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Article by DailyStocks_admin    (01-28-08 05:03 AM)

Description
The Daily Magic Formula Stock for 01/26/2008 is Harley-Davidson, Inc.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Harley-Davidson, Inc. was incorporated in 1981, at which time it purchased the Harley-Davidson ® motorcycle business from AMF Incorporated in a management buyout. In 1986, Harley-Davidson, Inc. became publicly held. Unless the context otherwise requires, all references to the “Company” include Harley-Davidson, Inc. and all of its subsidiaries. The Company operates in two segments: the Motorcycles & Related Products segment and the Financial Services segment. 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 Motorcycles & Related Products (Motorcycles) segment includes the group of companies doing business as Harley-Davidson Motor Company (Motor Company) and the group of companies doing business as Buell Motorcycle Company (Buell). The Motorcycles segment designs, manufactures and sells at wholesale primarily heavyweight (engine displacement of 651+cc) touring, custom and performance motorcycles as well as a complete line of motorcycle parts, accessories, clothing and collectibles. The Company, which is the only major American motorcycle manufacturer, has had the largest share of the United States heavyweight (651+cc) motorcycle market since 1986. During 2006, the Company’s market share, based on retail registrations of new Harley-Davidson motorcycles, was 49.3% in the United States (data provided by the Motorcycle Industry Council).

The Financial Services (Financial Services) segment includes the group of companies doing business as Harley-Davidson Financial Services (HDFS). HDFS provides wholesale and retail financing and insurance programs primarily to Harley-Davidson and Buell dealers and their retail customers. HDFS conducts business in the United States, Canada and Europe.

See Note 11 to the Consolidated Financial Statements for financial information related to the Company’s business segments.

Motorcycles — The primary business of the Motorcycles segment is to design and manufacture premium motorcycles for the heavyweight market and sell them at wholesale. The Company is best known for its Harley-Davidson motorcycle products, but also offers a line of motorcycles and related products under the Buell brand name. The Company’s worldwide motorcycle sales generated approximately 80% of the total net revenue in the Motorcycles segment during each of the years 2006, 2005 and 2004, respectively.

The Motor Company’s Harley-Davidson branded motorcycle products emphasize traditional styling, design simplicity, durability and quality. The Motor Company manufactures five families of motorcycles: Touring, Dyna™, Softail ® , Sportster ® , and VRSC™. The first four of these motorcycle families are powered by an air-cooled, twin-cylinder engine with a 45-degree “V” configuration. The VRSC family is powered by a liquid-cooled, twin-cylinder engine with a 60-degree “V” configuration. The Motor Company’s Harley-Davidson engines range in size from 883cc’s to 1800cc’s.

The Motor Company’s 2007 model year line up includes 35 models of Harley-Davidson heavyweight motorcycles, with domestic manufacturer’s suggested retail prices ranging from $6,595 to $20,195. The Motor Company also offers limited-edition, factory-custom motorcycles through its Custom Vehicle Operation (CVO) program. Motorcycles sold through the CVO program are available in limited quantities and offer unique features, paint schemes and accessories. The Motor Company currently has four motorcycle model offerings available through the CVO program with domestic manufacturer’s suggested retail prices ranging from $24,995 to $33,495.

The average U.S. retail purchaser of a new Harley-Davidson motorcycle is a married male in his mid-forties (two-thirds of these purchasers are between the ages of 35 and 54) with a median household income of approximately $81,700. These customers generally purchase a motorcycle for recreational purposes rather than to provide transportation. Nearly two-thirds of the U.S. retail sales of new Harley-Davidson motorcycles are to buyers with at least one year of education beyond high school and 30% of the buyers have college degrees. Approximately 12% of U.S. retail motorcycle sales of new Harley-Davidson motorcycles are to female buyers. (Source: 2006 Company studies)

The Company’s Buell ® motorcycle products emphasize innovative design, responsive handling and overall performance. Buell currently manufactures and sells ten models, including nine heavyweight models in its XB family, and the Blast ® . The Buell XB motorcycles focus on superior handling and are powered by either a 984cc (XB9) or a 1203cc (XB12) air-cooled, twin-cylinder engine with a 45-degree “V” configuration. The Buell XB motorcycle models have domestic manufacturer’s suggested retail prices ranging from $8,895 to $11,495. During 2006, Buell produced a limited production “race-only” motorcycle (XBRR) powered by a 1339cc air-cooled, 45-degree twin cylinder boasting a peak output rating of over 150 horsepower. The XBRR domestic manufacturer’s suggested retail price is $30,995. The Buell Blast is smaller and less expensive than the Buell XB models and is powered by a 492cc single-cylinder engine. The Blast, which competes in the standard market segment, has a domestic manufacturer’s suggested retail price of $4,695.

