**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

# **FORM 10-K**

|   | **x**                                                                                                                                                                                                   | **Annual report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|   | **for the fiscal year ended March 31, 2007 or**                                                                                                                                                         |
|   | ** **                                                                                                                                                                                              |                                                                                          |
|   | **o**                                                                                                                                                                                                   | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|   | **For the Transition period  from                           to** |

 

**CommissionFile Number: 0-18607**

**ARCTICCAT INC.**

(Exact name ofregistrant as specified in its charter)

| **Minnesota**                      |   | **41-1443470**       |
|------------------------------------|--------|----------------------|
| (State or other  jurisdiction      |   | (I.R.S. Employer     |
| of incorporation  or organization) |   | Identification  No.) |

 

**601Brooks Avenue South**

**ThiefRiver Falls, Minnesota 56701**

(Address ofprincipal executive offices) (Zip Code)

Registrant’s telephone number, including area code:**(218) 681-8558**

Securities registered pursuant to Section 12(b) of theAct:**None**

Securities registeredpursuant to Section 12(g) of the Act: **Common Stock, $.01 parvalue.Preferred Stock Purchase Rights.**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act:
| Yes | o | No | x |   |
|-----|---|----|---|--------|

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Exchange Act:
| Yes | o | No | x |   |
|-----|---|----|---|--------|

 

**Note** – Checkingthe box above will not relieve any registrant required to file reports pursuantto Section 13 or 15(d) of the Exchange Act from their obligations under thoseSections.

Indicate by check markwhether the registrant (1) has filed all reports required by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements forthe past 90 days:
| Yes | x | No | o |   |
|-----|---|----|---|--------|

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K: x

Indicate by check markwhether the registrant is a large accelerated filer, and accelerated filer, ora non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 ofthe Exchange Act.
| Large accelerated filer | o | Accelerated filer | x | Non-accelerated filer | o |
|-------------------------|---|-------------------|---|-----------------------|---|

 

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

 

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates computedby reference to the price at which the common equity was last sold, or theaverage bid and asked price of such common equity, as of the last business dayof the Registrant’s most recently completed second fiscal quarter:$320,109,121.

At June 1, 2007,12,304,422 shares of Common Stock and 6,102,000 shares of Class B Common Stockof the Registrant were outstanding.

**DocumentsIncorporated by Reference:**

Portions of the Company’sProxy Statement for its Annual Meeting of Shareholders currently scheduled tobe held on August 8, 2007 are incorporated by reference into Part III of this Form 10-K

 

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**ARCTIC CAT INC.**

**FORM 10-K**

**TABLE OF CONTENTS**
| Description      | ** ** | **Page Numbers**                                                                                                    |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------|
| **PART I**       | ** ** | ** **                                                                                                          | ** ** | ** ** |
| ** **       | ** ** | ** **                                                                                                          | ** ** | ** ** |
| ****ITEM 1.****  |       | Business                                                                                                            |   | 4-9 |
| **ITEM  1A.**    |       | Risk Factors                                                                                                        |   | 10-11 |
| **ITEM 1B.**     |       | Unresolved Staff Comments                                                                                           |   | 11 |
| ****ITEM 2.****  |       | Properties                                                                                                          |   | 11 |
| ****ITEM 3.****  |       | Legal  Proceedings                                                                                                  |   | 11 |
| ****ITEM 4.****  |       | Submission of Matters to a Vote of Security Holders                                                                 |   | 11 |
| ** **       |       |                                                                                                                |   |   |
| **PART II**      | ** ** | ** **                                                                                                          | ** ** | ** ** |
| ** **       | ** ** | ** **                                                                                                          | ** ** | ** ** |
| ****ITEM 5.****  |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   | 12 |
| ****ITEM 6.****  |       | Selected Financial Data                                                                                             |   | 13 |
|             |       | Quarterly Financial Data                                                                                            |   | 14 |
| **ITEM 7.**      |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                         |   | 15-17 |
| **ITEM 7A.**     |       | Quantitative and Qualitative Disclosures About Market  Risk                                                         |   | 18 |
| **ITEM 8.**      |       | Financial Statements and Supplementary Data                                                                         |   | 18 |
| **ITEM 9.**      |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                               |   | 18 |
| **ITEM 9A.**     |       | Controls and Procedures                                                                                             |   | 18-20 |
| **ITEM  9B.**    |       | Other  Information                                                                                                  |   | 20 |
| ** **       |       |                                                                                                                |   |   |
| **PART III**     | ** ** | ** **                                                                                                          | ** ** | ** ** |
| ** **       | ** ** | ** **                                                                                                          | ** ** | ** ** |
| ****ITEM 10.**** |       | Directors, Executive Officers and Corporate Governance                                                              |   | 21 |
| ****ITEM 11.**** |       | Executive Compensation                                                                                              |   | 21 |
| ****ITEM 12.**** |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                     |   | 21 |
| ****ITEM 13.**** |       | Certain Relationships and Related Transactions and  Director Independence                                           |   | 21 |
| ****ITEM 14.**** |       | Principal Accountant Fees and Services                                                                              |   | 21 |

 

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| **PART IV**                                              | ** ** | ** **                                 | ** ** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|------------|
| ** **                                               | ** ** | ** **                                 | ** ** | ** ** |
| **ITEM 15.**                                             |       | Exhibits and Financial Statement Schedules |       | 22-23      |
| ** **                                               |       |                                       |       |       |
| Signatures                                               |       | 24                                         |
| Consolidated  Balance Sheets                             |       | 25                                         |
| Consolidated Statements of Earnings                      |       | 26                                         |
| Consolidated Statements of Shareholders’ Equity     |       | 27                                         |
| Consolidated Statements of Cash Flows                    |       | 28                                         |
| Notes to Consolidated Financial Statements               |       | 29-36                                      |
| Report of Independent Registered Public Accounting  Firm |       | 37                                         |
| Exhibit  Index                                           |       | 38                                         |

 

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**PARTI**

# **ITEM 1.          BUSINESS**

Arctic Cat Inc., aMinnesota corporation (the “Company” or “Arctic Cat”), is based in Thief RiverFalls, Minnesota. The Company operates in a single industry segment anddesigns, engineers, manufactures and markets snowmobiles and all-terrainvehicles (ATVs) under the Arctic Catâ brand name, as well as related parts, garmentsand accessories. The Company markets its products through a network ofindependent dealers located throughout the United States, Canada, and Europeand through distributors representing dealers in Europe, the Middle East, Asiaand other international markets. The Arctic Cat brand name has existed for 45years and is among the most widely recognized and respected names in thesnowmobile industry. The Company trades on The NASDAQ Stock Market under thesymbol ACAT.

## **IndustryBackground**

**Snowmobiles–******Thesnowmobile, developed in the 1950’s, was originally intended to be used as autility vehicle, but today the overwhelming majority of the industry’s salesare for recreational use. Between the late 1950’s and early 1970’s, theindustry expanded dramatically reaching a peak of over 100 manufacturers and ahigh of nearly 495,000 units sold to retail customers in North America in 1971.Today the number of major industry participants has decreased to four, ArcticCat, Bombardier Recreational Products (BRP), Polaris and Yamaha. The Companybelieves there are currently more significant barriers to entry into thesnowmobile market than existed in the 1970’s. These barriers include increasedbrand loyalty, long-standing dealer and distributor networks and relationships,limited engine sources, cost of four stroke engine development, manufacturingand engineering expertise and higher initial start-up costs. Industry-widesnowmobile sales to retail customers in North America were approximately125,000 units for the 2007 model year.

**All-TerrainVehicles (ATVs) –**The ATV industry evolved from thethree-wheel model that was developed in the early 1970s to the four-wheelmodels that are sold today. The most popular ATV use is general recreation,followed by hunting/fishing, farm/ranch use, hauling/towing, transportation,and commercial uses. From 1970 to 1986, the number of ATVs retailed in theUnited States continued to grow until peaking in 1986 with approximately535,000 units sold during that calendar year. From 1987 to 1991, the number ofATVs sold declined to a low of approximately 147,000 units. Industry wide saleswere 782,000 units in the U.S. and 89,000 units in Canada in calendar 2006.Major competitors in the industry include Honda, Yamaha, Kawasaki, BRP, Polarisand Suzuki.

## **Products**

**Snowmobiles–** The Company produces a full line of snowmobiles,consisting of 47 models, marketed under the Arctic Cat brand name, and designedto satisfy various market niches. The 2007 Arctic Cat models carry suggestedU.S. retail prices ranging from $4,499 to $12,899, excluding a youth modelwhich is sold at a suggested U.S. retail price of $2,199. Arctic Catsnowmobiles are sold in the United States, Canada, Scandinavia and other internationalmarkets.

TheCompany’s 2007 year snowmobile models are categorized as  Performance, Mountain, Hybrid, Touring and Utility. The Company markets: PerformanceArctic Cat models under the names F series, Jaguar and Z; Mountain models underthe name M series; Hybrid models under the name Crossfire; Touring models underthe names Panther, and T660; and Utility models under the name Bearcat. Inaddition, to encourage family involvement in snowmobiling, the Company offers ayouth snowmobile marketed under the 120 name.

TheCompany believes the Arctic Cat brand name enjoys a premier image amongsnowmobile enthusiasts and that its snowmobiles have a long-standing reputationfor quality, performance, fuel management, style, comfort, ride and handling.Arctic Cat snowmobiles offer a wide range of standard and optional featureswhich enhance their operation, riding comfort and performance. Such featuresinclude hydraulic disc brakes, remote starters, heated seats and a technologicallyadvanced front and rear suspension. Arctic Cat is the industry leader in fuelmanagement technology offering an electronic fuel injection (EFI) system onmost of its snowmobiles. The Company was the first in the snowmobile industryto utilize four stroke engines to reduce emissions. The Company subsequentlyintroduced a snowmobile with a turbo charged four stroke inter-cooled engine,and for 2007 the first four-stroke engine designed specifically for asnowmobile.

ArcticCat focuses on new product development in order to grow its market share andintroduces at least one new model every year. These new models are consistentlythe Company’s best sellers in their respective category. In the 2007 modelyear, over 85 percent of the Company’s snowmobile sales were from models ormodel variations not available three years earlier. Some recent examples of thesuccess of Arctic Cat’s new products were *Snow Tech Magazine*voted the 2007 Arctic Cat F8 the best riding and handling sled,  *Supertrax Magazine*voted the 2007 Arctic Cat Jaguar the best Twin Spar chassis sled, *SnowGoer Magazine* voted the 2006 Crossfire 700 the bestcrossover sled for trail and powder riding, *Sledheads Magazine*voted the M-Series the lightest mountain sleds for 2006 and the 2005 M7 MountainCat was named “Snowmobile of the Year” by *SnowGoer Magazine*.

For the last threefiscal years ended 2007, 2006 and 2005 snowmobiles accounted for 32%, 32% and37%, respectively, of the Company’s revenues.

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**All-TerrainVehicles (ATVs) –** In December 1995, the Companyintroduced its first ATV. Since that time the Arctic Cat line has grown to 23models. Features like fully independent front and rear suspensions, hydraulicdisc brakes, hi-low range transmission, long travel suspension with high groundclearance, Speedracks, automatic transmissions, selectable 2WD/4WD shaft drive,locking differentials, newly introduced electronic fuel injection and a largefuel tank, all make Arctic Cat ATVs consumer friendly. The Company has specialtwo rider models that provide a proper alternative for customers that want toride double. The 2007 Arctic Cat ATV models carry suggested U.S. retail pricesranging from $3,599 to $9,299, excluding a youth model which is sold atsuggested U.S. retail price of $2,299.

TheCompany introduced its new Prowler UTV into the utility ATV vehicle segment in2006. The Prowler utilizes the Company’s 650cc engine, a rear cargo box, dualbucket seats as well as Arctic Cat’s renowned travel, suspension and ridecharacteristics. In fiscal year 2007 the Company expanded the UTV line to twomodels with retail prices of $9,299 and $9,999. Additionally, in 2007 ArcticCat introduced the industry’s first diesel ATV, capable of using biodieselfuels.

ArcticCat has continued to expand into international markets by focusing on newproduct development, adding new distributors, entering new territories, anddeveloping new markets. In July 2005, the Company acquired a 100% interest in aEuropean company that designs, engineers, manufactures and markets ATVs whichutilize the Company’s components. The Company completed this acquisition tofurther expand its ATV model offerings and strengthen its European presence.

ArcticCat believes its ATVs are recognized for their power, durability, utility,suspension, style and are well received within the market. *FarmIndustry News* gave Arctic Cat 2000 models the FinOvation Award forhaving the greatest reader interest. *ATV Magazine*awarded the Arctic Cat 250 4x4 model “Best in Class” in 2001 and “Best Utility”in 2002. In 2003 Arctic Cat MRP Speedrack models received the 2003 ProductInnovation Award from *ATV Magazine*.In 2004 the Arctic Cat 650 V-twin received “ATV of the Year” award from both *ATV Illustrated* and *ATV Guide*. In 2005 *ATV Illustrated*voted the Prowler the best new UTV for sport and utility purposes. In 2006 *All Terrain Vehicle Magazine* awarded the Arctic Cat 250 thebest entry level ATV and the Arctic Cat TRV as the best value. *Farm Industry News* awarded the Arctic Cat 400 4X4 bestground clearance in class.  In 2007 ATVMagazine crowned the Arctic Cat Prowler XT the best trail recreationalside-by-side.

Forthe last three fiscal years ended 2007, 2006, and 2005 ATVs  accounted for 55%, 54%, and 49%,respectively, of the Company’s revenues.

**Parts,Garments and Accessories –**The Company is theexclusive provider of genuine Arctic Cat snowmobile and ATV parts, garments andaccessories. Included are replacement parts and accessory items to upgradeArctic Cat snowmobiles such as electric start and reverse kits, luggage racksand bags, backrests, machine covers, windshields, and colored accessories.Other items include maintenance supplies such as oil and fuel additives, trackstuds and carbide runners. Arctic Cat ATV parts and accessories include winchkits, snow plow kits, Speedrack and Speedpoint system accessories, portablelights, utility bags as well as maintenance supplies.

TheCompany offers snowmobile garments for adults and children under the “Arcticwear”label. Suits, jackets, pants and accessory garments are offered in a widevariety of styles and sizes combining fashion with functional utility designedfor the demands of snowmobiling and other winter activities. The Arcticwearline of clothing also includes pull-overs, riding gloves, hats, helmets, boots,gear bags, sweatshirts, T-shirts, and caps. The colors and designs of many ofthese items are coordinated with specific Arctic Cat snowmobile models.

TheCompany offers ATV garments under the “Arcticwear ATV Gear” label. This line ofclothing is geared toward function and comfort and includes suits, jackets, gloves, helmets, gear bags, sweatshirts,T-shirts, and caps.

Forthe last three fiscal years ended 2007, 2006 and 2005 parts, garments andaccessories accounted for 13%, 14% and 14%, respectively, of the Company’srevenues.

## **Manufacturingand Engineering**

Arctic Cat snowmobilesand most ATVs are manufactured at the Company’s facilities in Thief RiverFalls, Minnesota. A Taiwanese company manufactures 90cc and 250cc ATVs forArctic Cat. The Company paints snowmobile hoods and produces other parts forArctic Cat snowmobiles and ATVs in its Madison, South Dakota plant. The Companyalso has a facility in Bucyrus, Ohio which houses its service parts, garmentsand accessories distribution operations. The Company has strategically identified specific core manufacturingcompetencies for vertical integration and has chosen outside vendors toprovide other parts. The Company has developed relationships with selected highquality vendors in order to obtain access to particular capabilities andtechnologies outside the scope of the Company’s expertise. The Company designscomponent parts often in cooperation with its vendors, contracts with them forthe development of tooling, and then entersinto agreements with these vendors to purchase component partsmanufactured utilizing the tooling. In its vertically integrated operations,the Company manufactures foam seats, seat covers and machines, welds and paintsother components. The Company completes the total assembly of most of itsproducts at its facilities in Thief River Falls. Manufacturing operationsinclude robotics as well as digital and computer-automated equipment to speedproduction, reduce costs and improve the quality, fit and finish of every product.The Company believes that most raw materials used in its manufacturing processand 

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most component parts,with the exception of engines are available from multiple alternative vendorson relatively short notice at competitive prices.

SuzukiMotor Corporation (“Suzuki”) has manufactured snowmobile and certain ATVengines for the Company pursuant to supply agreements which are automaticallyrenewed annually unless terminated. While notice of termination of the supplyagreements may be given annually, effective termination of supply would take atleast one model year for snowmobile and two model years for ATVs due tocontractual notice requirements.

TheCompany and Suzuki have enjoyed an excellent relationship since the Company’sinception. Suzuki purchased approximately 31% of the Company’s then outstandingcapital stock in July 1988, prior to the Company’s initial public offering inJuly of 1990, and is currently the Company’s largest shareholder withapproximately 33% of the Company’s outstanding capital stock. If Suzuki wereever to cease supplying engines to the Company, such an interruption couldmaterially and adversely affect production. The Company believes it could takeup to two model years for a new engine supplier to be in a position to manufacturethe Company’s specially designed engines.

Duringlate fiscal 2005 the Company began manufacturing its own designed 650 cc ATVengine as part of a strategic first step in a new engine program. The Companybelieves that having the capability to design and manufacture its own ATVengines will enable Arctic Cat to offer customers more choices, provideexcellent value, lower Japanese yen currency exposure and enhance its long-termcompetitive position. In 2007 the Company transitioned its engine manufacturingfrom the Thief River Falls facility to its new facility in St. Cloud,Minnesota.

Sincethe Company began snowmobile production, it has followed a build-to-orderpolicy to control inventory levels. Under this policy, the Company onlymanufactures a number of snowmobiles equivalent to the orders received from itsdealers and distributors, plus a number of uncommitted machines used for dealerand market development, in-house testing and miscellaneous promotionalpurposes.

