Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC), Buell Motorcycle Company (Buell), MV Agusta (MV) and Harley-Davidson Financial Services (HDFS). HDMC produces heavyweight custom and touring motorcycles. HDMC manufactures five families of motorcycles: Touring, Dyna®, Softail®, Sportster® and VRSC. Buell produces American sport performance motorcycles. MV produces premium, high-performance sport motorcycles sold under the MV Agusta® brand and lightweight sport motorcycles sold under the Cagiva ® brand. HDFS provides wholesale and retail financing and insurance programs primarily to Harley-Davidson and Buell dealers and customers.

The Company operates in two business segments: Motorcycles & Related Products (Motorcycles) and Financial Services (Financial Services). The Company's reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations.

The "% Change" figures included in the "Results of Operations" section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented.

Overview

The Company's 2008 results were impacted by the difficult economic environment including lower consumer confidence and significant disruptions in global capital markets. The Company's 2008 net revenue and net income were down 2.3% and 29.9%, respectively, compared to 2007. Operating income for the Motorcycles segment was down 21.5% while operating income for the Financial Services segment decreased 61.0%. Diluted earnings per share were $2.79 in 2008, a 25.4% decrease compared to last year's $3.74.

The Company's independent dealer network was also impacted by the economy, with worldwide retail sales of Harley-Davidson motorcycles down 7.1% in 2008 as compared to 2007. In the U.S., retail sales of Harley-Davidson motorcycles in 2008 were down 13.0%, while international retail sales were up 10.3% as compared to 2007. However, international retail sales growth slowed to 0.7 % during the fourth quarter of 2008 as a result of deteriorating economic conditions outside the U.S.

Outlook(1)

In response to the 2008 results and an economic environment that continues to be challenging, the Company announced on January 23, 2009 a three-part strategy to deal with the impact of the recession and the worldwide slowdown in consumer demand. In addition, the Company provided 2009 guidance that includes a planned decrease in Harley-Davidson motorcycle shipments and gross margin.

(1) Note Regarding Forward-Looking Statements

The Company intends that certain matters discussed in this report are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company "believes," "anticipates," "expects," "plans," or "estimates" or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including under the caption "Risk Factors" in Item 1A and under "Cautionary Statements" in Item 7 of this report. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are made only as of the date of the filing of this report (February 17, 2009), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

The Company's strategy is focused on three critical areas:

• investing in the Harley-Davidson brand;

• restructuring the operations and reducing the cost-structure; and

• obtaining funding for HDFS.

To execute the first part of this strategy, the Company is reinforcing its support of the Harley-Davidson brand, through its ongoing marketing efforts to reach out to emerging rider groups, including younger and diverse riders. In addition, the Company will continue to focus on product innovations targeted at specific growth opportunities within its strong core customer base and new riders.

The second aspect of the Company's strategy will be implemented through a combination of restructuring actions. The restructuring actions are designed to reduce excess capacity, exit ancillary business operations and lower the Company's cost structure. The Company's planned actions include:

• consolidating its two engine and transmission plants in the Milwaukee area into its facility in Menomonee Falls, Wisconsin;

• consolidating paint and frame operations at its assembly facility in York, Pennsylvania into existing operations at that site;

• closing its distribution facility in Franklin, Wisconsin, consolidating Parts and Accessories and General Merchandise distribution through a third party; and

• discontinuing the domestic transportation fleet.

In addition to these restructuring activities, the Company will also be reducing its hourly workforce due to lower production volumes and the salaried workforce to reduce operating expenses. In total, the Company expects to eliminate approximately 1,100 positions over 2009 and 2010. Of that total, approximately 800 will be hourly production positions and approximately 300 will be non-production, primarily salaried positions. The Company expects that approximately 800 positions (500 hourly production and 300 non-production) of the total will be eliminated in 2009 and all but approximately 100 of these reductions will occur in the first half of the year. The remaining 300 jobs will be eliminated during 2010 as the final stages of consolidating the engine and transmission operations are completed.

