**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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, 2008 or**                                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                            |
| **o**      | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | **For the Transition period  from                        to                        ** |

 

**Commission File Number: 0-18607**

 

**ARCTIC CAT INC.**

(Exact name of registrantas specified in its charter)

 

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

 

**601 Brooks Avenue South**

**Thief River Falls, Minnesota56701**

(Address of principalexecutive offices) (Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:**Common Stock, $.01 par value.**

 

**PreferredStock Purchase Rights.**

 

Securities registered pursuant to Section 12(g) of the Act:**None**

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act:

                Yes  o   No  x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act:

                Yes  o   No  x

 

Indicate by check mark whether the registrant (1) has filed allreports required by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days:

                Yes  x   No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K:   x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act)

Yes  o   No  x

 

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the Registrant’s most recently completed second fiscal quarter wasapproximately: $296,138,659.

 

At June 2, 2008, the Registrant had 11,967,485 shares of CommonStock and 6,102,000 shares of Class B Common Stock outstanding.

 

**Documents Incorporated byReference:**

# **Portions of the Registrant’s Proxy Statement for its AnnualMeeting Of Shareholders currently scheduled to be held on August 7, 2008 areincorporated by reference into Part iii of this Form 10-k, to the extentdescribed in such Part.**

# ** **

 

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# ** **

# **ARCTIC CAT INC.**

# **FORM 10-K**

# **TABLE OF CONTENTS**

# ** **

| ** **        | ** ** | **Description**                                                                                                     | ** ** | **Page Numbers** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| ** **        |       |                                                                                                                |       |                  |
| **PART I**   | ** ** | ** **                                                                                                          | ** ** | ** **            |
| ** **        | ** ** | ** **                                                                                                          | ** ** | ** **            |
| ****ITEM 1.****   |       | Business                                                                                                            |       | 3-8                   |
| **ITEM 1A.**      |       | Risk  Factors                                                                                                       |       | 9-10                  |
| **ITEM 1B.**      |       | Unresolved Staff  Comments                                                                                          |       | 10                    |
| ****ITEM 2.****   |       | Properties                                                                                                          |       | 10                    |
| ****ITEM 3.****   |       | Legal Proceedings                                                                                                   |       | 10                    |
| ****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                    |
| ** **        |       |                                                                                                                |       |                  |
| **PART IV**  | ** ** | ** **                                                                                                          | ** ** | ** **            |
| ** **        | ** ** | ** **                                                                                                          | ** ** | ** **            |
| ****ITEM 15.****  |       | Exhibits and  Financial Statement Schedules                                                                         |       | 22-23                 |
| ** **        |       | Signatures                                                                                                          |       | 24                    |
| ** **        |       | Consolidated Balance  Sheets                                                                                        |       | 25                    |
| ** **        |       | Consolidated  Statements of Operations                                                                              |       | 26                    |
| ** **        |       | Consolidated  Statements of Shareholders’ Equity                                                               |       | 27                    |
| ** **        |       | Consolidated  Statements of Cash Flows                                                                              |       | 28                    |
| ** **        |       | Notes to  Consolidated Financial Statements                                                                         |       | 29-37                 |
| ** **        |       | Report of  Independent Registered Public Accounting Firm                                                            |       | 38                    |
| ** **        |       | Exhibit Index                                                                                                  |       | 39                    |

 

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**PART I**

** **

**ITEM 1. BUSINESS**

** **

Arctic Cat Inc., a Minnesota corporation, (the “Company” or “Arctic Cat”),is based in Thief River Falls, Minnesota. The Company operates in a singleindustry segment and designs, engineers, manufactures and markets snowmobilesand all-terrain vehicles (ATVs) under the Arctic Catâbrand name, as well as related parts, garments and accessories. The Companymarkets its products through a network of independent dealers locatedthroughout the United States, Canada, and Europe and through distributors representingdealers in Europe, the Middle East, Asia and other international markets. TheArctic Cat brand name has existed for more than 45 years and is among the mostwidely recognized and respected names in the snowmobile industry. The Companytrades on the NASDAQ Global Select Market under the symbol ACAT.

 

**Industry Background**

** **

**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-wide snowmobilesales to retail customers in North America were approximately 130,000 units forthe 2008 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 reaching an initial peak of 535,000 unitsin 1986. From 1987 to 1991, the number of ATVs sold declined to a low ofapproximately 147,000 units. Industry wide sales were 637,000 units in theUnited States and 88,500 units in Canada in calendar 2007. Major competitors inthe industry include Honda, Yamaha, Kawasaki, BRP, Polaris and Suzuki.

 

**Products**

** **

**Snowmobiles–** The Company produces a full line of snowmobiles,consisting of 41 models, marketed under the Arctic Cat brand name, and designedto satisfy various market niches. The 2008 Arctic Cat models carry suggestedU.S. retail prices ranging from $5,499 to $12,699, excluding a youth modelwhich is sold at a suggested U.S. retail price of $2,249. Arctic Catsnowmobiles are sold in the United States, Canada, Scandinavia and other internationalmarkets.

 

TheCompany’s 2008 year snowmobile models are categorized as  Performance, Mountain, Crossover, Touring and Utility. The Company markets:Performance Arctic Cat models under the names F series and Jaguar ; Mountainmodels under the name M series; Crossover models under the name Crossfire;Touring models under the names Panther, and T series; and Utility models underthe name Bearcat. In addition, to encourage family involvement in snowmobiling,the Company offers a youth snowmobile marketed under the AC120 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 the 2007 model year, the first four-stroke engine designed specificallyfor a snowmobile.

 

Arctic Cat focuses on newproduct development in order to grow its market share and introduces at leastone new model every year. These new models are consistently the Company’s bestsellers in their respective category. In the 2008 model year, approximately 80percent of the Company’s snowmobile sales were from models or model variationsnot available three years earlier. Some recent examples of the success ofArctic Cat’s new products include the following:***American Snowmobiler*voted the 2008 TZ1 LXR the best touring sled for 2008, *Sno XMagazine* voted the 2008 TZ1 LXR the best touring sled ever,*Affinity Powersports Media*voted the 2008 Z1 Turbo Best of Class*, Snow Tech Magazine*  voted the 2007 Arctic Cat F8 the best ridingand handling sled, and *  Supertrax Magazine*  voted the 2007 Arctic Cat Jaguar the bestTwin Spar chassis sled.  Racers ridingArctic Cat snowmobiles won numerous events in the 2008 model year including theWinter X Games Snocross Gold Medal, The Alaskan Iron Dog Race, the WPSAPowersports Snowmobile Tour Pro Stock Points Championship, the USCC TripleCrown points championship, and both

 

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the Improved class andMod class King titles at the Jackson Hole Hillclimb.

 

Forthe last three fiscal years ended 2008, 2007 and 2006 snowmobiles accounted for26%, 32% and 32%, respectively, of the Company’s revenues.

 

**All-TerrainVehicles (ATVs) –** In December 1995, the Company introducedits first ATV. Since that time the Arctic Cat line has grown to 24 models. Featureslike fully independent front and rear suspensions, hydraulic disc brakes,hi-low range transmission, long travel suspension with high ground clearance,MRP 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 2008 Arctic Cat ATV models carry suggested U.S. retail pricesranging from $3,599 to $10,499, excluding youth models which are sold atsuggested U.S. retail price ranging from $1,799 to $2,299.

 

The Company introducedits new Prowler UTV into the utility ATV vehicle segment in 2006. The Prowlerutilizes the Company’s 650cc and 700cc engines, a rear cargo box, dual bucketseats as well as Arctic Cat’s renowned long travel, suspension and ridecharacteristics. In fiscal year 2008 the UTV line consisted of three modelswith retail prices of $9,499 to $10,999.

 

In 2007 Arctic Catintroduced the industry’s first diesel ATV, capable of using biodiesel fuelsand in 2008 the Company introduced the Thundercat 1000, the ATV with thelargest displacement in the industry.

 

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% interestin a European company that markets ATVs which utilize the Company’s base ATVmodels. The Company completed this acquisition to further expand its ATV modelofferings 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. In 2005, *ATV Illustrated* voted the Prowler the best new UTV for sportand utility purposes. In 2006, *All Terrain VehicleMagazine* awarded the Arctic Cat 250 the best entry level ATV and theArctic Cat TRV as the best value. *Farm Industry News*awarded the Arctic Cat 400 4X4 best ground clearance in class.  In 2007, ATV Magazine crowned the Arctic CatProwler XT the best trail recreational side-by-side. In 2008, *ATV Magazine*nominated the Thundercat as ATV of the Year and*All Terrain Vehicle Magazine* voted the Prowler XTX 700 as Best UTV in theIndustry. Also in 2008, *Affinity Powersports Media*voted the Thundercat “Best in Class”.

 

Forthe last three fiscal years ended 2008, 2007, and 2006 ATVs  accounted for 56%, 55%, and 54%,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, MRP Speedrack accessories, portable lights, utility bagsand 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 2008, 2007 and 2006 parts, garments andaccessories accounted for 18%, 13% and 14%, respectively, of the Company’srevenues.

 

**Manufacturing and Engineering**

** **

Arctic Cat snowmobiles and most ATVs are manufactured at the Company’sfacilities in Thief River Falls, Minnesota. The Company’s European subsidiary hasperformed a portion of the manufacturing of the road ready ATVs for theEuropean market. A Taiwanese company manufactures 50cc to 366cc ATVs for ArcticCat. The Company also has a facility in Bucyrus, Ohio which houses its parts,garments and accessories distribution operations. The Company has strategicallyidentified 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. 

 

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The Company completes the total assembly of most of its products at itsfacilities in Thief River Falls. Manufacturing operations include robotics aswell as digital and computer-automated equipment to speed production, reducecosts and improve the quality, fit and finish of every product. The Company believesthat most raw materials used in its manufacturing process and most componentparts, with the exception of engines are available from multiple alternativevendors on relatively short notice at competitive prices.

 

Suzuki MotorCorporation (“Suzuki”) has manufactured snowmobile engines and through fiscal2008 certain ATV engines for the Company pursuant to supply agreements whichare automatically renewed annually unless terminated.  During late fiscal 2005, the Company beganmanufacturing certain of its own designed ATV engines as part of a strategicfirst step in a new engine program.  TheCompany believes that having the capability to design and manufacture its ownATV engines will enable Arctic Cat to offer customers more choices, provideexcellent value, lower Japanese yen currency exposure and enhance its long-termcompetitive position.  In 2007, theCompany transitioned its engine manufacturing from the Thief River Fallsfacility to its new facility in St. Cloud, Minnesota.  Beginning in fiscal 2009, substantially allthe Company’s ATV’s will use engines that are produced from the Company’sengine facility or purchased separately or as part of the 50cc to 366cc unitsthe Company receives from a Taiwanese supplier.

 

The Company andSuzuki have enjoyed an excellent relationship since the Company’sinception.  Suzuki purchasedapproximately 31% of the Company’s then outstanding capital stock in July 1988,prior to the Company’s initial public offering in July of 1990, and iscurrently the Company’s largest shareholder with approximately 34% of theCompany’s outstanding capital stock.  IfSuzuki were ever to cease supplying snowmobile engines to the Company, such aninterruption could materially and adversely affect production and results ofoperations.  While notice of terminationof the supply agreement may be given annually, effective termination of supplywould take at least one model year and the Company believes it could take up totwo model years for the Company or a new engine supplier to be in a position tomanufacture the Company’s specially designed snowmobile engines.  As a consequence, the Company regularlyevaluates alternative snowmobile engine supply sources.

 

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 150 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 fiscal years ended 2008,2007, and 2006, the Company spent approximately $16,143,000, $17,756,000, and$17,067,000, respectively, on engineering, research and development. Inaddition, utilizing their particular expertise, the Company’s vendors regularlytest and apply new technologies to the design and production of componentparts.

 

**Sales and 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.

 

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 to 

 

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distributorsoutside North America are made in U.S. dollars and are supported to some extentby letters of credit.

 

TheCompany’s sales and marketing efforts are comprised of dealer and consumerpromotions, direct advertising and cooperative advertising  programs with its dealers. Each year, theCompany and its distributors conduct dealer shows in order to introduce theupcoming year’s models and to promote dealer orders. Marketing activities aredesigned to promote directly to consumers. Products are advertised by theCompany in consumer magazines and through other media. In addition, the Companyengages in extensive dealer cooperative advertising, on a local and nationallevel, whereby the Company and its dealers share advertising costs. Each seasonthe Company produces promotional films, product brochures, point of purchasedisplays, leaflets, posters and banners, and other promotional items for use bydealers. The Company also participates in consumer shows and rallies withdealers and sponsors independent racers who participate in snowmobile racesthroughout the world. In order for its dealers and distributors to remain pricecompetitive and to reduce retail inventories, the Company will from time totime make available to them rebate programs, discounts, or other incentives. Inorder to build brand loyalty the Company publishes and mails, during the year,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.

 

The Company is a member ofthe International Snowmobile Manufacturers Association (ISMA), a tradeassociation formed to promote safety in the manufacture and use of snowmobiles,among other things. The ISMA is currently made up of Arctic Cat, BRP, Yamaha,and Polaris. The ISMA members are also members of the Snowmobile Safety andCertification Committee (SSCC), which promulgated voluntary safety standardsfor snowmobiles. The SSCC standards, which require testing and evaluation by anindependent testing laboratory of each model category produced by participatingsnowmobile manufacturers, have been adopted by the Canadian Ministry ofTransport. Following the development of the SSCC standards, the U.S. ConsumerProducts Safety Commission denied a petition to develop a mandatory federalsafety standard for snowmobiles in light of the high degree of adherence to theSSCC standards in the United States. Since the Company’s inception, all of itsmodels have complied with the SSCC standards.

 

TheCompany is a member of the Specialty Vehicle Institute of America (SVIA), atrade association organized to foster and promote the safe and responsible useof ATVs manufactured and/or distributed throughout the United States. TheCompany is also a member of the Canadian Off-Highway Vehicle DistributorsCouncil (COHV), as well as the All-Terrain Vehicle Association Europe (ATVEA).

 

**Effects of Weather**

** **

While from time to timelack of snowfall in a particular region of the United States or Canada mayadversely affect snowmobile retail sales 

 

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within that region, theCompany works to mitigate this effect by taking snowmobile orders in the springfor the following winter season. In the past, weather conditions havematerially affected snowmobile sales and there is no assurance that weatherconditions will not materially affect the Company’s future sales ofsnowmobiles, ATV’s and parts, garments and accessories.

