a percentage of sales over time.

Pre-openingexpenses will continue to be related to store openings, including relocations.These expenses will fluctuate based on the number and timing of new storeopenings.

Inventoryturns are based on cost of sales and average inventory for the applicableperiod. We recognize that our inventory turns may be lower than those of otherretailers, which we believe is due, in part, to the categories of merchandisewe carry, including firearms, and the large quantities of merchandise we use inour in-store displays. We believe we have the opportunity to enhance our supplychain to improve our inventory turns. Additionally, in merchandise categoriesthat experience slower inventory turns, we continue to work with vendors toincrease our trade credit terms to reduce our investment in owned inventory. Wecannot assure you that we will be able to improve our inventory turns orinventory investment.

Identificationof appropriate new store sites is essential to our growth strategy. We believeour focus on our larger store size and our ability to utilize either recycled,or second-use, facilities or build-to-suit locations provides us with increasedopportunities to find optimal real estate locations on attractive terms. Weevaluate and invest in new stores based on site-specific projected returns oninvestment.

**CriticalAccounting Policies and Use of Estimates**

Our financial statements are prepared in accordance with U.S.generally accepted accounting principles. In connection with the preparation of the financial statements, we arerequired to make assumptions, make estimates and apply judgments that affectthe reported amounts of assets, liabilities, revenue, expenses and the relateddisclosures.  We base our assumptions,estimates and judgments on historical experience, current trends and otherfactors that we believe to be relevant at the time the financial statements areprepared.  On a regular basis, we reviewthe accounting policies, assumptions, estimates and judgments to ensure thatour financial statements are presented fairly and in accordance with U.S.generally accepted accounting principles. However, because future events andtheir effects cannot be determined with certainty, actual results could differfrom our assumptions and estimates, and such differences could be material.

Ourcritical accounting policies and use of estimates are discussed and should beread in conjunction with the annual financial statements and notes included inour Form 10-K, as filed with the Securities and Exchange Commission, whichincludes audited financial statements for our three fiscal years ended January28, 2006.

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**Resultsof Operations**

The followingtable includes selected items in the unaudited statements of operations,reflected as a percentage of sales: 
| ** **                          | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended** | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **July 29,  2006**      | ** ** | **July 30,  2005**      | ** ** | **July 29,  2006** | ** ** | **July 30,  2005** | ** ** |
| Sales                               |       | 100.0                        | %          | 100.0                        | %          | 100.0 | % | 100.0 | % |
| Cost of goods  sold                 |       | 75.8                         | %          | 76.5                         | %          | 79.0 | % | 78.6 | % |
| Gross profit                        |       | 24.2                         | %          | 23.5                         | %          | 21.0 | % | 21.4 | % |
| Operating  expenses:                |       |                         |       |                         |       |   |   |   |   |
| Store operating expenses            |       | 20.0                         | %          | 21.9                         | %          | 21.4 | % | 22.9 | % |
| General and administrative expenses |       | 5.3                          | %          | 5.6                          | %          | 5.6 | % | 5.9 | % |
| Gain on contract settlement         |       | 0.0                          | %          | 0.0                          | %          | 0.0 | % | (0.8 | )% |
| Pre-opening expenses                |       | 0.4                          | %          | 0.6                          | %          | 0.4 | % | 1.1 | % |
| Loss from  operations               |       | (1.5                         | )%         | (4.6                         | )%         | (6.4 | )% | (7.7 | )% |
| Interest  expense, net              |       | 2.6                          | %          | 1.4                          | %          | 2.6 | % | 1.3 | % |
| Loss before  income taxes           |       | (4.1                         | )%         | (6.0                         | )%         | (9.0 | )% | (9.0 | )% |
| Income tax  provision               |       | 0.0                          | %          | 0.0                          | %          | 0.0 | % | 0.0 | % |
| Net loss                            |       | (4.1                         | )%         | (6.0                         | )%         | (9.0 | )% | (9.0 | )% |

 

A store is included inthe comparable store base in its fifteenth full month of operations.  A relocated store returns to the comparablestore base in its fifteenth full month after relocation. Non-comparable storesales include sales from our stores before they have begun their fifteenthmonth of operation.

Cost of goods soldincludes the cost of merchandise, freight, distribution, inventory shrinkageand store occupancy costs. Store occupancy costs include rent, real estatetaxes and common area maintenance charges. Initial product margin representssales less the supplier’s cost of merchandise only.

Store operating expensesinclude store associate payroll, taxes and fringe benefits, advertising,maintenance, utilities, depreciation, insurance, bank and credit card chargesand other store level expenses.

General andadministrative expenses include all expenses associated with operating ourcorporate headquarters.

Pre-opening expensesconsist primarily of payroll, rent, recruiting, advertising and other costsincurred prior to a new store opening.