Buell attracts customers in the demographic age range of 25 to 55. The average U.S. retail purchaser of a new Buell XB motorcycle is a male at the age of 42 with a household income of approximately $94,800. Approximately 3% of all new Buell XB U.S. retail motorcycle sales are to females. The average U.S. retail purchaser of a new Buell Blast is at the age of 41, with nearly one-half of them being female. Half of new Buell Blast purchasers have never owned a motorcycle before and 95% of them had never owned a Buell motorcycle before. (Source: 2006 Company studies)

The total motorcycle market, including the heavyweight portion of the market, is comprised of the following four segments:

• standard (emphasizes simplicity and cost)

• performance (emphasizes handling and acceleration)

• custom (emphasizes styling and individual owner customization)

• touring (emphasizes comfort and amenities for long-distance travel)

The touring segment of the heavyweight market was pioneered by the Company and includes the Harley-Davidson Touring family of motorcycles which are equipped with fairings, windshields, saddlebags and Tour Pak ® luggage carriers. The custom segment of the market includes motorcycles featuring the distinctive styling associated with classic Harley-Davidson motorcycles and includes the Company’s Dyna, Softail, VRSC and Sportster families of motorcycles. The standard and performance segments of the market are served primarily by the Company’s Buell motorcycle line.

In the United States, suggested retail prices for the Company’s Harley-Davidson motorcycles range from being comparable to 50% higher than suggested retail prices for comparable motorcycles available in the market. Although there are some differences in accessories between the Company’s top-of-the line touring motorcycles and those of its competitors, suggested retail prices for these motorcycles are generally comparable. The Company’s larger-displacement custom motorcycles (Dyna, Softail and VRSC) represent its highest unit volumes. The Company believes its larger-displacement custom products continue to command a premium price because of the features, styling and higher resale value associated with Harley-Davidson custom products. The Company’s smallest displacement custom motorcycle (the 883cc Sportster) is price competitive with comparable motorcycles available in the market.

The Company’s 2006 surveys of retail purchasers in the United States indicate that three-quarters of the retail purchasers of its Sportster models either have previously owned competitive-brand motorcycles or are completely new to the sport of motorcycling. The Company expects to see sales of its Sportster models lead to future sales of its higher-priced models.

Since 1988, the Company’s research has consistently shown that retail purchasers of new Harley-Davidson motorcycles in the United States have a repurchase intent at or in excess of 90%. Research completed by the Company in 2006 shows that approximately 52% of all retail purchasers of new Harley-Davidson motorcycles in the United States had previously owned a Harley-Davidson motorcycle.

Parts & Accessories — The major Parts and Accessories (P&A) products are replacement parts (Genuine Motor Parts) and mechanical and cosmetic accessories (Genuine Motor Accessories). Worldwide P&A net revenue comprised 14.9%, 15.3% and 15.6% of net revenue in the Motorcycles segment in 2006, 2005 and 2004, respectively.

General Merchandise — Worldwide General Merchandise net revenue, which includes MotorClothes TM apparel and collectibles, comprised 4.8%, 4.6% and 4.5% of net revenue in the Motorcycles segment in 2006, 2005 and 2004, respectively.

Licensing — The Company creates an awareness of the Harley-Davidson brand among its customers and the non-riding public through a wide range of products for enthusiasts by licensing the name “Harley-Davidson” and other trademarks owned by the Company. The Company’s licensed products include t-shirts, jewelry, small leather goods, toys and numerous other products. The Company also licenses the use of its name in connection with a cafe located in Las Vegas, Nevada. Although the majority of licensing activity occurs in the U.S., the Company continues to expand these activities in international markets. Royalty revenues from licensing, included in Motorcycles segment net revenue, were $45.5 million, $43.0 million and $40.7 million in 2006, 2005 and 2004, respectively.

Other Services — The Company also provides a variety of services to its independent dealers including service and business management training programs, customized dealer software packages, delivery of its motorcycles, a motorcycle rental and tour program and Riders Edge ® , the Company’s rider training program.

Patents and Trademarks — The Company strategically manages its portfolio of patents, trade secrets, copyrights, trademarks and other intellectual property.

The Company and its subsidiaries own, and continue to obtain, patent rights that relate to its motorcycles and related products and processes for their production. Certain technology-related intellectual property is also protected, where appropriate, by license agreements, confidentiality agreements or other agreements with suppliers, employees and other third parties. The Company diligently protects its intellectual property, including patents and trade secrets, and its rights to innovative and proprietary technology. This protection, including enforcement, is important as the Company moves forward with investments in new products, designs and technologies. A patent review committee of the Motor Company and BMC, which is comprised of a number of key executives, manages the Company’s patent strategy and portfolio.