 

**Employees**

** **

At March 31, 2008,the Company had 1,630 employees including 380 salaried and 1,250 hourly andproduction personnel. The Company’s employees are not represented by a union orsubject to a collective bargaining agreement. The Company has never experienceda strike or work stoppage and considers its relations with its employeesto be excellent.

 

**Intellectual Property**

** **

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.

 

**Available Information**

** **

The Company is subject tothe reporting requirements of the Securities Exchange Act of 1934 and its rules andregulations (the “1934 Act”). The 1934 Act requires the Company to file reports,proxy statements and other information with the Securities and ExchangeCommission (the “SEC”). Copies of these reports, proxy statements and otherinformation can be read and copied at: SEC Public Reference Room, 100 F Street,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. TheSEC maintains 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,quarterly reports on Form 10-Q and current reports on Form 8-K andamendments to those reports, available on its website, free of charge, as soonas reasonably practicable after such report has been filed with or furnishedto, the SEC. The Company’s Code of Conduct, as well as any waivers from andamendments to the Code, are also posted on the Company’s website.

 

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** **

**EXECUTIVE OFFICERS OF REGISTRANT**

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                                               |
|-----------------------|------------|---------|------------|----------------------------------------------------------------------------|
| Christopher A. Twomey |       | 60      |       | Chairman of the Board  of Directors, President and Chief Executive Officer |
| Timothy C. Delmore    |       | 54      |       | Chief Financial Officer  and Corporate Secretary                           |
| Terry J. Blount       |       | 65      |       | Vice President – Human  Resources                                     |
| Ronald G. Ray         |       | 59      |       | Vice President –  Operations                                          |
| Roger H. Skime        |       | 65      |       | Vice President –  Research & Development                     |
| Ole E. Tweet          |       | 61      |       | Vice President –  General Manager, ATV                                |
| Mary  Ellen Walker    |       | 53      |       | General  Manager, Parts, Garments and Accessories and Sales                |

 

**Mr. Twomey**has been Chairman of the Company since 2003, President and Chief ExecutiveOfficer of the Company since 1986 and a director since 1987. Mr. Twomey isalso currently serving as a director of The Toro Company.

 

**Mr. Delmore**has been Chief Financial Officer of the Company since 1986 and has beenCorporate Secretary of the Company since 1989. Mr. Delmore, a CPA withseven years of prior public accounting experience, joined the Company in 1985as Controller.

 

**Mr. Blount**has been Vice President – Human Resources since 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 Resourcesfor a Minnesota-based company.

 

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

 

**Mr. Skime**has been 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**has been General Manager – ATVs since 2006 and prior to that was Vice President– New Product Development since 1992 and Vice President – Marketing since itsinception in 1983 to 1992. Mr. Tweet has been employed either in thesnowmobile or ATV industry for over 30 years.

 

**Ms. Walker**has beenGeneral Manager, Parts, Garments and Accessories and Sales since November 2007.Prior to joining the Company, Ms. Walker had been with a Minnesota-basedcompany, 3M for 26 years, most recently serving as General Manager of BuildingSafety Solutions.

 

8

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** **

**ITEM 1A. RISK FACTORS**

 

Thefollowing are significant factors known to the Company that could adverselyaffect the Company’s business, financial condition, or operating results, aswell as adversely affect the value of an investment in the Company’s commonstock. These risks could cause Arctic Cat’s actual results to differ materiallyfrom its 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 are subject to extensive federal andstate safety, environmental and other government regulation that may requirethe Company to incur expenses or modify product offerings in order to maintaincompliance with the actions of regulators.**

 

TheCompany’s products are subject to extensive laws and regulations relating tosafety, environmental and other regulations promulgated by the U.S. andCanadian federal governments and individual states and provinces as well asinternational regulatory authorities. Although the Company believes that its snowmobiles,and ATVs have always complied with applicable vehicle safety and emissionsstandards and related regulations, there can be no assurance that futureregulations will not require additional safety standards or emission reductionsthat would require additional expenses and/or modification of product offeringsin order to maintain such compliance. Although the Company is unable to predictthe ultimate 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 adverse determination in any material productliability claim against the Company could adversely affect its operatingresults or financial condition.**

 

Accidentsinvolving personal injury and property damage occur in the use of snowmobilesand ATVs. Claims have been made against the Company from time to time. It isthe Company’s policy to vigorously defend against these actions. The Companypresently maintains product liability insurance on a “per occurrence” basis(with coverage 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 $10,000,000 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/or replacement with respect to productwarranty claims or product recalls could have a material adverse impact on theresults of operations.**

 

TheCompany provides a limited warranty for a period of six months for its ATVs andone year for its snowmobiles. The Company may provide longer warranties incertain geographical markets as determined by local regulations and marketconditions. Although the Company employs quality control procedures, sometimesa product is distributed which needs repair or replacement. The Company’sstandard warranties require the Company or its dealers to repair or replacedefective products during such warranty periods at no cost to the consumer.Historically, product recalls have been administered through the Company’sdealers and distributors and have not had a material effect on the Company’sbusiness. See Note A of Notes to Consolidated Financial Statements in thisannual report.

 

**Changing weather conditions may reduce demand for certainArctic Cat products and negatively impact net sales.**

 

Lackof snowfall in any year in any particular region of the United States or Canadamay adversely affect snowmobile retail sales and related parts, garments andaccessories sales in that region. There is no assurance that weather conditionswill not materially affect the Company’s future sales of snowmobiles, ATVs, andparts, garments and accessories.

 

**The Company faces intense competition in all product lines,from competitors that have greater financial and marketing resources. Failureto compete effectively against competitors would negatively impact the Company’sbusiness and operating results.**

 

Thesnowmobile and ATV markets in the United States and Canada are highlycompetitive. Competition in such markets is based upon a number of factors,including performance, ride, suspension, innovation, technology, styling, fitand finish, brand loyalty, reliability, durability, price and distribution. Atthe dealer  level, competition is basedon a number of factors including sales and marketing support programs (such assales incentives and cooperative advertising). The Company’s competitors aremore diversified and have financial and marketing resources which aresubstantially greater than those of the Company. In addition, the Company’sproducts compete with many other recreational products for the discretionaryspending ofconsumers andto a lesser extent, with other vehicles designed for utility applications. Ifthe Company is not able to effectively compete 

 

9

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inthis environment, its business and operating results will be negativelyimpacted.

 

**Termination or interruption of supply arrangements could havea material adverse effect on the Company’s business or results of operations.**

 

SuzukiMotor Corporation (“Suzuki”) has manufactured snowmobile engines and throughfiscal 2008 certain ATV engines for the Company pursuant to supply agreementswhich are automatically renewed annually unless terminated.  During late fiscal 2005, the Company beganmanufacturing certain of its own designed ATV engines as part of a strategicfirst step in a new engine program.  TheCompany believes that having the capability to design and manufacture its ownATV engines will enable Arctic Cat to offer customers more choices, provideexcellent value, lower Japanese yen currency exposure and enhance its long-termcompetitive position.  In 2007, theCompany transitioned its engine manufacturing from the Thief River Falls facilityto its new facility in St. Cloud, Minnesota. Beginning in fiscal 2009, substantially all the Company’s ATV’s will useengines that are produced from the Company’s engine facility or purchasedseparately or as part of the 50cc to 366cc units the Company receives from aTaiwanese supplier.  The Company andSuzuki have enjoyed an excellent relationship since the Company’sinception.  Suzuki purchasedapproximately 31% of the Company’s then outstanding capital stock in July 1988,prior to the Company’s initial public offering in July of 1990, and iscurrently the Company’s largest shareholder with approximately 34% of theCompany’s outstanding capital stock.  IfSuzuki were ever to cease supplying snowmobile engines to the Company, such aninterruption could materially and adversely affect production and results ofoperations.  While notice of terminationof the supply agreement may be given annually, effective termination of supplywould take at least one model year and the Company believes it could take up totwo model years for the Company or a new engine supplier to be in a position tomanufacture the Company’s specially designed snowmobile engines.  As a consequence, the Company regularlyevaluates alternative snowmobile engine supply sources.  While the Company anticipates no significantdifficulties in obtaining substitute supply arrangements for other rawmaterials or components for which it relies upon limited sources of supply,there can be no assurance that alternate supply arrangements will be made onsatisfactory terms.

 

**General Economic Conditions and Certain Other ExternalFactors**

 

Companieswithin the snowmobile and ATV industry are subject to volatility in operatingresults due to external factors such as general economic conditions andpolitical changes. Specific factors affecting the industry include:

 

·                  Overallconsumer confidence and the level of discretionary consumer spending;

 

·                  Interestrates and related higher dealer floorplan costs;

 

·                  Adverseimpact on margins of increases in raw material and transportation costs whichcompanies are unable to pass on to dealers without negatively affecting sales;and

 

·                  Fluctuationin foreign currency exchange rates.

** **

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

 

Notapplicable.

 

# **ITEM 2. PROPERTIES**

#  

Thefollowing sets forth the Company’s material property holdings as of March 31,2008.

 
| ** **                    | ** ** | ** **                             | ** ** | **Owned or** | ** ** | ** **      | ** ** |
|-------------------------------|------------|----------------------------------------|------------|-------------------|------------|-----------------|------------|
| **Location**                  | ** ** | **Facility Type / Use** | ** ** | **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          |       |
| 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          |       |
| Plymouth,  Minnesota          |       | Corporate  Office                      |       | Leased            |       | 11,420          |       |

 

# **ITEM 3. LEGAL PROCEEDINGS**

#  

Accidentsinvolving personal injury and property damage occur in the use of snowmobilesand ATVs. Claims have been made against the Company from time to time. It isthe Company’s policy to vigorously defend against these actions. The Company isnot involved in any legal proceedings which it believes will have the potentialfor a materially adverse impact on the Company’s business or financialcondition.

 

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 theaggregate, with a $10,000,000 self-insured retention. The Companybelieves such insurance is adequate.

 

10

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

#  

# No matters weresubmitted to the shareholders during the fourth quarter of fiscal 2008.

 

11

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**PART II**

#  

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

 

TheCompany’s common stock is traded on The NASDAQ Global Select Market under theNASDAQ symbol “ACAT”. Quotations below represent the high and low sale pricesas reported by NASDAQ. The Company’s stock began trading on NASDAQ on June 26,1990.

 
| **Years ended March 31,** | ** ** | **2008** | ** ** | **2007**   | ** ** |
|------------------------------------------|------------|----------|------------|------------|------------|
| **Quarterly Prices**                | ** ** | **High** | ** ** | **Low**    | ** ** | **High** | ** ** | **Low** | ** ** |
| **First Quarter**                        | ** ** | **$**    | **20.77**  | ** ** | **$**      | **17.69** | ** ** | $ | 24.14 |   | $ | 16.56 |   |
| **Second Quarter**                       | ** ** | **$**    | **20.77**  | ** ** | **$**      | **15.50** | ** ** | $ | 19.94 |   | $ | 15.52 |   |
| **Third Quarter**                        | ** ** | **$**    | **17.95**  | ** ** | **$**      | **10.54** | ** ** | $ | 18.87 |   | $ | 16.11 |   |
| **Fourth Quarter**                       | ** ** | **$**    | **12.44**  | ** ** | **$**      | **6.81** | ** ** | $ | 19.99 |   | $ | 16.27 |   |

 

Asof June 2, 2008, the Company had approximately 386 stockholders of record,including the nominee of Depository Trust Company which held 11,244,503 sharesof common stock.

 

**Cash Dividends Paid**

 

CashDividends are declared quarterly and have been paid since 1995.

 
| **Quarter**    | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| 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 |   |

 

**Company Purchases of Company Equity Securities**

 

Thefollowing table presents the total number of shares repurchased during thefourth quarter of fiscal 2008 by fiscal month, the average price paid pershare, the number of shares that were purchased as part of a publicly announcedrepurchase plan, and the approximate dollar value of shares that may yet bepurchased pursuant to the Company’s stock repurchase program as of the end offiscal 2008:

 
| **Period**                                           | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs(1)** | ** ** | **Maximum Number  of Shares that May  Yet be Purchased  Under the Plans  or Programs** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1, 2008 – January 31,  2008   |       | 0                                                    |       | $                                                | —     |                                                                                                                                | 0          |                                                                                                                                | 1,081,165  | (2) |
| February 1, 2008 – February 29,  2008 |       | 0                                                    |       | $                                                | —     |                                                                                                                                | 0          |                                                                                                                                | 1,322,854  | (2) |
| March 1, 2008 – March 31, 2008        |       | 0                                                    |       | $                                                | —     |                                                                                                                                | 0          |                                                                                                                                | 1,371,848  | (2) |
| Total                                                |       | 0                                                    |       | $                                                | —     |                                                                                                                                | 0          |                                                                                                                                | 1,371,848  | (2) |

 

----

(1)           The Company has in the past maintainedpublicly announced stock repurchase programs which have been approved by theBoard of Directors. On October 26, 2006, the Company announced that theBoard of Directors approved a $20 million repurchase program and on January 4,2008, the Company announced that the Board approved an additional $10 millionstock repurchase program. Pricing under this program has been delegated tomanagement. There is no expiration date for this program.

 

(2)           Number of Shares purchasable at closing priceof the Company’s common stock on the last trading day of the month.

 

TheCompany purchases Company common stock primarily to offset the dilution createdby employee stock option programs and because the Board of Directors believesinvestment in the Company’s common stock is an excellent use of its excesscash.

 

TheCompany has executed the Company stock purchases in accordance with Rule 10b-18of the Securities Exchange Act of 1934. There have been no other purchases ofthe Company’s common stock.