***ThirteenWeeks Ended July 29, 2006 compared to Thirteen Weeks Ended July 30, 2005***

*Sales.*  Sales increased by $8.7 million, or 5.0%, to$182.5 million in the second quarter of fiscal 2006 from $173.8 million in thesecond quarter of fiscal 2005. This increase primarily resulted from sales of$22.3 million from new stores not yet included in the comparable store salesbase. This increase was partially offset by a comparable store sales decreaseof $9.8 million, and a $3.8 million sales decrease from relocated orconsolidated stores and changes in other revenues. Comparable store salesdecreased 6.7% compared to a decrease of 4.2% in the second  quarter of fiscal 2005. We opened one newstore during the second quarter of fiscal 2006 compared to four new storesduring the second quarter of fiscal 2005. Total square footage as of July 29,2006 increased 15.0% to 5.2 million square feet, as compared to July 30, 2005.

We believe the comparable store salesdecrease and the overall softness in sales is primarily attributable to (i)reduced spending in advertising and promotions, (ii) our focus on our EverydayLow Price strategy that resulted in fewer promotions to drive customer traffic,(iii) lower levels of clearance merchandise available to customers, and (iv)cannibalization from some of the new store openings and new competitionentering some of our markets.

*Gross Profit.* Gross profit increased by $3.2 million,or 7.9%, to $44.1 million in the second quarter of fiscal 2006 from $40.9million in the second quarter of fiscal 2005. As a percentage of sales, grossprofit increased  approximately 70 basispoints to 24.2% in the second quarter of fiscal 2006 from 23.5% in the secondquarter of fiscal 2005.  Major factorsprimarily affecting gross margin in the current quarter were:

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·                  aninitial product margin increase of approximately 170 basis points as a resultof continued benefits from increasing scale, the positive impact of ourEveryday Low Price strategy on our pricing structure, higher penetration of ourowned-brand merchandise, and lower clearance inventory coupled with bettermanagement of clearance merchandise and pricing,

·                  anincrease of approximately 40 basis points from a reduction in distributioncosts,

·                  a negativeimpact of approximately 140 basis points from increased store occupancy costsas a result of reduced leverage from lower comparable store sales and lowersales per square foot at our newer, less mature stores, and

·                  othersignificant factors impacting margin included increased co-branded credit cardrevenues, reduced new store discounts as a result of opening fewer new storeswith lower inventories for those new stores, and a continuation in the trendtoward higher freight costs as fuel prices increased.

*Store Operating Expenses.*  Store operating expenses decreased by $1.7million, or 4.4%, to $36.5 million in the second quarter of fiscal 2006 from$38.1 million in the second quarter of fiscal 2005. As a percentage of sales,store operating expenses decreased 190 basis points to 20.0% in the secondquarter of fiscal 2006 from 21.9% in the second quarter of fiscal 2005. Wereduced advertising and marketing expenditures by approximately 50% becausethese expenditures have proven less effective in driving sales in theseasonally slow second fiscal quarter. In addition, we had a modest gain in store labor productivity. Thesebenefits were offset in part by the de-leveraging of most other expenses as aresult of lower-than-expected sales.

*General and Administrative Expenses.*  General and administrative expenses decreasedby $0.1 million, or 1.4%, to $9.6 million in the second quarter of fiscal 2006from $9.7 million in the second quarter of fiscal 2005. As a percentage ofsales, general and administrative expenses decreased 30 basis points to 5.3% inthe second quarter of fiscal 2006 from 5.6% in the second quarter of fiscal2005 as a result of cost controls.

*Pre-opening Expenses.*  Pre-opening expenses decreased $0.3 million,or 30.4%, to $0.7 million in the second quarter of fiscal 2006 from $1.0million in the second quarter of fiscal 2005. We opened one new store in thesecond quarter of fiscal 2006 and incurred costs related to our five new storeswe plan to open in the third quarter of fiscal 2006.  In the second quarter of fiscal 2005, we openedfour new stores.

*Interest Expense, net.*  Interest expense increased by $2.5 million,or 106.4%, to $4.8 million in the second quarter of fiscal 2006 from $2.3million in the second quarter of fiscal 2005. The increase resulted from higheraverage borrowings incurred to fund our growth, including the placement of $20million of convertible debt in August 2005 and the addition of a $20 millionterm loan in March 2006. We also experienced higher average interest rates ofapproximately 290 basis points during the second quarter of fiscal 2006, ascompared to the second quarter of fiscal 2005.

*Income Tax Provision.* We did notrecord an income tax benefit for the second quarters of fiscal 2006 or fiscal2005 due to the uncertainty of the realization of the net operating loss carryforwards. We have determined the realization of the tax benefit related to ournet deferred tax asset is uncertain at this time and a valuation allowance wasrecorded for the entire balance of our net deferred tax asset.