Trademarks are important to the Company’s motorcycle business and licensing activities. The Company has a vigorous worldwide program of trademark registration and enforcement to maintain and strengthen the value of the trademarks and prevent the unauthorized use of those trademarks. The HARLEY-DAVIDSON trademark and the Bar and Shield trademark are each highly recognizable to the public and are very valuable assets. The BUELL trademark is well-known in performance motorcycle circles, as is the associated Pegasus logo. Additionally, the Company uses numerous other trademarks, trade names and logos which are registered worldwide. The following are among the Company’s trademarks: HARLEY-DAVIDSON, H-D, Harley, the Bar & Shield Logo, MotorClothes, the MotorClothes Logo, Rider’s Edge, Harley Owners Group, H.O.G., the H.O.G. Logo, Softail, Sportster, V-Rod, Buell and the Pegasus Logo. The HARLEY-DAVIDSON trademark has been used since 1903 and the Bar and Shield trademark since at least 1910. The BUELL trademark has been used since 1984. All of the Company’s trademarks are owned by H-D Michigan, Inc, a subsidiary of the Company, which also manages the Company’s trademark strategy and portfolio.

Marketing — The Company’s products are marketed to retail customers primarily through dealer promotions, customer events and advertising through national television, print, radio and direct mailings, as well as internet advertising. Many of the Company’s marketing efforts are accomplished through a cooperative program with its independent dealers. The Company also sponsors racing activities and special promotional events and participates in many major motorcycle consumer shows and rallies.

On an ongoing basis, the Company promotes its products and the related lifestyle through the Harley Owners Group ® , or H.O.G. ® H.O.G. has over one million members worldwide and is the industry’s largest company-sponsored motorcycle enthusiast organization. The Company formed the Harley Owners Group in 1983 in an effort to encourage Harley-Davidson owners to become more actively involved in the sport of motorcycling. This group also sponsors many motorcycle events, including world wide rallies and rides for Harley-Davidson motorcycle enthusiasts.

The Company website (www.harley-davidson.com) is also utilized to market its products and services. The Web site features an online catalog which allows customers to create and share product wish lists, utilize a dealer locator and place catalog orders. Internet orders are sold and fulfilled by the participating authorized Harley-Davidson dealer selected by the customer. Dealers also handle any after-sale services that customers may require.

International Sales — The Company’s revenue from the sale of motorcycles and related products to independent dealers and distributors located outside of the United States was approximately $1.18 billion, $1.04 billion and $917.3 million, or approximately 20%, 19% and 18% of net revenue of the Motorcycles segment, during 2006, 2005 and 2004, respectively.

Distribution-United States — In the United States the Company sells its motorcycles and related products at wholesale to a network of approximately 679 independently-owned full-service Harley-Davidson dealerships. In addition, the Company sells at wholesale to the Overseas Military Sales Corporation, an entity that retails the Company’s products to members of the U.S. military. The U.S. independent dealer network includes 309 combined Harley-Davidson and Buell dealerships. With respect to sales of new motorcycles, approximately 80% of the U.S. dealerships sell the Company’s motorcycles exclusively. All independent dealerships stock and sell the Company’s P&A, general merchandise and licensed products, and perform service for the Company’s motorcycles. The Company’s independent dealers also sell a smaller portion of P&A, general merchandise and licensed products through “non-traditional” retail outlets. The “non-traditional” outlets, which are extensions of the main dealership, consist of Secondary Retail Locations (SRLs), Alternate Retail Outlets (AROs), and Seasonal Retail Outlets (SROs). SRLs are satellites of the main dealership and are developed to meet the service needs of the Company’s riding customers. SRLs also provide P&A, general merchandise and licensed products and are authorized to sell and service new motorcycles. AROs are located primarily in high traffic locations such as malls, airports or popular vacation destinations and focus on selling the Company’s general merchandise and licensed products. SROs are located in similar high traffic areas, but operate on a seasonal basis out of temporary locations such as vendor kiosks. AROs and SROs are not authorized to sell new motorcycles. There are approximately 97 SRLs, 69 AROs, and 10 SROs located in the United States.

Distribution-Europe — In the European region, the Company sells its motorcycles and related products at wholesale to independent dealers and distributors. The Company’s European management team is located in Oxford, England and is responsible for all of the Company’s sales, marketing and distribution activities in Europe, the Middle East and Africa and is further represented by the Company’s sales offices in the United Kingdom, France, Germany, Italy, the Netherlands, Spain and Switzerland. In the European region, there are 7 independent distributors and 354 independent Harley-Davidson dealerships serving 32 country markets. This includes 311 combined Harley-Davidson and Buell dealerships. Buell is further represented by 6 independent dealerships that do not sell Harley-Davidson motorcycles. In addition, the Company’s dealer network includes 21 ARO’s across Europe.

Distribution-Asia/Pacific — In the Asia/Pacific region, the Company sells its motorcycles and related products at wholesale to independent dealers and distributors. In Japan, the Company’s sales, marketing, and distribution of product is managed from its subsidiary in Tokyo, which sells motorcycles and related products at wholesale to a network of 123 independent Harley-Davidson dealers. This includes 55 combined Harley-Davidson and Buell dealerships. Buell is further represented by 2 dealerships that do not sell Harley-Davidson motorcycles.

The Company’s sales, marketing and distribution of Harley-Davidson and Buell products in Australia and New Zealand are managed from its subsidiary in Sydney, Australia. The subsidiary sells to a network of 48 independent Harley-Davidson dealers which includes 31 combined Harley-Davidson and Buell dealerships. Buell is further represented by 1 dealership that does not sell Harley-Davidson motorcycles.