Mostsales of snowmobiles to retail customers begin in the early fall and continueduring the winter. Orders by dealers and distributors for each year’sproduction are placed in the spring following dealer and distributor meetings.Snowmobiles are built commencing in the spring and continuing through lateautumn or early winter.

Retailsales of ATVs occur throughout the year with seasonal highs occurring in thespring and fall. The Company builds and purchases ATVs throughout the year to coincide with expected dealer and consumerdemand.

TheCompany is committed to an ongoing engineering program dedicated to innovationand to continued improvements in the quality and performance of its products aswell as new product introduction. The Company currently employs 160 individualsin the design and development of new and existing products, with an additional32 individuals directly involved in the testing of snowmobiles and ATVs innormal and extraordinary conditions. In addition, snowmobiles and ATVs aretested in conditions and locations similar to those in which they are used. TheCompany uses computer-aided design and manufacturing systems to shorten thetime between initial concept and final production. For 2007, 2006, and 2005,the Company spent approximately $17,756,000 $17,067,000, and $17,350,000,respectively, on engineering, research and development. In addition, utilizingtheir particular expertise, the Company’s vendors regularly test and apply newtechnologies to the design and production of component parts.

## **Salesand Marketing**

The Company’s productsare currently sold through an extensive network of independent dealers locatedthroughout the United States, Canada, and Europe and through distributorsrepresenting dealers in Europe, the Middle East, Asia and other internationalmarkets. To promote new dealerships and to service its existing dealer network, the Company also employs salesrepresentatives throughout the United States and Canada. See Item 7A,Consolidated Statements of Earnings and Notes A & L of Notes toConsolidated Financial Statements for a discussion of export sales.

TheCompany’s dealers enter into an annual renewable contract and are required tomaintain status as an authorized dealer in order to continue selling theCompany’s products. To obtain and maintain such status, dealers are expected toorder a sufficient number of snowmobiles and/or ATVs to service their marketarea adequately. In addition, the dealers must perform service on these unitsand maintain satisfactory service performance levels, and their mechanics mustcomplete special training provided by the Company. Dealers are also expected tocarry adequate levels of inventory of genuine Arctic Cat parts and accessories.As is typical in the industry, most of the Company’s dealers also sell somecombination of motorcycles, marine products, lawn and garden products and otherrelated products.

TheCompany utilizes distributors outside the United States and Canada to takeadvantage of their knowledge and experiencein their respective markets and to increase market penetration of itsproducts. Canadian sales are made in Canadian dollars, nearly all of which isfinanced through certain Canadian financial institutions. Most sales todistributors outside North America are made in U.S. dollars and are supportedby letters of credit.

The Company’s sales andmarketing efforts are comprised of dealer and consumer promotions, directadvertising and cooperative advertising programs with its dealers. Each year, the Company and its distributorsconduct dealer shows in order to introduce the upcoming year’s models and topromote dealer orders. Marketing activities are designed to promote directly toconsumers. Products are advertised by the Company in consumer magazines andthrough other media. In 

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addition,the Company engages in extensive dealer cooperative advertising, on a local andnational level, whereby the Company and its dealers share advertising costs.Each season the Company produces promotional films, product brochures, point ofpurchase displays, leaflets, posters and banners, and other promotional itemsfor use by dealers. The Company also participates in consumer shows and rallieswith dealers and sponsors independent racers who participate in snowmobileraces throughout the world. In order for its dealers and distributors to remainprice competitive and to reduce retail inventories, the Company will from timeto time make available to them rebate programs, discounts, or other incentives.In order to build brand loyalty the Company publishes and mails, during theyear, magazines called *Pride*(snowmobile) and *Ride* (ATV) to  registered owners of its products.

TheCompany places strong emphasis on identifying and addressing the specific needsof its customers by periodically conducting dealer and consumer focus groupmeetings and surveys.

TheCompany warrants its snowmobiles and ATVs under a limited warranty againstdefects in materials and workmanship for a period generally ranging from sixmonths to one year from the date of retail sale or for a period of 90 days fromthe date of commercial or rental use. Repairs or replacements under warrantyare administered through the Company’s dealers and distributors.

## **Competition**

The snowmobile and ATVmarkets are highly competitive, based on a number of factors, includingperformance, ride, suspension, innovation, technology, styling, fit and finish,brand loyalty, reliability, durability, price and distribution. The Companybelieves Arctic Cat snowmobiles and ATVs are highly regarded by consumers inall of these competitive categories. Certain of the Company’s competitors aremore diversified and have financial and marketing resources which aresubstantially greater than those of the Company.

## **Regulation**

Bothfederal and state authorities have vigorous environmental control requirementsrelating to air, water and noise pollution that affect the manufacturingoperations of the Company. The Company endeavors to insure that its facilitiescomply with applicable environmental regulations and standards.

Certainmaterials used in snowmobile and ATV manufacturing that are toxic, flammable,corrosive or reactive are classified by the federal and state governments as “hazardousmaterials.” Control of these substances is regulated by the EnvironmentalProtection Agency (EPA) and various state pollution control agencies, whichrequire reports and inspection of facilities to monitor compliance. The Company’smanufacturing facilities are subject to the regulations promulgated by, and maybe inspected by, the Occupational Safety and Health Administration.

Variousstates and other governmental agencies have also promulgated safety regulationsregarding the use of snowmobiles and ATVs.The Company has supported laws and regulations pertainingto safety and exhaust emissions. The Companybelieves that the adoption of any pending laws or regulations would notnegatively affect its products to any greater degree than those of itscompetitors.

TheEPA adopted regulations affecting snowmobiles and ATVs for model years 2006 andbeyond. The Company believes that it is and will be in compliance with theseregulations. The Company supports balanced and appropriate programs thateducate the customer on the safe use of its products and protect theenvironment.

TheCompany is a member of the International Snowmobile Manufacturers Association(ISMA), a trade association formed to promote safety in the manufacture and useof snowmobiles, among other things. The ISMA is currently made up of ArcticCat, BRP, Yamaha, and Polaris. The ISMA members are also members of the SnowmobileSafety and Certification Committee (SSCC), which promulgated voluntary safetystandards for snowmobiles. The SSCC standards, which require testing andevaluation by an independent testing laboratory of each model category producedby participating snowmobile manufacturers, have been adopted by the CanadianMinistry of Transport. Following the development of the SSCC standards, theU.S. Consumer Products Safety Commission denied a petition to develop amandatory federal safety standard for snowmobiles in light of the high degreeof adherence to the SSCC standards in the United States. Since the Company’sinception, all of its models have complied with the SSCC standards.

TheCompany is a member of the Specialty Vehicle Institute of America (SVIA), a tradeassociation organized to foster and promote the safe and responsible use ofATVs manufactured and/or distributed throughout the United States. The Companyis also a member of the Canadian Off-Highway Vehicle Distributors Council(COHV), as well as the All-Terrain Vehicle Association Europe (ATVEA).

## **Effectsof Weather**

While from time to timelack of snowfall in a particular region of the United States or Canada mayadversely affect snowmobile retail sales within that region, the Company worksto mitigate this effect by taking snowmobile orders in the spring for thefollowing winter season. There is no assurance that weather conditions will notmaterially affect the Company’s future sales of snowmobiles, ATV’s and parts,garments and accessories.

## **Employees**

At March 31, 2007, theCompany had 1,840 employees including 390 salaried and 1,450 hourly andproduction personnel. The Company’s 

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employees are notrepresented by a union or subject to a collective bargaining agreement. TheCompany has never experienced a strike or work stoppage and considers itsrelations with its employees to be excellent.

## **IntellectualProperty**

The Company makes aneffort to patent significant innovations that it considers patentable and ownsnumerous patents for its snowmobiles, ATVs and other products. Trademarks arealso important to the Company’s snowmobile, ATVs and related parts, garmentsand accessories business activities. The Company has a program of trademarkenforcement to eliminate the unauthorized use of its patents and trademarks,thereby strengthening their value. The Company believes that its “Arctic Cat”registered trademark is its most significant trademark. Additionally, theCompany has numerous registered trademarks, trade names and logos, both in theUnited States and internationally.

## **AvailableInformation**

The Company is subject tothe reporting requirements of the Securities Exchange Act of 1934 and its rulesand regulations (the “1934 Act”). The 1934 Act requires the Company to filereports, proxy statements and other information with the Securities andExchange Commission (the “SEC”). Copies of these reports, proxy statements andother information can be read and copied at: SEC Public Reference Room, 100 FStreet, N.E., Washington D.C. 20549. Information on the operation of the PublicReference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SECmaintains a website that contains reports, proxy statements, and otherinformation regarding issuers that file electronically with the SEC. Thesematerials may be obtained electronically by accessing the SEC’s home page athttp://www.sec.gov.

The Company has awebsite at www.arcticcat.com, the contents of which are not part of orincorporated by reference into this annual report. The Company makes its annual reports on Form 10-K, quarterlyreports on Form 10-Q and current reports on Form 8-K and amendments to thosereports, available on its website, free of charge, as soon as reasonablypracticable after such report has been filed with or furnished to, the SEC. TheCompany’s Code of Conduct, as well as any waivers from and amendments to theCode, are also posted on the Company’s website.

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# **EXECUTIVE OFFICERS OF REGISTRANT**

| **Name**               | ** ** | **Age** | ** ** | **Position**                                                               |
|------------------------|------------|---------|------------|----------------------------------------------------------------------------|
| Christopher A.  Twomey |       | 59      |       | Chairman of the Board of Directors, President and  Chief Executive Officer |
| Timothy C.  Delmore    |       | 53      |       | Chief Financial Officer and Corporate Secretary                            |
| Terry J. Blount        |       | 64      |       | Vice President –Human Resources                                       |
| Ronald G. Ray          |       | 58      |       | Vice President – Operations                                           |
| Roger H. Skime         |       | 64      |       | Vice President – Research & Development                           |
| Ole E. Tweet           |       | 60      |       | Vice President – New Product Development                              |

 

**Mr. Twomey** hasbeen Chairman since 2003, President and Chief Executive Officer of the Companysince January 1986 and director since 1987. Mr. Twomey is currently serving asa director of The Toro Company and Universal Trailer Corporation.

**Mr. Delmore** hasbeen Chief Financial Officer of the Company since 1986 and has been CorporateSecretary of the Company since 1989. Mr. Delmore, a CPA with seven years ofprior public accounting experience, joined the Company in 1985 as Controller.

**Mr. Blount** hasbeen Vice President –uman Resources since August of 1996. Mr. Blount has over30 years of Human Resource experience in the manufacturing field. Prior tojoining the Company, Mr. Blount worked as Vice President-Human Resources for aMinnesota-based company.

**Mr. Ray** hasbeen Vice President – Operations since April of 2004; prior to that he servedas the Company’s Vice President – Manufacturing since 1992 and has over 30years of manufacturing experience. Before joining Arctic Cat he served eightyears as Vice President of Manufacturing for a Minnesota-based company.

**Mr. Skime** hasbeen Vice President – Research and Development of the Company since itsinception in 1983 and has been employed in the snowmobile industry for over 40years.

**Mr. Tweet** iscurrently General Manager – ATVs and has been Vice President – New ProductDevelopment since May 1992. Prior to that, he had been the Company’s VicePresident – Marketing since its inception in 1983 and has been employed eitherin the snowmobile or ATV industry for over 30 years.

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# **ITEM 1A.       RISK FACTORS**

The following aresignificant factors known to the Company that could adversely affect theCompany’s business, financial condition, or operating results, as well asadversely affect the value of an investment in the Company’s common stock.These risks could cause Arctic Cat’s actual results to differ materially fromits historical experience and from results predicted by forward-lookingstatements. All forward-looking statements made by Arctic Cat are qualified bythe risks described below. There may be additional risks that are not presentlymaterial or known. You should carefully consider each of the following risksand all other information set forth in this annual report.

**The Company’s products aresubject to extensive federal and state safety, environmental and othergovernment regulation that may require the Company to incur expenses or modifyproduct offerings in order to maintain compliance with the actions ofregulators.**

The Company’s productsare subject to extensive laws and regulations relating to safety, environmentaland other regulations promulgated by the U.S. and Canadian federal governmentsand individual states and provinces as well as international regulatoryauthorities. Although the Company believes that its snowmobiles, and ATVs havealways complied with applicable vehicle safety and emissions standards andrelated regulations, there can be no assurance that future regulations will notrequire additional safety standards or emission reductions that would requireadditional expenses and/or modification of product offerings in order tomaintain such compliance. Although the Company is unable to predict theultimate impact of adopted or proposed regulations on its business andoperating results, the Company believes that its business would be no moreadversely affected than those of its competitors by the adoption of any pendinglaws or regulations.

**A significant adversedetermination in any material product liability claim against the Company couldadversely affect its operating results or financial condition.**

Accidents involvingpersonal injury and property damage occur in the use of snowmobiles and ATVs.Claims have been made against the Company from time to time. It is the Company’spolicy to vigorously defend against these actions. Product liability insuranceis presently maintained by the Company on a “per occurrence” basis (withcoverage being provided in respect of accidents which occurred during thepolicy year, regardless of when the related claim is made) in the amount of$10,000,000 in the aggregate, with a $5,000,000 self-insured retention. WhileArctic Cat does not believe the outcome of any pending product liabilitylitigation will have a material adverse effect on its operations, no assurancecan be given that material product liability claims against Arctic Cat will notbe made in the future. Adverse determination of material product liabilityclaims made against Arctic Cat could adversely affect its operating results orfinancial condition.

**Significant repair and/orreplacement with respect to product warranty claims or product recalls couldhave a material adverse impact on the results of operations.**

The Company provides alimited warranty for ATVs for a period of six months and for a period of oneyear for its snowmobiles. The Company may provide longer warranties in certaingeographical markets as determined by local regulations and market conditions.Although the Company employs quality control procedures, sometimes a product isdistributed which needs repair or replacement. The Company’s standardwarranties require the Company or its dealers to repair or replace defectiveproducts during such warranty periods at no cost to the consumer. Historically,product recalls have been administered through the Company’s dealers anddistributors and have not had a material effect on the Company’s business. SeeNote A of Notes to Consolidated Financial Statements in this annual report.

**Changing weather conditions mayreduce demand for certain Arctic Cat products and negatively impact net sales.**

Lack of snowfall in anyyear in any particular region of the United States or Canada may adverselyaffect snowmobiles retail sales and related parts, garments and accessoriessales in that region. There is no assurance that weather conditions will notmaterially affect the Company’s future sales of snowmobiles, ATVs, and parts,garments and accessories.

**The Company faces intensecompetition in all product lines, from competitors that have greater financialand marketing resources. Failure to compete effectively against competitorswould negatively impact the Company’s business and operating results.**

The snowmobile and ATVmarkets in the United States and Canada are highly competitive. Competition insuch markets is based upon a number of factors, including performance, ride,suspension, innovation, technology, styling, fit and finish, brand loyalty,reliability, durability, price and distribution. At the dealer  level, competition is based on a number offactors including sales and marketing support programs (such as salesincentives and cooperative advertising). The Company’s competitors are morediversified and have financial and marketing resources which are substantiallygreater than those of the Company. In addition, the Company’s products competewith many other recreational products for the discretionary spending ofconsumers and to a lesser extent, with other vehicles designed for 

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utility applications. Ifthe Company is not able to effectively compete in this environment, itsbusiness and operating results will be negatively impacted.

**Termination or interruption ofsupply arrangements could have a material adverse effect on the Company’sbusiness or results of operations.**

Suzukimanufactures snowmobile and certain ATV engines for the Company pursuant tosupply agreements which are automatically renewed annually unless terminated.While notice of termination of the supply agreements may be given annually,effective termination of supply would take at least one model year forsnowmobile and two model years for ATVs due to contractual notice requirements.The Company and Suzuki have enjoyed an excellent relationship since the Company’sinception. Suzuki purchased approximately 31% of the Company’s then outstandingcapital stock in July 1988, prior to the Company’s initial public offering inJuly of 1990, and is currently the Company’s largest shareholder withapproximately 33% of the Company’s outstanding capital stock. If Suzuki wereever to cease supplying engines to the Company, such an interruption couldmaterially and adversely affect production as well as results of operations.The Company believes it could take up to two model years for a new engine supplierto be in a position to manufacture the Company’s specially designed engines.While the Company anticipates no significant difficulties in obtainingsubstitute supply arrangements for other raw materials or components for whichit relies upon limited sources of supply, there can be no assurance thatalternate supply arrangements will be made on satisfactory terms.

**General Economic Conditions andCertain Other External Factors**

Companies within thesnowmobile and ATV industry are subject to volatility in operating results dueto external factors such as general economic conditions and political changes.Specific factors affecting the industry include:

·                  Overall consumer confidence and thelevel of discretionary consumer spending;

·                  Interest rates and related higherdealer floorplan costs;

·                  Adverse impact on margins ofincreases in raw material costs which the Company is unable to pass on todealers without negatively affecting sales; and

·                  Fluctuationin foreign currency exchange rates.

# **ITEM 1B.       UNRESOLVED STAFF COMMENTS**

Notapplicable.

