Overview

Arctic Cat Inc. (the "Company") designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles ("ATVs") under the Arctic Cat brand name, as well as related parts, garments and accessories ("PG&A") principally through its facilities in Thief River Falls, Minnesota. The Company markets its products through a network of independent dealers located throughout the United States, Canada, and Europe and through distributors representing dealers in Europe, the Middle East, Asia, and other international markets. The Arctic Cat brand name has existed for more than 45 years and is among the most widely recognized and respected names in the snowmobile industry. The Company trades on the NASDAQ Global Select Market under the symbol "ACAT."

Executive Overview

The following discussion pertains to the results of operations and financial position of the Company for the quarter ended June 30, 2009. Due to the seasonality of the snowmobile, ATV and PG&A businesses, and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year.

For the first quarter ended June 30, 2009 the Company reported net sales of $69.4 million, a net loss of $5.9 million and a loss per share of $0.33 compared to June 30, 2008 quarterly net sales of $93.9 million, a net loss of $7.0 million and a loss per share of $0.39. Lower operating expenses and an increased tax benefit contributed to a narrower loss for the quarter.

Overall demand for recreational products remains weak, due to the continued difficult global economic conditions, higher unemployment, historically low consumer confidence and the continued credit crisis. As a result, recreational product retail sales declined further in the first quarter ended June 30, 2009. Retail sales of the Company's ATVs fared somewhat better than the industry as a whole for the first quarter. However, because of the weak retail environment, the Company expects significantly lower ATV and snowmobile sales to our dealers as it aligns dealer inventories to better match consumer demand. Given this situation, the Company has implemented several profitability initiatives aimed at improving our margins and, reducing operating expenses to achieve improved operating results this fiscal year on lower sales.

Results of Operations



 Product Line Sales for the Quarter Ended June 30



                                                                                Percent
                                           Percent of              Percent of    Change
                                             Total                   Total      2009 vs.
($ in thousands)                  2009       Sales        2008       Sales        2008
ATV                             $ 32,171           46 % $ 53,774           57 %      (40 )%
Snowmobile                        17,917           26 %   21,416           23 %      (16 )%
Parts, garments & accessories     19,282           28 %   18,687           20 %        3 %
Net Sales                       $ 69,370          100 % $ 93,877          100 %      (26 )%

Product Line Sales

During the first quarter of fiscal 2010, net sales decreased 26% to $69.4 million from $93.9 million in the first quarter of fiscal 2009. ATV unit volume decreased 51%, snowmobile unit volume decreased 37% and parts, garments and accessories sales increased $595,000. ATV and snowmobile unit volume decreased primarily due to declining industrywide ATV and snowmobile retail sales and planned reductions in production. PG&A sales increases during the first quarter of fiscal 2010 were primarily due to the timing of preseason snowmobile parts and accessory shipments and are not indicative of PG&A sales for the full fiscal year.

Cost of Goods Sold for the Quarter Ended June 30



                                                                                 Percent
                                           Percent of                             Change
                                             Total                 Percent of    2009 vs.
($ in thousands)                  2009       Sales        2008     Total Sales     2008
Snowmobiles & ATV units         $ 50,342         72.6 % $ 69,479          74.0 %    (27.5 )%
Parts, garments & accessories   $ 11,480         16.5 % $ 11,521          12.3 %     (0.4 )%
Total Cost of Goods Sold        $ 61,822         89.1 % $ 81,000          86.3 %    (23.7 )%

Cost of Goods Sold

During the first quarter of fiscal 2010 cost of sales decreased 23.7% to $61.8 million from $81.0 million for the first quarter of fiscal 2009. Fiscal 2010 snowmobile and ATV unit cost of sales decreased 27.5% to $50.3 million from $69.5 million in line with decreases in unit sales during the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. The first quarter of fiscal 2010 cost of sales for PG&A were essentially flat at $11.5 million compared to $11.5 million for fiscal 2009, in line with flat sales.

Gross Profit for the Quarter Ended June 30,

Change ($ in thousands) 2009 2008 2009 vs. 2008 Gross Profit Dollars $ 7,548 $ 12,877 (41 )% Percentage of Sales 10.9 % 13.7 % (3 )%

Gross Profit

Gross profit decreased 41% to $7.5 million in the first quarter of fiscal 2010 from $12.9 million in the first quarter of fiscal 2009. The gross profit percentage for the first quarter of fiscal 2009 decreased to 10.9% versus 13.7% in 2009. The decrease in the 2010 gross profit percentage was primarily due to lower ATV and snowmobile volumes and were offset partially by increased PG&A sales.

Operating Expenses for the Quarter Ended June 30,

                                                    Change
($ in thousands)             2009       2008     2009 vs 2008
Selling and Marketing      $  6,422   $  8,884            (28 )%
Research & Development        3,170      4,680            (32 )%
General & Administrative      6,634      7,467            (11 )%
Total Operating Expenses   $ 16,226   $ 21,031            (23 )%
Percentage of Sales            23.4 %     22.4 %

Operating Expenses

Selling and Marketing expenses decreased 28% to $6.4 million in the first quarter of fiscal 2010 from $ 8.9 million in the first quarter of fiscal 2009, primarily due to lower advertising expenses. Research and Development expenses decreased 32% to $3.2 million in the first quarter of fiscal 2010 compared to $4.7 million in the first quarter of fiscal 2009 due primarily to lower compensation and development expenses. General and Administrative expenses decreased 11% to $6.6 million in the first quarter of fiscal 2010 from $7.5 million in the first quarter of fiscal 2009 due primarily to decreased operating costs of the European subsidiary partially offset by increased bank fees.