*Net Loss.*As a result of thefactors discussed above, the net loss of $7.6 million for the second quarter offiscal 2006 represented a decrease of $2.8 million, or 27.2%, from the net lossof $10.4 million for the second quarter of fiscal 2005.

***TwentySix Weeks Ended July 29, 2006 compared to Twenty Six Weeks Ended July 30, 2005***

*Sales.*  Sales increased by $29.0 million, or 9.4%, to$338.1 million in the first half of fiscal 2006 from $309.0 million in thefirst half of fiscal 2005. This increase primarily resulted from sales of $58.6million from new stores not yet included in the comparable store sales base.This increase was partially offset by a comparable store sales decrease of$23.0 million, and a $6.6 million sales decrease from relocated or consolidatedstores and changes in other revenues. Comparable store sales decreased 8.4%compared to a decrease of 2.7% in the first half of fiscal 2005. We openedthree new stores during the first half of fiscal 2006 compared to ten newstores during the first half of fiscal 2005. We relocated one store during the first half of fiscal 2006. During thesame period of fiscal 2005, we also relocated one store.

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We believe the comparable store salesdecrease and the overall softness in sales is primarily attributable to (i)reduced spending in advertising and promotions , (ii) our focus on our EverydayLow Price strategy that resulted in fewer promotions to drive customer traffic,(iii) lower levels of clearance merchandise available to customers, and (iv)cannibalization from some of the new store openings and new competitionentering some of our markets.

*Gross Profit.* Gross profit increased by $4.9 million,or 7.4%, to $71.1 million in the first half of fiscal 2006 from $66.2 millionin the first half of fiscal 2005. As a percentage of sales, gross profitdecreased 40 basis points to 21.0% in the first half of fiscal 2006 from 21.4%in the first half of fiscal 2005.  Majorfactors primarily affecting gross margin in the comparable six-month periodswere:

·                  aninitial product margin increase of approximately 140 basis points as a resultof continued benefits from increasing scale, the positive impact of ourEveryday Low Price strategy on our pricing structure and higher penetration ofour owned-brand merchandise,

·                  anincrease of approximately 30 basis points from a reduction in distributioncosts,

·                  a negativeimpact of approximately 150 basis points from increased store occupancy costsas a result of reduced leverage from lower comparable store sales and lowersales per square foot at our newer, less mature stores, and

·                  othersignificant factors impacting margin included increased co-branded credit cardrevenues, reduced new store discounts as a result of opening fewer new storeswith lower inventories for those new stores, and a continuation in the trendtoward higher freight costs as fuel prices increased.

*Store Operating Expenses.*  Store operating expenses increased by $1.6million, or 2.3%, to $72.3 million in the first half of fiscal 2006 from $70.7million in the first half of fiscal 2005. As a percentage of sales, storeoperating expenses decreased 150 basis points to 21.4% in the first half offiscal 2006 from 22.9% in the first half of fiscal 2005. We reduced advertising and marketing expenditures by 44%because these expenditures have proven less effective in driving sales in theseasonally slow first and second fiscal quarters.  In addition, we had a modest gain in storelabor productivity. These benefits were offset in part by the de-leveraging ofmost other expenses as a result of lower-than-expected sales.

*General and Administrative Expenses.*  General and administrative expenses increasedby $0.8 million, or 4.6%, to $19.0 million in the first half of fiscal 2006from $18.1 million in the first half of fiscal 2005. As a percentage of sales,general and administrative expenses decreased 30 basis points to 5.6% in thefirst half of fiscal 2006 from 5.9% in the first half of fiscal 2005 as aresult of cost controls.

*Gain on Contract Settlement*. In March2005, we received a $2.5 million non-recurring payment relating to thetermination of our contract with the former provider of our co-branded creditcard services in consideration of the lost opportunity.

*Pre-opening Expenses.*  Pre-opening expenses decreased $2.3 million,or 61.0%, to $1.5 million in the first half of fiscal 2006 from $3.8 million inthe first half of fiscal 2005. We opened three new stores in the first half offiscal 2006, and incurred costs related to our five new stores we plan to openin the third quarter of fiscal 2006.  Inthe first half of fiscal 2005 we opened ten new stores.

*Interest Expense, net.*  Interest expense increased by $4.8 million,or 120.1%, to $8.8 million in the first half of fiscal 2006 from $4.0 millionin the first half of fiscal 2005. The increase resulted from higher averageborrowings incurred to fund our growth, including the placement of $20 millionof convertible debt in August 2005 and the addition of a $20 million term loanin March 2006. We also experienced higher average interest rates ofapproximately 270 basis points during the first half of fiscal 2006, ascompared to the first half of fiscal 2005.