# **ITEM 2.          PROPERTIES**

The following sets forththe Company’s material property holdings as of March 31, 2007.
| **Location**                  | ** ** | **Facility Type / Use** | ** ** | **Owned or  Leased ** | ** ** | **Sq Ft.** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|-----------------|------------|
| Thief River  Falls, Minnesota |       | Manufacturing  / Corporate Office      |       | Owned                           |       | 558,000         |       |
| Thief River  Falls, Minnesota |       | Warehouse                              |       | Leased                          |       | 92,135          |       |
| Thief River  Falls, Minnesota |       | Warehouse                              |       | Leased                          |       | 14,350          |       |
| Madison, South  Dakota        |       | Manufacturing                          |       | Owned                           |       | 40,000          |       |
| Bucyrus, Ohio                 |       | Distribution  Center                   |       | Owned                           |       | 220,000         |       |
| Winnipeg,  Manitoba           |       | Service  Center                        |       | Leased                          |       | 10,602          |       |
| Island Park,  Idaho           |       | Test  & Development Facility       |       | Owned                           |       | 3,000           |       |
| St. Johann,  Austria          |       | Manufacturing/Distribution             |       | Leased                          |       | 5,899           |       |
| St. Cloud, Minnesota          |       | Manufacturing                          |       | Owned                           |       | 60,800          |       |

 

# **ITEM 3.          LEGAL PROCEEDINGS**

Accidents involvingpersonal injury and property damage occur in the use of snowmobiles and ATVs.Claims have been made against the Company from time to time. It is the Company’spolicy to vigorously defend against these actions. The Company is not involved inany legal proceedings which it believes will have the potential for amaterially adverse impact on the Company’s business or financial condition.

Productliability insurance is presently maintained by the Company on a “per occurrence”basis (with coverage being provided in respect of accidents which occurredduring the policy year, regardless of when the related claim is made) in theamount of $10,000,000 in the aggregate, with a $5,000,000 self-insuredretention. The Company believes such insurance is adequate.

# **ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

No matters were submittedto the shareholders during the fourth quarter of fiscal 2007.

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# **PARTII**

# **ITEM 5.          MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER   PURCHASES OF EQUITY SECURITIES**

The Company’scommon stock is traded on The NASDAQ Stock Market under the NASDAQ symbol “ACAT”.Quotations below represent the high and low sale prices as reported by NASDAQ.The Company’s stock began trading on The NASDAQ Stock Market on June 26, 1990.
| **Years ended March 31,** | ** ** | **2007** | ** ** | **2006**   | ** ** |
|------------------------------------------|------------|----------|------------|------------|------------|
| **Quarterly Prices**                | ** ** | **High** | ** ** | **Low**    | ** ** | **High** | ** ** | **Low** | ** ** |
| **First  Quarter**                       | ** ** | **$**    | **24.14**  | ** ** | **$**      | **16.56** |   | $ | 28.20 |   | $ | 18.63 |   |
| **Second  Quarter**                      | ** ** | **$**    | **19.94**  | ** ** | **$**      | **15.52** |   | $ | 22.66 |   | $ | 19.50 |   |
| **Third  Quarter**                       | ** ** | **$**    | **18.87**  | ** ** | **$**      | **16.11** |   | $ | 22.57 |   | $ | 17.93 |   |
| **Fourth  Quarter**                      | ** ** | **$**    | **19.99**  | ** ** | **$**      | **16.27** |   | $ | 25.75 |   | $ | 20.05 |   |

 

As of June 1, 2007, theCompany had approximately 398 stockholders of record, including the nominee ofDepository Trust Company which held 11,715,562 shares of common stock.

**Cash Dividends Paid**

Cash Dividends aredeclared quarterly and have been paid since 1995.
| **Quarter**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| First Quarter  | ** ** | **$**    | **0.07**   |     | $          | 0.07 |   |
| Second Quarter | ** ** | **$**    | **0.07**   |     | $          | 0.07 |   |
| Third Quarter  | ** ** | **$**    | **0.07**   |     | $          | 0.07 |   |
| Fourth Quarter | ** ** | **$**    | **0.07**   |     | $          | 0.07 |   |
| Total          | ** ** | **$**    | **0.28**   |     | $          | 0.28 |   |

 

**CompanyPurchases of Company Equity Securities**
| **Period**                                 | ** ** | **Total Number of   Shares Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total number of   Shares Purchased  as Part of Publicly   Announced Plans  or Programs** | ** ** | **Maximum Number  of Shares that May  Yet be Purchased  Under the Plans  or Programs** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1, 2007 –  January 31, 2007   |       | 0                                                          |       | $                                                | —     |                                                                                                                                         | 0          |                                                                                                                                | 583,400    | * |
| February 1, 2007 –  February 28, 2007 |       | 0                                                          |       | $                                                | —     |                                                                                                                                         | 0          |                                                                                                                                | 579,600    | * |
| March 1, 2007 – March 31,  2007       |       | 0                                                          |       | $                                                | —     |                                                                                                                                         | 0          |                                                                                                                                | 552,200    | * |
| Total                                      |       | 0                                                          |       | $                                                | —     |                                                                                                                                         | 0          |                                                                                                                                | 552,200    | * |

 

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*Number of Sharespurchasable at closing price of the Company’s common stock on the last tradingday of the month.

The Companypurchases Company common stock primarily to offset the dilution created byemployee stock option programs and because the Board of Directors believesinvestment in the Company’s common stock is an excellent use of its excesscash.

The Company has apublicly announced stock repurchase program which has been approved by theBoard of Directors. On October 26, 2006 the Company announced the Boardapproved a $20 million repurchase program. Pricing under this program has beendelegated to management. There is no expiration date for this program.

The Company hasexecuted the Company stock purchases in accordance with Rule 10b-18 of theSecurities Exchange Act of 1934. There have been no other purchases of theCompany’s common stock.

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# **ITEM 6.          SELECTED FINANCIAL DATA**

| **(In thousands, except per share amounts)** | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Years ended March 31,**                              | ** ** | **2007**    | ** **  | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
| **INCOME STATEMENT DATA:**                                            | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales**                                                         | ** ** | **$**       | **782,431** | ** ** | $          | 732,794    |       | $          | 689,145    |       | $          | 649,617 |   | $ | 577,070 |   |
| **Cost of goods sold**                                                | ** ** | **640,637** |        | 596,284    |       | 553,365    |       | 510,445    |       | 448,266    |       |
| **Gross profit**                                                      | ** ** | **141,794** |        | 136,510    |       | 135,780    |       | 139,172    |       | 128,804    |       |
| **Selling, general and administrative expenses**                      | ** ** | **109,861** |        | 103,775    |       | 95,745     |       | 95,511     |       | 81,757     |       |
| **Operating profit**                                                  | ** ** | **31,933**  |        | 32,735     |       | 40,035     |       | 43,661     |       | 47,047     |       |
| **Interest income**                                                   | ** ** | **1,139**   |        | 1,556      |       | 1,213      |       | 993        |       | 1,442      |       |
| **Interest expense**                                                  | ** ** | **(1,026**  | **)**       | (105       | )          | —     |       | —     |       | —     |       |
| **Earnings before income taxes**                                      | ** ** | **32,046**  |        | 34,186     |       | 41,248     |       | 44,654     |       | 48,489     |       |
| **Income tax expense**                                                | ** ** | **9,976**   |        | 10,440     |       | 12,949     |       | 14,289     |       | 15,786     |       |
| **Net earnings**                                                      | ** ** | **$**       | **22,070**  |       | $          | 23,746     |       | $          | 28,299     |       | $          | 30,365 |   | $ | 32,703 | (1) |
| **Net earnings per share**                                            |       |        |        |       |       |       |       |       |       |       |       |
| **Basic**                                                             | ** ** | **$**       | **1.16**    |       | $          | 1.21       |       | $          | 1.38       |       | $          | 1.42 |   | $ | 1.46 | (1) |
| **Diluted**                                                           | ** ** | **$**       | **1.15**    |       | $          | 1.20       |       | $          | 1.36       |       | $          | 1.40 |   | $ | 1.45 | (1) |
| **Cash  dividends per share**                                         | ** ** | **$**       | **0.28**    |       | $          | 0.28       |       | $          | 0.28       |       | $          | 0.26 |   | $ | 0.24 |   |
| **Weighted average shares outstanding**                               |       |        |        |       |       |       |       |       |       |       |       |
| **Basic**                                                             | ** ** | **19,030**  |        | 19,642     |       | 20,516     |       | 21,424     |       | 22,396     |       |
| **Diluted**                                                           | ** ** | **19,128**  |        | 19,828     |       | 20,794     |       | 21,730     |       | 22,615     |       |

 
| **As of March 31,**                    | ** ** | **2007**    | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------|------------|-------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **BALANCE SHEET DATA (In thousands):** |       |        |       |       |       |       |       |       |       |       |       |
| **Cash and short-term investments**    | ** ** | **$**       | **75,277** |       | $          | 69,893     |       | $          | 88,394     |       | $          | 106,440 |   | $ | 91,295 |   |
| ** **                             | ** ** | ** **  |       |       |       |       |       |       |       |       |       |
| **Working capital**                    | ** ** | **110,382** |       | 108,348    |       | 123,069    |       | 128,036    |       | 132,525    |       |
| **Total assets**                       | ** ** | **326,204** |       | 311,236    |       | 291,733    |       | 280,586    |       | 273,852    |       |
| **Long-term debt**                     | ** ** | **—**  | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** |       |
| **Shareholders’ equity**          | ** ** | **192,221** |       | 189,365    |       | 185,510    |       | 185,953    |       | 187,286    |       |
|                                        |            |             |            |            |            |            |            |            |            |            |            |  |  |  |  |  |

 

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(1)  In fiscal 2003, the Company’s results included a netreduction of restructuring accruals and other costs related to the fiscal 2000exit from the personal watercraft (PWC) business. This reduction increased:pretax earnings $5.4 million, net earnings $3.4 million and diluted earningsper share $0.15.

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# **QUARTERLYFINANCIAL DATA** (unaudited)

| ** **                                                            | ** **  | **Total**  | ** **  | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** **  | **Fourth**  | ** ** |
|-----------------------------------------------------------------------|-------------|------------|-------------|-------------|------------|-------------|------------|-------------|-------------|-------------|------------|
| **(In thousands, except per share amounts)** | ** **  | **Year**   | ** **  | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** **  | **Quarter** | ** ** |
| **Net Sales**                                                         |        |       |        |        |       |        |       |        |        |        |       |
| **2007**                                                              | ** **  | **$**      | **782,431** | ** **  | **$**      | **96,418**  | ** ** | **$**       | **285,325** | ** **  | **$**      | **228,114** | ** ** | **$** | **172,574** |   |
| 2006                                                                  |        | 732,794    |        | 107,924     |       | 276,270     |       | 195,301     |        | 153,299     |       |
| 2005                                                                  |        | 689,145    |        | 102,594     |       | 240,673     |       | 188,855     |        | 157,023     |       |
| **Gross Profit**                                                      |        |       |        |        |       |        |       |        |        |        |       |
| **2007**                                                              | ** **  | **$**      | **141,794** | ** **  | **$**      | **16,281**  | ** ** | **$**       | **59,609**  | ** **  | **$**      | **39,779** | ** ** | **$** | **26,125** |   |
| 2006                                                                  |        | 136,510    |        | 22,280      |       | 55,082      |       | 36,072      |        | 23,076      |       |
| 2005                                                                  |        | 135,780    |        | 18,956      |       | 52,612      |       | 37,849      |        | 26,363      |       |
| **Net Earnings (Loss)**                                               |        |       |        |        |       |        |       |        |        |        |       |
| **2007**                                                              | ** **  | **$**      | **22,070**  | ** **  | **$**      | **(4,532**  | **)**      | **$**       | **19,976**  | ** **  | **$**      | **8,181** | ** ** | **$** | **(1,555** | **)** |
| 2006                                                                  |        | 23,746     |        | 448         |       | 19,217      |       | 4,673       |        | (592        | )          |
| 2005                                                                  |        | 28,299     |        | 124         |       | 19,651      |       | 5,792       |        | 2,732       |       |
| **Net Earnings (Loss) Per Share**                                     |        |       |        |        |       |        |       |        |        |        |       |
| **2007**                                                              | **Basic**   | ** ** | **$**       | **1.16**    | ** ** | **$**       | **(0.23**  | **)**       | **$**       | **1.04**    | ** ** | **$** | **0.43** | ** ** | **$** | **(0.08** | **)** |
| ** **                                                            | **Diluted** | ** ** | **1.15**    | ** **  | **(0.23**  | **)**       | **1.03**   | ** **  | **0.43**    | ** **  | **(0.08**  | **)** |
| 2006                                                                  | Basic       |       | 1.21        |        | 0.02       |        | 0.97       |        | 0.24        |        | (0.03      | ) |
|                                                                  | Diluted     |       | 1.20        |        | 0.02       |        | 0.96       |        | 0.24        |        | (0.03      | ) |
| 2005                                                                  | Basic       |       | 1.38        |        | 0.01       |        | 0.95       |        | 0.28        |        | 0.14       |   |
|                                                                  | Diluted     |       | 1.36        |        | 0.01       |        | 0.94       |        | 0.28        |        | 0.13       |   |

#  

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#  

# **ITEM 7.          MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

## **Executive Level Overview**

Fiscal 2007 wasthe seventh consecutive year of record sales for Arctic Cat. Fiscal 2007 netsales increased 7% to $782.4 million from $732.8 million in fiscal 2006. Fiscal2007 net earnings were $22.1 million or $1.15 per diluted share compared to netearnings of $23.7 million or $1.20 per diluted share in fiscal 2006. Thedecrease in net earnings was mainly due to increased sales incentive programson snowmobiles caused by challenging snowmobile market conditions due to poorsnow in the Midwest and Eastern United States. During the year the Companyrepurchased nearly 1,135,000 shares of the common stock and ended the year with$75.3 million in cash and short-term investments.

TheCompany’s product lines consist of all-terrain vehicles (ATVs), snowmobiles andparts, garments and accessories.

ATVsales increased 9% in fiscal 2007 to $431.5 million from $394.9 million infiscal 2006. ATV net sales first surpassed snowmobile net sales in fiscal 2004and are the Company’s largest product line, comprising over 55% of net sales infiscal 2007. The Company’s ATV growth is due to Arctic Cat’s expanded productline-up that now fills nearly every market segment.

Snowmobilesales increased 4% in fiscal 2007 to $247.0 million from $238.1 million infiscal 2006 primarily due to new model introductions for the 2007 model year.Snowmobiles comprised 32% of the Company’s net sales in fiscal 2007. Parts,garments and accessory sales increased 4% in fiscal 2007 to $103.9 million from$99.8 million in fiscal 2006.  Parts,garments and accessory sales were 13% of the Company’s net sales in fiscal2007. The following discussions should be read in conjunction with theconsolidated financial statements and notes thereto included elsewhere in thisannual report.

## **Results of Operations**

**Fiscal2007 vs. Fiscal 2006** – During fiscal 2007 net salesincreased 6.8% to $782,431,000 from $732,794,000 in fiscal 2006. ATV unitvolume decreased 1.8%, snowmobile unit volume decreased 4.9% and dollar salesof parts, garments and accessories increased $4,101,000. The Company believesthe continued increase in ATV net sales is due to higher end product offeringsled by the Prowler UTV. Snowmobile unit volume decreased because of lowerdealer orders related to less than normal snowfalls during the prior winterseason in certain key regions in North America.

Grossprofit increased 3.9% to $141,794,000 in 2007 from $136,510,000 in 2006. Thegross profit percentage decreased to 18.1% versus 18.6% in 2006. The decreasein the 2007 gross profit percentage was mainly due to increased snowmobilesales incentives.

Selling,general and administrative expenses increased 5.9% to $109,861,000 in 2007 from$103,775,000 in 2006. Selling, general and administrative costs increasedprimarily due to increased operating cost of the European subsidiary andincreased product liability and litigation accruals. As a percent of net sales,operating expenses were 14.0% in 2007 compared with 14.2% in 2006.

Operatingprofits decreased 2.4% to $31,933,000 in 2007 from $32,735,000 in 2006. As apercent of net sales, operating profits were 4.1% in 2007 compared to 4.5% in2006. The decrease in operating profits is attributable to increased operatingexpenses.

Interestincome decreased to $1,139,000 in fiscal 2007 from $1,556,000 in fiscal 2006.Interest expense increased to $1,026,000 in fiscal 2007 from $105,000 in fiscal2006. Interest income was primarily affected by the lower cash levels at thebeginning of our fiscal year compared to last year. Interest expense was alsoaffected by the lower cash balances that resulted in increased borrowings fromthe Company’s line of credit during the first and second quarters of fiscal2007 compared to the same period last year.

Netearnings decreased to $22,070,000 or $1.15 per diluted share from $23,746,000or $1.20 per diluted share for fiscal 2006. Net earnings as a percent of netsales were 2.8% and 3.2% in 2007 and 2006, respectively. The decrease in netearnings is attributable to increased operating expenses.

**Fiscal2006 vs. Fiscal 2005** – During fiscal 2006 net salesincreased 6.3% to $732,794,000 from $689,145,000 in fiscal 2005. ATV unitvolume increased 9.9%, snowmobile unit volume decreased 9.4% and dollar salesof parts, garments and accessories increased $4,151,000. The Company believesthe continued increase in ATV sales is due both to enthusiastic dealer andconsumer reception of the Arctic Cat ATV and growth in certain segments of theATV market. Snowmobile unit volume decreased because of lower dealer ordersrelated to less than normal snowfalls during the prior winter season in certainkey regions in North America.

Grossprofit increased to $136,510,000 in 2006 from $135,780,000 in 2005. The grossprofit percentage decreased to 18.6% versus 19.7% in 2005. The decrease in the2006 gross profit percentage was mainly due to increased engine costs resultingfrom the stronger yen versus dollar relationship, increased raw material,freight costs and sales incentives.

Selling,general and administrative expenses increased 8.4% to $103,775,000 in 2006 from$95,745,000 in 2005, resulting mainly from a $3.4 million increase in Canadiancurrency hedge costs, operating costs of the European subsidiary acquired inJuly 2005 and increased ATV marketing costs. As a percent of net sales,operating expenses were 14.2% in 2006 compared with 13.9% in 2005.

Operatingprofits decreased 18.2% to $32,735,000 in 2006 from $40,035,000 in 2005. As apercent of net sales, operating profits were 4.5% in 2006 compared to 5.8% in2005. The decrease in operating profits is attributable to the decrease ingross profit and increased operating expenses.