Other Income / Expense

Interest income decreased 94.4% to $4,000 in the first quarter of fiscal 2010 from $72,000 in the first quarter of fiscal 2009. Interest expense decreased 64.9% to $72,000 in the first quarter of fiscal 2010 from $204,000 in the first quarter of fiscal 2009. Interest income was primarily affected by the lower cash levels at the beginning of the fiscal year compared to last year. Interest expense was affected by lower borrowing levels in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 primarily due to reduced inventory levels in the first quarter of fiscal 2010 and the Company's efforts to conserve cash.

Liquidity and Capital Resources

The seasonality of the Company's snowmobile production cycle and the lead time between the commencement of snowmobile and ATV production in the early spring and commencement of shipments late in the first quarter have resulted in significant fluctuations in the Company's working capital requirements. Historically, the Company has financed its working capital requirements out of available cash balances at the beginning and end of the production cycle and with short-term bank borrowings during the middle of the cycle. The Company's cash balances traditionally peak early in the fourth quarter and then decrease as working capital requirements increase when the Company's snowmobile and spring ATV production cycles begin. The increase in the Company's inventory and receivable balances as of June 30, 2009 compared to March 31, 2009 is due to the seasonality of the Company's snowmobile and ATV business. Inventory was $127.1 million at June 30, 2009 compared to $156.2 at June 30, 2008 and $120.8 million on March 31, 2009. Accounts receivable was $42.6 million at June 30, 2009 compared to $45.4 million at June 30, 2008. The decrease in accounts receivable is due to decreased ATV and snowmobile sales. The accounts receivable balance at March 31, 2009 was $ 38.2 million. During the three months ended June 30, 2009 and 2008, the Company had no repurchases of its common shares. Cash and short-term investments were $7,871,000 and $5,790,000 at June 30, 2009 and 2008, respectively. The Company's investment objectives are first, safety of principal and second, rate of return.

The Company believes that the cash generated from operations and available cash will be sufficient to meet its working capital, and capital expenditure requirements on a short and long-term basis. Additionally, to preserve cash for operations, on January 29, 2009, the Board of Directors voted to suspend regular quarterly cash dividends on its common stock. The Board of Directors' decision to suspend the dividend will conserve more than $5 million in cash annually, and the Company believes such decision is prudent, given the current slowdown in our industry, the Company's anticipated near-term earnings and the general macroeconomic conditions.

Line of Credit

The Company has operated this year under a secured credit agreement with a bank for the issuance of up to $60,000,000 of documentary and stand-by letters of credit and for working capital. The scheduled decreases in the working capital borrowing limits are in line with the Company's bank line needs (see Note F). This agreement will expire March 31, 2010, by which time the Company expects to have a new credit facility in place. The Company was in compliance with the credit agreement as of June 30, 2009.

Significant Accounting Policies

See the Company's most recent Annual Report on Form 10-K for the year ended March 31, 2009 for a discussion of its critical accounting policies.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP FAS 107-1"). FSP FAS 107-1 requires interim reporting period disclosure about the fair value of financial instruments, effective for interim reporting periods ending after June 15, 2009. The Company has adopted the disclosure requirements of FSP 107-1. Due to their nature, the carrying value of cash, receivables, payables and debt obligations approximates fair value.

In May 2009, the FASB issued Statement No. 165, "Subsequent Events." Statement No. 165 incorporates guidance into accounting literature that was previously addressed only in auditing standards. The statement refers to subsequent events that provide additional evidence about conditions that existed at the balance-sheet date as "recognized subsequent events". Subsequent events which provide evidence about conditions that arose after the balance-sheet date but prior to the issuance of the financial statements are referred to as "non-recognized subsequent events". It also requires companies to disclose the date through which subsequent events have been evaluated and whether this date is the date the financial statements were issued or the date the financial statements were available to be issued. Statement No. 165 is effective for interim and annual periods ending after June 15, 2009. The Company has adopted this new standard.

In June 2009, the FASB issued Statement No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles." Statement No. 168 replaces FASB Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles," and establishes the FASB Accounting Standards Codification TM (the "Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP). Statement No. 168 is effective for interim and annual periods ending after September 15, 2009. The Company will begin to use the new Codification when referring to GAAP in its quarterly report on Form 10-Q for the fiscal period ending September 30, 2009. This will not have an impact on the consolidated results of the Company.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB statement No. 133," which requires increased disclosure about the Company's strategies and objectives for using derivative instruments; the location and amounts of derivative instruments in the Company's financial statements; how derivative instruments and related hedged items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities;" and how derivative instruments and related hedged items affect the Company's financial position, financial performance, and cash flows. Certain disclosures are also required with respect to derivative features that are credit-risk related. SFAS No. 161 became effective for the Company as of January 1, 2009 on a prospective basis. The adoption of this standard did not have a material impact on the Company's consolidated results of operations or financial condition.

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations." SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquired Company and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 141(R) did not have any significant impact on the Company's accounting treatment for business combinations on a prospective basis beginning in the period it was adopted.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements. This Quarterly Report on Form 10-Q contains forward-looking statements that reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. The words "aim," "believe," "expect," "anticipate," "intend," "estimate," and other expressions that indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to: product mix and volume; competitive pressure on sales, pricing and sales incentives; increase in material or production cost which cannot be recouped in product pricing; changes in the sourcing of engines from Suzuki; interruption of dealer floor plan financing; warranty

expenses and product recalls; foreign currency exchange rate fluctuations; product liability claims and other legal proceedings in excess of reserves or insured amounts; environmental and product safety regulatory activity; effects of the weather; general economic conditions and political changes, interest rate changes and consumer demand and confidence. The Company does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.