 

12

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**Item 6. Selected Financial Data**

 
| **(In thousands, except per share amounts)** | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Years ended March 31,**                              | ** ** | **2008**    | ** **  | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
| **INCOME STATEMENT DATA:**                                            |       |        |        |       |       |       |       |       |       |       |       |
| **Net sales**                                                         | ** ** | **$**       | **621,568** |       | $          | 782,431    |       | $          | 732,794    |       | $          | 689,145 |   | $ | 649,617 |   |
| **Cost of goods sold**                                                | ** ** | **511,139** |        | 640,637    |       | 596,284    |       | 553,365    |       | 510,445    |       |
| **Gross profit**                                                      | ** ** | **110,429** |        | 141,794    |       | 136,510    |       | 135,780    |       | 139,172    |       |
| **Selling, general and administrative  expenses**                     | ** ** | **119,142** |        | 109,861    |       | 103,775    |       | 95,745     |       | 95,511     |       |
| **Operating profit (loss)**                                           | ** ** | **(8,713**  | **)**       | 31,933     |       | 32,735     |       | 40,035     |       | 43,661     |       |
| **Interest income**                                                   | ** ** | **632**     | ** **  | 1,139      |       | 1,556      |       | 1,213      |       | 993        |       |
| **Interest expense**                                                  | ** ** | **(1,066**  | **)**       | (1,026     | )          | (105       | )          | —     |       | —     |       |
| **Earnings before income taxes**                                      | ** ** | **(9,147**  | **)**       | 32,046     |       | 34,186     |       | 41,248     |       | 44,654     |       |
| **Income tax expense (benefit)**                                      | ** ** | **(5,888**  | **)**       | 9,976      |       | 10,440     |       | 12,949     |       | 14,289     |       |
| **Net earnings (loss)**                                               | ** ** | **$**       | **(3,259**  | **)**      | $          | 22,070     |       | $          | 23,746     |       | $          | 28,299 |   | $ | 30,365 |   |
| **Net earnings (loss) per share**                                     |       |        | ** **  |       |       |       |       |       |       |       |       |
| **Basic**                                                             | ** ** | **$**       | **(0.18**   | **)**      | $          | 1.16       |       | $          | 1.21       |       | $          | 1.38 |   | $ | 1.42 |   |
| **Diluted**                                                           | ** ** | **$**       | **(0.18**   | **)**      | $          | 1.15       |       | $          | 1.20       |       | $          | 1.36 |   | $ | 1.40 |   |
| **Cash dividends per share**                                          | ** ** | **$**       | **0.28**    | ** ** | $          | 0.28       |       | $          | 0.28       |       | $          | 0.28 |   | $ | 0.26 |   |
| **Weighted average shares outstanding**                               |       |        |        |       |       |       |       |       |       |       |       |
| **Basic**                                                             | ** ** | **18,137**  |        | 19,030     |       | 19,642     |       | 20,516     |       | 21,424     |       |
| **Diluted**                                                           | ** ** | **18,137**  |        | 19,128     |       | 19,828     |       | 20,794     |       | 21,730     |       |

 
| **As of  March 31,**               | ** ** | **2008**    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|-------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **BALANCE SHEET DATA**  (In thousands): |       |        |       |     |       |     |       |     |       |     |       |
| **Cash and short-term investments**     | ** ** | **$**       | **35,063** |     | $          | 75,277   |       | $        | 69,893     |     | $          | 88,394 |   | $ | 106,440 |   |
| **Working capital**                     | ** ** | **113,274** |       | 110,382  |       | 108,348  |       | 123,069  |       | 128,036  |       |
| **Total assets**                        | ** ** | **305,898** |       | 326,204  |       | 311,236  |       | 291,733  |       | 280,586  |       |
| **Long-term debt**                      |       | —      |       | —   |       | —   |       | —   |       | —   |       |
| **Shareholders’ equity**           | ** ** | **180,862** |       | 192,221  |       | 189,365  |       | 185,510  |       | 185,953  |       |
|                                         |            |             |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

13

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#  

# **QUARTERLY FINANCIAL DATA**(unaudited)

 
| **(In thousands, except per share amounts)** | ** **  | **Total Year** | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|-----------------------------------------------------------------------|-------------|---------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|
| **Net Sales**                                                         |        |                |       |                   |       |                    |       |                   |       |                    |       |
| **2008**                                                              | ** **  | **$621,568**        | ** ** | **$87,862**            | ** ** | **$205,210**            | ** ** | **$159,595**           | ** ** | **$168,901**            | ** ** |
| 2007                                                                  |        | 782,431             |       | 96,418                 |       | 285,325                 |       | 228,114                |       | 172,574                 |       |
| 2006                                                                  |        | 732,794             |       | 107,924                |       | 276,270                 |       | 195,301                |       | 153,299                 |       |
| **Gross Profit**                                                      |        |                |       |                   |       |                    |       |                   |       |                    |       |
| **2008**                                                              | ** **  | **$110,429**        | ** ** | **$12,818**            | ** ** | **$54,179**             | ** ** | **$18,156**            | ** ** | **$25,276**             | ** ** |
| 2007                                                                  |        | 141,794             |       | 16,281                 |       | 59,609                  |       | 39,779                 |       | 26,125                  |       |
| 2006                                                                  |        | 136,510             |       | 22,280                 |       | 55,082                  |       | 36,072                 |       | 23,076                  |       |
| **Net Earnings (Loss)**                                               |        |                |       |                   |       |                    |       |                   |       |                    |       |
| **2008**                                                              | ** **  | **$(3,259**         | **)**      | **$(7,155**            | **)**      | **$13,944**             | ** ** | **$(10,472**           | **)**      | **$424**                | ** ** |
| 2007                                                                  |        | 22,070              |       | (4,532                 | )          | 19,976                  |       | 8,181                  |       | (1,555                  | )          |
| 2006                                                                  |        | 23,746              |       | 448                    |       | 19,217                  |       | 4,673                  |       | (592                    | )          |
| **Net Earnings (Loss) Per Share**                                     |        |                |       |                   |       |                    |       |                   |       |                    |       |
| **2008**                                                              | **Basic**   | ** **          | **$(0.18** | **)**                  | **$(0.39** | **)**                   | **$0.77**  | ** **             | **$(0.58** | **)**                   | **$0.02**  | ** ** |
| ** **                                                            | **Diluted** | ** **          | **(0.18**  | **)**                  | **(0.39**  | **)**                   | **0.76**   | ** **             | **(0.58**  | **)**                   | **0.02**   | ** ** |
| 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      | ) |

 

14

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# **ITEM 7.****          ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

#  

## **Executive Level Overview**

##  

Fiscal2008 net sales decreased 21% to $621.6 million from $782.4 million in fiscal2007. The fiscal 2008 net loss was $3.3 million or $0.18  per diluted share compared to net earnings of$22.1 million or $1.15 per diluted share in fiscal 2007. The decrease in netearnings  was mainly due to decreasedsales of ATVs and snowmobiles caused by challenging retail market conditionsfor ATV sales and the planned reduction of fiscal 2008 snowmobile production toalign inventory with retail demand. During the year the Company repurchasednearly 624,000 shares of the common stock and ended the fiscal year with $35million in cash and short-term investments.

 

TheCompany’s product lines consist of ATVs, snowmobiles and parts, garments andaccessories.

 

ATVsales decreased 19% in fiscal 2008 to $350.3 million from $431.5 million infiscal 2007. ATV net sales first surpassed snowmobile net sales in fiscal 2004and are the Company’s largest product line, comprising over 56% of net sales infiscal 2008.Snowmobilesales decreased 34% in fiscal 2008 to $161.9 million from $247.0 million infiscal 2007 primarily due to the planned reduction in snowmobile production toalign dealer inventory with retail demand. Snowmobiles comprised 26% of theCompany’s net sales in fiscal 2008. Parts, garments and accessory salesincreased 5% in fiscal 2008 to $109.4 million from $103.9 million in fiscal2007 driven primarily by snowmobile parts and accessories.  Parts, garments and accessory sales were 18%of the Company’s net sales in fiscal 2008. The following discussions should beread in conjunction with the consolidated financial statements and notesthereto included elsewhere in this annual report.

 

## Resultsof Operations

##  

**Fiscal 2008 vs. Fiscal 2007****–**During fiscal 2008 net sales decreased 21% to $621,568,000 from $782,431,000 infiscal 2007. ATV unit volume decreased 25%, snowmobile unit volume decreased37% and sales of parts, garments and accessories increased 5% or $5,489,000.ATV unit volume decreased primarily due to declining industry wide ATV retailsales. Snowmobile unit volume decreases were largely due to the Company’splanned 30% reduction in fiscal 2008 snowmobile production to align dealerinventory with retail demand.

 

Grossprofit decreased 22% to $110,429,000 in 2008 from $141,794,000 in 2007. Thegross profit percentage for fiscal 2008 decreased to 17.8% versus 18.1% in2007. The decrease in the 2008 gross profit percentage was mainly due toadditional Canadian sales incentives to help compensate for the strongerCanadian dollar as well as lower sales volumes.

 

Selling,general and administrative expenses increased 8% to $119,142,000  in 2008 from $109,861,000 in 2007. Selling,general and administrative costs increased primarily due to increased Canadiancurrency hedge costs. As a percent of net sales, operating expenses were 19.2%in 2008 compared with 14.0% in 2007.

 

Operatingprofit (loss) decreased 127.3% to $(8,713,000) in 2008 from $31,933,000 in2007. As a percent of net sales, operating profit (loss) were (1.4%) in 2008compared to 4.1% in 2007. The decrease in operating profit is attributable todecreased gross profit and increased operating expenses.

 

Interestincome decreased 44.5% to $632,000 in fiscal 2008 from $1,139,000 in fiscal2007. Interest expense increased 3.9% to $1,066,000 in fiscal 2008 from$1,026,000 in fiscal 2007. Interest income was primarily affected by the highercash levels at the beginning of our fiscal year compared to last year, andlower cash balances during the third and fourth quarters of fiscal 2008 dueprimarily to higher working capital needs.

 

Thenet loss was $3,259,000 or $0.18 per diluted share versus net earnings of$22,070,000 or $1.15 per diluted share for fiscal 2007. Net earnings (loss) asa percent of net sales were( 0.5%) and 2.8% in 2008 and 2007, respectively. Thedecrease in net earnings (loss) is attributable to decreased sales andincreased operating expenses.

 

**Fiscal 2007 vs. Fiscal 2006****–**During fiscal 2007 net sales increased 6.8% to $782,431,000 from $732,794,000in fiscal 2006. ATV unit volume decreased 1.8%, snowmobile unit volumedecreased 4.9% and dollar sales of parts, garments and accessories increased$4,101,000. The Company believes the continued increase in ATV net sales is dueto higher end product offerings led by the Prowler UTV. Snowmobile unit volumedecreased because of lower dealer orders related to less than normal snowfallsduring the prior winter season 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.

 

15

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## **Critical Accounting Policies**

##  

Thepreparation of the consolidated financial statements in accordance withaccounting principles generally accepted in the United States requiresmanagement to make certain estimates and assumptions that affect the amount ofreported assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and revenuesand expenses during the periods reported. Actual results may differ from thoseestimates. The Company reviewed the development and selection of the criticalaccounting policies and believes the following are the most critical accountingpolicies that could have an effect on the Company’s reported results. Thesecritical accounting policies and estimates have been reviewed with the auditcommittee of the Board of Directors.

 

**Revenue Recognition –** The Company recognizes revenue and providesfor estimated marketing and sales incentive costs when products are shipped todealers and distributors pursuant to their order, the price is fixed andcollection is reasonably assured. The Company has agreements with financecompanies to repurchase products repossessed up to certain limits. The Company’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, the Company has not incurred material losses as aresult of repurchases nor has it provided a financial reserve for repurchases.Adverse changes in retail sales could cause this situation to change.

 

**Marketing and Sales Incentive Costs –** The Company provides for various marketingand sales incentive costs which are offered to its dealers and consumers at thelater of when the revenue is recognized or when the marketing and salesincentive program is approved and communicated. Examples of these costsinclude: dealer and consumer rebates, dealer floorplan financing assistance andother incentive and promotion programs. Adverse market conditions resulting inlower than expected retail sales or the matching of competitor programs couldcause accrued marketing and incentive costs to materially increase if the Company authorizes and communicates newprograms to its dealers. The Company estimates marketing and salesincentive costs based on expected usage and historical experience. The relatedmarketing and sales incentive costs accrual is included in accrued marketing inthe Company’s balance sheet. To the extent current experience differs withprevious estimates the accrued liability for marketing and sales incentives isadjusted accordingly.

 

**Product Warranties –** The Company generally provides a limited warranty to the owner ofsnowmobiles for twelve months from the date of consumer registration and forsix months on ATVs. The Company provides for estimated warranty costs at thetime of sale based on historical rates and trends and makes subsequentadjustments to their estimate as actual claims become known or the amounts aredeterminable. Adverse changes in actual warranty costs compared to the Company’sinitial estimates could cause accrued warranty to materially change.

 

**Product Liability and Litigation –** The Company is subject to product liabilityclaims and other litigation in the normal course of business. Arctic Catinsures for product liability claims although it retains a modest self insuredretention accrual within the balance sheet caption Insurance. The estimated costsresulting from any losses over insured amounts are charged to operatingexpenses when it is probable a loss has been incurred and the amount of theloss 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**

##  

TheCompany recognizes stock based compensation based on certain assumption inputswithin the Black-Scholes Model. These assumption inputs are used to determinean estimated 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**

##  

Theseasonality of the Company’s snowmobile production cycle and the lead timebetween the commencement of snowmobile and ATV production in the early springand commencement 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.

 

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

##  

Cashand short-term investments decreased to $35,063,000 at March 31, 2008 from$75,277,000 at March 31, 2007 because of the fiscal 2008 net loss andincreased inventories. The Company’s cash balances traditionally peak early inthe fourth quarter and then decrease as working capital requirements increasewhen the

 

16

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Company’ssnowmobile and spring ATV production cyclesbegin. The Company’s investment objectives are first, safety ofprincipal and second, rate of return.

 

## **Financing Arrangements and Cash Flows**

##  

TheCompany has a $75,000,000 unsecured bank credit agreement for the documentaryand stand-by letters of credit and for working capital purposes. Total workingcapital borrowings under the credit agreement are limited to $60,000,000 duringthe last five months of the fiscal year. The total letters of credit issued at March 31,2008 were $7,367,000, of which $5,746,000 was issued to Suzuki for engine andservice 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 $45,222,000 at March 31,2008. 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.

 

In2008, the Company invested $15,466,000 in capital expenditures. The Companyexpects that capital expenditures, will increase to approximately $27,000,000in fiscal 2009. Since 1996, the Company has repurchased over 11 million sharesof common stock. There is approximately $10,000,000 remaining on the January 2008repurchase 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**

##  

Thefollowing table summarizes the Company’s significant future contractual obligationsat March 31, 2008 (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      |       | $                                        | 1.0        |   | $ | 0.1 |   | $ | 0.5 |   | $ | 0.4 |   | 0 |   |
| Purchase Obligations(1)          |       | 116.8                                    |       | 116.8 |   | 0 |   | 0 |   | 0 |   |
| Total Contractual Obligations    |       | $                                        | 117.8      |   | $ | 116.9 |   | $ | 0.5 |   | $ | 0.4 |   | 0 |   |

 

----

(1)   TheCompany has outstanding purchase obligations with suppliers and vendors   at March 31, 2008 for raw materials andother supplies as part of the normal course of business.