Netinterest income (expense) increased 19.6% to $1,451,000 in fiscal 2006 from$1,213,000 in fiscal 2005 due to higher yields on invested cash related tohigher rates of return than the prior year and interest income received withincome tax refunds.

Netearnings decreased 16.1% to $23,746,000 or $1.20 per diluted share from$28,299,000 or $1.36 per diluted share for fiscal 2005. Net earnings as apercent of net sales were 3.2% and 4.1% in 2006 and 2005, respectively.

15

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## **Critical Accounting Policies**

The preparation ofthe consolidated financial statements in accordance with accounting principlesgenerally accepted in the United States requires management to make certainestimates and assumptions that affect the amount of reported assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and revenues and expenses during theperiods reported. Actual results may differ from those estimates. The Companyreviewed the development and selection of the critical accounting policies andbelieves the following are the most critical accounting policies that couldhave an effect on the Company’s reported results. These critical accountingpolicies and estimates have been reviewed with the audit committee of the Boardof Directors.

**RevenueRecognition –** The Company recognizes revenue andprovides for estimated marketing and sales incentive costs when products areshipped to dealers and distributors pursuant to their order, the price is fixedand collection is reasonably assured. Arctic Cat has agreements with financecompanies to repurchase products repossessed up to certain limits. Arctic Cat’sfinancial exposure to repurchase products is limited to the difference betweenthe amount paid to the finance company and the resale value of the repossessedproducts. Historically, Arctic Cat has not incurred material losses as a resultof repurchases nor has it provided a financial reserve for repurchases. Adversechanges in retail sales could cause this situation to change.

**Marketingand Sales Incentive Costs –** The Company provides forvarious marketing and sales incentive costs which are offered to its dealersand consumers at the later of when the revenue is recognized or when themarketing and sales incentive program is approved and communicated. Examples ofthese costs include: dealer and consumer rebates, dealer floorplan financingassistance and other incentive and promo­tion programs. Adverse marketconditions resulting in lower than expected retail sales or the matching ofcompetitor programs could cause accrued marketing and incentive costs tomaterially increase if the Companyauthorizes and communicates new programs to its dealers. The Companyesti­mates marketing and sales incentive costs based on expected usage andhistorical experience. The related marketing and sales incentive costs accrualis included in accrued marketing in the Company’s balance sheet. To the extentcurrent experience differs with previous estimates the accrued liability formarketing and sales incentives is adjusted accordingly.

**ProductWarranties –** The Company generally provides a limitedwarranty to the owner of snowmobiles for twelve months from the date ofconsumer registration and for six months on ATVs. The Company provides forestimated warranty costs at the time of sale based on historical rates andtrends and makes subsequent adjustments to their estimate as actual claimsbecome known or the amounts are determinable. Adverse changes in actualwarranty costs compared to the Company’s initial estimates could cause accruedwarranty to materially change.

**ProductLiability and Litigation –** The Company is subject toproduct liability claims and other litigation in the normal course of business.Arctic Cat insures for product liability claims although it retains a modestself insured retention accrual within the balance sheet caption Insurance. Theestimated costs resulting from any losses over insured amounts are charged tooperating expenses when it is probable a loss has been incurred and the amountof the loss is reasonably determinable.

TheCompany utilizes historical trends and other analysis to assist in determiningthe appropriate loss. Adverse changes in the final determination of productliability or other claims made against the Company could have a material impacton the Company’s financial condition.

## **Stock-Based Compensation**

The Companyrecognizes stock based compensation based on certain assumption inputs withinthe Black-Scholes Model. These assumption inputs are used to determine anestimated fair value of stock based payment awards on the date of grant andrequire subjective judgment. The Company accounts for stock based paymentawards in accordance with Statement of Financial Accounting Standard No.123(R), *Share Based Payments (SFAS 123(R))*.Because employee stock options have characteristics significantly differentfrom those of traded options, and because changes in the input assumptions canmaterially affect the fair value estimate, the existing models may not providea reliable single measure of the fair value of the employee stock options.Management assesses the assumptions and methodologies used to calculateestimated fair value of stock-based compensation on a regular basis.Circumstances may change and additional data may become available over time,which could result in changes to these assumptions and methodologies andthereby materially impact our fair value determination. If factors change andthe Company employs different assumptions in the application of SFAS 123(R) theamount of compensation expense associated with SFAS 123(R) may differsignificantly from what was recorded in the current period.

## **Liquidity and Capital Resources**

The seasonality ofthe Company’s snowmobile production cycle and the lead time between thecommencement of snowmobile and ATV production in the early spring andcommencement of shipments late in the first quarter have resulted insignificant fluctuations in the Company’s working capital requirements duringthe year. Historically, the Company has financed its working capitalrequirements out of available cash balances at the beginning and end of theproduction cycle and with short-term bank borrowings during the middle of thecycle. The Company believes current available cash and cash generated fromoperations together with its available line of credit will provide sufficientfunds to finance the Company on a short and long-term basis.

16

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## **Cash and Short-Term Investments**

Cash andshort-term investments were $75,277,000 at March 31, 2007 compared to$69,893,000 at March 31, 2006. The Company’s cash balances traditionally peakearly in the fourth quarter and then decrease as working capital requirementsincrease when the Company’s snowmobile andspring ATV production cycles begin. The Company’s investment objectivesare first, safety of principal and second, rate of return.

## **Financing Arrangements and Cash Flows**

The Company has a$75,000,000 unsecured bank credit agreement for the documentary and stand-byletters of credit and for working capital purposes. Total working capitalborrowings under the credit agreement are limited to $60,000,000 during thelast five months of the fiscal year. The total letters of credit issued atMarch 31, 2007 were $16,740,000, of which $13,235,000 was issued to SuzukiMotor Corporation for engine and service parts purchases.

TheCompany has agreements with certain finance companies to provide snowmobile andATV floor plan financing for the Company’s North American dealers. Theseagreements improve the Company’s liquidity by financing dealer purchases ofproducts without requiring substantial use of the Company’s working capital.The Company is paid by the floor plan companies shortly after shipment and aspart of its marketing programs the Company pays the floor plan financing of itsdealers for certain set time periods depending on the size of a dealer’s order.The financing agreements require repurchase of repossessed new and unused unitsand set limits upon the Company’s potential liability for annual repurchases.The aggregate potential liability was approximately $47,727,000 at March 31,2007. The Company has incurred no material losses under these agreements. TheCompany believes current available cash and cash generated from operationsprovide sufficient funding in the event there is a requirement to perform underthis guarantee and repurchase agreement.

In2007, the Company invested $25,729,000 in capital expenditures. The Companyexpects that capital expenditures, will increase to approximately $27,000,000in fiscal 2008. Since 1996, the Company has repurchased over 11 million sharesof common stock. There is approximately $10.8 million remaining on the October2006 repurchase authorization. The Company believes that cash generated fromoperations and available cash will be sufficient to meet its working capital,regular quarterly dividend, share repurchase program and capital expenditurerequirements on a short and long-term basis.

## **Contractual Obligations**

The followingtable summarizes the Company’s significant future contractual obligations atMarch 31, 2007 (in millions):
| ** **                    | ** ** | **Payment Due by Period** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|
| ** **                    | ** ** | ** **                               | ** ** | **Less   than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More   than** | ** ** |
| **Contractual Obligations**   | ** ** | **Total**                                | ** ** | **1 Year** | ** ** | **1-3 years** | ** ** | **3-5 Years** | ** ** | **5 years** | ** ** |
| Operating Lease Obligations   |       | $                                        | 0.7        |   | $ | 0.7 |   | 0 |   | 0 |   | 0 |   |
| Purchase Obligations(1)       |       | 148.8                                    |       | 148.8 |   | 0 |   | 0 |   | 0 |   |
| Total Contractual Obligations |       | $                                        | 149.5      |   | $ | 149.5 |   | 0 |   | 0 |   | 0 |   |

 

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(1)       TheCompany has outstanding purchase obligations with suppliers and vendors atMarch 31, 2007 for raw materials and other supplies as part of the normalcourse of business.

## **Forward-Looking Statements**

The PrivateSecurities Litigation Reform Act of 1995 provides a safe harbor for certainforward-looking statements. This annual report on Form 10-K, as well as theCompany’s Annual Report and future filings with the Securities and ExchangeCommission, the Company’s press releases and oral statements made with theapproval of an authorized executive officer, contain forward-looking statementsthat reflect the Company’s current views with respect to future events andfinancial performance. These forward-looking statements are subject to certainrisks and uncertainties that could cause actual results to differ materiallyfrom historical results or those anticipated. The words “aim,” “believe,” “expect,”“anticipate,” “intend,” “estimate” and other expressions that indicate futureevents and trends identify forward-looking statements. Actual future resultsand trends may differ materially from historical results or those anticipateddepending on a variety of factors, including, but not limited to the riskfactors described in Item 1A of this annual report. The Company does notundertake any obligation to publicly update or revise any forward-lookingstatement, whether as a result of new information, future events or otherwise.

17

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# **ITEM 7A.       QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK**

**Inflation, Foreign Exchange Ratesand Interest Rates**

Inflation is notexpected to have a significant impact on the Company’s business. The Companygenerally has been able to offset the impact of increasing costs through acombination of productivity gains and product sales price increases.

Duringfiscal 2007, approximately 18% of the Company’s cost of sales was purchasedfrom Japanese yen denominated suppliers. The majority of these purchases weremade from Suzuki Motor Corporation who supplies engines for the Company’ssnowmobiles and ATVs. The Company has an agreement with Suzuki MotorCorporation for snowmobile engine purchases to share the impact of fluctuationsin the exchange rate between the U.S. dollar and the Japanese yen above andbelow a fixed range contained in the agreement. This agreement renews annually.During fiscal 2007, the exchange rate fluctuation between the U.S. dollar andthe Japanese yen had a modest positive impact on the Company’s operatingresults. From time to time the Company utilizes foreign exchange cash flowhedging contracts to minimize the impact of exchange rate fluctuations relatingto ATV engine purchases. During 2007, the average contracted forward exchangerate on these cash flow hedges was approximately 112 (Japanese yen to the U.S.dollar).  At March 31, 2007, there wereJapanese yen forward exchange contracts outstanding with a notional amount of$38,120,000.

Salesto Canadian dealers are made in Canadian dollars with the U.S. dollar servingas the functional currency. During fiscal 2007, sales to Canadian dealerscomprised 19.8% of total net sales. During fiscal 2007, the exchange ratefluctuation between the U.S. dollar and the Canadian dollar had a modest positiveimpact on operating profits. During 2007, the Company utilized cash flow hedgesto mitigate the variability in Canadian exchange rate changes relating toCanadian dollar fund transfers to the United States. During 2007, the averagecontracted forward exchange rate on these cash flows hedges was approximately$1.12 (Canadian dollar to U.S. dollar). At March 31, 2007 there were noCanadian dollar forward exchange contracts outstanding.

Salesto European on-road ATV dealers and distributors are made in Euros with theEuro serving as the functional currency. During fiscal 2007, sales to Europeanon-road ATV dealers comprised 2.4% of total net sales. During fiscal 2007, theexchange rate fluctuation between the U.S. dollar and the Euro had nosignificant impact on operating profits. During 2007, the Company did notutilize any hedges to mitigate the variability in the Euro exchange rate and atMarch 31, 2007, there were no foreign exchange contracts outstanding for theEuro.

Thefair values of the Japanese yen hedge contracts at March 31, 2007 representedan unrealized gain of $903,000. A ten percent fluctuation in the currency ratesas of March 31, 2007 would have resulted in a change in fair value of theJapanese yen hedge contracts of approximately $3,812,000.

Interestrate market risk is managed for cash and short-term investments by investing ina diversified frequently maturing portfolio consisting of municipal bonds,auction rate securities and money market funds that experience minimalvolatility. The carrying amount of available-for-sale debt securitiesapproximate related fair value and the associated market risk is not deemed tobe significant.

TheCompany is a party to an unsecured bank line of credit arrangement under whichit may borrow an aggregate of up to $75 million. The total letters of creditissued at March 31, 2007 were $16,740,000 of which $13,235,000 was issued toSuzuki Motor Corporation for engine and service parts purchases. Interest ischarged at variable rates based on either LIBOR or prime. Because the interestrate risk related to the line of credit is not deemed to be significant, theCompany does not actively manage this exposure.

# **ITEM 8.          FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

FinancialStatements, Notes, and Report of Independent Registered Public Accounting Firmappear on pages 21 through 32. Quarterly financial data appears in Item 6.

# **ITEM 9.          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE**

None.

# **ITEM 9A.       CONTROLS AND PROCEDURES**

The Company’smanagement, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of theeffectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Rule 13a-15 under the 1934 Act as of March31, 2007. Based on that evaluation, theCompany’s Chief ExecutiveOfficer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures are effective in ensuring that information required to bedisclosed by the Company in the reports it files or submits under the 1934 Actis recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms.

18

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There have been no significant changes in internalcontrols over financial reporting during the fiscal quarter ended March 31,2007 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

**MANAGEMENT’S REPORT OF INTERNAL CONTROL OVER FINANCIAL REPORTING**

The management ofArctic Cat Inc. is responsible for establishing and maintaining adequateinternal control over financial reporting as defined in Rule 13a-15(f) underthe Securities and Exchange Act of 1934. The Company’s internal control systemwas designed to provide reasonable assurance to the Company’s management andBoard of Directors regarding the preparation and fair presentation of publishedfinancial statements.

Allinternal control systems, no matter how well designed, have inherentlimitations. Therefore, even those systems determined to be effective canprovide only reasonable assurance with respect to financial statementpreparation and presentation.

ArcticCat Inc.’s management assessed the effectiveness of the Company’s internalcontrol over financial reporting as of March 31, 2007. In making thisassessment, it used the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) in *Internal Control — Integrated Framework*. Based on theassessment management believes that, as of March 31, 2007, the Company’sinternal control over financial reporting is effective based on those criteria.

ArcticCat Inc.’s independent registered public accounting firm has issued an auditreport on our assessment of the Company’s internal control over financialreporting. This report appears below.

# **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directorsand Shareholders of Arctic Cat Inc.

Wehave audited management’s assessment, included in the accompanying Manage­ment’sReport included in Item 9 of this Form 10-K, that Arctic Cat Inc. andsubsidiaries main­tained effective internal control over financial reporting asof March 31, 2007, based on the criteria estab­lished in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (the COSOcriteria).  Arctic Cat Inc. andsubsidiaries’ management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express an opinion on management’s assess­mentand an opinion on the effectiveness of the Company’s internal control overfinancial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Account­ing Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to pro­vide reason­able assurance regarding thereliability of financial reporting and the preparation of financial state­mentsfor external purposes in accordance with generally accepted accountingprinciples.  A company’s internal controlover financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispo­sitions of the assets of thecompany; (2) provide reason­able assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of manage­mentand directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that ArcticCat Inc. and subsidiaries main­tained effective internal control over financialreporting as of March 31, 2007, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, Arctic Cat Inc. and subsidiaries maintained, inall material respects, effective internal control over financial reporting asof March 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the 

19

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consolidatedbalance sheets of Arctic Cat Inc. and subsidiaries as of March 31, 2007and March 31, 2006, and the related consolidated state­ments of earnings,shareholders’ equity, and cash flows for each of the three years in the periodended March 31, 2007 and our report dated June 11, 2007 expressed anunqualified opinion on those consolidated financial statements.
| /s/ GRANT THORNTON LLP |   |
|------------------------|--------|

 

 

Minneapolis, Minnesota

June11, 2007

# **ITEM 9B**.       **OTHER INFORMATION**

None.

20

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**PART III**

# **ITEM 10.       DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

The informationincluded under the heading “Election of Directors,” “Election of Directors –Board Committees,” “ Election of Directors – Code of Conduct” and “BeneficialOwnership of Capital Stock-Section 16(a) Beneficial Ownership ReportingCompliance” in the Company’s definitive Proxy Statement for the Annual Meetingof Shareholders to be held August 8, 2007, is incorporated herein by reference.

Pursuantto instruction 3 to Item 401(b) of Regulation S-K, information as to executiveofficers of the Company is set forth in Item 4A of this annual report.

# **ITEM 11.       EXECUTIVE COMPENSATION**

The informationincluded under the heading “Executive Compensation and Other Information” inthe Company’s definitive Proxy Statement for the Annual Meeting of Shareholdersto be held August 8, 2007, is incorporated herein by reference.

# **ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS**

The informationincluded under the heading “Beneficial Ownership of Capital Stock” and “BeneficialOwnership of Capital Stock — Equity Compensation Plan Information” in theCompany’s definitive Proxy Statement for the Annual Meeting of Shareholders tobe held August 8, 2007, is incorporated herein by reference.

# **ITEM 13.       CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

Information withrespect to certain relationships and related transactions, appearing under theheading “Executive Compensation and Other Information-Certain Transactions”  and “Election of Directors – DirectorIndependence” in the Company’s definitive Proxy Statement for the AnnualMeeting of Shareholders to be held on August 8, 2007, is incorporated herein byreference.

# **ITEM 14.       PRINCIPALACCOUNTANT FEES AND  SERVICES**

The informationrequired by this item is incorporated by reference to the information set forthunder the heading “Independent Registered Public Accounting Firm” in theCompany’s definitive Proxy Statement for the Annual Meeting of Shareholders tobe held August 8, 2007.