*Income Tax Provision.* We did notrecord an income tax benefit for the first half of fiscal 2006 or fiscal 2005due to the uncertainty of the realization of the net operating loss carryforwards. We have determined the realization of the tax benefit related to ournet deferred tax asset is uncertain at this time and a valuation allowance wasrecorded for the entire balance of our net deferred tax asset.

*Net Loss.*As a result of thefactors discussed above, the net loss of $30.5 million for the first half offiscal 2006 represented an increase of $2.6 million from the net loss of $27.9million for the first half of fiscal 2005.

**Liquidityand Capital Resources**

Ourprimary capital requirements are for inventory, capital improvements,pre-opening expenses to support our new store growth plans, and, to the extentof the highly seasonal nature of our business, operating losses.

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*Operating Activities.*  Net cash used in operating activities for thefirst half of fiscal 2006 decreased by $7.7 million to $31.7 million, ascompared to $39.4 million for the first half of fiscal 2005. Overall, ourefforts to manage inventories have resulted in lower levels of inventories inour recently opened new stores, as well as a reduction in inventories in allour stores. There were also seven fewer new stores opened during the first halfof fiscal 2006 as compared to the first half of fiscal 2005. This resulted in$31.5 million less cash used to fund inventory growth in the first half offiscal 2006 as compared to the first half of fiscal 2005. This reduced use ofcash was partially offset by a reduction of $24.8 million in cash generatedfrom accounts payable and other liabilities resulting from several factors,including reduced liabilities relative to property and equipment purchases andreduced tenant improvement allowances related to fewer new stores in the firsthalf of fiscal 2006 compared to the first half of fiscal 2005, increasedefficiencies in systems and processes that improved timeliness of vendorpayments, fewer new store openings, which typically provide extended terms oninitial inventory purchases, improved timing of charge-backs for vendor allowancesand increased foreign product sourcing activities, which often involve the useof letters of credit or other arrangements.

*Investing Activities*.  Net cash used in investing activities was$15.1 million in the first half of fiscal 2006 and $32.8 million in the firsthalf of fiscal 2005, consisting of purchases of property and equipment. We usedcash primarily for tenant improvements and equipment to open new stores and toremodel and upgrade existing stores. There were three new stores opened in thefirst half of fiscal 2006 and ten new stores opened in the first half of fiscal2005. We also expended $5.6 million to replace our corporate aircraft in June2006 and received proceeds of $2.1 million from the sale of the replacedaircraft. Purchases of property and equipment in the first half of fiscal 2005also included expenditures for equipment for our distribution center,information technology equipment and office furniture and equipment at our newcorporate headquarters.

*Financing Activities*. * *Net cash provided byfinancing activities for the first half of fiscal 2006 decreased by $25.9million to $46.5 million, as compared to $72.5 million in the first half offiscal 2005. The reduced funding needed from our credit facility was due to thedecrease in cash used in operations of $7.7 million and a $15.5 millionreduction in property and equipment purchases. Our financing activities wereutilized to fund our continued store expansion, including inventory, propertyand equipment, and to fund our operating losses. In addition, we financed theacquisition of our corporate aircraft with a $5.3 million, seven-year term notepayable.

*Credit Facility. *To meet our liquidity and capital needs, we enteredinto a credit facility with Bank of America, N.A.  This credit facilityprovides for revolving loans in an aggregate amount of up to $275 millionincluding up to $50 million in the form of letters of credit, and matures onJune 30, 2009.  Availability under thefacility may be further increased to $300 million, subject to certainconditions including the absence of default. The actual availability under theamended credit facility is limited to 85% of eligible credit card receivablesplus the lesser of 68% to 75% of eligible inventory or 85% of the inventory’sliquidation value, in each case, net of specified reserves and less any lettersof credit outstanding. Interest on the outstanding indebtedness under therevolving credit facility currently accrues at the lender’s prime commerciallending rate plus 0% to 0.5% depending on our EBITDA, as defined in the creditagreement, or, if we elect, at the one, two, three or six month LIBOR plus1.25% to 2.25% depending on such EBITDA. Our obligations under the creditfacility are secured by interests in substantially all of our assets.

On March 3, 2006, we amended and restated ourcredit facility. The principal purpose of the amendment was to add a $20million term loan to the credit facility. The amount of the term loan is notdeducted in determining availability under the revolving credit facility,except to the extent that the balance of the term loan exceeds approximately 4%to 5% of the eligible borrowing base. The term loan matures on June 30, 2009and bears interest at either (a) 2% over the higher of Bank of America’s primerate or the federal funds rate plus 0.5%, or (b) LIBOR plus 4%.  This additional financing was obtained tomaintain the liquidity levels necessary to fund continued growth and seasonalcash flow needs.