 

## **Forward-Looking Statements**

##  

ThePrivate Securities Litigation Reform Act of 1995 provides a safe harbor forcertain forward-looking statements. This annual report on Form 10-K, aswell as the Company’s Annual Report and future filings with the Securities andExchange Commission, the Company’s press releases and oral statements made withthe approval of an authorized executive officer, contain forward-lookingstatements that reflect the Company’s current views with respect to futureevents and financial performance. These forward-looking statements are subjectto certain risks and uncertainties that could cause actual results to differmaterially from historical results or those anticipated. The words “aim,” “believe,”“expect,” “anticipate,” “intend,” “estimate” and other expressions thatindicate future events and trends identify forward-looking statements. Actualfuture results and trends may differ materially from historical results orthose anticipated depending on a variety of factors, including, but not limitedto the risk factors described in Item 1A of this annual report. The Companydoes not undertake any obligation to publicly update or revise anyforward-looking statement, whether as a result of new information, futureevents or otherwise.

 

17

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

# ** **

**Inflation, Foreign Exchange Ratesand Interest Rates**

 

Inflationhistorically, has not significantly impacted on the Company’s business. TheCompany generally has been able to offset the impact of increasing coststhrough a combination of productivity gains and product sales price increases.

 

Duringfiscal 2008, approximately 15% of the Company’s cost of sales was purchasedfrom Japanese yen denominated suppliers. The majority of these purchases weremade from Suzuki, who supplies engines for the Company’s snowmobiles and ATVs.The Company has an agreement with Suzuki for snowmobile engine purchases toshare the impact of fluctuations in the exchange rate between the U.S. dollarand the Japanese yen above and below a fixed range contained in the agreement.This agreement renews annually. During fiscal 2008, the exchange ratefluctuation between the U.S. dollar and the Japanese yen had a modest negativeimpact on the Company’s operating results. From time to time the Companyutilizes foreign exchange cash flow hedging contracts to minimize the impact ofexchange rate fluctuations relating to ATV engine purchases. During 2008, theaverage contracted forward exchange rate on these cash flow hedges wasapproximately 118 (Japanese yen to the U.S. dollar).  At March 31, 2008, there were noJapanese yen forward exchange contracts outstanding.

 

Salesto Canadian dealers are made in Canadian dollars with the U.S. dollar servingas the functional currency. During fiscal 2008, sales to Canadian dealerscomprised 27.5% of total net sales. During fiscal 2008, the exchange ratefluctuation between the U.S. dollar and the Canadian dollar had no materialimpact on operating profits. During 2008, the Company utilized cash flow hedgesto mitigate the variability in Canadian exchange rate changes relating toCanadian dollar fund transfers to the United States. During 2008, the averagecontracted forward exchange rate on these cash flows hedges was approximately $1.10(Canadian dollar to U.S. dollar). At March 31, 2008 there were Canadiandollar forward exchange contracts outstanding with a notional amount of$30,599,000.

 

Salesto European on-road ATV dealers and distributors are made in Euros with theEuro serving as the functional currency. During fiscal 2008, sales to Europeanon-road ATV dealers comprised 5.0% of total net sales. During fiscal 2008, theexchange rate fluctuation between the U.S. dollar and the Euro had nosignificant impact on operating profits. During 2008, the Company did notutilize any hedges to mitigate the variability in the Euro exchange rate and atMarch 31, 2008, there were no foreign exchange contracts outstanding forthe Euro.

 

Thefair values of the Canadian dollar hedge contracts at March 31, 2008represented an unrealized gain of $211,000. A ten percent fluctuation in thecurrency rates as of March 31, 2008 would have resulted in a change infair value of the Canadian dollar hedge contracts of approximately $3,060,000.

 

Interestrate market risk is managed for cash and short-term investments by investing ina diversified frequently maturing portfolio consisting of municipal bonds andmoney market funds that experience minimal volatility. The carrying amount ofavailable-for-sale debt securities approximate related fair value and theassociated market risk is not deemed to be 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, 2008 were $7,367,000 of which $5,746,000 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.** | **FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA** |
|--------------|--------------------------------------------------|

# ** **

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

 
| **ITEM  9.** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|--------------|-------------------------------------------------------------------------------------------|

# ** **

None.

 
| **ITEM  9A.** | **CONTROLS  AND PROCEDURES** |
|---------------|------------------------------|

# ** **

TheCompany’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted anevaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures pursuant to Rule 13a-15 underthe 1934 Act as of March 31, 2008.Based on that evaluation, the Company’s Chief ExecutiveOfficer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures are effective in ensuring thatinformation required to be disclosed by the Company in the reports itfiles or submits under the 1934 Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.

 

18

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There have been no significant changes ininternal controls over financial reporting during the fiscal quarter ended March 31,2008 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 of Arctic Cat is responsible for establishing andmaintaining adequate internal 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.

 

All internal control systems, no matter how well designed, haveinherent limitations. Therefore, even those systems determined to be effectivecan provide only reasonable assurance with respect to financial statementpreparation and presentation.

 

The Company’s management assessed the effectiveness of the Company’sinternal control over financial reporting as of March 31, 2008. In makingthis assessment, 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, 2008, the Company’sinternal control over financial reporting is effective based on those criteria.

 

The Company’s independent registered public accounting firm has issuedan audit report on our assessment of the Company’s internal control overfinancial reporting. This report appears below.

 

# **REPORT OF INDEPENDENTREGISTERED**PUBLIC ACCOUNTING FIRM

# ** **

Board of Directors and Shareholders of Arctic Cat Inc.

 

We have audited management’s assessment, included in the accompanyingManagement’s Report included in Item 9 of this Form 10-K, that Arctic Cat Inc. and subsidiaries maintained effectiveinternal control over financial reporting as of March 31, 2008, based onthe criteria established in *Internal Control–IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (the COSO criteria). Arctic Cat Inc. and subsidiaries’ management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress an opinion on the effectiveness of the Company’s internal control overfinancial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects.  Our audit included obtainingan understanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financialreporting 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, Arctic Cat Inc. and subsidiaries maintained, in allmaterial respects, effective internal control over financial reporting as of March 31,2008, based on criteria established *in InternalControl-Integrated Framework issued by COSO.*

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated balancesheets of Arctic Cat Inc. and subsidiaries as of March 31, 2008 and March 31,2007, and the related consolidated statements of operations, shareholders’equity, and cash flows for 

 

19

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each of the three years in the period ended March 31, 2008 and ourreport dated June 10, 2008 expressed an unqualified opinion on thoseconsolidated financial statements.

 

 

/s/ GRANT THORNTON LLP

 

 

Minneapolis, Minnesota

June 10, 2008

 

**ITEM 9B**. **OTHERINFORMATION**

 

None.

 

20

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# ** **

# **PART III**

# ** **

| **ITEM  10.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | **DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**                                          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** **                                                                                           |
| The  information included under the heading “Election of Director,” “Election of  Director – Board Committees,” “ Election of Director – Code of Conduct” and  “Beneficial Ownership of Capital Stock-Section 16(a) Beneficial  Ownership Reporting Compliance” in the Company’s definitive Proxy Statement  for the Annual Meeting of Shareholders to be held August 7, 2008, is  incorporated herein by reference. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                 |
|    Pursuant  to instruction 3 to Item 401(b) of Regulation S-K, information as to  executive officers of the Company is set forth in Item 4A of this Annual  Report.                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                 |
| **ITEM  11.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | **EXECUTIVE  COMPENSATION**                                                                          |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** **                                                                                           |
| The  information included under the heading “Executive Compensation and Other  Information” in the Company’s definitive Proxy Statement for the Annual  Meeting of Shareholders to be held August 7, 2008, is incorporated  herein by reference.                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                 |
| **ITEM  12.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** **                                                                                           |
| The  information included under the heading “Beneficial Ownership of Capital  Stock” and “Beneficial Ownership of Capital Stock – Equity Compensation Plan  Information” in the Company’s definitive Proxy Statement for the Annual  Meeting of Shareholders to be held August 7, 2008, is incorporated  herein by reference.                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                 |
| **ITEM 13.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | **CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**                       |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** **                                                                                           |
| Information  with respect to certain relationships and related transactions, appearing  under the heading “Executive Compensation and Other Information-Certain  Transactions” and “Election of Director – Director Independence” in the  Company’s definitive Proxy Statement for the Annual Meeting of Shareholders  to be held on August 7, 2008, is incorporated herein by reference.                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                 |
| **ITEM  14.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | **PRINCIPAL ACCOUNTANT FEES AND  SERVICES**                                                          |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** **                                                                                           |
| The  information required by this item is incorporated by reference to the  information set forth under the heading “Proposal 2. Ratification and  Appointment of Independent Registered Public Accounting Firm” in the  Company’s definitive Proxy Statement for the Annual Meeting of Shareholders  to be held August 7, 2008.                                                                                                                                       |

 

21

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**PART IV**

 

# **ITEM15. EXHIBITS AND FINANCIAL STATEMENT**SCHEDULES

# ** **

## **(a) Documents filedas part of report**

## ** **

## **1. Financial Statements.**

## ** **

The following consolidated financial statementsof the Company and its subsidiaries are filed as part of this Form 10-K:

 
| ** ** | ** ** | ** **                                                                                                          | ** ** | **Form 10-K**      |
|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------|
| ** ** | ** ** | ** **                                                                                                          | ** ** | **Reference Page** |
| **(i)**    |       | Consolidated  Balance Sheets as of March 31, 2008 and 2007                                                     |       | 25                      |
|       |       |                                                                                                                |       |                    |
| **(ii)**   |       | Consolidated  Statements of Operations for the three years ended March 31, 2008, 2007  and 2006                |       | 26                      |
|       |       |                                                                                                                |       |                    |
| **(iii)**  |       | Consolidated  Statements of Shareholders’ Equity for the three years ended March 31, 2008,  2007 and 2006 |       | 27                      |
|       |       |                                                                                                                |       |                    |
| **(iv)**   |       | Consolidated  Statements of Cash Flows for the three years ended March 31, 2008, 2007  and 2006                |       | 28                      |
|       |       |                                                                                                                |       |                    |
| **(v)**    |       | Notes  to Consolidated Financial Statements                                                                         |       | 29-37                   |
|       |       |                                                                                                                |       |                    |
| **(vi)**   |       | Report  of Independent Registered Public Accounting Firm                                                            |       | 38                      |

## ** **

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

## ** **

Theinformation required to be disclosed within Schedule II – Valuation andQualifying Accounts is provided within the Consolidated Financial Statements ofthe Company, filed as part of this Form 10-K.

 

## **3. Exhibits**

## ** **

| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Method of Filing** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|
| **3(a)**   |       | Amended and Restated  Articles of Incorporation of the Company                                                                                                                                                                                                                                                                                                    |       | (3)                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                              |       |                           |
| **3(b)**   |       | Restated  By-Laws of the Company                                                                                                                                                                                                                                                                                                                                  |       | (1)(10)                        |
|       |       |                                                                                                                                                                                                                                                                                                                                                              |       |                           |
| **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)**  |       | 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(b)**  |       | Form of  Employment Agreement between the Company and each of its executive officers.                                                                                                                                                                                                                                                                        |       | (1)                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                              |       |                           |
| **10(c)**  |       | Floorplan  Repurchase Agreement dated July 13, 1984, between the Company and ITT  Commercial Finance Corp.                                                                                                                                                                                                                                                   |       | (1)                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                              |       |                           |
| **10(d)**  |       | 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(e)**  |       | Discretionary  Revolving Credit Facility, dated as of June 6, 1997, between the Company  and Wells Fargo Bank Minnesota, National Association.                                                                                                                                                                                                               |       | (3)                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                              |       |                           |
| **10(f)**  |       | 2002 Stock Plan                                                                                                                                                                                                                                                                                                                                                   |       | (5)                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                              |       |                           |
| **10(g)**  |       | Form of Incentive  Stock Option Agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                                                |       | (7)                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                              |       |                           |
| **10(h)**  |       | Form of  Non-Qualified Stock Option Agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                                            |       | (7)                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                              |       |                           |
| **10(i)**  |       | Form of Director  Non-Qualified Stock Option Agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                                   |       | (7)                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                              |       |                           |
| **10(j)**  |       | 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)                            |

 

22

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| ** **      | ** ** | ** **                                                                                                                              | ** ** | **Method of Filing** |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|
| **10(k)**       |       | Repurchase Agreement,  dated as of January 20, 2003, By****and****between Arctic Cat Sales Inc. and Textron Financial  Corporation |       | (6)                            |
|            |       |                                                                                                                                    |       |                           |
| **10(l) ** |       | 2007 Omnibus Stock and  Incentive Plan                                                                                                  |       | (8)                            |
|            |       |                                                                                                                                    |       |                           |
| **10(m)**       |       | Form of Incentive  Stock Option Agreement for 2007 Omnibus Stock and Incentive Plan                                                |       | (8)                            |
|            |       |                                                                                                                                    |       |                           |
| **10(n)**       |       | Form of  Non-Qualified Stock Option Agreement for 2007 Omnibus Stock and Incentive  Plan                                           |       | (8)                            |
|            |       |                                                                                                                                    |       |                           |
| **10(0)**       |       | Form of Director  Stock Option Agreement for 2007 Omnibus Stock and incentive Plan                                                 |       | (9)                            |
|            |       |                                                                                                                                    |       |                           |
| **10(p)**       |       | Form of  Restricted Stock Agreement for 2007 Omnibus Stock and Incentive Plan                                                      |       | (9)                            |
|            |       |                                                                                                                                    |       |                           |
| **10(q)**       |       | Form of  Stock-Settled Appreciation Rights Agreement for 2007 Omnibus Stock and  Incentive Plan                                    |       | (9)                            |
|            |       |                                                                                                                                    |       |                           |
| **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)                            |

## ** **

## **(b) Exhibits**

## ** **

Referenceis made to Item 15(a) 3.

 

**(c) Schedules**

 

Reference is made to Item 15(a) 2.

 

----

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

 

(2) Filed with thisForm 10-K.

 

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

 

(4) Incorporated byreference to Exhibit 1 to the Company’s Registration on Form 8-Afiled with the SEC on September 20, 2001.

 

(5) Incorporatedby reference to Exhibit 99.1 to the Company’s Registration on Form S-8filed with the SEC on September 6, 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 thefiscal year ended March 31, 2005.

 

(8) Incorporatedherein by reference to the Company’s Current Report of Form8-Kfiled August 14, 2007.

 

(9) Incorporatedherein by reference to the Company’s Current Report of Form8-Kfiled April 7, 2008.

 

(10) Incorporatedby reference to the Company’s Current Report on Form8-Kfiled December 19, 2007.

 

23

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, on the 13th day ofJune, 2008.

 
| **ARCTIC CAT INC.**                                                        |
|----------------------------------------------------------------------------|
|                                                                       |
|                                                                       | /s/CHRISTOPHER A.  TWOMEY |   |
| Christopher A. Twomey                                                      |
| Chairman of the Board  of Directors, President and Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the date indicated.