21

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# **PART IV**

# **ITEM 15.       EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

## **(a) Documents filed as part of report**

## **1. Financial Statements.**

The followingconsolidated financial statements of the Company and its subsidiaries are filedas part of this Form 10-K:
|           | ** ** | ** **                                                                                                    | ** ** | **Form 10-K  Reference Page** |
|-----------|------------|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------|
|      |       |                                                                                                          |       |                          |
| **(i)**   |       | Consolidated  Balance Sheets as of March 31, 2007 and 2006                                                    |       | 25                            |
|      |       |                                                                                                          |       |                          |
| **(ii)**  |       | Consolidated Statements of Earnings for the three  years ended March 31, 2007, 2006 and 2005                  |       | 26                            |
|      |       |                                                                                                          |       |                          |
| **(iii)** |       | Consolidated Statements of Shareholders’ Equity for  the three years ended March 31, 2007, 2006 and 2005 |       | 27                            |
|      |       |                                                                                                          |       |                          |
| **(iv)**  |       | Consolidated Statements of Cash Flows for the three  years ended March 31, 2007, 2006 and 2005                |       | 28                            |
|      |       |                                                                                                          |       |                          |
| **(v)**   |       | Notes to Consolidated Financial Statements                                                                    |       | 29-36                         |
|      |       |                                                                                                          |       |                          |
| **(vi)**  |       | Report of Independent Registered Public Accounting  Firm                                                      |       | 37                            |

 

## **2. Schedules filed as part of this Form 10-K.**

The informationrequired to be disclosed within Schedule II — Valuation and Qualifying Accountsis provided within the Consolidated Financial Statements of the Company, filedas part of this Form 10-K.

## **3. Exhibits**

|            | ** ** | **Method of  Filing**                                                                                                                                                                                                                                                                                                                                   |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **3(a)**   |       | Amended and  Restated Articles of Incorporation of Company                                                                                                                                                                                                                                                                                              |   | (3) |
|       |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **3(b)**   |       | Restated By-Laws  of the Company                                                                                                                                                                                                                                                                                                                        |   | (1) |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **4(a)**   |       | Form of specimen  Common Stock Certificate                                                                                                                                                                                                                                                                                                              |   | (1) |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **4(b)**   |       | Rights Agreement  by and between the Company and Wells Fargo Bank Minnesota, N.A., dated  September 17, 2001                                                                                                                                                                                                                                            |   | (4) |
|       |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(a)**  |       | 1989 Stock  Option Plan, as amended                                                                                                                                                                                                                                                                                                                     |   | (3) |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(b)**  |       | 1995 Stock Plan,  as amended                                                                                                                                                                                                                                                                                                                            |   | (3) |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(c)**  |       | Purchase/Supply  Agreement dated as of March 1, 1985 between Suzuki Motor Co., Ltd. and the  Company, and related Agreement on Implementation of Warranty Provision.                                                                                                                                                                                    |   | (1) |
|       |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(d)**  |       | Form of  Employment Agreement between the Company and each of its executive officers                                                                                                                                                                                                                                                                    |   | (1) |
|       |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(e)**  |       | Floorplan  Repurchase Agreement dated July 13, 1984, between the Company and ITT  Commercial Finance Corp.                                                                                                                                                                                                                                              |   | (1) |
|       |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(f)**  |       | Floorplan  Repurchase Agreement dated as of June 15, 1988, between the Company and ITT  Commercial Finance, a division of ITT Industries of Canada, Ltd.                                                                                                                                                                                                |   | (1) |
|       |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(g)**  |       | Discretionary  Revolving Credit Facility, dated as of June 6, 1997, between the Company and  Wells Fargo Bank Minnesota, National Association.                                                                                                                                                                                                          |   | (3) |
|       |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(h)**  |       | 2002 Stock Plan                                                                                                                                                                                                                                                                                                                                         |   | (5) |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(i)**  |       | Form of  incentive stock option agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                                           |   | (7) |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(j)**  |       | Form of  non-qualified stock option agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                                       |   | (7) |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(k)**  |       | Form of Director  non-qualified stock option agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                              |   | (7) |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(l)**  |       | Program  agreement, dated as of January 20, 2003, by and****between  Arctic Cat Sales Inc. and Textron Financial Corporation (Confidential  treatment pursuant to 17 CFR Sections 200.80(b) and 240.246-2 has been  granted for certain portions of this exhibit. Such portions have been omitted  herein and have been filed separately with the SEC.) |   | (6) |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                    |   |   |
| **10(m)**  |       | Repurchase  Agreement, dated as of January 20, 2003, by and between Arctic Cat Sales Inc.  and Textron Financial Corporation.                                                                                                                                                                                                                           |   | (6) |

 

22

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| **21**     |   | Subsidiaries of  the Registrant                                                                       |   | (2)       |
|------------|--------|-------------------------------------------------------------------------------------------------------|--------|-----------|
| ** ** |   |                                                                                                  |   |      |
| **23**     |   | Consent of  Independent Registered Public Accounting Firm                                             |   | (2)       |
| ** ** |   |                                                                                                  |   |      |
| **31.1**   |   | Section 302  Certification of Chief Executive Officer                                                 |   | (2)       |
| ** ** |   |                                                                                                  |   |      |
| **31.2**   |   | Section 302  Certification of Chief Financial Office                                                  |   | (2)       |
| ** ** |   |                                                                                                  |   |      |
| **32.1**   |   | Certification of  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002  |   |  (2) |
| ** ** |   |                                                                                                  |   |      |
| **32.2**   |   | Certification of  Chief Financial Officer pursuant to   Section 906 of the Sarbanes-Oxley Act of 2002 |   |  (2) |

 

## **(b) Exhibits**

Reference is madeto Item 15(a) 3.

**(c) Schedules**

Reference is made toItem 15(a) 2.

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(1) Incorporatedherein by reference to the Company’s Form S-1 Registration Statement (FileNumber 33-34984).

(2) Filed withthis Form 10-K.

(3) Incorporatedherein by reference to the Company’s Annual Report on Form 10-K for the fiscalyear ended March 31, 1997.

(4) Incorporatedby reference to Exhibit 1 to the Company’s Registration on Form 8-A filed withthe SEC on September 20, 2001.

(5) Incorporated by reference to Exhibit99.1 to the Company’s Registration on Form S-8 filed with the SEC on September6, 2002.

(6)Incorporatedherein by reference to the Company’s Quarterly Report on Form 10-Q for thequarter ended December 31, 2003.

(7) Incorporatedherein by reference to the Company’s Annual Report on Form 10-K for the fiscalyear ended March 31, 2005.

23

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized, on the 14th day of June, 2007.

**ARCTIC CAT INC.**
|   | /s/ Christopher A. Twomey |   |
|--------|---------------------------|--------|
|   | Christopher A. Twomey     |   |

 

Chairman of the Board of Directors, President andChief Executive Officer

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in the capacities and on the dateindicated.
| Signature                                                                     | ** ** | **Date** |
|-------------------------------------------------------------------------------|------------|----------|
|                                                                          |       |     |
| /s/ Christopher A. Twomey                                                     |       |     | June 14, 2007 |
|  Christopher  A. Twomey                                                  |       |     |
|  Chairman  of the Board of Directors, President, Chief Executive Officer |       |     |
|  (Principal  Executive Officer)                                          |       |     |
|                                                                          |       |     |
| /s/ Timothy C.  Delmore                                                       |       |     | June 14, 2007 |
|  Timothy C.  Delmore                                                     |       |     |
|  Chief  Financial Officer                                                |       |     |
|  (Principal  Financial and Accounting Officer)                           |       |     |
|                                                                          |       |     |
| /s/ Robert J. Dondelinger                                                     |       |     | June 14, 2007 |
|  Robert J.  Dondelinger, Director                                        |       |     |
|                                                                          |       |     |
| /s/ Masayoshi Ito                                                             |       |     | June 14, 2007 |
|  Masayoshi  Ito, Director                                                |       |     |
|                                                                          |       |     |
| /s/ Susan Lester                                                              |       |     | June 14, 2007 |
|  Susan  Lester, Director                                                 |       |     |
|                                                                          |       |     |
| /s/ William G. Ness                                                           |       |     | June 14, 2007 |
|  William G.  Ness, Director                                              |       |     |
|                                                                          |       |     |
| /s/ Gregg A. Ostrander                                                        |       |     | June 14, 2007 |
|  Gregg A.  Ostrander, Director                                           |       |     |
|                                                                          |       |     |
| /s/ David Roberts                                                             |       |     | June 14, 2007 |
|  David  Roberts, Director                                                |       |     |
|                                                                          |       |     |
| /s/ Kenneth J. Roering                                                        |       |     | June 14, 2007 |
|  Kenneth  Roering, Lead Director                                         |       |     |

 

24

----

**ConsolidatedBalance Sheets**
| **Arctic Cat Inc. March 31,**                                                                                               | ** ** | **2007**               | ** ** | **2006**                                | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------------------|------------|
| **ASSETS**                                                                                                                                      | ** ** | ** **             | ** ** | ** **                              | ** ** |
| **Current Assets**                                                                                                                              |       |                   |       |                                    |       |
| **Cash and equivalents**                                                                                                                        | ** ** | **$ 36,217,000**  | ** ** | **$    40,075,000** |       |
| **Short-term investments**                                                                                                                      | ** ** | **39,060,000**         | ** ** | **29,818,000**                          |       |
| **Accounts receivable,  less allowances**                                                                                                       | ** ** | **40,428,000**         | ** ** | **42,295,000**                          |       |
| **Inventories**                                                                                                                                 | ** ** | **98,524,000**         | ** ** | **92,289,000**                          |       |
| **Prepaid expenses**                                                                                                                            | ** ** | **3,488,000**          | ** ** | **5,463,000**                           |       |
| **Deferred income taxes**                                                                                                                       | ** ** | **14,861,000**         | ** ** | **8,810,000**                           |       |
| **Total current assets**                                                                                                                        | ** ** | **232,578,000**        | ** ** | **218,750,000**                         |       |
| **Property and Equipment – At Cost**                                                                                                       |       |                   |       |                                    |       |
| **Machinery, equipment  and tooling**                                                                                                           | ** ** | **184,119,000**        | ** ** | **170,053,000**                         |       |
| **Land, buildings and  improvements**                                                                                                           | ** ** | **28,568,000**         | ** ** | **24,556,000**                          |       |
| ** **                                                                                                                                      | ** ** | **212,687,000**        |       | **194,609,000**                         |       |
| **Less accumulated  depreciation**                                                                                                              | ** ** | **123,566,000**        | ** ** | **106,145,000**                         |       |
| ** **                                                                                                                                      | ** ** | **89,121,000**         |       | **88,464,000**                          |       |
| **Other Assets**                                                                                                                                |       |                   |       |                                    |       |
| **Goodwill,  intangibles and other assets**                                                                                                     | ** ** | **4,505,000**          |       | 4,022,000                               |       |
| ** **                                                                                                                                      | ** ** | **$ 326,204,000** |       | **$  311,236,000**            |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                  | ** ** | ** **             | ** ** | ** **                              | ** ** |
| **Current Liabilities**                                                                                                                         |       |                   |       |                                    |       |
| **Accounts payable**                                                                                                                            | ** ** | **$ 60,440,000**  | ** ** | **$    65,613,000** |       |
| **Accrued expenses**                                                                                                                            | ** ** | **53,512,000**         | ** ** | **43,775,000**                          |       |
| **Income taxes payable**                                                                                                                        | ** ** | **8,244,000**          | ** ** | **1,014,000**                           |       |
| **Total current  liabilities**                                                                                                                  | ** ** | **122,196,000**        | ** ** | **110,402,000**                         |       |
| **Deferred Income Taxes**                                                                                                                       | ** ** | **11,787,000**         | ** ** | **11,469,000**                          |       |
| **Commitments and Contingencies**                                                                                                               | ** ** | **—**             | ** ** | **—**                              |       |
| **Shareholders’ Equity**                                                                                                                   |       |                   |       |                                    |       |
| **Preferred stock, par  value $1.00; 2,050,000 shares authorized; none issued**                                                                 | ** ** | **—**             | ** ** | **—**                              |       |
| **Preferred stock –  Series A Junior Participating, par value $1.00; 450,000 shares authorized;  none issued**                             |       | **—**             | ** ** | **—**                              |       |
| **Common stock, par value  $.01; 37,440,000 shares authorized; shares issued and outstanding, 12,259,423  in 2007; 12,708,365 in 2006**         | ** ** | **123,000**            | ** ** | **127,000**                             |       |
| **Class B common stock,  par value $.01; 7,560,000 shares authorized, Shares issued, and outstanding  6,102,000 in 2007 and 6,717,000 in 2006** | ** ** | **61,000**             | ** ** | **67,000**                              |       |
| **Additional  paid-in-capital**                                                                                                                 | ** ** | **—**             | ** ** | **1,010,000**                           |       |
| **Accumulated other  comprehensive income (loss)**                                                                                              | ** ** | **2,117,000**          | ** ** | **(440,000**                            | **)**      |
| **Retained earnings**                                                                                                                           | ** ** | **189,920,000**        | ** ** | **188,601,000**                         |       |
| **Total shareholders’  equity**                                                                                                            | ** ** | **192,221,000**        | ** ** | **189,365,000**                         |       |
| ** **                                                                                                                                      | ** ** | **$ 326,204,000** |       | **$  311,236,000**            |       |

The accompanyingnotes are an integral part of these statements.

25

----

**Consolidated Statements ofEarnings**

 
| **Arctic Cat Inc. Years ended March 31,** | ** ** | **2007**        | ** **      | **2006**    | ** ** | **2005**    | ** ** |
|-------------------------------------------------------------------------|------------|-----------------|-----------------|-------------|------------|-------------|------------|
| **Net  sales**                                                          | ** ** | **$**           | **782,431,000** | ** **  | $          | 732,794,000 |       | $ | 689,145,000 |   |
| **Cost of  goods sold**                                                 | ** ** | **640,637,000** | ** **      | 596,284,000 |       | 553,365,000 |       |
| **Gross profit**                                                        | ** ** | **141,794,000** | ** **      | 136,510,000 |       | 135,780,000 |       |
| **Selling,  general and administrative expenses**                       | ** ** | **109,861,000** | ** **      | 103,775,000 |       | 95,745,000  |       |
| **Operating profit**                                                    | ** ** | **31,933,000**  | ** **      | 32,735,000  |       | 40,035,000  |       |
| **Other  income (expense)**                                             | ** ** | ** **      | ** **      |        |       |        |       |
| **Interest income**                                                     | ** ** | **1,139,000**   | ** **      | 1,556,000   |       | 1,213,000   |       |
| **Interest expense**                                                    | ** ** | **(1,026,000**  | **)**           | (105,000    | )          | —      |       |
| ** **                                                              | ** ** | **113,000**     | ** **      | 1,451,000   |       | 1,213,000   |       |
| **Earnings Before Income Taxes**                                        | ** ** | **32,046,000**  | ** **      | 34,186,000  |       | 41,248,000  |       |
| **Income  tax expense**                                                 | ** ** | **9,976,000**   | ** **      | 10,440,000  |       | 12,949,000  |       |
| **Net Earnings**                                                        | ** ** | **$**           | **22,070,000**  | ** **  | $          | 23,746,000  |       | $ | 28,299,000 |   |
| **Net  Earnings Per Share**                                             | ** ** | ** **      | ** **      |        |       |        |       |
| **Basic**                                                               | ** ** | **$**           | **1.16**        | ** **  | $          | 1.21        |       | $ | 1.38 |   |
| **Diluted**                                                             | ** ** | **$**           | **1.15**        | ** **  | $          | 1.20        |       | $ | 1.36 |   |
| **Weighted  average shares outstanding**                                | ** ** | ** **      | ** **      |        |       |        |       |
| **Basic**                                                               | ** ** | **19,030,000**  | ** **      | 19,642,000  |       | 20,516,000  |       |
| **Diluted**                                                             | ** ** | **19,128,000**  | ** **      | 19,828,000  |       | 20,794,000  |       |

The accompanying notesare an integral part of these statements.