The Company estimates that costs associated with the restructuring activities will be incurred over 2009 and 2010 and will total approximately $110 million to $140 million. The Company expects that approximately 75% of these costs will be paid in cash with the balance consisting of non-cash charges. The Company expects to incur between $80 million and $100 million of these costs in 2009, with $30 million to $40 million in the first quarter. The remaining restructuring costs, between $30 million and $40 million, are expected to be incurred in 2010. Restructuring costs will be excluded from gross profit and disclosed separately in the Company's income statement.

The Company expects the ongoing annual benefit of its restructuring activities to be between $60 million and $70 million beginning in 2011. During 2009 and 2010, the Company expects that the annual benefit of these activities will be $10 million to $20 million and $30 million to $50 million, respectively.

The third aspect of the Company's strategy will focus on obtaining funding for HDFS. The Company is evaluating a range of options to provide the necessary liquidity for the wholesale and retail lending activities of HDFS. In order to meet HDFS' funding needs for the remainder of 2009, the Company intends to pursue a combination of actions, including (a) accessing the unsecured debt capital markets, (b) increasing and extending its existing asset-backed commercial paper conduit facility, (c) renewing its 364-day credit facility that expires in July 2009 and (d) gaining access to the asset-backed securitization market through the U.S. Federal Reserve's Term Asset-backed securities Loan Facility (TALF) program. These options are discussed in greater detail under "Liquidity and Capital Resources."

Given the uncertain and unpredictable global economy in 2009, the Company has decided not to provide 2009 earnings per share guidance at this time and has instead provided full year and quarterly shipment guidance, gross margin expectations and anticipated capital expenditures.

On January 23, 2009, the Company announced that it plans to ship between 264,000 and 273,000 Harley-Davidson motorcycles in 2009, a decrease of 10% to 13% compared to 2008. In the first quarter of 2009, the Company expects to ship between 74,000 to 78,000 Harley-Davidson motorcycles, a 3.0% to 8.5% increase over the first quarter of 2008 as the Company and its independent dealers and distributors prepare for the spring and summer selling season.

For the full year of 2009, the Company expects gross margin to be between 30.5% and 31.5%. The Company's gross margin expectations include anticipated benefits of the restructuring activities in 2009. However, these benefits are expected to be more than offset by three primary factors (as compared to 2008):

• higher anticipated fixed costs per unit resulting from the allocation of fixed costs over fewer units;

• lower anticipated gross margin resulting from a change in the motorcycle product mix; and

• lower anticipated gross margin resulting from the negative impact of foreign currency exchange rate changes.

Finally, the Company expects its capital expenditures in 2009 to be lower than in 2008, with planned expenditures of $180 million to $200 million in 2009. In addition, the Company expects to incur approximately $10 to $20 million of capital expenditures in connection with its restructuring activities in 2009.

Consolidated Results



                                                                                                    (Decrease)        %
(in millions, except earnings per share and effective income tax rate)    2008         2007          Increase       Change
Operating income from motorcycles & related products                     $ 966.4     $ 1,230.6     $     (264.2 )    (21.5 )%
Operating income from financial services                                 $  82.8     $   212.2     $     (129.4 )    (61.0 )%

Investment income                                                        $   9.5     $    22.3     $      (12.8 )    (57.3 )%

Interest expense                                                         $   4.5            -      $        4.5        N/M

Net income                                                               $ 654.7     $   933.8     $     (279.1 )    (29.9 )%

Diluted earnings per share                                               $  2.79     $    3.74     $      (0.95 )    (25.4 )%

Effective income tax rate                                                   36.7 %        35.5 %

As discussed in the Overview, operating income for both of the Company's segments was impacted by the difficult economic environment including lower consumer confidence and significant disruptions in global capital markets. Motorcycles operating income fell 21.5% during 2008, driven by a decrease in shipments of Harley-Davidson motorcycles. In addition, lower operating income from Financial Services driven by lower securitization income and a write-down of finance receivables and investment of retained securitization interests, contributed to the decrease in consolidated income from operations for 2008. Please refer to the detailed discussion of segment results following.