 

 
| **Signature**                                                                                    | ** ** | **Date**           |
|--------------------------------------------------------------------------------------------------|------------|--------------------|
|                                                                                             |       |               |
| /s/ CHRISTOPHER A. TWOMEY                                                                        |       | June 13, 2008 |
|      Christopher A. Twomey                                                   |       |               |
|      Chairman of the Board of Directors,  President, Chief Executive Officer |       |               |
|      (Principal Executive Officer)                                           |       |               |
|                                                                                             |       |               |
| /s/ TIMOTHY C. DELMORE                                                                           |       | June 13, 2008 |
|      Timothy C. Delmore                                                      |       |               |
|      Chief Financial Officer                                                 |       |               |
|      (Principal Financial and Accounting Officer)                            |       |               |
|                                                                                             |       |               |
| /s/ ROBERT J. DONDELINGER                                                                        |       | June 13, 2008 |
|      Robert J. Dondelinger, Director                                         |       |               |
|                                                                                             |       |               |
| /s/ MASAYOSHI ITO                                                                                |       | June 13, 2008 |
|      Masayoshi Ito, Director                                                 |       |               |
|                                                                                             |       |               |
| /s/ SUSAN LESTER                                                                                 |       | June 13, 2008 |
|      Susan Lester, Director                                                  |       |               |
|                                                                                             |       |               |
| /s/ WILLIAM G. NESS                                                                              |       | June 13, 2008 |
|      William G. Ness, Director                                               |       |               |
|                                                                                             |       |               |
| /s/ GREGG A. OSTRANDER                                                                           |       | June 13, 2008 |
|      Gregg A. Ostrander, Director                                            |       |               |
|                                                                                             |       |               |
| /s/ DAVID ROBERTS                                                                                |       | June 13, 2008 |
|      David Roberts, Director                                                 |       |               |
|                                                                                             |       |               |
| /s/ KENNETH J. ROERING                                                                           |       | June 13, 2008 |
|      Kenneth Roering, Lead Director                                          |       |               |

 

24

----

 

**Consolidated Balance Sheets**

 
| **Arctic Cat Inc. March 31,**                                                                                               | ** ** | **2008**        | ** **      | **2007**        | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|-----------------|-----------------|------------|
| ** **                                                                                                                                 | ** ** | ** **      | ** **      | ** **      | ** ** |
| **ASSETS**                                                                                                                                 | ** ** | ** **      |            |            |       |
| **Current Assets**                                                                                                                         |       |            |            |            |       |
| **Cash and equivalents**                                                                                                                   | ** ** | **$**           | **10,057,000**  | ** **      | **$**      | 36,217,000 |   |
| **Short-term investments**                                                                                                                 | ** ** | **25,006,000**  | ** **      | **39,060,000**  |       |
| **Accounts receivable,  less allowances**                                                                                                  | ** ** | **39,666,000**  | ** **      | **40,428,000**  |       |
| **Inventories**                                                                                                                            | ** ** | **126,981,000** | ** **      | **98,524,000**  |       |
| **Income taxes receivable**                                                                                                                | ** ** | **9,546,000**   | ** **      | **—**      |       |
| **Prepaid expenses**                                                                                                                       | ** ** | **3,196,000**   | ** **      | **3,488,000**   |       |
| **Deferred income taxes**                                                                                                                  | ** ** | **12,690,000**  | ** **      | **14,861,000**  |       |
| **Total current assets**                                                                                                                   | ** ** | **227,142,000** | ** **      | **232,578,000** |       |
| ** **                                                                                                                                 | ** ** | ** **      | ** **      | ** **      |       |
| **Property and Equipment –  At Cost**                                                                                                 |       |            |            |            |       |
| **Machinery, equipment  and tooling**                                                                                                      | ** ** | **182,936,000** | ** **      | **184,119,000** |       |
| **Land, buildings and  improvements**                                                                                                      | ** ** | **27,857,000**  | ** **      | **28,568,000**  |       |
| ** **                                                                                                                                 | ** ** | **210,793,000** | ** **      | **212,687,000** |       |
| **Less accumulated  depreciation**                                                                                                         | ** ** | **136,310,000** | ** **      | **123,566,000** |       |
| ** **                                                                                                                                 | ** ** | **74,483,000**  | ** **      | **89,121,000**  |       |
| **Other Assets**                                                                                                                           |       |            |            |            |       |
| **Goodwill,  intangibles and other assets**                                                                                                | ** ** | **4,273,000**   |            | 4,505,000       |       |
| ** **                                                                                                                                 | ** ** | **$**           | **305,898,000** | ** **      | **$**      | 326,204,000 |   |
| ** **                                                                                                                                 | ** ** | ** **      | ** **      | ** **      |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                             | ** ** | ** **      |            |            |       |
| **Current Liabilities**                                                                                                                    |       |            |            |            |       |
| **Accounts payable**                                                                                                                       | ** ** | **$**           | **74,576,000**  | ** **      | **$**      | 60,440,000 |   |
| **Accrued expenses**                                                                                                                       | ** ** | **39,292,000**  | ** **      | **53,512,000**  |       |
| **Income taxes payable**                                                                                                                   | ** ** | **—**      | ** **      | **8,244,000**   |       |
| **Total current  liabilities**                                                                                                             | ** ** | **113,868,000** | ** **      | **122,196,000** |       |
| **Deferred Income Taxes**                                                                                                                  | ** ** | **11,168,000**  | ** **      | **11,787,000**  |       |
| **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,  11,833,485 in 2008; 12,259,423 in 2007** |       | **118,000**     |            | **123,000**     |       |
| **Class B common  stock, par value $.01; 7,560,000 shares authorized,****Shares issued, and  outstanding 6,102,000 in 2008 and 2007** |       | **61,000**      |            | **61,000**      |       |
| **Additional  paid-in-capital**                                                                                                            | ** ** | **—**      | ** **      | **—**      |       |
| **Accumulated other  comprehensive income**                                                                                                | ** ** | **4,768,000**   | ** **      | **2,117,000**   |       |
| **Retained earnings**                                                                                                                      | ** ** | **175,915,000** | ** **      | **189,920,000** |       |
| **Total shareholders’  equity**                                                                                                       | ** ** | **180,862,000** | ** **      | **192,221,000** |       |
| ** **                                                                                                                                 | ** ** | **$**           | **305,898,000** | ** **      | **$**      | 326,204,000 |   |

 

The accompanying notesare an integral part of these statements.

 

25

----

 

**Consolidated Statements ofOperations**

 
| **Arctic Cat Inc. Years ended March 31,** | ** ** | **2008**        | ** **      | **2007**        | ** ** | **2006**        | ** ** |
|--------------------------------------------------------------------|------------|-----------------|-----------------|-----------------|------------|-----------------|------------|
| **Net sales**                                                      | ** ** | **$**           | **621,568,000** | ** **      | **$**      | **782,431,000** |       | $ | 732,794,000 |   |
| **Cost of goods sold**                                             | ** ** | **511,139,000** | ** **      | **640,637,000** |       | 596,284,000     |       |
| **Gross profit**                                                   | ** ** | **110,429,000** | ** **      | **141,794,000** |       | 136,510,000     |       |
| **Selling, general and  administrative expenses**                  | ** ** | **119,142,000** | ** **      | **109,861,000** |       | 103,775,000     |       |
| **Operating profit (loss)**                                        | ** ** | **(8,713,000**  | **)**           | **31,933,000**  |       | 32,735,000      |       |
| **Other income (expense)**                                         |       |            | ** **      |            |       |            |       |
| **Interest income**                                                | ** ** | **632,000**     | ** **      | **1,139,000**   |       | 1,556,000       |       |
| **Interest  expense**                                              | ** ** | **(1,066,000**  | **)**           | (1,026,000      | )          | (105,000        | )          |
| ** **                                                         |       | **(434,000**    | **)**           | 113,000         |       | 1,451,000       |       |
| **Earnings (Loss) Before  Income Taxes**                           | ** ** | **(9,147,000**  | **)**           | **32,046,000**  |       | 34,186,000      |       |
| **Income tax expense  (benefit)**                                  | ** ** | **(5,888,000**  | **)**           | **9,976,000**   |       | 10,440,000      |       |
| **Net Earnings (loss)**                                            | ** ** | **$**           | **(3,259,000**  | **)**           | **$**      | **22,070,000**  |       | $ | 23,746,000 |   |
| **Net Earnings (Loss) Per  Share**                                 |       |            | ** **      |            |       |            |       |
| **Basic**                                                          | ** ** | **$**           | **(0.18**       | **)**           | **$**      | **1.16**        |       | $ | 1.21 |   |
| **Diluted**                                                        | ** ** | **$**           | **(0.18**       | **)**           | **$**      | **1.15**        |       | $ | 1.20 |   |
| **Weighted average shares  outstanding**                           |       |            | ** **      |            |       |            |       |
| **Basic**                                                          | ** ** | **18,137,000**  | ** **      | **19,030,000**  |       | 19,642,000      |       |
| **Diluted**                                                        | ** ** | **18,137,000**  | ** **      | **19,128,000**  |       | 19,828,000      |       |

 

The accompanying notesare an integral part of these statements.

 

26

----

** **

**Consolidated Statements of Shareholders’ 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, 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 ($.26  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            | )          | (4,343000      | **)**      | **—**             |       | (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** | ** ** |
| **Exercise of stock options**                                     | ** ** | **197,862**           | ** ** | **2,000**             | ** **  | **—**       | ** **    | **—**        | ** ** | **2,535,000**  | ** ** | **—**             | ** ** | **—**      | ** ** | **2,537,000**   | ** ** |
| **Tax benefits from stock****option exercises**                   |       | **—**            |       | **—**            |        | **—**       |          | **—**        |       | **475,000**    |       | **—**             |       | **—**      |       | **475,000**     |       |
| **Repurchase of common stock**                                    | ** ** | **(623,800**          | **)**      | **(7,000**            | **)**       | **—**       | ** **    | **—**        | ** ** | **(5,073,000** | **)**      | **—**             | ** ** | **(5,683,000**  | **)**      | **(10,763,000** | **)**      |
| **Stock based compensation expense**                              | ** ** | **—**            | ** ** | **—**            | ** **  | **—**       | ** **    | **—**        | ** ** | **2,063,000**  | ** ** | **—**             | ** ** | **—**      | ** ** | **2,063,000**   | ** ** |
| **Other comprehensive loss:**                                     |       |                  |       |                  |        |             |          |              |       |           |       |                   |       |            |       |            |       |
| **Net loss**                                                      | ** ** | **—**            | ** ** | **—**            | ** **  | **—**       | ** **    | **—**        | ** ** | **—**     | ** ** | **—**             | ** ** | **(3,259,000**  | **)**      | **(3,259,000**  | **)**      |
| **Unrealized loss on securities available-for-sale, net of  tax** | ** ** | **—**            | ** ** | **—**            | ** **  | **—**       | ** **    | **—**        | ** ** | **—**     | ** ** | **(2,000**             | **)**      | **—**      | ** ** | **(2,000**      | **)**      |
| **Unrealized loss on derivative instruments, net of tax**         | ** ** | **—**            | ** ** | **—**            | ** **  | **—**       | ** **    | **—**        | ** ** | **—**     | ** ** | **(436,000**           | **)**      | **—**      | ** ** | **(436,000**    | **)**      |
| Foreign currency  adjustment                                      | ** ** | **—**            | ** ** | **—**            | ** **  | **—**       | ** **    | **—**        | ** ** | **—**     | ** ** | **3,089,000**          | ** ** | **—**      | ** ** | **3,089,000**   | ** ** |
| **Total other comprehensive loss**                                | ** ** | **—**            | ** ** | **—**            | ** **  | **—**       | ** **    | **—**        | ** ** | **—**     | ** ** | **—**             | ** ** | **—**      | ** ** | **(608,000**    | **)**      |
| **Dividends ($.28 per share)**                                    | ** ** | **—**            | ** ** | **—**            | ** **  | **—**       | ** **    | **—**        | ** ** | **—**     | ** ** | **—**             | ** ** | **(5,063,000**  | **)**      | **(5,063,000**  | **)**      |
| **Balances at March 31,  2008**                              | ** ** | **11,833,485**        | ** ** | **$**                 | **118,000** | ** **       | **6,102,000** | ** **        | **$**      | **61,000**     | ** ** | **$**                  | **—** | ** **      | **$**      | **4,768,000**   | ** ** | **$** | **175,915,000** | ** ** | **$** | **180,862,000** | ** ** |

 

The accompanying notes are an integral part of these statements.