The Company supplies product directly from its U.S. operations to the remaining Asia/Pacific dealers, which includes 7 Harley-Davidson dealers located in East and Southeast Asia.

Distribution-Latin America — The Company supplies all products sold in the Latin America region directly to independent dealers from its U.S. operations, with the exception of certain motorcycles sold in Brazil which are assembled and distributed by the Company’s subsidiary in Manaus, Brazil. In Latin America, 22 countries are served by 31 independent dealers. Brazil is the Company’s largest market in Latin America and is served by 10 independent dealers. Mexico, the region’s second largest market, has 11 independent dealers. In the remaining countries in the Latin America region there are 10 independent dealers.

Distribution-Canada — In Canada, the Company sells its motorcycles and related products at wholesale to a single independent distributor, Deeley Harley-Davidson Canada/Fred Deeley Imports Ltd. There are approximately 75 independent Harley-Davidson dealerships, two SRLs, two AROs and one SRO. In addition, 44 of the 75 dealerships are combined Harley-Davidson and Buell dealerships.

Seasonality — Over the last several years the Company has been working to increase the availability of its motorcycles at dealers to improve the customer experience. The Company believes that increased availability results in independent dealers providing wider selections of motorcycles at manufacturer’s suggested retail prices which in turn has a positive impact on the customer experience and better positions the Company to attract retail buyers that are new to the brand or new to the sport of motorcycling. As a result of improving the availability of its motorcycles to customers, the timing of retail purchases is now tracking more closely with the riding season, requiring the Company and its independent dealers to balance the economies of level production with a more seasonal retail sales pattern.

In general, the Motor Company has not experienced similar seasonal fluctuations in its wholesale sales. The Company’s independent dealers typically build their inventory levels in the late fall and winter in anticipation of the spring and summer selling seasons. The availability of floor plan financing helps allow dealers to manage these seasonal increases in inventory. The Company also offers financing assistance to its dealers in the United States as a way to manage seasonal increases in inventory. Retail Customer and Dealer Financing — The Company believes that HDFS, as well as other financial services companies, provide adequate financing to the Company’s independent distributors, dealers and their retail customers. HDFS provides financing to the Company’s independent distributors, dealers and to the retail customers of those dealers in the U.S. and Canada. HDFS also provides wholesale financing to many of the Company’s independent dealers in Europe. The Company’s customers in the Asia/Pacific and Latin America regions are not serviced by HDFS, but have access to financing though other established financial services companies.

Competition — The heavyweight (651+cc) motorcycle market is highly competitive. The Company’s major competitors are based outside the U.S. and generally have financial and marketing resources that are substantially greater than those of the Company. They also have larger worldwide revenue and are more diversified than the Company and compete in all four segments of the market. In addition to these larger, established competitors, the Company has competitors headquartered in the United States. These competitors generally offer heavyweight motorcycles with traditional styling that compete directly with many of the Company’s products. These competitors currently have production and sales volumes that are lower than the Company’s and have considerably lower domestic market share than the Company.

Competition in the heavyweight motorcycle market is based upon a number of factors, including price, quality, reliability, styling, product features, customer preference and warranties. The Company emphasizes quality, reliability and styling in its products and offers a two-year warranty for its motorcycles. The Company regards its support of the motorcycling lifestyle in the form of events, rides, rallies and H.O.G. and its financing through HDFS as competitive advantages. In general, the Company believes that resale values for used Harley-Davidson motorcycles, measured by reflecting the used motorcycle price as a percentage of the manufacturer’s suggested retail price when new, are higher than resale values for used motorcycles of its competitors (source: 2006 Company data).

Domestically, the Company competes most heavily in the touring and custom segments of the heavyweight motorcycle market. According to the Motorcycle Industry Council, these segments accounted for 79%, 80% and 79% of total heavyweight retail unit registrations in the United States during 2006, 2005 and 2004, respectively. The larger-displacement custom and touring motorcycles are generally the most expensive vehicles in the market and the most profitable for the Company. During 2006, the heavyweight portion of the market represented approximately 53% of the total U.S. motorcycle market (on- and off-highway motorcycles and scooters) in terms of new units registered.

For the last 19 years, the Company has led the industry in the United States for retail unit registrations of new heavyweight motorcycles. The Company’s (Harley-Davidson motorcycles only) share of the heavyweight market was 49.3% and 48.9% in 2006 and 2005, respectively. This share is significantly greater than that of the Company’s largest competitor in the domestic market which had a 15.1% market share in 2006.

CEO BACKGROUND



BARRY K. ALLEN, 58, has been a director since 1992.