Investment income was lower during 2008 due to the decrease in average cash and marketable securities during the year. Interest expense during 2008 relates to debt incurred in connection with the acquisition of MV.

The Company's effective income tax rate for 2008 was 36.7% compared to 35.5% in 2007. The increase was due primarily to tax implications associated with the acquisition and ongoing operations of MV.

Diluted earnings per share during 2008 were down 25.4% from 2007 on lower net income which more than offset the positive impact of fewer weighted-average shares outstanding. Diluted earnings per share during 2008 were positively impacted by a decrease in the weighted-average shares outstanding, which were 234.5 million in 2008 compared to 249.9 million in 2007. The decrease in weighted-average shares outstanding was driven by the Company's repurchases of common stock over 2007 and 2008 through August. The Company's 2008 share repurchases are discussed in further detail under "Liquidity and Capital Resources."

Motorcycle Unit Shipments and Net Revenue

The following table includes wholesale motorcycle unit shipments for the
Motorcycles segment:



                                                                                   (Decrease)       %
                                                2008                2007            Increase      Change
Motorcycle Unit Shipments
United States                              206,309    68.0 %   241,539    73.1 %      (35,230 )    (14.6 )%
International                               97,170    32.0 %    89,080    26.9 %        8,090        9.1

Harley-Davidson motorcycle units           303,479   100.0 %   330,619   100.0 %      (27,140 )     (8.2 )


Touring motorcycle units                   101,887    33.6 %   114,076    34.5 %      (12,189 )    (10.7 )
Custom motorcycle units*                   140,908    46.4 %   144,507    43.7 %       (3,599 )     (2.5 )
Sportster motorcycle units                  60,684    20.0 %    72,036    21.8 %      (11,352 )    (15.8 )

Harley-Davidson motorcycle units           303,479   100.0 %   330,619   100.0 %      (27,140 )     (8.2 )


Buell motorcycle units                      13,119              11,513                  1,606       13.9 %

* Custom motorcycle units, as used in this table, include Dyna, Softail, VRSC and CVO models.

During 2008, the Company shipped 303,479 Harley-Davidson motorcycles, a decrease of 27,140 motorcycles, or 8.2%, from last year. The Company's shipments in the U.S. in 2008 continued to be negatively impacted by the challenging economic environment, but were consistent with the Company's expectations to ship 23,000 to 27,000 fewer Harley-Davidson motorcycles in 2008 than were shipped in 2007. The Company's shipments in international markets grew during 2008, and the percentage of units shipped to international customers increased, consistent with the Company's strategic focus on global markets.

The following table includes net revenue for the Motorcycles segment (in millions):

                                                             (Decrease)        %
                                      2008        2007        Increase       Change
      Net Revenue
      Harley-Davidson motorcycles   $ 4,278.2   $ 4,446.6   $     (168.4 )     (3.8 )%
      Buell motorcycles                 123.1       100.5           22.6       22.4

                                      4,401.3     4,547.1         (145.8 )     (3.2 )

      Parts & Accessories               858.7       868.3           (9.6 )     (1.1 )
      General Merchandise               313.8       305.4            8.4        2.8
      Other                              20.5         6.0           14.5        N/M

      Net revenue                   $ 5,594.3   $ 5,726.8   $     (132.5 )     (2.3 )%

Motorcycles segment net revenue decreased $132.5 million, or 2.3%. Net revenue was lower by approximately $323 million primarily due to the 8.2% lower shipment volume of Harley-Davidson motorcycles. Partially offsetting the unfavorability in volume was favorability resulting from changes in foreign currency exchange rates of approximately $95 million and product mix changes of approximately $70 million. In addition, wholesale price increases on Harley-Davidson motorcycles contributed approximately $21 million to revenue.