Effective May 25, 2006, we amended our creditfacility to adjust the level of the EBITDA covenants for the months of April2006 through July 2006. As amended, testing of the EBITDA covenant is requiredwhen our availability is less than 10% of the lesser of (a) the revolvingcredit facility maximum on any given day or (b) the borrowing base, as definedand adjusted for certain reserves. The credit facility continues to specifyquarterly testing of the operating cash flow covenant.  Other substantive terms of the agreement werenot materially changed in the May 25, 2006 amendment. The credit agreementcontains certain covenants that, among other things, restrict our ability toincur substantial indebtedness, create certain liens, engage in certain mergersand acquisitions, sell assets, enter into certain capital leases or make juniorpayments, including dividends. We are in compliance with all covenants of thecredit facility.

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Outstanding borrowings under the creditfacility, including letters of credit, were $226.5 million and $192.9 millionas of July 29, 2006 and July 30, 2005, respectively.  Actual availability under the amended creditfacility is limited to specific advance rates on eligible inventory andaccounts receivable up to the $295,000,000 facility limit. Typically,availability will increase in the latter half of the fiscal year as inventorylevels and advance rates increase. Based on eligible inventory and accountsreceivable balances as of July 29, 2006 and July 30, 2005, our available borrowingcapacity under the credit facility, after subtracting letters of credit, was$16.7 million and $26.7 million, respectively, and was approximately $34million as of September 1, 2006.  Totalunused borrowing capacity, assuming sufficient eligible inventory and accountsreceivable, would have been $68.5 million as of July 29, 2006.

*Income Taxes.*Due to theuncertainty of the realization of net operating loss carry forwards, we havedetermined the realization of the tax benefit related to our net deferred taxasset is uncertain at this time and a valuation allowance was recorded for theentire balance of our net deferred tax asset.

*Future Capital Requirements*.  Our future capital requirements willprimarily depend on our future financial performance, the number of new storeswe open and the timing of those openings within a given fiscal year. Theserequirements will include costs directly related to opening new stores and mayalso include costs necessary to ensure that our infrastructure, includingtechnology and distribution capabilities, is able to support a larger storebase. We anticipate opening five additional new stores during the second halfof fiscal 2006. However, business conditions, business strategy or otherfactors may cause us to adjust these plans.

Additional needs forcapital include funding seasonal inventory levels and operating losses due toour seasonality, and will include investments for an expansion into otherdistribution channels in addition to our retail channel. We have beguninitiatives, and announced new intiatives with certain partners, to developadditional distribution channels. We do not expect our investments in theseinitiatives to be significant in fiscal 2006.

We also expect tocontinue to increase our direct product sourcing activities, requiringadditional funding possibly through increased letters of credit or tradecredit. We intend to satisfy our capital requirements over the next twelvemonths with cash flows from operations, funds available under our creditfacility, equipment financing leases and/or funds from additional borrowingcapacity. However, if changes in our capital requirements occur, includingchanges in trade credit, vendor terms or other factors detailed from time totime in our filings with the Securities and Exchange Commission, we may need toseek additional debt or equity financing in the public or private capitalmarkets. Our ability to access capital sources is impacted by our financialperformance, as well as by general business, economic and other factors, someof which are beyond our control. There is no assurance that financing will beavailable to us on acceptable terms. Beyond fiscal 2006, we anticipate needingadditional financing to significantly grow our business.

We privately placed a $20million subordinated unsecured convertible note in August 2005. The holder ofthe note is a trust, the current beneficiary of which is a member of our boardof directors. The note matures in August 2010. The note is convertible into shares of our common stock at the price of$16 per share, subject to certain adjustments. If the holder does not elect toconvert the note,  $20 million will bedue at maturity.

**Contractual Obligations and Other Commitments**

Ourmaterial off-balance sheet arrangements are operating lease obligations forsubstantially all of our retail stores, our distribution center and corporateoffice and letters of credit.  Weexcluded these items from the balance sheet in accordance with U.S. generallyaccepted accounting principles. As of July 29, 2006, the minimum operatinglease payments due within one year were $52.6 million. As of July 29, 2006,total minimum operating lease payments remaining over all of our operatingleases were $630.3 million. These leases have an average remaining term of 10.2years. These obligation amounts include future minimum lease payments andexclude direct operating costs such as common area costs and real estate taxes.

Issued and outstanding letters ofcredit were $10.7 million and $6.2 million at July 29, 2006 and July 30, 2005,respectively, and were related primarily to importing of merchandise andfunding insurance program liabilities.

Inthe ordinary course of business, we enter into arrangements with vendors topurchase merchandise in advance of expected delivery. Because most ofthese purchase orders do not contain any termination payments or otherpenalties if cancelled, they are not included as outstanding contractualobligations. The merchandise purchases for which we do have firm commitmentsoutstanding, in addition to letters of credit, were $2.4 million as of July 29,2006.