26

----

**Consolidated Statements ofShareholder’s Equity**

 
| ** **                                                    | ** ** | ** **            | ** ** | ** **            | ** **  | ** **       | ** **    | ** **        | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** **   | ** **    | ** **  | ** **  |
|---------------------------------------------------------------|------------|-----------------------|------------|-----------------------|-------------|------------------|---------------|-------------------|------------|--------------|------------|------------------------|------------|--------------|---------------|-------------|-------------|
| ** **                                                    | ** ** | ** **            | ** ** | ** **            | ** **  | **Class B** | ** **    | **Additional**    | ** ** | **Other**    | ** ** | ** **             | ** ** | ** **   | ** **    |
| **Arctic Cat Inc.**                                 | ** ** | **Common Stock** | ** ** | **Common Stock** | ** **  | **Paid-in**      | ** **    | **Comprehensive** | ** ** | **Retained** | ** ** | ** **             | ** ** |
| **Years ended March 31,**                      | ** ** | **Shares**            | ** ** | **Amount**            | ** **  | **Shares**       | ** **    | **Amount**        | ** ** | **Capital**  | ** ** | **Income (loss)** | ** ** | **Earnings** | ** **    | **Total**   | ** **  |
| Balances at March 31,  2004                                   |       | 14,285,882            |       | $                     | 143,000     |             | 6,717,000     |              | $          | 67,000       |       | $                      | —     |         | $             | (221,000    | )           | $ | 185,964,000 |   | $ | 185,953,000 |   |
| Exercise  of stock options                                    |       | 115,762               |       | 1,000                 |        | —           |          | —            |       | 1,429,000    |       | —                 |       | —       |          | 1,430,000   |        |
| Tax benefits from stock option exercises                      |       | —                |       | —                |        | —           |          | —            |       | 618,000      |       | —                 |       | —       |          | 618,000     |        |
| Repurchase  of common stock                                   |       | (1,022,946            | )          | (10,000               | )           | —           |          | —            |       | (2,047,000   | )          | —                 |       | (23,272,000  | )             | (25,329,000 | )           |
| Other  comprehensive income:                                  |       |                  |       |                  |        |             |          |              |       |         |       |                   |       |         |          |        |        |
| Net  earnings                                                 |       | —                |       | —                |        | —           |          | —            |       | —       |       | —                 |       | 28,299,000   |          | 28,299,000  |        |
| Unrealized loss on securities available-for-sale, net  of tax |       | —                |       | —                |        | —           |          | —            |       | —       |       | (135,000               | )          | —       |          | (135,000    | )           |
| Unrealized gain on derivative instruments, net of tax         |       | —                |       | —                |        | —           |          | —            |       | —       |       | 416,000                |       | —       |          | 416,000     |        |
| Total  other comprehensive income                             |       | —                |       | —                |        | —           |          | —            |       | —       |       | —                 |       | —       |          | 28,580,000  |        |
| Dividends  ($.26 per share)                                   |       | —                |       | —                |        | —           |          | —            |       | —       |       | —                 |       | (5,742,000   | )             | (5,742,000  | )           |
| Balances at March 31,  2005                                   |       | 13,378,698            |       | 134,000               |        | 6,717,000        |          | 67,000            |       | —       |       | 60,000                 |       | 185,249,000  |          | 185,510,000 |        |
| Exercise  of stock options                                    |       | 56,167                |       | —                |        | —           |          | —            |       | 902,000      |       | —                 |       | —       |          | 902,000     |        |
| Tax benefits from stock option exercises                      |       | —                |       | —                |        | —           |          | —            |       | 135,000      |       | —                 |       | —       |          | 135,000     |        |
| Repurchase  of common stock                                   |       | (726,500              | )          | (7,000                | )           | —           |          | —            |       | (27,000      | )          | —                 |       | (14,897,000  | )             | (14,931,000 | )           |
| Other  comprehensive income:                                  |       |                  |       |                  |        |             |          |              |       |         |       |                   |       |         |          |        |        |
| Net  earnings                                                 |       | —                |       | —                |        | —           |          | —            |       | —       |       | —                 |       | 23,746,000   |          | 23,746,000  |        |
| Unrealized loss on securities available-for-sale, net  of tax |       | —                |       | —                |        | —           |          | —            |       | —       |       | (43,000                | )          | —       |          | (43,000     | )           |
| Unrealized loss on derivative instruments, net of tax         |       | —                |       | —                |        | —           |          | —            |       | —       |       | (450,000               | )          | —       |          | (450,000    | )           |
| Foreign currency adjustment                                   |       | —                |       | —                |        | —           |          | —            |       | —       |       | (7,000                 | )          | —       |          | (7,000      | )           |
| Total  other comprehensive income                             |       | —                |       | —                |        | —           |          | —            |       | —       |       | —                 |       | —       |          | 23,246,000  |        |
| Dividends  ($.28 per share)                                   |       | —                |       | —                |        | —           |          | —            |       | —       |       | —                 |       | (5,497,000   | )             | (5,497,000  | )           |
| Balances at March 31,  2006                                   |       | 12,708,365            |       | 127,000               |        | 6,717,000        |          | 67,000            |       | $            | 1,010,000  |                   | (440,000   | )            | 188,601,000   |        | 189,365,000 |   |
| Exercise  of stock options                                    |       | 70,817                |       | 1,000                 |        | —           |          | —            |       | 1,074,000    |       | —                 |       | —       |          | 1,075,000   |        |
| Tax benefits from stock option exercises                      |       | —                |       | —                |        | —           |          | —            |       | 89,000       |       | —                 |       | —       |          | 89,000      |        |
| Repurchase  of common stock                                   |       | (519,759              | )          | (5,000                | )           | (615,000         | )             | (6,000            | )          | (4,343,000   | )          | —                 |       | (15,419,000  | )             | (19,773,000 | )           |
| Stock based compensation expense                              |       | —                |       | —                |        | —           |          | —            |       | 2,170,000    |       | —                 |       | —       |          | 2,170,000   |        |
| Other  comprehensive income:                                  |       |                  |       |                  |        |             |          |              |       |         |       |                   |       |         |          |        |        |
| Net  earnings                                                 |       | —                |       | —                |        | —           |          | —            |       | —       |       | —                 |       | 22,070,000   |          | 22,070,000  |        |
| Unrealized loss on securities available-for-sale, net  of tax |       | —                |       | —                |        | —           |          | —            |       | —       |       | (12,000                | )          | —       |          | (12,000     | )           |
| Unrealized gain on derivative instruments, net of tax         |       | —                |       | —                |        | —           |          | —            |       | —       |       | 1,016,000              |       | —       |          | 1,016,000   |        |
| Foreign  currency adjustment                                  |       | —                |       | —                |        | —           |          | —            |       | —       |       | 1,553,000              |       | —       |          | 1,553,000   |        |
| Total  other comprehensive income                             |       | —                |       | —                |        | —           |          | —            |       | —       |       | —                 |       | —       |          | 24,627,000  |        |
| Dividends  ($.28 per share)                                   |       | —                |       | —                |        | —           |          | —            |       | —       |       | —                 |       | (5,332,000   | )             | (5,332,000  | )           |
| **Balances at March 31, 2007**                                | ** ** | **12,259,423**        | ** ** | **$**                 | **123,000** | ** **       | **6,102,000** | ** **        | **$**      | **61,000**   |       | —                 | ** ** | **$**        | **2,117,000** | ** **  | **$**       | **189,920,000** | ** ** | **$** | **192,221,000** |   |

 

The accompanying notesare an integral part of these statements.

27

----

**Consolidated Statements of CashFlows**
| **Arctic Cat Inc.Years ended March 31,**                        | ** ** | **2007**         | ** **     | **2006**    | ** ** | **2005**    | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------|----------------|-------------|------------|-------------|------------|
| **Cash  flows from operating activities**                                                | ** ** | ** **       | ** **     |        |       |        |       |
| **Net earnings**                                                                         | ** ** | **$**            | **22,070,000** | ** **  | $          | 23,746,000  |       | $ | 28,299,000 |   |
| **Adjustments to reconcile net earnings to net  cash provided by operating activities**  | ** ** | ** **       | ** **     |        |       |        |       |
| **Depreciation and amortization**                                                        | ** ** | **26,269,000**   | ** **     | 22,241,000  |       | 19,584,000  |       |
| **Loss on the disposal of fixed assets**                                                 | ** ** | **366,000**      | ** **     | —      |       | —      |       |
| **Deferred income taxes**                                                                | ** ** | **(6,322,000**   | **)**          | (1,055,000  | )          | 2,666,000   |       |
| **Stock based compensation expense**                                                     | ** ** | **2,170,000**    | ** **     | —      |       | —      |       |
| **Changes in operating assets and liabilities, net  of effect from acquired net assets** | ** ** | ** **       | ** **     |        |       |        |       |
| **Trading securities**                                                                   | ** ** | **(11,262,000**  | **)**          | 36,988,000  |       | (9,151,000  | )          |
| **Accounts receivable**                                                                  | ** ** | **3,543,000**    | ** **     | 8,121,000   |       | (18,194,000 | )          |
| **Inventories**                                                                          | ** ** | **(4,974,000**   | **)**          | (17,734,000 | )          | (6,862,000  | )          |
| **Prepaid expenses**                                                                     | ** ** | **2,000,000**    | ** **     | (1,815,000  | )          | 14,000      |       |
| **Accounts payable**                                                                     | ** ** | **(5,844,000**   | **)**          | (1,321,000  | )          | 2,385,000   |       |
| **Accrued expenses**                                                                     | ** ** | **9,640,000**    | ** **     | 6,834,000   |       | 1,281,000   |       |
| **Income taxes**                                                                         | ** ** | **7,230,000**    | ** **     | (2,601,000  | )          | 4,648,000   |       |
| **Net cash provided by operating activities**                                            | ** ** | **44,886,000**   | ** **     | 73,404,000  |       | 24,670,000  |       |
| **Cash  flows from investing activities**                                                | ** ** | ** **       | ** **     |        |       |        |       |
| **Purchase of property and equipment**                                                   | ** ** | **(25,729,000**  | **)**          | (31,986,000 | )          | (22,630,000 | )          |
| **Purchase of other assets**                                                             | ** ** | **(682,000**     | **)**          | —      |       | —      |       |
| **Net assets acquired, net of cash acquired**                                            | ** ** | **—**       | ** **     | (3,464,000  | )          | —      |       |
| **Sale and maturity of available-for-sale  securities**                                  | ** ** | **2,001,000**    | ** **     | 754,000     |       | 3,703,000   |       |
| **Net cash used in investing activities**                                                | ** ** | **(24,410,000**  | **)**          | (34,696,000 | )          | (18,927,000 | )          |
| **Cash  flows from financing activities**                                                | ** ** | ** **       | ** **     |        |       |        |       |
| **Proceeds from short-term borrowings**                                                  | ** ** | **120,776,000**  | ** **     | 47,625,000  |       | —      |       |
| **Payments on short-term borrowings**                                                    | ** ** | **(120,776,000** | **)**          | (47,625,000 | )          | —      |       |
| **Proceeds from issuance of common stock**                                               | ** ** | **1,075,000**    | ** **     | 902,000     |       | 1,273,000   |       |
| **Tax benefit from stock option exercises**                                              | ** ** | **89,000**       | ** **     | 135,000     |       | 618,000     |       |
| **Repurchase of common stock**                                                           | ** ** | **(19,773,000**  | **)**          | (14,931,000 | )          | (25,172,000 | )          |
| **Dividends paid**                                                                       | ** ** | **(5,332,000**   | **)**          | (5,497,000  | )          | (5,742,000  | )          |
| **Net cash used in financing activities**                                                | ** ** | **(23,941,000**  | **)**          | (19,391,000 | )          | (29,023,000 | )          |
| **Effect  of exchange rate changes on cash and cash equivalents**                        | ** ** | **(393,000**     | **)**          | (7,000      | )          | —      |       |
| **Net  increase (decrease) in cash and equivalents**                                     | ** ** | **(3,858,000**   | **)**          | 19,310,000  |       | (23,280,000 | )          |
| **Cash  and equivalents at beginning of year**                                           | ** ** | **40,075,000**   | ** **     | 20,765,000  |       | 44,045,000  |       |
| **Cash  and equivalents at end of year**                                                 | ** ** | **$**            | **36,217,000** | ** **  | $          | 40,075,000  |       | $ | 20,765,000 |   |
| **Supplemental  disclosure of cash payments for:**                                       | ** ** | ** **       | ** **     |        |       |        |       |
| **Income  taxes**                                                                        | ** ** | **$**            | **8,983,000**  |        | $          | 14,404,000  |       | $ | 7,691,000 |   |
| **Interest**                                                                             | ** ** | **$**            | **1,026,000**  |        | $          | 105,000     |       | — |   |

Supplemental disclosureof non-cash investing and financing activities:

As of March 31, 2007 and2006, the unrealized gain on securities available-for-sale, net of tax was$2,000 and $14,000.

As of March 31, 2007 and2006, the unrealized gain (loss) on derivative instruments, net of tax was$569,000 and $(447,000).

As of March 31, 2007and  2006, property and equipmentpurchases of $1,279,000 and $2,777,000 were included in accounts payable.

During2005, mature common shares with a fair market value of $157,000 were exchangedin settlement for the exercise of certain stock options.

The accompanying notesare an integral part of these statements.

28

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# **Notes toConsolidated Financial Statements**

Artic Cat Inc.  March 31, 2007, 2006, and 2005

# **A SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

Arctic Cat Inc.(the “Company”) operates in a single industry segment and designs, engineers,manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under theArctic Cat® brand name, and related parts, garments andaccessories principally through its facilities in Thief River Falls, Minnesota.The Company’s products are sold through a network of independent dealerslocated throughout the United States, Canada, and Europe and throughdistributors in Europe, the Middle East, Asia and other international markets.

## **Use of Estimates**

Preparation of theCompany’s consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect reported amounts ofassets and liabilities, related revenues and expenses and disclosure aboutcontingent assets and liabilities at the date of the financial statements.Actual results could differ from the estimates used by management.

## **Principles of Consolidation**

The consolidatedfinancial statements include the accounts of Arctic Cat Inc. and itswholly-owned subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation.

## **Cash and Equivalents**

The Companyconsiders highly liquid temporary investments with an original maturity ofthree months or less or variable rate demand notes with put options exercisablein three months or less to be cash equivalents. Cash and equivalents consistprimarily of commercial paper and put bonds. As of March 31, 2007 and 2006, theCompany had approximately $4,000,000 and $5,900,000 of cash located in foreignbanks primarily in Canada. The Company’s cash management policy provides forbank disbursement accounts to be reimbursed on a daily basis. Checks issued butnot presented to the banks for payment are included in cash and equivalents asa reduction of other cash balances.

**Fair Values of FinancialInstruments**

Except wherenoted, the carrying value of current financial assets and liabilitiesapproximates their fair value, due to their short-term nature.

## **Short-Term Investments**

Short-terminvestments are reported at fair value and include trading securities, withunrealized gains and losses included in net earnings, and available-for-salesecurities, with unrealized gains and losses reported as a separate component of shareholders’ equity. The Companyutilizes the specific identification method in accounting for its short-terminvestments.

## **Accounts Receivable**

The Company’saccounts receivable balance consists of amounts due from its dealers andcertain finance companies. The Company extends credit to its dealers based onan evaluation of the dealers’ financial condition. The Company’s collectionexposure relating to accounts receivable amounts due from certain dealerfinance companies is limited due to the financial strength of the financecompanies and provisions of its existing agreements. Accounts receivable ispresented net of an allowance for estimated uncollectible amounts due from itsdealers. The Company estimates the uncollectible amounts considering numerousfactors, mainly historical trends as well as current available information. TheCompany’s allowance for uncollectible accounts was $815,000, $966,000 and$802,000 at March 31, 2007, 2006 and 2005. The activity within the allowancefor uncollectible accounts for the three years ending March 31, 2007 was notsignificant.  Accounts receivable amountswritten off have been within management’s expectations.

## **Inventories**

Inventories arestated at the lower of cost or market, with cost determined using the first-in,first-out method.

## **Derivative Instruments and Hedging Activities**

The Company entersinto forward exchange contracts to hedge the variability in foreign exchangerates related to purchase commitments denominated in Japanese yen for ATVengines and transfers of Canadian dollar funds to the United States of America.The contracts are designated as, and meet the criteria for, cash flow hedges.The Company does not enter into forward contracts for the purpose of trading.Gains and losses on forward contracts are recorded in accumulated other comprehensiveincome (loss), net of tax, and subsequently reclassified within 12 months intocost of goods sold upon the sale of ATV units or into operating expense uponcompleting transfers of Canadian dollar funds.

Therewere no open Canadian dollar forward exchange contracts at March 31, 2007.  As of March 31, 2006, the Company had openCanadian dollar forward exchange contracts, maturing through March 2007  with notional amounts totaling $51,655,000and fair value assets and liabilities, netted in accounts payable, of $840,000at March 31, 2006. The related amount reported within other 

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comprehensive income(loss), net of tax, was $529,000. As of March 31, 2007and 2006 the Company hadopen Japanese yen forward exchange contracts, maturing through February 2008 andJanuary 2007, with notional amounts totaling $38,120,000 and $59,966,000 andfair value assets and liabilities of $903,000 included in accounts receivableat March 31, 2007 and $1,549,000 included in accounts payable at March 31,2006. The related amount reported within other comprehensive income (loss), netof tax was $569,000 and $(976,000). The amounts reported within othercomprehensive income (loss) and the fair value assets and liabilities, includedin accounts payable, at March 31, 2006 for the Canadian dollar and the Japaneseyen forward exchange contracts have been offset resulting in a loss, net of taxof $447,000, and a net payable of $709,000 at March 31, 2006.

## **Property and Equipment**

Depreciation isprovided in amounts sufficient to relate the cost of depreciable assets tooperations over their estimated service lives, using the units of productionmethod for tooling and the straight-line method for all other property andequipment. Repairs and maintenance cost that are considered not to extend theuseful life of the property and equipment are expensed as incurred. Tooling isamortized over the life of the product, generally three years. Estimatedservice lives range from 15 - 20 years for buildings and improvements and 5 - 7years for machinery and equipment. Accelerated and straight-line methods areused for income tax reporting.

## **Goodwill and Intangibles**

In July 2005, theCompany adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwilland Other Intangible Assets” SFAS No. 142 prohibits the amortization ofgoodwill and intangible assets with indefinite useful lives. SFAS No. 142requires that these assets be reviewed for impairment at least annually. Animpairment charge is recognized only when the calculated fair value of areporting unit, including goodwill, is less than its carrying amount. TheCompany performed the analysis as of March 31, 2007 and 2006 which indicatedthat no goodwill impairment existed.

Thechanges in the carrying amount of goodwill and other intangibles included ingoodwill, intangibles and other assets for the year ended March 31, 2007 and2006 are as follows:
| ** **                                 | ** ** | **2007** | ** ** | **2006**  | ** ** |
|--------------------------------------------|------------|----------|------------|-----------|------------|
| Balance at April 1,                        |       | $        | 3,539,000  |      | $          | — |   |
| Goodwill acquired during the year          |       | —   |       | 1,750,000 |       |
| Other intangibles acquired during the year |       | —   |       | 1,950,000 |       |
| Current year amortization                  |       | (215,000 | )          | (161,000  | )          |
| Balance at March 31,                       |       | $        | 3,324,000  |      | $          | 3,539,000 |   |

 

As required by SFAS No.142, intangibles with finite lives will continue to be amortized. Included inother intangible assets are customer relationships, a homologation license, anda non-compete agreement. Intangible assets before accumulated amortization were$1,950,000 at March 31, 2007 and 2006. Accumulated amortization was $376,000and $161,000 at March 31, 2007 and 2006. Amortization expense is expected to beapproximately $215,000 in each of the next five fiscal years. The net value ofother intangible assets is included as a component of goodwill and otherintangibles in the accompanying consolidated balance sheets.