Harley-Davidson Motorcycle Retail Sales

The Company sells its motorcycles at wholesale to an independent network of dealers and distributors who in turn sell the Company's products at retail. Worldwide retail sales of Harley-Davidson motorcycles decreased 7.1% during 2008 relative to 2007. Retail sales of Harley-Davidson motorcycles decreased 13.0% in the United States while growing 10.3% internationally. On an industry-wide basis, the heavyweight (651+cc) portion of the market was down 7.0% in the United States while growing 2.2% in Europe when compared to the same periods in 2007. The following table includes retail unit sales of Harley-Davidson motorcycles:

                  Harley-Davidson Motorcycle Retail Sales (a)

                              Heavyweight (651+cc)



                                                                        (Decrease)       %
                                                     2008      2007      Increase      Change
North America Region
United States                                       218,939   251,772      (32,833 )    (13.0 )%
Canada                                               16,502    14,779        1,723       11.7

Total North America Region                          235,441   266,551      (31,110 )    (11.7 )

Europe Region (Includes Middle East and Africa)
Europe(b)                                            40,725    38,866        1,859        4.8
Other                                                 4,317     3,436          881       25.6

Total Europe Region                                  45,042    42,302        2,740        6.5

Asia Pacific Region
Japan                                                14,654    13,765          889        6.5
Other                                                10,595     9,689          906        9.4

Total Asia Pacific Region                            25,249    23,454        1,795        7.7

Latin America Region                                  8,037     5,467        2,570       47.0

Total Worldwide Retail Sales                        313,769   337,774      (24,005 )     (7.1 )%

(a) Data source for retail sales figures shown above is sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning retail sales and this information is subject to revision. Only Harley-Davidson motorcycles are included in the Harley-Davidson Motorcycle Retail Sales data.

(b) Data for Europe include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

The following table includes industry retail motorcycle registration data:

                                                    (Decrease)       %
                                 2008      2007      Increase      Change
             United States(a)   479,776   516,083      (36,307 )     (7.0 )%
             Europe(b)          397,336   388,681        8,655        2.2 %

(a) U.S. industry data includes 651+cc models derived from submission of motorcycle retail sales by each major manufacturer to an independent third party.

(b) Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. Industry retail motorcycle registration data includes 651+cc models derived from information provided by Giral S.A., an independent agency.

Industry retail registration data for the remaining international markets has not been presented because the Company does not believe definitive and reliable registration data is available at this time.

Cost of Goods Sold

Cost of goods sold was $3.66 billion for the Motorcycles segment in 2008, an increase of $50.7 million or 1.4% versus last year. The increased cost was led by higher manufacturing and raw material costs of approximately $117 million. Manufacturing costs increased partially as the result of a higher fixed cost per unit due to allocating fixed costs to fewer units. Additionally, higher manufacturing costs were the result of increased product cost as the Company invests in new models and increased product content, such as new features and options on the Company's motorcycles. Raw material surcharges were approximately $23 million higher when compared to the prior year. Cost of goods sold also increased by approximately $29 million resulting from changes in foreign currency exchange rates and approximately $42 million related to changes in product mix. Partially offsetting these cost increases were lower costs of approximately $137 million resulting from lower shipment volumes.

Gross Profit

Gross profit was $1.93 billion for the Motorcycles segment for 2008, a decrease of $183.3 million or 8.7% versus 2007. Gross margin for 2008 was 34.5% compared to 36.9% for 2007. The factors impacting the change in gross margin are detailed under "Motorcycle Unit Shipments and Net Revenue" and "Cost of Goods Sold" above.