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**Quarterly Results of Operationsand Seasonality**

Our quarterly operating results may fluctuatesignificantly because of several factors, including the timing of new storeopenings and related expenses, profitability of new stores, weather conditionsand general economic conditions. Our business is also subject to seasonalfluctuation, with approximately 62% to 65% of our sales activity normallyoccurring during the third and fourth quarters of our fiscal year, which areprimarily associated with the fall hunting seasons and the holiday season.  However, this factor cannot necessarily beused as an indicator of future results. Our customers’ demand for our productsand therefore our sales, can be significantly impacted by unseasonable weatherconditions that affect outdoor activities and the demand for related appareland equipment. This seasonality also impacts our inventory levels, which tendto rise beginning approximately in April, reach a peak in November, and declineto lower levels after the December holiday season.

Our pre-opening expenseshave and will continue to vary significantly from quarter to quarter, primarilydue to the timing of store openings.  Wetypically incur most pre-opening expenses for a new store during the threemonths preceding, and the month of, its opening.  In addition, our labor and operating costsfor a newly opened store can be greater during the first one to two months ofoperation than what can be expected after that time, both in aggregate dollarsand as a percentage of sales. Accordingly, the volume and timing of new store openings in any quarterhas had and is expected to continue to have a significant impact on quarterlypre-opening costs and store labor and operating expenses.  Due to these factors, results for anyparticular quarter may not be indicative of results to be expected for anyother quarter or for a full fiscal year.

**Critical Accounting Policies andUse of Estimates**

**Adoption of SFAS 123R**

Effective January 29, 2006, we adopted thefair-value recognition provisions of the Financial Accounting Standards Board’sStatement No. 123 (revised 2004), *Share-BasedPayment* (“SFAS 123R”), which requires the measurement andrecognition of compensation expense for all stock-based payment awards made toemployees and directors including employee stock option awards and employeestock purchases made under our employee stock purchase plan. We adopted theprovisions of SFAS 123R, using the modified-prospective transition method.Under this transition method, stock-based compensation expense was recognizedin the financial statements for the 13 and 26 weeks ended July 29, 2006, forgranted, modified, or settled stock options and for expense related to theemployee stock purchase plan. The provisions of SFAS 123R apply to new stockoptions and stock options outstanding, but not yet vested, on the effectivedate of January 29, 2006. Results for prior periods have not beenrestated, in accordance with the modified-prospective transition method.

Theamount of compensation expense for stock-based awards to be recognized during aperiod is based on the portion of the awards that are ultimately expected tovest. We estimate option forfeitures at the time of grant and revise thoseestimates in subsequent periods if actual forfeitures differ significantly fromthose estimates. Cost is recognized using a straight-line amortization methodover the requisite service period**,**whichtypically is the vesting period. As a result of adopting SFAS 123R, our lossfrom operations and net loss for the 13 and 26 weeks ended July 29, 2006 are$295,000 and $531,000 higher, respectively, than if we had continued to accountfor share-based compensation under APB No. 25. Basic and diluted loss per sharefor the 13 and 26 weeks ended July 29, 2006 are $.02 and $.04 higher,respectively, than under APB No. 25. There was no impact on cash flows.

AtJuly 29, 2006, there was approximately $3.4 million of total unrecognizedstock-based compensation expense related to unvested option awards. Unrecognizedstock-based compensation is expected to be recognized over a weighted-averageperiod of 2.5 years.

**New Accounting Pronouncement**

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (“FIN 48”), an interpretation of Statement ofFinancial Accounting Standards No. 109, *Accountingfor Income Taxes*.  FIN 48clarifies the accounting for uncertainty in income taxes by prescribing arecognition threshold for tax positions taken or expected to be taken in a taxreturn. FIN 48 is effective for fiscal years beginning after December 15,2006. We are currently evaluating the impact FIN 48 will have on our financialposition and results of operations.

In March2006, the FASB’s Emerging Issues Task Force released Issue 06-3, *How Sales Taxes Collected From Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement* (“EITF 06-3”).A consensus was reached that entities may adopt a policy of presenting salestaxes in the statement of 

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operations on either a gross or net basis. If taxes aresignificant, an entity should disclose its policy of presenting taxes and theamount of taxes if reflected on a gross basis in the income statement. EITF06-3 is effective for periods beginning after December 15, 2006. We presentsales net of sales taxes in our statement of operations and do not anticipatechanging our policy as a result of EITF 06-3.