 

27

----

 

**Consolidated Statements of CashFlows**

 
| **Arctic Cat Inc. Years ended March 31,**                                   | ** ** | **2008**         | ** **     | **2007**         | ** ** | **2006**        |       |
|-----------------------------------------------------------------------------------------------------------|------------|------------------|----------------|------------------|------------|-----------------|------------|
| **Cash flows from  operating activities**                                                                 |       |             | ** **     |             |       |            |       |
| **Net earnings (loss)**                                                                                   | ** ** | **$**            | **(3,259,000** | **)**            | **$**      | 22,070,000      |       | $ | 23,746,000 |   |
| **Adjustments to  reconcile net earnings (loss) to net cash provided by (used in) operating  activities** | ** ** | ** **       | ** **     | ** **       | ** ** | ** **      | ** ** |
| **Depreciation and  amortization**                                                                        | ** ** | **29,737,000**   | ** **     | **26,269,000**   |       | 22,241,000      |       |
| **Loss on  the disposal of assets**                                                                       | ** ** | **49,000**       | ** **     | 366,000          |       | —          |       |
| **Deferred income taxes**                                                                                 | ** ** | **1,809,000**    | ** **     | **(6,322,000**   | **)**      | **(1,055,000**  | **)**      |
| **Stock  based compensation expense**                                                                     | ** ** | **2,063,000**    | ** **     | 2,170,000        |       | —          |       |
| **Changes in operating  assets and liabilities,****net of effect from acquired net assets**               |       |             | ** **     |             |       |            |       |
| **Trading securities**                                                                                    | ** ** | **13,701,000**   | ** **     | **(11,262,000**  | )          | 36,988,000      |       |
| **Accounts receivable,  less allowances**                                                                 | ** ** | **1,663,000**    | ** **     | **3,543,000**    |       | 8,121,000       |       |
| **Inventories**                                                                                           | ** ** | **(25,733,000**  | **)**          | **(4,974,000**   | )          | (17,734,000     | )          |
| **Prepaid expenses**                                                                                      | ** ** | **343,000**      | ** **     | **2,000,000**    | ** ** | **(1,815,000**  | **)**      |
| **Accounts payable**                                                                                      | ** ** | **8,460,000**    | ** **     | **(5,844,000**   | **)**      | **(1,321,000**  | **)**      |
| **Accrued expenses**                                                                                      | ** ** | **(14,474,000**  | **)**          | **9,640,000**    |       | 6,834,000       |       |
| **Income taxes**                                                                                          | ** ** | **(17,791,000**  | **)**          | **7,230,000**    | ** ** | **(2,601,000**  | **)**      |
| **Net cash provided by  (used in) operating activities**                                                  | ** ** | **(3,432,000**   | **)**          | **44,886,000**   | ** ** | **73,404,000**  | ** ** |
| **Cash flows from  investing activities**                                                                 |       |             | ** **     |             |       |            |       |
| **Purchase of property  and equipment**                                                                   | ** ** | **(15,466,000**  | **)**          | **(25,729,000**  | )          | (31,986,000     | )          |
| **Proceeds  from the sale of assets**                                                                     | ** ** | **773,000**      | ** **     | —           |       | —          |       |
| **Purchase  of other assets**                                                                             | ** ** | **—**       | ** **     | (682,000         | )          | —          |       |
| **Net assets acquired,  net of cash acquired**                                                            | ** ** | **—**       | ** **     | **—**       | ** ** | **(3,464,000**  | **)**      |
| **Sale and maturity of  available-for-sale securities**                                                   | ** ** | **350,000**      | ** **     | 2,001,000        |       | 754,000         |       |
| **Net cash used in  investing activities**                                                                | ** ** | **(14,343,000**  | **)**          | **(24,410,000**  | )          | (34,696,000     | )          |
| **Cash flows from financing  activities**                                                                 |       |             | ** **     |             |       |            |       |
| **Checks written in  excess of bank balance**                                                             | ** ** | **5,347,000**    | ** **     | **—**       | ** ** | **—**      | ** ** |
| **Proceeds from  short-term borrowings**                                                                  | ** ** | **201,875,000**  | ** **     | **120,776,000**  | ** ** | **47,625,000**  | ** ** |
| **Payments on short-term  borrowings**                                                                    | ** ** | **(201,875,000** | **)**          | **(120,776,000** | **)**      | **(47,625,000** | **)**      |
| **Proceeds from issuance  of common stock**                                                               | ** ** | **2,537,000**    | ** **     | **1,075,000**    |       | 902,000         |       |
| **Tax benefit from stock  option exercises**                                                              | ** ** | **475,000**      | ** **     | **89,000**       |       | 135,000         |       |
| **Repurchase of common  stock**                                                                           | ** ** | **(10,763,000**  | **)**          | **(19,773,000**  | )          | (14,931,000     | )          |
| **Dividends paid**                                                                                        | ** ** | **(5,063,000**   | **)**          | **(5,332,000**   | )          | (5,497,000      | )          |
| **Net cash used in  financing activities**                                                                | ** ** | **(7,467,000**   | **)**          | **(23,941,000**  | )          | (19,391,000     | )          |
| **Effect  of exchange rate changes on cash and cash equivalents**                                         | ** ** | **(918,000**     | **)**          | (393,000         | )          | (7,000          | )          |
| **Net increase (decrease)  in cash and equivalents**                                                      | ** ** | **(26,160,000**  | **)**          | **(3,858,000**   | **)**      | **19,310,000**  | ** ** |
| **Cash and equivalents at  beginning of year**                                                            | ** ** | **36,217,000**   | ** **     | **40,075,000**   |       | 20,765,000      |       |
| **Cash and equivalents at  end of year**                                                                  | ** ** | **$**            | **10,057,000** | ** **       | **$**      | 36,217,000      |       | $ | 40,075,000 |   |
| **Supplemental disclosure  of cash payments for:**                                                        |       |             | ** **     |             |       |            |       |
| **Income taxes**                                                                                          | ** ** | **$**            | **9,628,000**  | ** **       | **$**      | 8,983,000       |       | $ | 14,404,000 |   |
| **Interest**                                                                                              | ** ** | **$**            | **1,066,000**  | ** **       | $          | 1,026,000       |       | $ | 105,000 |   |

 

Supplemental disclosureof non-cash investing and financing activities:

 

Asof March 31, 2008 and 2007, the unrealized gain on securitiesavailable-for-sale, net of tax was $0 and $2,000.

Asof March 31, 2008 and 2007, the unrealized gain on derivative instruments,net of tax was $133,000 and $569,000.

Asof March 31, 2008 and 2007, property and equipment purchases of  $0 and $1,279,000 were included in accounts payable.

 

The accompanying notesare an integral part of these statements.

 

28

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENT**

 

**A             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

** **

Arctic Cat Inc. (the “Company”)operates in a single industry segment and designs, engineers, manufactures andmarkets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat®brand name, and related parts, garments and accessories principally through itsfacilities in Thief River Falls, Minnesota. The Company’s products are soldthrough a network of independent dealers located throughout the United States,Canada, and Europe and through distributors in Europe, the Middle East, Asiaand 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 Company considershighly liquid temporary investments with an original maturity of three monthsor less or variable rate demand notes with put options exercisable in three monthsor less to be cash equivalents. Cash and equivalents consist primarily ofcommercial paper and put bonds. As of March 31, 2008 and 2007, the Companyhad approximately $10,000,000 and $4,000,000 of cash located in foreign banksprimarily in Canada. The Company’s cash management policy provides for bankdisbursement accounts to be reimbursed on a daily basis. Checks issued but notpresented to the banks for payment are included in cash and equivalents as areduction of other cash balances. Checks written in excess of bank balance at March 31,2008 in the amount of $5,347,000 were classified as accounts payables.

 

**Fair Values of Financial Instruments**

** **

Except where noted, thecarrying value of current financial assets and liabilities approximates theirfair value, due to their short-term nature.

 

**Short-Term Investments**

** **

Short-term investmentsare reported at fair value and include trading securities, with unrealizedgains and losses included in net earnings, and available-for-sale securities,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’s accountsreceivable balance consists of amounts due from its dealers and certain financecompanies. The Company extends credit to its dealers based on an evaluation ofthe dealers’ financial condition. The Company’s collection exposure relating toaccounts receivable amounts due from certain dealer finance companies islimited due to the financial strength of the finance companies and provisionsof its existing agreements. Accounts receivable is presented net of anallowance for estimated uncollectible amounts due from its dealers. The Companyestimates the uncollectible amounts considering numerous factors, mainlyhistorical trends as well as current available information. The Company’sallowance for uncollectible accounts was $952,000, $815,000 and $966,000 at March 31,2008, 2007 and 2006. The activity within the allowance for uncollectibleaccounts for the three years ending March 31, 2008 was notsignificant.  Accounts receivable amountswritten off have been within management’s expectations.

 

**Inventories**

** **

Inventories are stated atthe lower of cost or market, with cost determined using the first-in, first-outmethod.

 

**Derivative Instruments and Hedging Activities**

** **

The Company enters intoforward exchange contracts to hedge the variability in foreign exchange ratesrelated to purchase commitments denominated in Japanese yen for ATV engines andtransfers of Canadian dollar funds to the United States of America. Thecontracts are designated as, and meet the criteria for, cash flow hedges. TheCompany does not enter into forward contracts for the purpose of trading. Gainsand losses on forward contracts are recorded in accumulated other comprehensiveincome (loss), net of

 

29

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tax, and subsequentlyreclassified within 12 months into cost of goods sold upon the sale of ATVunits or into operating expense upon completing transfers of Canadian dollarfunds.

 

As of March 31,2008, the Company had open Canadian dollar forward exchange contracts maturing April 2008,with notional amounts totaling $30,599,000 and fair value assets andliabilities, netted in accounts receivable of $211,000 at March 31, 2008.The related amount reported within other comprehensive income (loss), net oftax was $133,000. There were no open Canadian dollar forward exchange contractsat March 31, 2007. As of March 31, 2007 the Company had open Japaneseyen forward exchange contracts, maturing through February 2008, withnotional amounts totaling $38,120,000 and fair value assets and liabilities of$903,000 included in accounts receivable at March 31, 2007. The relatedamount reported within other comprehensive income (loss), net of tax was$569,000. There were no open Japanese yen forward exchange contracts at March 31,2008.

 

**Property and Equipment**

** **

Depreciation is providedin amounts sufficient to relate the cost of depreciable assets to operationsover their estimated service lives, using the units of production method fortooling and the straight-line method for all other property and equipment.Repairs and maintenance cost that are considered not to extend the useful lifeof the property and equipment are expensed as incurred. Tooling is amortizedover the life of the product, generally three years. Estimated service livesrange from 15 - 20 years for buildings and improvements and 5 - 7 years formachinery and equipment. Accelerated and straight-line methods are used forincome tax reporting.

 

**Goodwill and Intangibles**

** **

Goodwill and intangiblesare reviewed for impairment at least annually. An impairment charge isrecognized when the calculated fair value of a reporting unit, includinggoodwill, is less than its carrying amount. The Company performed the analysisas of March 31, 2008 and 2007 which indicated that no goodwill impairmentexisted.

 

The changes in thecarrying amount of goodwill and other intangibles included in goodwill,intangibles and other assets for the year ended March 31, 2008 and 2007are as follows:

 
| ** **                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Balance at  April 1,  |       | $        | 3,324,000  |     | $          | 3,539,000 |   |
| Current year  amortization |       | (215,000 | )          | (215,000 | )          |
| Balance at  March 31, |       | $        | 3,109,000  |     | $          | 3,324,000 |   |

 

As required by SFAS No. 142, intangibles withfinite lives will continue to be amortized. Included in other intangible assetsare customer relationships, a homologation license, and a non-compete agreement.Intangible assets before accumulated amortization were  $1,950,000 at March 31, 2008 and 2007.Accumulated amortization was $591,000 and $376,000 at March 31, 2008 and2007. Amortization expense is expected to be approximately $215,000 in fiscalyears 2009 and 2010, $147,000 in fiscal 2011, $94,000 in fiscal 2012, and$83,000 in fiscal 2013. The net value of other intangible assets is included asa component of goodwill and other intangibles in the accompanying consolidatedbalance sheets.

 

**Product Warranties**

** **

The Company generallyprovides a limited warranty to the owner of snowmobiles for twelve months fromthe date of consumer registration and for six months on ATVs. The Companyprovides for estimated warranty costs at the time of sale based on historicalrates and trends and makes subsequent adjustments to its estimate as actualclaims become known or the amounts are determinable. The following representschanges in the Company’s accrued warranty liability for the fiscal years ended March 31,

 
| ** **                 | ** ** | **2008**       | ** **     | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------|------------|----------------|----------------|------------|------------|------------|------------|
| Balance at  April 1,  | ** ** | **$**          | **17,974,000** |       | $          | 14,203,000 |       | $ | 12,053,000 |   |
| Warranty  Provision        | ** ** | **12,282,000** |           | 17,374,000 |       | 13,377,000 |       |
| Warranty Claim  Payments   | ** ** | **13,762,000** |           | 13,603,000 |       | 11,227,000 |       |
| Balance at  March 31, | ** ** | **$**          | **16,494,000** |       | $          | 17,974,000 |       | $ | 14,203,000 |   |

 

**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 Company recognizesrevenue and provides for estimated marketing and sales incentive costs whenproducts 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.

 

30

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**Marketing and Sales Incentive Costs**

 

At the time productrevenue is recognized the Company provides for various marketing and salesincentive costs which are offered to its dealers and consumers. Examples ofthese costs, which are recognized as a reduction of revenue when the productsare sold, include: dealer and consumer rebates, dealer floor plan financingassistance and other incentive and promotion programs. Generally, the Companyrecords costs related to these marketing programs at the later of when therevenue is recognized or when the sales incentive or marketing program isapproved and communicated for products previously shipped. Sales incentivesthat involve a free product or service delivered to the consumer are recordedas a component of cost of goods sold. The Company estimates the costs of thesevarious incentive and marketing programs at the time of sale or subsequentlywhen programs are approved and communicated based on historical experience. Tothe extent current experience differs with previous estimates the accruedliability for marketing and sales incentives is adjusted accordingly.

 

**Dealer Holdback**

** **

The Company records a dealer holdback program liability at the timecertain products are shipped to its dealers. If the products subject to theholdback program are sold within the program time period, the Company refunds aportion of the original sale price, referred to as dealer holdback, to thedealer. The Company’s dealer holdback program liability, included within theaccounts payable, as of March 31, 2008, 2007 and 2006 was $17,493,000,$19,998,000, and $17,321,000. The increases and decreases from March 31,2006 to 2008 were principally related to qualifying additional products, theperiod of coverage under the program and the timing of payments.

** **

**Research and Development**

** **

Research and developmentcosts are expensed as incurred and are reported as a component of selling,general and administrative expenses. Research and development expense was$16,143,000, $17,756,000, and $17,067,000 during 2008, 2007 and 2006.

 

**Advertising**

** **

The Company expensesadvertising costs as incurred, except for cooperative advertising obligationsarising related to the sale of the Company’s products to its dealers. Theestimated cost of cooperative advertising, which the dealer is required tosupport, is recorded as marketing expense at the time the product is sold.Cooperative advertising was $5,004,000, $6,841,000, and $6,996,000, in 2008,2007 and 2006. Total advertising expense, including cooperative advertising,was $24,072,000, $23,671,000, and $23,482,000 in 2008, 2007 and 2006.

 

**Stock Based Compensation**

** **

At March 31, 2008,the Company had stock based compensation plans, all previously approved by theshareholders. Stock options granted under these plans generally vest ratablyover one to three years of service, have a contractual life of five to tenyears and provide for accelerated vesting if there is a change in control, asdefined. At March 31, 2008, the Company had approximately 1,491,380 sharesavailable for future grant under its stock option plans.

 

On April 1, 2006,the Company adopted Statement of Financial Accounting Standard No. 123(R),Share Based Payments (SFAS 123(R)), which requires the fair value of all sharebased payment transactions, including stock options, be recognized in theincome statement as an operating expense, based on their fair value over therequisite service period. The Company has elected the modified prospectivetransition method in applying SFAS 123(R). Accordingly, periods prior to adoptionhave not been restated. Under this transition method, the Company applies theprovisions 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 forthese awards will be based on their grant-date fair value as calculated for thepro forma disclosures required by SFAS 123(R). At March 31, 2008, theCompany had $2,569,000 of unrecognized compensation costs related to non-vestedstock options that are expected to be recognized over a weighted average periodof approximately two years.