Mr. Allen has served as Executive Vice President, Operations since March 2004 of Qwest Communications International Inc., a broadband Internet-based communications company, and prior to that time, from August 2002, he served as Chief Human Resources Officer of Qwest. Mr. Allen also serves as President of Allen Enterprises, LLC, a private equity investment and management company he established in August 2000. Mr. Allen served as President of Ameritech Corporation, a telecommunications company, from October 1999 until August 2000. Mr. Allen was Executive Vice President of SBC Communications (f/k/a Ameritech Corporation) from August 1995 to October 1999. He is also a director of Fiduciary Management, Inc. which is the investment advisor for certain funds including FMI Common Stock Fund, Inc., FMI Large Cap Fund and FMI Focus Fund and FMI Provident Trust Strategy Fund, for which Mr. Allen serves as a director.

RICHARD I. BEATTIE , 67, has been a director since 1996.



Mr. Beattie is currently Chairman of Simpson Thacher & Bartlett LLP, a law firm, a position he has held since May 2004. Mr. Beattie has been a partner of Simpson Thacher & Bartlett LLP since 1977 and had served as Chairman of the Executive Committee of that firm from 1991 to 2004. Mr. Beattie is an expert in corporate governance issues, serving as counsel to numerous boards and non-management directors. Mr. Beattie also has a distinguished record of public service, including serving as General Counsel of the Department of Health, Education and Welfare during President Carter’s administration and as a Senior Advisor to the Secretary of State for Reorganization Issues in 1997 during President Clinton’s administration. From 1995 to 1997, Mr. Beattie served as President Clinton’s Emissary for Cyprus. Mr. Beattie is also a director of Heidrick & Struggles International, Inc.



JUDSON C. GREEN, 54, has been a director since November 2004.



Mr. Green has been the President and Chief Executive Officer of NAVTEQ Corporation, a leading provider of comprehensive digital map information for automotive navigation systems, mobile navigation devices and Internet-based mapping applications, since May 2000. Prior to joining NAVTEQ Corporation, Mr. Green was the Chairman of Walt Disney Attractions from December 1998 until April 2000, and President of Walt Disney Attractions, the theme park and resort segment of The Walt Disney Company, from August 1991 through December 1998. Mr. Green is also a director of NAVTEQ Corporation and DreamWorks Animation SKG, Inc.

GEORGE H. CONRADES, 68, has been a director since 2002.



Mr. Conrades is Executive Chairman of Akamai Technologies, Inc., a provider of secure, outsourced e-business infrastructure services and software, a position he has held since April 2005. Mr. Conrades served as Chairman and Chief Executive Officer of Akamai from April 1999 to April 2005. Since August 1998, Mr. Conrades also has served as a venture partner with Polaris Venture Partners, an early stage investment company. Mr. Conrades previously served as Executive Vice President of GTE Corporation, a telecommunications company, and President of GTE Internetworking, Inc., an Internet communications company, from May 1997 to August 1998, following that firm’s acquisition of BBN Corporation, a technological research and development company. Prior to that time and for 31 years, Mr. Conrades was employed by International Business Machines Corporation, an information technology company. He is also a director of Cardinal Health, Inc.



SARA L. LEVINSON, 56, has been a director since 1996.



Ms. Levinson is ChairMom of ClubMom, Inc., a consumer relationship and social networking company, a position she has held since May 2000. Ms. Levinson previously served as President of the Women’s Group of Rodale, Inc., the world’s leading publisher of information on healthy, active lifestyles, a position she held from September 2002 to May 2005. She previously served as Chief Executive Officer of ClubMom, Inc. from May 2000 to September 2002. Ms. Levinson was President of NFL Properties, Inc., a trademark licensing company for the National Football League, from September 1994 to April 2000. Prior to that time, Ms. Levinson served as President and Business Director of MTV: Music Television, a cable television network, from 1993 to September 1994. She is also a director of Federated Department Stores, Inc.



GEORGE L. MILES, JR., 65, has been a director since 2002.



Mr. Miles is President and Chief Executive Officer of WQED Multimedia, the public broadcaster for southwestern Pennsylvania, a position he has held since April 1994. Mr. Miles is also a certified public accountant who at the beginning of his career worked for over eight years with Touche Ross & Company, an accounting firm, and six years as an auditor for the federal government. He is also a director of American International Group, Inc., Equitable Resources, Inc., WESCO International, Inc. and HFF, Inc. since January 2007. Mr. Miles also served as director of Westwood One, Inc. and resigned from this position effective March 31, 2006.



JEFFREY L. BLEUSTEIN, 67, has been a director since 1996.



Mr. Bleustein was elected Chairman of the Board of Harley-Davidson in December 1998. On April 30, 2005, Mr. Bleustein retired as our Chief Executive Officer and President. He served as our Chief Executive Officer and President from July 1997 to April 2005. From July 1997 to May 1999 Mr. Bleustein served as President and Chief Executive Officer of the Motor Company. Mr. Bleustein served as President and Chief Operating Officer of the Motor Company from January 1993 to May 2000. He was our Executive Vice President from September 1991 to June 1997. Mr. Bleustein was an employee of the Motor Company for 34 years. He is also a director of Brunswick Corporation and Kohler Co.



DONALD A. JAMES, 63, has been a director since 1991.