**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

We are exposed to market risk from changes ininterest rates on borrowings under our credit facility. This floating rateindebtedness was $215.8 million at July 29, 2006 and averaged $192.3 millionduring the second  quarter of fiscal2006. Our average interest rate for the second quarter of fiscal 2006 under ourcredit facility was 7.6% and was 290 basis points higher than the same periodlast year due primarily to general interest rate movement. If short-termfloating interest rates on our average variable rate debt for the secondquarter of fiscal 2006 had increased by 100 basis points, our interest expensewould have increased by approximately $0.5 million, assuming comparableborrowing levels. These amounts are determined by considering the impact of thehypothetical interest rates on our average amount of floating rate indebtednessoutstanding and cash equivalents balances.

Wehave no derivative financial instruments or derivative commodity instruments inour cash and cash equivalents.  We haveno international sales, however, we import certain items for sale in ourstores.  Substantially all of ourpurchases are denominated in U.S. dollars.

**ITEM 4.  CONTROLS AND PROCEDURES**

Asof the end of the period covered by this report, we conducted an evaluation,under the supervision and with the participation of the principal executiveofficer and principal financial and accounting officer, of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934 (the “Exchange Act”)).  Based on this evaluation, the principalexecutive officer and principal financial and accounting officer concluded thatour disclosure controls and procedures are effective to ensure that informationrequired to be disclosed by us in reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and forms.  There was no change in our internal controlover financial reporting identified in connection with the evaluation requiredby Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during theperiod covered by this report that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

#### **PARTII. OTHER INFORMATION**

**ITEM1.  LEGAL PROCEEDINGS**

***Contingent Trademark Litigation* -**On July 2, 2004, we filed acomplaint in the U.S. District Court for the District of Minnesota seekingdeclaratory relief that the contingent trademark licensing provision of anoncompetition agreement dated May 16, 1996, made between our predecessor andCabela’s Incorporated, is invalid and unenforceable. Although thenoncompetition provisions of the noncompetition agreement expired in June 2003,Cabela’s contends that a contingent trademark licensing provision of thenoncompetition agreement now requires us to grant Cabela’s a license to certainof our trademarks that were in existence in 1996.

OnAugust 18, 2005, the court ruled that the contingent trademark licensingprovision is not legally invalid as a noncompetition agreement and dismissedour complaint.  The court alsoacknowledged that it had not been asked at that point to determine, and was notdetermining, the scope of the contingent trademark license or the parties’respective rights thereunder.  InDecember 2005, the court granted our motion to file an amended reply to Cabela’scounterclaim in which we raised multiple additional issues regarding thevalidity and enforceability of any trademark rights allegedly possessed byCabela’s, and any limitations upon our rights to engage in certain marketingactivities under the trademarks at issue. These issues remain before the court. Discovery is currently underway and the court has established atrial-ready date of May 1, 2007.

Weare not able to predict the ultimate outcome of such proceedings, but they maybe costly and disruptive. The total costs may not be reasonably estimated atthis time. The outcome of this dispute may impact the manner in which wemarket our products in certain distribution channels in the future. It isnot expected to have any affect on the marketing of our products through ourretail stores.

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##### ***DerivativeLitigation***— As previously reported, our company,as a nominal defendant, and certain of our present and former directors werenamed as defendants in a purported derivative action,*KurtHaberle v. Mark R. Baker, et al*, that was filed on February 11,2005 in the U.S. District Court for the District of Minnesota.   On August 30, 2005, the court issued anorder dismissing the complaint without prejudice on the grounds that plaintiffwas required to make a pre-suit demand on our board of directors and failed to doso. The plaintiff filed a motion to alter or amend the judgment.  On May16, 2006, the court entered judgment denying plaintiff’s motion and dismissedthe case. The time period for appeal has expired without an appeal being filed,thus terminating this case.

***Other Legal Claims* -**Various claims and lawsuits arising in the normal courseof business may be pending against us from time to time. The subject matter ofthese proceedings typically relate to commercial disputes and employmentissues. As of the date of this report, we are not a party to any legalproceedings that are expected, individually or in the aggregate, to have amaterial adverse effect on our financial condition or results of operations.

**ITEM1A.  RISK FACTORS**

Not applicable.

**ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

Not applicable.

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.**

OnJune 8, 2006, we held our annual meeting of shareholders for the purposeof (a) electing eight directors to serve until their successors are dulyelected and (b) ratifying the appointment of Ernst & Young LLP asour independent registered public accounting firm for the fiscal year endingFebruary 3, 2007.