 

Forthe fiscal years ended March 31, 2008 and 2007, the Company recordedcompensation expense of $2,063,000 and $2,170,000 related to the adoption ofSFAS 123(R), which has been included in selling, general and administrativeexpenses. The Company’s total stock based compensation related expense reducedboth basic and diluted earnings per share by $0.07 and $0.08 for the fiscalyears ended March 31, 2008 and 2007.

 

Priorto adopting SFAS 123(R), the Company accounted for these plans under therecognition and measurement principles of APB Opinion No. 25, Accountingfor Stock Issued to Employees, and related Interpretations. No stock basedemployee compensation cost was reflected in net earnings, as all optionsgranted under those plans had an exercise price equal to the market value ofthe underlying common stock on the date of the grant.

 

31

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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 theexercise of stock options resulting from tax benefits in excess of recognizedcumulative compensation cost (excess tax benefits) be classified as financingcash flow. For the fiscal years ended March 31, 2008 and 2007, the totalincome tax benefit from the exercise of stock options classified as financingcash flows was $475,000 and $89,000.

 

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 year ended March 31, 2006:

 
| ** **                                       | ** ** | **2006**  | ** ** |
|--------------------------------------------------|------------|-----------|------------|
| **Net  earnings:**                               |       |      |       |
| **As  reported**                                 |       | $         | 23,746,000 |   |
| **Additional  compensation expense, net of tax** |       | 1,601,000 |       |
| **Pro  forma**                                   |       | $         | 22,145,000 |   |
| **Net  earnings per share:**                     |       |      |       |
| **As  reported**                                 |       |      |       |
| **Basic**                                        |       | $         | 1.21       |   |
| **Diluted**                                      |       | $         | 1.20       |   |
| **Pro  forma**                                   |       |      |       |
| **Basic**                                        |       | $         | 1.13       |   |
| **Diluted**                                      |       | $         | 1.12       |   |

 

The fair value of each stock option awardwas estimated on the date of grant using the Black-Scholes options pricingmodel. The following assumptions were used to estimate the fair value ofoptions:

 
| ** **                    | ** ** | **2008**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| **Assumptions:**              |       |        | ** ** |     |       |     |       |
| **Dividend  yield**           | ** ** | **1.3**     | **%**      | 1.3      | %          | 1.3      | %          |
| **Average  term**             | ** ** | **5 years** | ** ** | 5 years  |       | 5 years  |       |
| **Volatility**                | ** ** | **30**      | **%**      | 30       | %          | 30       | %          |
| **Risk-free  rate of return** | ** ** | **5.0**     | **%**      | 5.0      | %          | 5.0      | %          |

 

Theweighted average fair value of options granted during each of the followingyears ended March 31:

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Fair  value of options granted** | ** ** | **$**    | **5.54**   |     | $          | 5.70     |       | $ | 6.91 |   |
|                                    |            |          |            |          |            |          |            |  |  |  |

 

SeeNote K for additional disclosures regarding stock option plans.

 

**Net Earnings Per Share**

** **

The Company’s dilutedweighted average shares outstanding include common shares and common shareequivalents relating to stock options, when dilutive. Options to purchase1,362,617, 942,500, and 571,500, shares of common stock with weighted averageexercise prices of $20.57, $22.37 and $24.41 were outstanding during 2008, 2007and 2006, but were excluded from the computation of common share equivalents becausethey were anti-dilutive.

 

Weightedaverage shares outstanding consist of the following for the years ended March 31,

 
| ** **                                            | ** ** | **2008**       | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| Weighted average  number of common shares outstanding | ** ** | **18,137,000** |       | 19,030,000 |       | 19,642,000 |       |
| Dilutive effect  of option plan                       | ** ** | **—**     |       | 98,000     |       | 186,000    |       |
| Common and  potential shares outstanding-diluted      | ** ** | **18,137,000** |       | 19,128,000 |       | 19,828,000 |       |

** **

**Foreign Currency Translation**

** **

The Company’s sales andmarketing activities with Canadian dealers are denominated in Canadian currencywith the U.S. dollar serving as the functional currency. The Company’s salesand marketing activities with European on-road ATV dealers and distributors aredenominated in the Euro with the Euro serving as the functional currency.Assets and liabilities denominated in Canadian currency and the Euro aretranslated using the exchange rates in effect at the balance sheet date.Revenues and expenses are translated at the average foreign exchange rates ineffect for the period. Exchange gains and losses relating to the Canadiancurrency and Euro currency are reflected in the results of operations and as acomponent of other comprehensive income.

 

**Comprehensive Income**

** **

Comprehensive incomerepresents net earnings adjusted for the unrealized gain or loss on derivativeinstruments, debt securities 

 

32

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classified asavailable-for-sale and foreign currency translation adjustments and is shown inthe consolidated financial statements of stockholders’ equity.

 

**Accounting Policy and Disclosure Changes**

** **

InFebruary 2007, the Financial Accounting Standards Board (FASB) issuedStatement No. 159, The Fair Value Option for Financial Assets andFinancial Liabilities. This Statement permits entities to measure mostfinancial instruments at fair value if desired. It may be applied on a contractby contract basis and is irrevocable once applied to those contracts. TheStandard may be applied at the time of adoption for existing eligible items, orat initial recognition of eligible items. After election of this option,changes in fair value are reported in earnings. The items measured at fairvalue must be shown separately on the balance sheet. The effective date is thebeginning of fiscal year 2009. The cumulative effect of adoption would bereported as an adjustment to beginning retained earnings. We have not yetdetermined the impact that the implementation will have on our results ofoperations or financial condition.

 

InMarch 2008, the FASB issued No. 161, “Disclosures about DerivativeInstruments and Hedging Activities” (SFAS No. 161”), which will requireincreased disclosures about an entity’s strategies and objectives for usingderivative instruments; the location and amounts of derivative instruments inan entity’s financial statements; how derivative instruments and related hedgeditems are accounted for under SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities;” and how derivative instruments and relatedhedged items affect its financial position, financial performance, and cashflows. Certain disclosures will also be required with respect to derivativefeatures that are credit-risk related. SFAS No. 161 is effective for theCompany beginning January 1, 2009 on a prospective basis. The Company doesnot expect this standard to have a material impact on its consolidated resultsof operations or financial condition.

 

InSeptember 2006, the U.S. Securities and Exchange Commission staff issuedStaff Accounting Bulletin No. 108 (SAB 108), Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements. SAB 108 eliminates the diversity of practice regardinghow public companies quantify financial statement misstatements. It establishesan approach that requires quantification of financial statement misstatementsbased on the effects of the misstatements on each of the company’s financialstatements and related financial statement disclosures. SAB 108 must be appliedto annual financial 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, FASB issued Statement ofFinancial Accounting Standards No. 157, Fair Value Measurement (SFAS 157).This standard clarifies the principle that fair value should be based on theassumptions that market participants would use when pricing an asset orliability. Additionally, it establishes a fair value hierarchy that prioritizesthe information used to develop those assumptions. SFAS 157 is effective forfinancial statements issued for the fiscal years beginning after November 15,2007. We have not yet determined the impact that the implementation of SFAS 157will have on our results of operations or financial condition.

 

InJuly 2006, the FASB issued Interpretation No. 48, “Accounting forUncertainty in Income Taxes (“FIN 48”), which clarifies the accounting foruncertainty in income taxes recognized in a company’s financial statements inaccordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN48 describes when an uncertain tax item should be recorded in the financialstatements and for how much, provides guidance on recording interest andpenalties and accounting and reporting for income taxes in interim periods. FIN48 was adopted by the Company as of April 1, 2007. The adoption of FIN 48did not have a material impact on the Company’s financial position or resultsof operations.

 

**B             SHORT-TERM INVESTMENTS**

 

Short-term investmentsconsist primarily of a diversified portfolio of municipal bonds and moneymarket funds and are classified as follows at March 31:

 
| ** **                              | ** ** | **2008**   | ** **     | **2007** | ** ** |
|-----------------------------------------|------------|------------|----------------|----------|------------|
| **Trading  securities**                 | ** ** | **$**      | **25,006,000** |     | $          | 38,707,000 |   |
| **Available-for-sale  debt securities** | ** ** | **—** |           | 353,000  |       |
| ** **                              |       | **$**      | **25,006,000** |     | $          | 39,060,000 |   |

 

Tradingsecurities consists of $25,006,000 and $38,707,000  invested in various money market funds at March 31,2008 and 2007, respectively, while the remainder of trading securities andavailable-for-sale securities consists primarilyof “A” rated or higher municipal bond investments. The amortized costand fair value of debt securities classified as available-for-sale was $350,000and $353,000, at March 31, 2007. At March 31, 2008 noavailable-for-sale debt securities were being held. The unrealized gain onavailable-for-sale debt securities is reported, net of tax, as a separatecomponent of 

 

33

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shareholders’ equity. The contractual maturities of available-for-saledebt securities at March 31, 2007, were all within one year.

 

**C             INVENTORIES**

** **

Inventories consist ofthe following at March 31:

 
| ** **                            | ** ** | **2008**       | ** **      | **2007**   | ** ** |
|---------------------------------------|------------|----------------|-----------------|------------|------------|
| **Raw  materials and sub-assemblies** | ** ** | **$**          | **30,264,000**  |       | $          | 23,591,000 |   |
| **Finished  goods**                   | ** ** | **67,731,000** |            | 44,058,000 |       |
| **Parts,  garments and accessories**  | ** ** | **28,986,000** |            | 30,875,000 |       |
| ** **                            |       | **$**          | **126,981,000** |       | $          | 98,524,000 |   |

 

**D             ACCRUEDEXPENSES**

** **

Accrued expenses consistof the following at March 31:

 
| ** **       | ** ** | **2008**       | ** **     | **2007**   | ** ** |
|------------------|------------|----------------|----------------|------------|------------|
| **Marketing**    | ** ** | **$**          | **9,555,000**  |       | $          | 16,874,000 |   |
| **Compensation** | ** ** | **4,667,000**  |           | 9,044,000  |       |
| **Warranties**   | ** ** | **16,494,000** |           | 17,974,000 |       |
| **Insurance**    | ** ** | **6,442,000**  |           | 7,440,000  |       |
| **Other**        | ** ** | **2,134,000**  |           | 2,180,000  |       |
| ** **       |       | **$**          | **39,292,000** |       | $          | 53,512,000 |   |

 

**E              ACQUISITION**

 

In July 2005, theCompany acquired a 100% interest in a European company that markets ATVs whichutilize the Company’s base ATV models. The Company completed this acquisitionto further expand its ATV model offerings and strengthen its European presence.The Company invested $3,464,000, net of cash acquired, to acquire a 100%interest resulting in an excess purchase price over the estimated fair value ofnet assets was approximately $1,750,000. Allocation of the acquisition costs isas 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 andexpires July 27, 2009.  Interest onthe working capital borrowings is payable monthly at alternative interestrates, at the Company’s election. The Company was in compliance with the creditagreement covenants or obtained non-compliance waivers. At March 31, 2008,there was $7,367,000 issued letters of credit outstanding and no workingcapital borrowings outstanding. Of the issued letters of credit outstanding,$5,746,000 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’s 401(k) retirementsavings plan covers substantially all eligible employees. Employees maycontribute up to 50% of their compensation with the Company matching 100% ofthe employee contributions, up to a maximum of 3% of the employee’scompensation. The Company can elect to makeadditional contributions at its discretion. Total Company matchingcontributions were $1,451,000, $1,513,000 and $1,522,000 in 2008, 2007 and2006. There were no discretionary contributions made during 2008, 2007 and2006.

 

**H             RELATEDPARTY TRANSACTIONS**

** **

The Company purchasesengines and service parts from Suzuki, owner of the Company’s Class Bcommon stock. Such purchases totaled $73,689,000, $113,975,000, and$131,965,000 in 2008, 2007 and 2006. The purchase price of the engines andservice parts is determined annually. The Company has an agreement with Suzukifor snowmobile engine purchases to share the impact of fluctuations in theexchange rate between the U.S. dollar and the Japanese yen above and below afixed range contained in the agreement. This agreement renews annually.

 

TheCompany is dependent on Suzuki for the near term supply of most of its enginesand related service parts. An interruption of this supply could have a materialadverse effect on the Company’s

 

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operations. Certain raw materials and services are purchased fromvendors in which certain of the Company’s directors are officers or significantshareholders. In 2008, 2007 and 2006, these transactions aggregated $148,000,$127,000 and $2,580,000.

 

**I               INCOMETAXES**

 

Income tax expense(benefit) consists of the following for the years ended March 31:

 
| ** **   | ** ** | **2008**      | ** **     | **2007**   | ** ** | **2006**   | ** ** |
|--------------|------------|---------------|----------------|------------|------------|------------|------------|
| **Current**  |       |          | ** **     |       |       |       |       |
| **Federal**  | ** ** | **$**         | **(6,950,000** | **)**      | $          | 15,025,000 |       | $ | 11,095,000 |   |
| **State**    | ** ** | **(446,000**  | **)**          | 1,826,000  |       | 478,000    |       |
| **Foreign**  | ** ** | **(301,000**  | **)**          | (553,000   | )          | (78,000    | )          |
| **Deferred** | ** ** | **1,809,000** | ** **     | (6,322,000 | )          | (1,055,000 | )          |
| ** **   |       | **$**         | **(5,888,000** | **)**      | $          | 9,976,000  |       | $ | 10,440,000 |   |

 

Thefollowing is a reconciliation of the Federal statutory income tax rate to theeffective tax rate for the years ended March 31:

 
| ** **                       | ** ** | **2008**  | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| **Statutory  income tax rate**   | ** ** | **(35.0** | **)%**     | 35.0     | %          | 35.0     | %          |
| **State  taxes**                 | ** ** | **(2.4**  | **)**      | 2.7      |       | 1.3      |       |
| **Tax  exempt interest**         | ** ** | **(0.6**  | **)**      | (0.4     | )          | (0.6     | )          |
| **Research  tax credit**         | ** ** | **(12.4** | **)**      | (1.6     | )          | (1.7     | )          |
| **Foreign  sales corporation**   | ** ** | **(4.6**  | **)**      | (3.5     | )          | (2.5     | )          |
| **FIN 48  reserves**             | ** ** | **(3.8**  | **)**      | —   |       | —   |       |
| **Other  permanent differences** | ** ** | **(5.6**  | **)**      | (1.1     | )          | (1.0     | )          |
| ** **                       |       | **(64.4** | **)%**     | 31.1     | %          | 30.5     | %          |

 