Mr. James is a co-founder, equity owner and, since 2002, has served as Chairman and Chief Executive Officer of Fred Deeley Imports Ltd., doing business as Deeley Harley-Davidson Canada (“Deeley Imports”), the largest independent motorcycle distributorship in Canada and the exclusive distributor of our motorcycles in Canada. He served as Vice Chairman and Chief Executive Officer of Deeley Imports from 1973 to 2002.



JAMES A. NORLING , 65, has been a director since 1993.



Mr. Norling has served as Chairman of the board of directors of Chartered Semiconductor Manufacturing Ltd., a semiconductor manufacturer, since August 2002. Mr. Norling also served as interim President and Chief Executive Officer of that company from April 2002 to July 2002. In August 2000, Mr. Norling retired as Executive Vice President of Motorola, Inc., a manufacturer of electronics, and as President, Personal Communications Sector of Motorola, Inc., positions that he held since June 1999. He served as Executive Vice President, Deputy to Chief Executive Officer and President, Europe, Middle East and Africa for Motorola, Inc. from December 1998 to June 1999, and as President and General Manager, Messaging, Information and Media Sector for Motorola, Inc. from January 1997 to December 1998.



JAMES L. ZIEMER, 57, has been a director since December 2004.



Mr. Ziemer is our Chief Executive Officer and President, a position he has held since April 30, 2005. Mr. Ziemer previously served as our Vice President and Chief Financial Officer from December 1990 to April 2005 and President of The Harley-Davidson Foundation, Inc. until March 2006. His career at the company or the Motor Company has spanned approximately 38 years. On March 1, 2007, he became a director of Textron, Inc.

SHARE OWNERSHIP

(1) Except as otherwise noted, all persons have sole voting and investment power over the shares listed. In all cases, information regarding such power is based on information that the individual beneficial owners provide to us.



(2) Includes shares of common stock issuable upon the exercise of stock options exercisable within 60 days of January 31, 2007 and shares of common stock held in our 401(k) Plan, our Dividend Reinvestment Plan and our Employee Stock Purchase Plan, as of January 31, 2007. For the executive officers, the number of shares also includes shares of unvested restricted stock granted under the Harley-Davidson, Inc. 2004 Incentive Stock Plan, which are subject to forfeiture until completion of, generally, a four year vesting period. Generally, fifty percent of the shares of restricted stock granted may vest after two years based on our performance. For the executive officers, the number of shares of unvested restricted stock is set forth in the Outstanding Equity Awards at December 31, 2006 table.



(3) Includes only stock options exercisable within 60 days of January 31, 2007.



(4) The Barry K. Allen Revocable 1990 Living Trust held 22,156 shares of common stock for the primary benefit of Mr. Allen. Mr. Allen has shared voting and investment power over the shares held in the trust.



(5) As of January 31, 2007, the Jeffrey L. & Brenda Bleustein Living Trust held 632,448 shares for the primary benefit of Mr. Bleustein and Brenda Bleustein, his spouse. Both share voting and investment power over the shares held in the trust.



(6) The Brostowitz Family Limited Partnership held 25,000 shares of common stock. Mr. Brostowitz is the general partner of the limited partnership and has shared voting and investment power over the shares.



(7) The Green Family Trust held 2,257 shares of common stock for the primary benefit of Mr. Green and Joyce Green, his spouse. Both share voting and investment power over the shares held in the trust.



(8) Deeley Imports held 293,675 shares of common stock. Mr. James has sole voting power and shared investment power over the shares.



(9) Heritage Ventures, Ltd. held 8,000 shares of common stock. Mr. Norling has sole voting and investment power over the shares.



(10) The Ziemer Family Foundation held 4,500 shares of common stock. Mr. Ziemer has shared voting and investment power over these shares. The Ziemer Family Limited Partnership held 21,800 shares of common stock. Mr. Ziemer is a general and limited partner of the partnership and has shared voting and investment power over the shares. The Ziemer Family Limited Partnership, #2 held 36,600 shares of common stock. Mr. Ziemer is a general partner of the partnership and has shared voting and investment power over these shares. Mr. Ziemer’s grandchildren hold 509 shares of common stock, and Mr. Ziemer acts as custodian over these 509 shares.



(11) We derived the information from a Schedule 13G/A that Capital Research and Management Company, an investment company and investment adviser, filed with the company and the SEC on February 12, 2007. As of December 31, 2006, Capital Research and Management Company, an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, was deemed to be the beneficial owner of 13,273,900 shares as a result of acting as investment adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940. Capital Research and Management Company is located at 333 South Hope Street, Los Angeles, California 90071.

COMPENSATION
The Human Resources Committee of our Board (“HR Committee”) has overall responsibility for reviewing total direct compensation—consisting of base salaries, short-term incentive compensation and long-term incentive compensation—for our FLG. In addition, the HR Committee also reviews other aspects of compensation, for example deferred compensation plans and health and welfare plans. During 2006, the HR Committee consisted of the following directors: Barry K. Allen, George H. Conrades (Chairperson) and Sara L. Levinson.