Financial Services

The following table includes the condensed statements of operations for the
Financial Services segment (in millions):



                                                                   Increase         %
                                              2008      2007      (Decrease)      Change
  Interest income                            $ 290.1   $ 196.8   $       93.3       47.4 %
  Income from securitizations                   13.4      97.6          (84.2 )    (86.2 )
  Other income                                  73.5     121.8          (48.3 )    (39.7 )

  Financial services income                    377.0     416.2          (39.2 )     (9.4 )

  Interest expense                             136.8      81.5           55.3       67.9
  Operating expenses                           157.4     122.5           34.9       28.5

  Financial services expense                   294.2     204.0           90.2       44.2

  Operating income from financial services   $  82.8   $ 212.2   $     (129.4 )    (61.0 )%

Interest income benefited from higher average retail outstanding receivables, partially offset by lower wholesale lending rates and slightly lower average wholesale outstanding receivables. Interest expense was higher due to increased borrowings to support growth in outstanding retail receivables, partially offset by lower borrowing rates. The increase in retail receivables outstanding was driven by a reduction in term asset-backed securitization activity during 2008 due to capital market volatility. The increase in operating expenses is primarily due to a $28.4 million increase in the provision for credit losses.

Other income decreased during 2008 as compared to 2007 primarily due to a $37.8 million charge to earnings from the lower of cost or market value of its finance receivables held for sale. HDFS uses discounted cash flow methodologies to estimate the fair value of finance receivables held for sale that incorporate appropriate assumptions for discount rate, funding costs and credit enhancement, as well as estimates concerning credit losses and prepayments that, in management's judgment, reflect assumptions marketplace participants would use. Any amount by which cost exceeds fair value is accounted for as a valuation adjustment with an offset to other income. The decline in fair value below cost was due to higher projected credit losses, increased funding costs and an increased discount rate in the fourth quarter of 2008 from 12% to 18%.

Income from securitizations during 2008 was lower as compared to 2007 due to a $41.4 million write-down of certain retained interests during 2008, a loss on the first quarter 2008 securitization transaction and the absence of a securitization transaction in the last three quarters of 2008. This compares to a $9.9 million write-down and three securitization transactions completed in 2007.

During 2008, HDFS sold $540.0 million in retail motorcycle loans in a securitization transaction and recognized a loss of $5.4 million, or 0.99% as a percentage of loans sold. This compares to a gain as a percentage of loans sold of 1.42%, or $36.0 million, on $2.53 billion of loans securitized in 2007. The loss in 2008 was driven by increased securitization funding costs due to capital market volatility and higher projected credit losses. In the 2008 securitization transaction, HDFS retained $54.0 million of the subordinated securities issued by the securitization trust. The subordinated securities that were retained have been included in the investment in retained securitization interests (a component of finance receivables held for investment) in the Consolidated Balance Sheets. The cash proceeds from the 2008 securitization transaction are net of the cost of the retained subordinated securities.

Income from securitizations was also negatively impacted in 2008 by a $41.4 million write down of certain retained securitization interests. The write downs, which occurred in June and December of 2008 and are considered permanent impairments, resulted from a decline in the fair value of certain retained securitization interests due to higher actual and anticipated credit losses on those securitization portfolios and an increase in the discount rate from 12% to 18% in the fourth quarter of 2008. This compares to an impairment charge of $9.9 million incurred in 2007.

HDFS reviews its assumptions for determining the fair value of the investment in retained securitization interests each quarter. Key assumptions include expected losses, prepayment speed and discount rate. HDFS determines these assumptions by reviewing historical trends and current economic conditions. Given the challenging U.S. economy, credit losses on HDFS' retail installment loans have increased, and as a result, the fair value of retained securitization interests has declined and in some cases this decline is permanent. Depending on the behavior of future loss rates, prepayment speeds and the discount rate, HDFS could experience further write-downs of its retained interests, which had a fair value of $330.7 million as of December 31, 2008. A write-down in the retained securitization interest generally represents a non-cash charge in the period in . . .