Thecumulative temporary differences between the tax bases of assets andliabilities and their carrying amounts for financial reporting purposes underthe liability methods are as follows at March 31:

 
| ** **                                    | ** ** | **2008**       | ** **     | **2007**   | ** ** |
|-----------------------------------------------|------------|----------------|----------------|------------|------------|
| **Short-term  deferred income tax assets**    |       |           | ** **     |       |       |
| **Accrued  expenses**                         | ** ** | **$**          | **11,860,000** | ** ** | $          | 14,278,000 |   |
| **Inventory  capitalization and adjustments** | ** ** | **2,117,000**  | ** **     | 2,369,000  |       |
| **Other**                                     | ** ** | **352,000**    | ** **     | 302,000    |       |
| **Short-term  deferred income tax liability** |       |           | ** **     |       |       |
| **Prepaid  expenses and other**               | ** ** | **(1,639,000** | **)**          | (2,088,000 | )          |
| **Net  short-term deferred tax asset**        | ** ** | **$**          | **12,690,000** | ** ** | $          | 14,861,000 |   |
| **Long-term  deferred income tax liability**  |       |           | ** **     |       |       |
| **Property  and equipment**                   | ** ** | **$**          | **11,168,000** | ** ** | $          | 11,787,000 |   |
| **Long-term  deferred tax liability**         | ** ** | **$**          | **11,168,000** | ** ** | $          | 11,787,000 |   |

 

On April 1, 2007, the Company adopted Financial AccountingStandards board Interpretation No. 48, Accounting for Uncertainty inIncome Taxes (“FIN 48”) which clarifies the accounting for income taxes byprescribing the minimum threshold a tax position is required to meet beforebeing recognized in the financial statements as well as a guidance onde-recognition, measurement, classification and disclosure of tax positions.The adoption of FIN 48 by the Company resulted in no cumulative effect ofaccounting change being recorded by the Company as of April 1, 2007. TheCompany had liabilities recorded related to unrecognized tax benefits totaling$4,164,000 and $4,510,000 at March 31, 2008 and 2007. At March 31,2007 the liability was classified as income taxes payable. The March 31,2008 liability was classified as an offset to income taxes receivable in theaccompanying condensed consolidated balance sheets in accordance with FIN 48.The Company recognizes potential interest and penalties related to income taxpositions as a component of the provision for income taxes on the consolidatedstatements of operations. The Company had reserves related to potentialinterest and penalties of $718,000 and $704,000 recorded as a component of theliability at March 31, 2008 and 2007. The entire amount of the liabilityat March 31, 2008, if recognized, would affect the Company’s effective taxrate. The Company does not anticipate that total unrecognized tax benefits willsignificantly change during the next twelve months. With few exceptions, theCompany is no longer subject to federal, state, or foreign income taxexaminations for years prior to 2004. A reconciliation of the beginning andending amount of unrecognized tax benefits is as follows:

 
| Balance at  April 1, 2007                   |   | $        | 4,510,000 |   |
|--------------------------------------------------|--------|----------|-----------|--------|
| Increases  related to prior year tax positions   |   | 317,000  |      |
| Decreases  related to prior year tax positions   |   | (182,000 | )         |
| Increases  related to current year tax positions |   | 359,000  |      |
| Settlements                                      |   | (840,000 | )         |
| Balance at  March 31, 2008                  |   | $        | 4,164,000 |   |

 

**J              COMMITMENTSAND CONTINGENCIES**

 

**Dealer Financing**

** **

Finance companies providecertain of the Company’s dealers with floor plan financing. The Company hasagreements with these finance companies to repurchase certain repossessedproducts sold to its dealers. At March 31, 2008, the Company wascontingently liable under these agreements for a maximum repurchase amount ofapproximately $45,222,000.  The Company’sfinancial exposure under these agreements is limited to the difference between the

 

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amount paid to thefinance companies for repurchases and the amount received upon the resale ofthe repossessed product. Losses incurred under these agreements during theperiods presented have not been material.

 

**Litigation**

 

The Company is subject tolegal proceedings and claims which arise in the ordinary course of business.Accidents involving personal injury and property damage occur in the use ofsnowmobiles and ATVs. Claims have been made against the Company from time totime. It is the Company’s policy to vigorously defend against these actions.The Company is not involved in any legal proceedings which it believes willhave the potential for a materially adverse impact on the Company’s business orfinancial condition, results of operations or cash flows.

 

**Leases**

** **

The Company leasesbuildings and equipment under non-cancelable operating leases. Total rentexpense under all lease agreements was $924,000, $1,404,000 and $853,000 forfiscal 2008, 2007, and 2006. Future minimum payments, exclusive of other costsrequired under non-cancelable operating leases at March 31, 2008 areapproximately $165,000 in each of the fiscal years 2009 through 2015.

 

**K             SHAREHOLDERS’EQUITY**

** **

**Stock Option Plans**

** **

The Company has stockoption plans that provide for incentive and non-qualified stock options to begranted 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, 2008, the Company had 1,491,380shares of common stock available for grant under the plans.

 

Transactionsunder the plans during each of the three years in the period ended March 31,are summarized as follows:

 
| ** **                              | ** ** | **Number of  Shares under  option** | ** ** | **Weighted  average exercise  price** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|
| Outstanding at  April 1, 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                                      |       |
| Granted                                 |       | 408,620                                       |       | 17.43                                      |       |
| Cancelled                               |       | (14,655                                       | )          | 18.31                                      |       |
| Exercised                               |       | (197,862                                      | )          | 12.82                                      |       |
| **Outstanding  at March 31, 2008** | ** ** | **1,862,135**                                 | ** ** | **19.25**                                  | ** ** |
|                                         |            |                                               |            |                                            |            |  |

 

**Options exercisable at March 31 are asfollows:**

 
| ** ** | ** ** | **Number of**    | ** ** | **Weighted**            | ** ** |
|------------|------------|-----------------------|------------|-------------------------|------------|
| ** ** | ** ** | **shares under** | ** ** | **average**             | ** ** |
| ** ** | ** ** | **option**            | ** ** | **exercise price** | ** ** |
| 2006       |       | 1,013,522             |       | $                       | 17.17      |   |
| 2007       |       | 1,155,038             |       | $                       | 18.26      |   |
| **2008**   | ** ** | **1,225,342**         | ** ** | **$**                   | **19.82**  | ** ** |

 

Thefollowing tables summarize information concerning currently outstanding andexercisable stock options at March 31, 2008:

 

**Options Outstanding**

 
| ** **          | ** ** | ** **      | ** ** | **Weighted**         | ** ** | **Weighted** | ** ** |
|---------------------|------------|-----------------|------------|----------------------|------------|--------------|------------|
| ** **          | ** ** | ** **      | ** ** | **Average**          | ** ** | **Average**  | ** ** |
| **Range of**   | ** ** | **Number**      | ** ** | **Remaining**        | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Outstanding** | ** ** | **Contractual Life** | ** ** | **Price**    | ** ** |
| $9.38 – 13.37  |       |            | 151,857    |                 | 5.34 years |         | 11.15      |   |
| 15.33 – 21.96  |       |            | 1,471,278  |                 | 6.93 years |         | 18.73      |   |
| 25.45 – 28.00  |       |            | 239,000    |                 | 5.93 years |         | 27.59      |   |
|                |       |            | 1,862,135  |                 | 6.68 years |         | $          | 19.25 |   |
|                     |            |                 |            |                      |            |              |            |  |  |

 

**Options Exercisable**

 
| ** **               | ** ** | ** **      | ** ** | **Weighted** | ** ** |
|--------------------------|------------|-----------------|------------|--------------|------------|
| ** **               | ** ** | ** **      | ** ** | **Average**  | ** ** |
| **Range of**        | ** ** | **Number**      | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Exercisable** | ** ** | **Price**    | ** ** |
| $9.38 – 13.37       |       | 119,857         |       | 10.56        |       |
| 15.33 – 21.96       |       | 866,485         |       | 18.96        |       |
| 25.45 – 28.00       |       | 239,000         |       | 27.59        |       |
|                     |       | 1,225,342       |       | $            | 19.82      |   |
|                          |            |                 |            |              |            |  |

 

36

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**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 ofshares of the Company’s common stock. The Class B shareholder is entitledto elect one member of the Company’s Board of Directors but cannot vote for theelection of other directors of the Company. The Class B shareholder canvote on all other matters submitted to the common shareholders. The Class Bcommon stock participates equally with the common stock in all dividends andother distributions duly declared by the Company’s Board of Directors. The Class Bcommon shares are converted into an equal number of shares of common stock if:Suzuki owns less than 15% of the aggregate number of outstanding common and Class Bcommon shares; 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.

 

In addition, the Companyhas a Stock Purchase Agreement with Suzuki that prohibits the purchase ofadditional shares of the Company’s common stock unless, following suchpurchase, Suzuki’s ownership is less than or equal to 32% of the aggregateoutstanding shares of common and Class B common stock. The Company has thefirst right of refusal to purchase any shares Suzuki intends to sell. Suzukihas agreed not to compete in the manufacture of snowmobiles or related parts solong 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’s Board ofDirectors is authorized to issue 2,050,000 shares of $1.00 par value preferredstock in one or more series. The board can determine voting, conversion,dividend and redemption rights and other preferences of each series. No shareshave been issued.

 

**Shareholders’ Rights Plan**

 

In connection with theadoption 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 purchaseone-hundredth of a share of Series B Junior Participating preferred stockat a stated price, or to purchase either the Company’s common shares or commonshares of an acquiring entity at half their market value. The Rights related tothis plan expire September 17, 2011.

 

**Share Repurchase Authorization**

 

The Company invested$10,763,000, $19,773,000 and $14,931,000 during 2008, 2007 and 2006 to repurchase and cancel 623,800, 1,134,800and 726,500  shares of common stock,pursuant to Board of Directors’ authorizations. Included in the 2007repurchases are 615,000 shares of Class B stock from Suzuki MotorCorporation, repurchased for $10,781,000 or $17.53 per share.  At March 31, 2008, authorization torepurchase $10,001,000 or approximately 1,372,000 shares remain outstanding.

 

**L             SEGMENTREPORTING**

 

Sales to foreigncustomers, located primarily in Canada, amounted to $248,601,000, $228,008,000and $204,132,000 in 2008, 2007 and 2006. The Company has identifiablelong-lived assets of approximately $2,751,000 and $2,869,000 located in Canadaand Europe at March 31, 2008 and 2007.

 

37

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

Board of Directors andShareholders of

Arctic Cat Inc.

 

We have auditedthe accompanying consolidated balance sheets of Arctic Cat Inc. andsubsidiaries as of March 31, 2008 and March 31, 2007, and the relatedconsolidated statements of operations, shareholders’ equity and cash flows foreach of the three years in the period ended March 31, 2008.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free of materialmisstatement.  An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in theconsolidated financial statements.  Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Arctic Cat Inc. andsubsidiaries as of March 31, 2008 and March 31, 2007 and theconsolidated results of their operations and their consolidated cash flows foreach of the three years in the period ended March 31, 2008 in conformitywith accounting principles generally accepted in the United States of America.

 

As discussed inNote I to the consolidated financial statements, the Company adopted FinancialAccounting Standards Board Interpretation No. 48; Accounting forUncertainty in Income Taxes, effective April 1, 2007.

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of Arctic Cat Inc.’sinternal control over financial reporting as of March 31, 2008, based oncriteria established in *Internal Control –Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated June 10,2008 expressed an unqualified opinion on the effectiveness of Arctic Cat Inc.and subsidiaries internal control over financial reporting.

 

 

/s/ GRANT THORNTON LLP

 

Minneapolis, Minnesota

June 10, 2008

 

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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)(10)               |
| **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)**          |       | 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(b)**          |       | Form of Employment  Agreement between the Company and each of its executive officers.                                                                                                                                                                                                                                                                        |       | (1)                   |
| **10(c)**          |       | Floorplan Repurchase  Agreement dated July 13, 1984, between the Company and ITT Commercial  Finance Corp.                                                                                                                                                                                                                                                   |       | (1)                   |
| **10(d)**          |       | 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(e)**          |       | Discretionary Revolving  Credit Facility, dated as of June 6, 1997, between the Company and Wells  Fargo Bank Minnesota, National Association.                                                                                                                                                                                                               |       | (3)                   |
| **10(f)**          |       | 2002  Stock Plan                                                                                                                                                                                                                                                                                                                                                  |       | (5)                   |
| **10(g)**          |       | Form of  Incentive Stock Option Agreement for 2002 Stock Plan                                                                                                                                                                                                                                                                                                |       | (7)                   |
| **10(h)**          |       | Form of Non-Qualified Stock Option Agreement  for 2002 Stock Plan                                                                                                                                                                                                                                                                                            |       | (7)                   |
| **10(i)**          |       | Form of Director Non-Qualified Stock Option Agreement  for 2002 Stock Plan                                                                                                                                                                                                                                                                                   |       | (7)                   |
| **10(j)**          |       | 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(k)**          |       | Repurchase  Agreement, dated as of January 20, 2003, By****and****between Arctic Cat Sales Inc. and Textron Financial  Corporation                                                                                                                                                                                                                           |       | (6)                   |
| **10(l)**          |       | 2007  Omnibus Stock and Incentive Plan                                                                                                                                                                                                                                                                                                                            |       | (8)                   |
| **10(m)**          |       | Form of  Incentive Stock Option Agreement for 2007 Omnibus Stock and Incentive Plan                                                                                                                                                                                                                                                                          |       | (8)                   |
| **10(n)**          |       | Form of  Non-Qualified Stock Option Agreement for 2007 Omnibus Stock and Incentive  Plan                                                                                                                                                                                                                                                                     |       | (8)                   |
| **10(0)**          |       | Form of  Director Stock Option Agreement for 2007 Omnibus Stock and incentive Plan                                                                                                                                                                                                                                                                           |       | (9)                   |
| **10(p)**          |       | Form of  Restricted Stock Agreement for 2007 Omnibus Stock and Incentive Plan                                                                                                                                                                                                                                                                                |       | (9)                   |
| **10(q)**          |       | Form of  Stock-Settled Appreciation Rights Agreement for 2007 Omnibus Stock and  Incentive Plan                                                                                                                                                                                                                                                              |       | (9)                   |
| **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) Filedwith this Form 10-K.

 

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

 

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

 

(5) Incorporated by reference to Exhibit 99.1to the Company’s Registration on Form S-8 filed with the SEC on September 6,2002.

 

(6) Incorporated herein by referenceto the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31,2003.

 

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

 

(8) Incorporated herein by referenceto the Company’s Current Report of Form 8-K filed August 14, 2007.

 

(9) Incorporated herein by referenceto the Company’s Current Report of Form 8-K filed April 7, 2008.

 

(10) Incorporated by reference to theCompany’s Current Report on Form 8-K filed December 19, 2007.

 

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