We describe the responsibilities and functions of the HR Committee more fully in the “Corporate Governance Principles and Board Matters—Human Resources Committee” section beginning on page 19.



Use of Consultants and Other Advisors



The HR Committee has the authority to engage the services of outside advisors, experts and others to assist it in performing its responsibilities. In 2006, the HR Committee retained the services of Mercer as its primary advisor on issues related to the HR Committee’s responsibilities. We describe Mercer’s primary responsibilities and reporting obligations more fully in the “Corporate Governance Principles and Board Matters—Human Resources Committee” section which begins on page 19.



Also, with the assistance of Mercer, the HR Committee looks to a group of comparator companies which it believes to be similar to Harley-Davidson in business characteristics and economics. These companies generally have similar characteristics, such as having a focus on manufacturing, engineering, lifestyle and strong product brands. In 2006, these 14 companies were as follows: Apple Inc., The Black & Decker Corporation, Brunswick Corporation, Eastman Kodak Company, Energizer Holdings, Inc., Fortune Brands, Inc., Hasbro, Inc., Mattel, Inc., Maytag Corporation, Polaris Industries, Inc., Snap-on Incorporated, The Stanley Works, Thor Industries, Inc., Whirlpool Corporation, and Xerox Corporation. The HR Committee reviews this comparator group periodically, and Mercer compiles data on compensation levels and reward practices from these comparator companies’ proxy disclosures.



In addition to the compensation data for these comparator companies, Mercer also provides to the HR Committee and management a broader set of data from six leading compensation surveys as an additional market reference point. The HR Committee believes that this survey data, together with the data from the comparator group, accurately defines competitive market compensation levels for executive talent.

The HR Committee reviews compensation and incentives to evaluate their alignment with our compensation philosophy and to link the financial interests of our FLG with the interests of our shareholders. This involves reviewing the mix of short- and long-term incentive opportunities as they relate to base pay, our competitive environment and our overall philosophy of having a significant amount of pay at risk. Periodically the HR Committee reviews Mercer’s analysis of the three main elements of our total direct compensation.



In addition to the executive compensation work that Mercer performed for the HR Committee for 2006, management periodically engages Mercer to provide advice on other Human Resources issues, including reward strategy and incentive design, competitiveness of compensation programs and group benefits plans.



Executive Compensation Philosophy



Our compensation philosophy emphasizes pay for performance by targeting base salary midpoints for FLG at or below the market median. We target short-term incentive opportunities and equity-based awards at or above the market median. Our goal is to provide an opportunity for total direct compensation that is competitive with the market median. By setting base salaries at or below market median, we believe salaries are sufficient to attract and retain executives but low enough to provide more emphasis on variable compensation.



Our executive compensation philosophy is designed to:


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Provide a competitive compensation opportunity to allow us to attract, retain and appropriately motivate key talent


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Provide a significant portion of pay at-risk (incentive compensation), so that actual compensation paid will vary up and down with our performance. The portion of pay at risk increases for more senior executive positions; and


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Align executive and shareholder interests by linking incentive pay primarily to key quantitative financial results. We further enhance this alignment by using equity-based grants. The value that participating executives realize from such grants depends upon our share price.



Components of the Executive Compensation Program



The compensation packages of our FLG consist of several elements. The primary elements include:



Base Salary . Base salaries provide FLG with fixed compensation. We set base salaries by starting with salary midpoints which are at or below the competitive market median, and then making adjustments based upon an executive’s individual performance, length and nature of experience, competency and potential for advancement. We utilize competitive market data that our Human Resources Department and Mercer supply in determining FLG salaries.

The HR Committee evaluates the performance of the CEO and the external market compensation data to formulate the CEO’s salary and recommends such compensation for approval by the Nominating Committee. The CEO has the responsibility for determining salary levels of FLG executives other than the CEO. Senior executives recommend salaries for FLG executives, and the CEO approves them before providing them to the HR Committee for review during the February HR Committee meeting.



We hired Mr. Bergmann in March 2006. In February 2006, the HR Committee reviewed the market competitive data for elements of direct compensation that Mercer provided for the position of CFO. The company used this data in determining Mr. Bergmann’s direct compensation.



Short-Term Incentive Plans . Our STIPs have broad-based participation and provide an opportunity to earn annual cash awards based upon company performance during the course of our fiscal year relative to financial goals or other performance objectives that we establish prior to the start of the year. The amounts we report in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table represent the amounts that the NEOs earned for fiscal year 2006 under our STIPs for 2006.



Under the Employee Short Term Incentive Plan (“Employee Plan”), which shareholders approved at the 2005 annual meeting, the HR Committee approves several STIPs to motivate and reward the performance of employees of the Motor Company, Buell, HDFS, and Harley-Davidson Dealer Systems, Inc. (“HDDS”). Of the NEOs, Messrs. Hutchinson and McCaslin participate in the Motor Company STIP. In addition to these operating companies’ STIPs, we have a Corporate STIP which shareholders last approved at the 2004 annual meeting. This Corporate STIP provides a financial incentive to contribute to our future success and prosperity for the following officers who have company-wide responsibilities and who do not participate in other incentive plans: Messrs. Bergmann and Brostowitz, Ms. Lione and Mr. Ziemer.