## **Product Warranties**

The Companygenerally provides a limited warranty to the owner of snowmobiles for twelvemonths from the date of consumer registration and for six months on ATVs. TheCompany provides for estimated warranty costs at the time of sale based onhistorical rates and trends and makes subsequent adjustments to its estimate asactual claims become known or the amounts are determinable. The followingrepresents changes in the Company’s accrued warranty liability for the fiscalyears ended March 31,
| ** **              | ** ** | **2007**       | ** **     | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------|------------|----------------|----------------|------------|------------|------------|------------|
| Balance at April 1,     | ** ** | **$**          | **14,203,000** |       | $          | 12,053,000 |       | $ | 10,331,000 |   |
| Warranty Provision      | ** ** | **17,374,000** |           | 13,377,000 |       | 14,237,000 |       |
| Warranty Claim Payments | ** ** | **13,603,000** |           | 11,227,000 |       | 12,515,000 |       |
| Balance at March 31,    | ** ** | **$**          | **17,974,000** |       | $          | 14,203,000 |       | $ | 12,053,000 |   |

 

## **Insurance**

The Company isself-insured for employee medical, workers’ compensation, and product liabilityclaims. Specific stop loss coverages are provided for catastrophic claims.Losses and claims are charged to operations when it is probable a loss has beenincurred and the amount can be reasonably estimated.

## **Revenue Recognition**

The Companyrecognizes revenue and provides for estimated marketing and sales incentivecosts when products are shipped to dealers and distributors pursuant to their order, the price is fixed andcollection is reasonably assured. Shipping and handling costs are recorded as a component of costs ofgoods sold at the time product is shipped.

## **Marketing and Sales Incentive Costs**

At the timeproduct revenue is recognized the Company provides for various marketing andsales incentive costs which are offered to its dealers and consumers. Examplesof these costs, which are 

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recognized as areduction of revenue when the products are sold, include: dealer and consumerrebates, dealer floor plan financing assistance and other incentive and promo­tionprograms. Generally, the Company records costs related to these marketingprograms at the later of when the revenue is recog­nized or when the salesincentive or marketing program is approved and com­municated for productspreviously shipped. Sales incentives that involve a free product or servicedelivered to the consumer are recorded as a component of cost of goods sold.The Company esti­mates the costs of these various incentive and marketingprograms at the time of sale or subsequently when programs are approved andcommunicated based on historical experience. To the extent current experiencediffers with previous estimates the accrued liability for marketing and salesincentives is adjusted accordingly.

## **Dealer Holdback**

## The Company records a dealer holdback programliability at the time certain products are shipped to its dealers. If theproducts subject to the holdback program are sold within the program timeperiod, the Company refunds a portion of the original sale price, referred toas dealer holdback, to the dealer. The Company’s dealer holdback programliability, included within the accounts payable, as of March 31, 2007, 2006 and2005 was $19,998,000, $17,321,000, and $14,085,000. The increases from March31, 2005 to 2007 were principally related to qualifying additional products,the period of coverage under the program and the timing of payments.

## **Research and Development**

Research anddevelopment costs are expensed as incurred and are reported as a component ofselling, general and administrative expenses. Research and development expensewas $17,756,000, $17,067,000, and $17,350,000 during 2007, 2006 and 2005.

## **Advertising**

The Companyexpenses advertising costs as incurred, except for cooperative advertisingobligations arising related to the sale of the Company’s products to itsdealers. The estimated cost of cooperative advertising, which the dealer isrequired to support, is recorded as marketing expense at the time the productis sold. Cooperative advertising was $6,841,000, $6,996,000, and $6,681,000, in2007, 2006 and 2005. Total advertising expense, including cooperativeadvertising, was $23,671,000, $23,482,000, and $22,031,000  in 2007, 2006 and 2005.

## **Stock Based Compensation**

AtMarch 31, 2007, the Company had stock based compensation plans, all previouslyapproved by the shareholders. Stock options granted under these plans generallyvest ratably over one to three years of service, have a contractual life offive to ten years and provide for accelerated vesting if there is a change incontrol, as defined. At March 31, 2007, the Company had approximately 252,000shares available for future grant under its stock option plans.

OnApril 1, 2006, the Company adopted Statement of Financial Accounting StandardNo. 123(R), Share Based Payments (SFAS 123(R)), which requires the fair valueof all share based payment transactions, including stock options, be recognizedin the income statement as an operating expense, based on their fair value overthe requisite service period. The Company has elected the modified prospectivetransition method in applying SFAS 123(R). Accordingly, periods prior toadoption have not been restated. Under this transition method, the Companyapplies the provisions of SFAS 123(R) to new awards modified, repurchased, orcancelled after April 1, 2006. Additionally, the Company recognizescompensation cost for the portion of awards for which the requisite service hasnot been rendered (unvested awards) that are outstanding as of April 1, 2006,as the remaining service is rendered. The compensation cost recorded for theseawards will be based on their grant-date fair value as calculated for the proforma disclosures required by SFAS 123(R). At March 31, 2007, the Company had$2,424,000 of unrecognized compensation costs related to non-vested stockoptions that are expected to be recognized over a weighted average period ofapproximately two years.

Forthe fiscal year ended March 31, 2007, the Company recorded compensation expenseof $2,170,000 related to the adoption of SFAS 123(R), which has been includedin selling, general and administrative expenses. The Company’s total stockbased compensation related expense reduced both basic and diluted earnings pershare by $0.08 for the fiscal year ended March 31, 2007.

Priorto adopting SFAS 123(R), the Company accounted for these plans under therecognition and measurement principles of APB Opinion No. 25, Accounting forStock Issued to Employees, and related Interpretations. No stock based employeecompensation cost was reflected in net earnings, as all options granted underthose plans had an exercise price equal to the market value of the underlyingcommon stock on the date of the grant.

Additionally,prior to adopting SFAS 123(R), the Company presented all tax benefits resultingfrom the exercise of stock options as operating cash flows in the consolidatedStatement of Cash Flows. SFAS 123(R) requires that cash flows from the exerciseof stock options resulting from tax benefits in excess of recognized cumulativecompensation cost (excess tax benefits) be classified as financing cash flow.For the fiscal year ended March 31, 2007, the total income tax benefit from theexercise of stock options classified as financing cash flows was $89,000.

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Thefollowing table illustrates the effect on net earnings and earnings per sharehad the fair value based method been applied to the comparable period in theprior fiscal years ended March 31:
| ** **                                             | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
| **Net earnings:**                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** As reported**                                  |       | $          | 23,746,000 |       | $          | 28,299,000 |   |
| ** Additional compensation expense, net of  tax** | ** ** | 1,601,000  | ** ** | 1,555,000  | ** ** |
| ** Pro forma**                                    |       | $          | 22,145,000 |       | $          | 26,744,000 |   |
| **Net earnings per share:**                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** As reported**                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic**                                              |       | $          | 1.21       |       | $          | 1.38 |   |
| **Diluted**                                            |       | $          | 1.20       |       | $          | 1.36 |   |
| ** Pro forma**                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic**                                              |       | $          | 1.13       |       | $          | 1.30 |   |
| **Diluted**                                            |       | $          | 1.12       |       | $          | 1.29 |   |

 

The fair value of eachstock option award was estimated on the date of grant using the Black-Scholesoptions pricing model. The following assumptions were used to estimate the fairvalue of options:

|                              | ** ** | **2007**    | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| **Assumptions:**             |       |        |       |     |       |     |       |
| **Dividend yield**           | ** ** | **1.3**     | **%**      | 1.3      | %          | 1.1      | %          |
| **Average term**             | ** ** | **5 years** |       | 5 years  |       | 7 years  |       |
| **Volatility**               | ** ** | **30**      | **%**      | 30       | %          | 36       | %          |
| **Risk-free rate of return** | ** ** | **5.0**     | **%**      | **5.0**  | **%**      | 4.1      | %          |

 

The weighted averagefair value of options granted during each of the following years ended March31:
| ** **                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Fair value of options granted** | ** ** | **$**    | **5.70**   |     | $          | 6.91     |       | $ | 10.94 |   |
|                                   |            |          |            |          |            |          |            |  |  |  |

 

See Note K foradditional disclosures regarding stock option plans.

## **Net Earnings Per Share**

The Company’sdiluted weighted average shares outstanding include common shares and commonshare equivalents relating to stock options, when dilutive. Options to purchase942,500,  571,500, and 195,000,  shares of common stock with weighted averageexercise prices of $22.37, $24.41, and $27.68 were outstanding during 2007,2006 and 2005, but were excluded from the computation of common shareequivalents because they were anti-dilutive.

Weighted average sharesoutstanding consist of the following for the years ended March 31,
| ** **                                           | ** ** | **2007**       | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| Weighted average number of common shares outstanding | ** ** | **19,030,000** |       | 19,642,000 |       | 20,516,000 |       |
| Dilutive effect of option plan                       | ** ** | **98,000**     |       | 186,000    |       | 278,000    |       |
| Common and potential shares outstanding-diluted      | ** ** | **19,128,000** |       | 19,828,000 |       | 20,794,000 |       |

 

## **Foreign Currency Translation**

The Company’ssales and marketing activities with Canadian dealers are denominated inCanadian currency with the U.S. dollar serving as the functional currency. TheCompany’s sales and marketing activities with European on-road ATV dealers anddistributors are denominated in the Euro with the Euro serving as thefunctional currency. Assets and liabilities denominated in Canadian currencyand the Euro are translated using the exchange rates in effect at the balancesheet date. Revenues and expenses are translated at the average foreignexchange rates in effect for the period. Exchange gains and losses relating tothe Canadian currency and Euro currency are reflected in the results ofoperations and as a component of other comprehensive income.

## **Comprehensive Income**

Comprehensiveincome represents net earnings adjusted for the unrealized gain or loss onderivative instruments, debt securities classified as available-for-sale andforeign currency translation adjustments and is shown in the consolidatedfinancial statements of stockholders’ equity.

## **Accounting Policy and Disclosure Changes**

In December 2004, theFASB issued SFAS  No. 123 (revised 2004),“Share-Based Payments” (“SFAS No. 123(R)”). SFAS No. 123 (R) required theexpensing of stock options in the Company’s financial statements beginningApril 1, 2006. The Company implemented SFAS No. 123(R) during the interimperiod ending June 30, 2006. The adoption of SFAS No. 123(R) resulted in acharge to fiscal year 2007 earnings of $0.08 per diluted share. However, thetotal expense recorded in future periods will depend on several variables,including the number of share-based awards granted, the number of grants thatultimately vest, and the fair value assigned to those awards.

In September 2006, theU.S. Securites and Exchange Commission staff issued Staff Accounting BulletinNo. 108 (SAB 108), Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements. SAB 108eliminates the diversity of practice regarding how public companies quantifyfinancial statement misstatements. It establishes 

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an approach thatrequires quantification of financial statement misstatements based on theeffects of the misstatements on each of the company’s financial statements andrelated financial statement disclosures. SAB 108 must be applied to annualfinancial statements for their first fiscal year ending after November 15,2006. The adoption of SAB 108 did not have a material impact on our financialcondition or results of operations.

In September 2006, theFinancial Accounting Board (FASB) issued Statement of Financial AccountingStandards No. 157, Fair Value Measurement (SFAS 157). This standard clarifiesthe principle that fair value should be based on the assumptions that marketparticipants would use when pricing an asset or liability. Additionally, itestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. SFAS 157 is effective for financial statements issuedfor the fiscal years beginning after November 15, 2007. We have not yetdetermined the impact that the implementation of SFAS 157 will have on ourresults of operations for financial condition.

In July 2006, the FASBissued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN48”), which clarifies the accounting for uncertainty in income taxes recognizedin a company’s financial statements in accordance with FASB Statement No. 109, “Accountingfor Income Taxes.” FIN 48 describes when an uncertain tax item should berecorded in the financial statements and for how much, provides guidance onrecording interest and penalties and accounting and reporting for income taxesin interim periods. FIN 48 is effective for the Company’s year beginning April1, 2007. The Company does not expect FIN 48 to have a material impact on theCompany’s financial position or results of operations.

In November 2004, theFASB issued SFAS No. 151, “Inventory Costs” (“SFAS 151”). The provisions ofthis statement become effective for the Company in fiscal 2007. SFAS 151 amendsthe existing guidance on the recognition of inventory costs to clarify theaccounting for abnormal amounts of idle expense, freight, handling costs, andwasted material (spoilage). Existing rules indicate that under somecircumstances, items such as idle facility expense, excessive spoilage, doublefreight, and rehandling costs may be so abnormal as to require treatment ascurrent period charges.  SFAS 151requires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. Theadoption of this Statement did not have a material impact on the valuation ofinventory or operating results.

In May2005, the FASB issued SFAS No. 154, “Account Changes and Error Corrections.” This new standard replaces APB Opinion 20, Accounting Changes, and FASB No. 3,Reporting Accounting Changes in Interim Financial Statements. Among otherchanges, SFAS No. 154 requires that a voluntary change in accounting principleto be applied retrospectively with all prior period financial statementspresented on a new accounting principle, unless it is impracticable to doso.  SFAS No. 154 also provides that (1) a change in method ofdepreciating or amortizing a long-lived non-financial asset be accounted for asa change in estimate (prospectively) that was effected by a change inaccounting principle, and (2) correction of errors in previously issuedfinancial statements should be termed a “restatement.”  The new standardis effective for accounting changes and correction of errors made in fiscalyears beginning after December 15, 2005. The adoption of the provisions ofSFAS No. 154 did not have a material impact on the consolidated financialstatements.

**Reclassification**

Certain 2006 and 2005 amounts have been reclassifiedto conform with the 2007 financial statement presentation. The reclassificationhad no effect of previously reported operating results.

# **B SHORT-TERM INVESTMENTS**

Short-terminvestments consist primarily of a diversified portfolio of municipal bonds,auction rate securities and money market funds and are classified as follows atMarch 31:
| ** **                             | ** ** | **2007**    | ** **     | **2006**  | ** ** |
|----------------------------------------|------------|-------------|----------------|-----------|------------|
| **Trading securities**                 | ** ** | **$**       | **38,707,000** |      | $          | 27,445,000 |   |
| **Available-for-sale debt securities** | ** ** | **353,000** |           | 2,373,000 |       |
|                                   | ** ** | **$**       | **39,060,000** |      | $          | 29,818,000 |   |

 

Tradingsecurities consists of $38,707,000 and $19,370,000  invested in various money market funds atMarch 31, 2007 and 2006, respectively, while the remainder of tradingsecurities and available-for-sale securities consists primarily of “A” rated orhigher municipal bond investments and auction rate securities. The amortizedcost and fair value of debt securities classified as available-for-sale was$350,000 and $353,000 at March 31, 2007 and $2,351,000 and $2,373,000, at March31, 2006. The unrealized gain on available-for-sale debt securities isreported, net of tax, as a separate component of shareholders’ equity. Thecontractual maturities of available-for-sale debt securities at March 31, 2007,are all within one year.

# **C INVENTORIES**

Inventoriesconsist of the following at March 31:
| ** **                           | ** ** | **2007**       | ** **     | **2006**   | ** ** |
|--------------------------------------|------------|----------------|----------------|------------|------------|
| **Raw materials and sub-assemblies** | ** ** | **$**          | **23,591,000** |       | $          | 27,214,000 |   |
| **Finished goods**                   | ** ** | **44,058,000** |           | 36,193,000 |       |
| **Parts, garments and accessories**  | ** ** | **30,875,000** |           | 28,882,000 |       |
| ** **                           | ** ** | **$**          | **98,524,000** |       | $          | 92,289,000 |   |

#  

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# **D ACCRUEDEXPENSES**

Accrued expensesconsist of the following at March 31:
| ** **       | ** ** | **2007**       | ** **     | **2006**   | ** ** |
|------------------|------------|----------------|----------------|------------|------------|
| **Marketing**    | ** ** | **$**          | **16,874,000** |       | $          | 14,388,000 |   |
| **Compensation** | ** ** | **9,044,000**  |           | 8,871,000  |       |
| **Warranties**   | ** ** | **17,974,000** |           | 14,203,000 |       |
| **Insurance**    | ** ** | **7,440,000**  |           | 4,446,000  |       |
| **Other**        | ** ** | **2,180,000**  |           | 1,867,000  |       |
| ** **       |       | **$**          | **53,512,000** |       | $          | 43,775,000 |   |

 

# **E ACQUISITION**

In July 2005, theCompany acquired a 100% interest in a European company that designs, engineers,manufactures and markets ATVs which utilize the Company’s components. TheCompany completed this acquisition to further expand its ATV model offeringsand strengthen its European presence. The Company invested $3,464,000, net ofcash acquired, to acquire a 100% interest resulting in an excess purchase priceover the estimated fair value of net assets was approximately $1,750,000. TheCompany has completed its evaluation of the purchase price and the allocationof the acquisition costs is as follows:
| Cash                           |   | $          | 2,102,000 |   |
|--------------------------------|--------|------------|-----------|--------|
| Accounts receivables           |   | 3,948,000  |      |
| Inventories                    |   | 6,566,000  |      |
| Other                          |   | 462,000    |      |
| Goodwill and other intangibles |   | 3,700,000  |      |
| Total assets acquired          |   | 16,778,000 |      |
| Total liabilities assumed      |   | 11,212,000 |      |
| Net assets acquired            |   | $          | 5,566,000 |   |

 

# **F FINANCING**

The Company has a$75,000,000 unsecured bank credit agreement for documentary and stand-byletters of credit and for working capital purposes. Total working capitalborrowings under the credit agreement were limited to $60,000,000 during thelast five months of the fiscal year. The credit agreement is due on demand and expiresJuly 27, 2008.  Interest on the workingcapital borrowings is payable monthly at alternative interest rates, at the Com­pany’selection. The credit agreement contains certain covenants. At March 31, 2007,there was $16,740,000 of issued letters of credit outstanding and no workingcapital borrowings outstanding. Of the issued letters of credit outstanding,$13,235,000 was issued to Suzuki Motor Corporation (Suzuki) for engine andservice parts purchases (see Note H). Outstanding letters of credit will berepaid over the following six months in accordance with the credit agreementand any such renewal.