The shareholders presentin person or by proxy cast the following numbers of votes (in whole shares) inconnection with the election of directors: 
|                     | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------|------------|------------|------------|--------------|------------|
| Mark R. Baker       |       | 13,199,231 |       | 225,665      |       |
| Karen M. Bohn       |       | 13,209,586 |       | 215,310      |       |
| Marshall L. Day     |       | 13,208,551 |       | 216,345      |       |
| Richard C. Dell     |       | 13,209,442 |       | 215,454      |       |
| Gerald A.  Erickson |       | 13,199,019 |       | 225,877      |       |
| Ronald A.  Erickson |       | 13,199,341 |       | 225,555      |       |
| Dale Nitschke       |       | 13,210,187 |       | 214,709      |       |
| David C. Pratt      |       | 13,208,261 |       | 216,635      |       |

The shareholders presentin person or by proxy cast the following numbers of votes (in whole shares) inconnection with the ratification of the selection of Ernst & Young LLPas our independent registered public accounting firm for the fiscal year endingFebruary 3, 2007:

| For        | ** ** | **Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** |
|------------|------------|-------------|------------|-----------------|------------|----------------------|
| 13,415,038 |       | 6,236       |       | 3,532           |       | 0                    |

 

**ITEM5.  OTHER INFORMATION**

None

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**ITEM6.  EXHIBITS**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **Method of Filing**          |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|
| 3.1         |       | Amended and Restated Articles of Incorporation of  the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | Incorporated By Reference (1) |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                          |
| 3.2         |       | Amended and Restated Bylaws of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | Incorporated By Reference (2) |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                          |
| 10          |       | Amendment Agreement No. 1, dated May 25,  2006, to Second Amended and Restated Loan and Security Agreement, dated  March 3, 2006, among the Registrant, Bank of America, N.A., as  administrative agent, Bank of America Securities, LLC, as the lead arranger,  Foothill Capital Corporation, as the syndication agent, The CIT  Group/Business Credit, Inc., as collateral agent, General Electric  Capital Corporation, as documentation agent, and the lenders named therein |       | Incorporated by Reference (3) |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                          |
| 31.1        |       | Rule 13a-14(a)/15d-14(a) Certification by Principal  Executive Officer                                                                                                                                                                                                                                                                                                                                                                                                                               |       | Filed Electronically          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                          |
| 31.2        |       | Rule 13a-14(a)/15d-14(a) Certification by Principal  Financial and Accounting Officer                                                                                                                                                                                                                                                                                                                                                                                                                |       | Filed Electronically          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                          |
| 32          |       | Section 1350 Certifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | Filed Electronically          |

 

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(1)          Incorporated byreference to Exhibit 3.3 to Amendment No. 1 to the Registrant’s RegistrationStatement on Form S-1 (Registration No. 333-112494), filed with the Commissionon March 15, 2004.

(2)          Incorporated byreference to Exhibit 3.4 to Amendment No. 1 to the Registrant’s RegistrationStatement on Form S-1 (Registration No. 333-112494), filed with the Commissionon March 15, 2004.

(3)          Incorporated byreference to Exhibit 10 to the Registrant’s Current Report on Form 8-K (FileNo. 000-50659), filed with the Commission on May 31, 2006.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized. 
|                          | GANDER MOUNTAIN COMPANY |
|--------------------------|-------------------------|
|                     |                    |   |
|                     |                    |   |
| Date: September  7, 2006 | By:                     | /s/ Mark R. Baker |   |
|                     |                    | Mark R. Baker |
| * *                 | * *                | *President  and Chief Executive Officer* |
|                     |                    | (Principal  Executive Officer) |
|                     |                    |   |
|                     |                    |   |
| Date: September  7, 2006 | By:                     | /s/ Dennis M. Lindahl |   |
|                     |                    | Dennis M. Lindahl |
| * *                 | * *                | *Executive  Vice President, Chief Financial Officer and Treasurer* |
|                     |                    | (Principal  Financial and Accounting Officer) |

 

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**EXHIBITINDEX**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Method of Filing**      |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|
| 3.1         |       | Amended and Restated Articles of Incorporation of  the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | Incorporated By Reference |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                      |
| 3.2         |       | Amended and Restated Bylaws of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | Incorporated By Reference |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                      |
| 10          |       | Amendment Agreement No. 1, dated May 25,  2006, to Second Amended and Restated Loan and Security Agreement, dated  March 3, 2006, among Gander Mountain Company, Bank of America, N.A., as  administrative agent, Bank of America Securities, LLC, as the lead arranger,  Foothill Capital Corporation, as the syndication agent, The CIT  Group/Business Credit, Inc., as collateral agent, General Electric  Capital Corporation, as documentation agent, and the lenders named therein |       | Incorporated by Reference |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                      |
| 31.1        |       | Rule 13a-14(a)/15d-14(a) Certification by Principal  Executive Officer                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | Filed Electronically      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                      |
| 31.2        |       | Rule 13a-14(a)/15d-14(a) Certification by Principal  Financial and Accounting Officer                                                                                                                                                                                                                                                                                                                                                                                                                         |       | Filed Electronically      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                      |
| 32          |       | Section 1350 Certifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | Filed Electronically      |

 

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