# **G RETIREMENTSAVINGS PLAN**

The Company’s401(k) retirement savings plan covers substantially all eligible employees.Employees may contribute up to 50% of their compensation with the Companymatching 100% of the employee contributions, up to a maximum of 3% of theemployee’s compensation. The Company can elect to make additional contributionsat its discretion. Total Company matching contributions were $1,513,000,$1,522,000 and $1,448,000 in 2007, 2006 and 2005. There were no discretionarycontributions made during 2007, 2006 and 2005.

# **H RELATEDPARTY TRANSACTIONS**

The Companypurchases engines and service parts from Suzuki, owner of the Company’s Class Bcommon stock. Such purchases totaled $111,931,000,  $131,965,000, and $138,021,000 in 2007, 2006and 2005. The purchase price of the engines and service parts is determinedannually. The Company has an agreement with Suzuki for snowmobile enginepurchases to share the impact of fluctuations in the exchange rate between theU.S. dollar and the Japanese yen above and below a fixed range contained in theagreement. This agreement renews annually.

The Company is dependenton Suzuki for the near term supply of most of its engines and related serviceparts. An interruption of this supply could have a material adverse effect onthe Company’s operations. Certain raw materials and services are purchased fromvendors in which certain of the Company’s directors are officers or significantshareholders. In 2007, 2006 and 2005, these transactions aggregated $127,000,$2,580,000 and $2,678,000.

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# **I INCOMETAXES**

Income tax expenseconsists of the following for the years ended March 31:
| ** **   | ** ** | **2007**       | ** **     | **2006**   | ** ** | **2005**   | ** ** |
|--------------|------------|----------------|----------------|------------|------------|------------|------------|
| **Current**  |       |           |           |       |       |       |       |
| **Federal**  | ** ** | **$**          | **14,472,000** |       | $          | 11,017,000 |       | $ | 9,166,000 |   |
| **State**    | ** ** | **1,826,000**  |           | 478,000    |       | 1,117,000  |       |
| **Deferred** | ** ** | **(6,322,000** | **)**          | (1,055,000 | )          | 2,666,000  |       |
|         | ** ** | **$**          | **9,976,000**  |       | $          | 10,440,000 |       | $ | 12,949,000 |   |

 

The following is areconciliation of the Federal statutory income tax rate to the effective taxrate for the years ended March 31:

|                                 | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Statutory income tax rate**   | ** ** | **35.0** | **%**      | 35.0     | %          | 35.0     | %          |
| **State taxes**                 | ** ** | **2.7**  | ** ** | 1.3      |       | 1.8      |       |
| **Tax exempt interest**         | ** ** | **(0.4** | **)**      | (0.6     | )          | (0.7     | )          |
| **Foreign sales corporation**   | ** ** | **(3.5** | **)**      | (2.5     | )          | (3.2     | )          |
| **Other permanent differences** | ** ** | **(2.7** | **)**      | (2.7     | )          | (1.5     | )          |
| ** **                      | ** ** | **31.1** | **%**      | 30.5     | %          | 31.4     | %          |

 

The cumulative temporarydifferences between the tax bases of assets and liabilities and their carryingamounts for financial reporting purposes under the liability methods are asfollows at March 31:
| ** **                                   | ** ** | **2007**       | ** **     | **2006**   | ** ** |
|----------------------------------------------|------------|----------------|----------------|------------|------------|
| **Short-term deferred income tax assets**    | ** ** | ** **     | ** **     | ** ** | ** ** |
| **Accrued expenses**                         | ** ** | **$**          | **14,278,000** |       | $          | 8,065,000 |   |
| **Inventory capitalization and adjustments** | ** ** | **2,369,000**  |           | 2,412,000  |       |
| **Other**                                    | ** ** | **302,000**    |           | 301,000    |       |
| **Short-term deferred income tax liability** | ** ** | ** **     | ** **     | ** ** | ** ** |
| **Prepaid expenses and other**               | ** ** | **(2,088,000** | **)**          | (1,968,000 | )          |
| **Net short-term deferred tax asset**        | ** ** | **$**          | **14,861,000** |       | $          | 8,810,000 |   |
| **Long-term deferred income tax liability**  | ** ** | ** **     | ** **     | ** ** | ** ** |
| **Property and equipment**                   | ** ** | **$**          | **11,787,000** |       | $          | 11,469,000 |   |
| **Long-term deferred tax liability**         | ** ** | **$**          | **11,787,000** |       | $          | 11,469,000 |   |

 

# **J COMMITMENTSAND CONTINGENCIES**

## **Dealer Financing**

Finance companiesprovide certain of the Company’s dealers with floor plan financing. The Companyhas agreements with these finance companies to repurchase certain repossessedproducts sold to its dealers. At March 31, 2007, the Company was contingentlyliable under these agreements for a maximum repurchase amount of approximately$47,727,000.  The Company’s financialexposure under these agreements is limited to the difference between the amountpaid to the finance companies for repurchases and the amount received upon theresale of the repossessed product. Losses incurred under these agreementsduring the periods presented have not been material.

## **Litigation**

The Company issubject to legal proceedings and claims which arise in the ordinary course ofbusiness. Accidents involving personal injury and property damage occur in theuse of snowmobiles and ATVs. Claims have been made against the Company fromtime to time. It is the Company’s policy to vigorously defend against theseactions. The Company is not involved in any legal proceedings which it believeswill have the potential for a materially adverse impact on the Company’sbusiness or financial condition, results of operations or cash flows.

# **K SHAREHOLDERS’EQUITY**

## **Stock Option Plans**

The Company hasstock option plans that provide for incentive and non-qualified stock optionsto be granted to directors, officers and other key employees. The stock optionsgranted generally have a five to ten year life, vest over a period of one tothree years, and have an exercise price equal to the fair market value of thestock on the date of grant. At March 31, 2007, the Company had  251,942 shares of common stock available forgrant under the plans.

Transactionsunder the plans during each of the three years in the period ended March 31,are summarized as follows:
| ** **                        | ** ** | **Number of**    | ** ** | **Weighted**            | ** ** |
|-----------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **shares under** | ** ** | **average**             | ** ** |
| ** **                        | ** ** | **option**            | ** ** | **exercise price** | ** ** |
| Outstanding at April 1, 2004      |       | 1,128,778             |       | $                       | 15.72      |   |
| Granted                           |       | 274,000               |       | 27.60                   |       |
| Cancelled                         |       | (1,000                | )          | 12.00                   |       |
| Exercised                         |       | (115,762              | )          | 12.35                   |       |
| Outstanding at March 31, 2005     |       | 1,286,016             |       | 18.56                   |       |
| Granted                           |       | 338,500               |       | 21.69                   |       |
| Exercised                         |       | (56,167               | )          | 16.07                   |       |
| Outstanding at March 31, 2006     |       | 1,568,349             |       | 19.30                   |       |
| Granted                           |       | 306,000               |       | 17.81                   |       |
| Cancelled                         |       | (137,500              | )          | 22.70                   |       |
| Exercised                         |       | (70,817               | )          | 15.18                   |       |
| **Outstanding at March 31, 2007** | ** ** | **1,666,032**         | ** ** | **$**                   | **18.92**  |   |

 

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Options exercisable atMarch 31 are as follows:

|          | ** ** | **Number of  shares under  option** | ** ** | **Weighted  average  exercise price** | ** ** |
|----------|------------|-----------------------------------------------|------------|---------------------------------------|------------|
| 2005     |       | 762,189                                       |       | $                                     | 15.51      |   |
| 2006     |       | 1,013,522                                     |       | $                                     | 17.17      |   |
| **2007** | ** ** | **1,155,038**                                 | ** ** | **$**                                 | **18.26**  | ** ** |

 

The following tablessummarize information concerning currently outstanding and exercisable stockoptions at March 31, 2007:

**OptionsOutstanding**

| Range of  Exercise Prices | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-------------------------------------|------------|-------------------------|------------|---------------------------------------------------------|------------|----------------------------------------|------------|
| $6.11                               |       | 11,814                  |       | 1.4 years                                               |       | $                                      | 6.11       |   |
| 9.38 –13.33                    |       | 225,906                 |       | 2.2 years                                               |       | 11.04                                  |       |
| 15.33 –21.96                   |       | 1,189,312               |       | 7.0 years                                               |       | 18.81                                  |       |
| 25.45 –28.00                   |       | 239,000                 |       | 4.7 years                                               |       | 27.59                                  |       |
|                                |       | 1,666,032               |       |                                                    |       | $                                      | 18.92      |   |

 

**OptionsExercisable**

| Range of  Exercise Prices | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|
| $6.11                               |       | 11,814                  |       | $                                      | 6.11       |   |
| 9.38 –13.33                    |       | 225,906                 |       | 11.04                                  |       |
| 15.33 –21.96                   |       | 745,649                 |       | 18.48                                  |       |
| 25.45 –28.00                   |       | 171,669                 |       | 27.59                                  |       |
|                                |       | 1,155,038               |       | $                                      | 18.26      |   |

 

## **Class B Common Stock**

Suzuki owns alloutstanding shares of the Company’s Class B common stock. At the option ofSuzuki, the Class B common stock is convertible into an equal number of sharesof the Company’s common stock. The Class B shareholder is entitled to elect onemember of the Company’s Board of Directors but cannot vote for the election ofother directors of the Company. The Class B shareholder can vote on all other matterssubmitted to the common shareholders. The Class B common stock participatesequally with the common stock in all dividends and other distributions dulydeclared by the Company’s Board of Directors. The Class B common shares areconverted into an equal number of shares of common stock if: Suzuki owns lessthan 15% of the aggregate number of outstanding common and Class B commonshares; the Company becomes a non-surviving party due to a merger orrecapitalization; the Company sells substantially all of its assets; or Suzukitransfers its Class B common stock to any person.

Inaddition, the Company has a Stock Purchase Agreement with Suzuki that prohibitsthe purchase of additional shares of the Company’s common stock unless,following such purchase, Suzuki’s ownership is less than or equal to 32% of theaggregate outstanding shares of common and Class B common stock. The Companyhas the first right of refusal to purchase any shares Suzuki intends to sell.Suzuki has agreed not to compete in the manufacture of snowmobiles or relatedparts so long as it supplies engines to the Company or owns at least 10% of theaggregate common and Class B common shares outstanding.

## **Preferred Stock**

The Company’sBoard of Directors is authorized to issue 2,050,000 shares of $1.00 par valuepreferred stock in one or more series. The board can determine voting,conversion, dividend and redemption rights and other preferences of eachseries. No shares have been issued.

## **Shareholders’ Rights Plan**

In connection withthe adoption of a Shareholders’ Rights Plan, the Company created a Series BJunior Participating preferred stock. Under terms of the Company’s ShareholderRights Plan, upon the occurrence of certain events, registered holders ofcommon stock and Class B common stock are entitled to purchase one-hundredth ofa share of Series B Junior Participating preferred stock at a stated price, orto purchase either the Company’s common shares or common shares of an acquiringentity at half their market value. The Rights related to this plan expireSeptember 17, 2011.

## **Share Repurchase Authorization**

The Companyinvested $19,773,000, $14,931,000 and $25,329,000  during 2007, 2006 and 2005 to repurchase andcancel 1,134,800, 726,500 and 1,023,000 shares of common stock, pursuant to Board of Directors’ authorizations.Included in the 2007 repurchases are 615,000 shares of Class B stock fromSuzuki Motor Corporation, repurchased for $10,781,000 or $17.53 per share.  At March 31, 2007, authorization torepurchase $10,763,000 or approximately 552,000 shares remain outstanding.

# **L SegmentReporting**

Sales to foreigncustomers, located primarily in Canada, amounted to $228,008,000, $204,132,000and $171,075,000 in 2007, 2006 and 2005. The Company has identifiablelong-lived assets of approximately $2,869,000 and $1,100,000 located in Canadaand Europe at March 31, 2007 and 2006.

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

Board of Directors andShareholders of

ArcticCat Inc.

We have audited the accompanying consolidated balancesheets of Arctic Cat Inc. and subsidi­aries as of March 31, 2007 andMarch 31, 2006, and the related con­solidated statements of earnings,shareholders’ equity and cash flows for each of the three years in the periodended March 31, 2007.  Theseconsolidated financial statements are the responsi­bility of the Company’s man­agement.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material mis­statement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

As discussed in Note A to the consolidated financialstatements, the Company adopted Financial Accounting Standards Board StatementNo. 123(R), Share-Based Payment effective April 1, 2007.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Arctic Cat Inc. and subsidi­aries as of March 31,2007 and March 31, 2006 and the consolidated results of their operationsand their consolidated cash flows for each of the three years in the periodended March 31, 2007 in conformity with accounting principles generallyaccepted in the United States of America.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of Arctic Cat Inc.’s internal control over finan­cial reportingas of March 31, 2007, based on criteria established in *Inter­nal Control – Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), andour report dated June 11, 2007 expressed an unqualified opinion onmanagement’s assessment of internal control over financial reporting and anunquali­fied opinion on the effectiveness of Arctic Cat Inc. and subsidiariesinternal control over financial reporting.
| /s/ GRANT THORNTON LLP |   |
|------------------------|--------|
|                   |
| Minneapolis, Minnesota |
| June 11, 2007          |

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# **ARCTIC CAT INC. EXHIBIT INDEX**

| EXHIBIT NUMBER | ** ** | **METHOD OF FILING**                                                                                                                                                                                                                                                                                                                                 | ** ** | ** ** |
|----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **3(a)**       |       | Amended and  Restated Articles of Incorporation of the Company                                                                                                                                                                                                                                                                                       |       | (3)        |
|           |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **3(b)**       |       | Restated By-Laws  of the Company                                                                                                                                                                                                                                                                                                                     |       | (1)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **4(a)**       |       | Form of specimen  Common Stock Certificate                                                                                                                                                                                                                                                                                                           |       | (1)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **4(b)**       |       | Rights Agreement  by and between the Company and Wells Fargo Bank Minnesota, N.A., dated  September 17, 2001                                                                                                                                                                                                                                         |       | (4)        |
|           |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(a)**      |       | 1989 Stock  Option Plan, as amended                                                                                                                                                                                                                                                                                                                  |       | (3)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(b)**      |       | 1995 Stock Plan,  as amended                                                                                                                                                                                                                                                                                                                         |       | (3)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(c)**      |       | Purchase/Supply  Agreement dated as of March 1, 1985 between Suzuki Motor Co., Ltd. and the  Company, and related Agreement on Implementation of Warranty Provision.                                                                                                                                                                                 |       | (1)        |
|           |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(d)**      |       | Form of  Employment Agreement between the Company and each of its executive officers                                                                                                                                                                                                                                                                 |       | (1)        |
|           |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(e)**      |       | Floorplan  Repurchase Agreement dated July 13, 1984, between the Company and ITT  Commercial Finance Corp.                                                                                                                                                                                                                                           |       | (1)        |
|           |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(f)**      |       | Floorplan  Repurchase Agreement dated as of June 15, 1988, between the Company and ITT  Commercial Finance, a division of ITT Industries of Canada, Ltd.                                                                                                                                                                                             |       | (1)        |
|           |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(g)**      |       | Discretionary  Revolving Credit Facility, dated as of June 6, 1997, between the Company and  Wells Fargo Bank Minnesota, National Association.                                                                                                                                                                                                       |       | (3)        |
|           |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(h)**      |       | 2002 Stock Plan                                                                                                                                                                                                                                                                                                                                      |       | (5)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(i)**      |       | Form of  incentive stock option agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                                        |       | (7)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(j)**      |       | Form of  non-qualified stock option agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                                    |       | (7)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(k)**      |       | Form of Director  non-qualified stock option agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                           |       | (7)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(l)**      |       | Program  agreement, dated as of January 20, 2003, by and between Arctic Cat Sales Inc.  and Textron Financial Corporation (Confidential treatment pursuant to 17 CFR  Sections 200.80(b) and 240.246-2 has been granted for certain portions of  this exhibit. Such portions have been omitted herein and have been filed  separately with the SEC.) |       | (6)        |
|           |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **10(m)**      |       | Repurchase  Agreement, dated as of January 20, 2003, by and between Arctic Cat Sales Inc.  and Textron Financial Corporation.                                                                                                                                                                                                                        |       | (6)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **21**         |       | Subsidiaries of  the Registrant                                                                                                                                                                                                                                                                                                                      |       | (2)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **23**         |       | Consent of  Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                            |       | (2)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **31.1**       |       | Section 302  Certification of Chief Executive Officer                                                                                                                                                                                                                                                                                                |       | (2)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **31.2**       |       | Section 302  Certification of Chief Financial Officer                                                                                                                                                                                                                                                                                                |       | (2)        |
| ** **     |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **32.1**       |       | Certification of  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                                                                 |       | (2)        |
|           |       |                                                                                                                                                                                                                                                                                                                                                 |       |       |
| **32.2**       |       | Certification of  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                                                                 |       | (2)        |

 

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(1) Incorporatedherein by reference to the Company’s Form S-1 Registration Statement (FileNumber 33-34984).

(2) Filed withthis Form 10-K.

(3) Incorporatedherein by reference to the Company’s Annual Report on Form 10-K for the fiscalyear ended March 31, 1997.

(4) Incorporatedby reference to Exhibit 1 to the Company’s Registration on Form 8-A filed withthe SEC on September 20, 2001.

(5) Incorporated by reference to Exhibit99.1 to the Company’s Registration on Form S-8 filed with the SEC on September6, 2002.

(6)Incorporatedherein by reference to the Company’s Quarterly Report on Form 10-Q for thequarter ended December 31, 2003.

(7) Incorporatedherein by reference to the Company’s Annual Report on Form 10-K for the fiscalyear ended March 31, 2005.

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