Essentially all employees (other than field sales employees who participate in a sales incentive or commission plan) participate in a STIP. The HR Committee has reviewed and approved performance measures and goals for each of the STIPs that it believes will encourage all eligible employees to achieve their respective goals. While the plans may have different measures and formulas, they all have objective and quantifiable measures that the HR Committee reviews and approves annually.



In December 2005, the HR Committee reviewed and approved the 2006 performance measures and goals for the Motor Company STIP, the HDFS STIP, the Buell STIP, and the HDDS STIP. The HR Committee also reviewed the target STIP opportunities for all FLG who participated in these STIPs. Also in December 2005, the HR Committee reviewed and approved the performance measures, goals and target opportunities under the 2006 Corporate STIP.



Upon the completion of the fiscal year, the HR Committee reviews the extent to which actual performance satisfies the defined performance goals for each STIP. The HR Committee has the right to reduce awards that executives would otherwise earn under the Corporate STIP by an amount not to exceed 50%. We typically pay STIP awards in February after the prior year’s financial statement audit is complete and the HR Committee approves earned amounts.

Corporate STIP . Messrs. Bergmann and Brostowitz, Ms. Lione and Mr. Ziemer were the four participants in the Corporate STIP. The HR Committee approved earnings per share growth (“EPS”) as the sole performance criterion for the 2006 Corporate STIP formula to continue to align interests of the Corporate STIP participants and shareholders. The Corporate STIP has used EPS growth since 2004. In 2006, this formula provided for 0% STIP award payouts unless EPS increased relative to 2005. A participant would earn an award of 200% of target if 2006 EPS increased by 20% over 2005, and the scale was linear.



Under the Corporate STIP, the minimum payout was zero (0) and the maximum payout under the formula was unlimited for 2006, although the terms of the Corporate STIP limit the total dollar payment to any one individual to $3 million per year. In 2007, the maximum payment to any participant will be the lesser of $3 million or 200% of the participant’s target award opportunity, and the scale continues to be linear. The HR Committee approved EPS as the sole performance criterion for the 2007 Corporate STIP formula. We believe earning payouts under the formula will be more challenging to achieve than it was in 2006 and prior years.



For 2006 performance, the approved mathematical formula would have provided a STIP payout of 152% of each participant’s target opportunity. Based upon the recommendation of the CEO, the HR Committee exercised its discretion and approved a reduced Corporate STIP payment in the range of 120% to 135% of the target opportunities, to achieve more consistency with the Motor Company STIP payout and the STIP payouts for the other affiliates. The HR Committee recommended a STIP payment of 120% of the target opportunity for Mr. Ziemer, and the Nominating Committee accepted the recommendation.



Motor Company STIP . Messrs. Hutchinson and McCaslin were among over 8,700 participants in the Motor Company STIP. In 2006, we based award payouts under the Motor Company STIP upon Motor Company financial targets related to earnings before interest and taxes (“EBIT”) and objectively-measured strategic targets related to worldwide retail sales and quality. Under the 2006 Motor Company STIP formula related to earnings before interest and taxes, participants would have earned a 0% STIP award for the portion of the award based on financial goals unless 2006 Motor Company EBIT increased relative to 2005. Participants would have earned an award of 200% of target for the portion of the award based on financial goals if 2006 Motor Company EBIT increased by 20% over 2005, and the scale was linear. The non-financial elements of the Motor Company STIP were increases in worldwide retail sales and improvements in product quality. We targeted the year over year increase in retail sales at 8% for 2006 with zero points earned at a growth level of less than 8%. The quality metric was based upon a 5% year over year improvement in the repairs per hundred during the first 30 days of ownership. If there was no improvement, then participants would have earned zero points for this measure. The scale for the quality measure was linear. During 2006, failure to achieve goals under the non-financial targets had the effect of reducing amounts that we would pay as a result of performance under the financial target. In February 2007, the HR Committee exercised its authority under the Employee Plan in determining the degree to which performance in 2006 met targets under the Motor Company STIP. In this determination, the HR Committee disregarded the impact on Motor Company EBIT of a $5 million charitable contribution that the company made to the Harley-Davidson Foundation. Based upon the actual performance results for 2006 and this HR Committee determination, award payouts were 88% of the target award opportunity.



Under the Motor Company STIP, the minimum payout was zero (0) and the maximum payout under the formulas was unlimited, although the terms of the Employee Plan limit the total dollar

MANAGEMENT DISCUSSION FROM LATEST 10K

The Company’s net revenue for 2006 was $5.80 billion, up 8.6% over 2005 driven by a 6.1% increase in shipments of Harley-Davidson ® motorcycles over 2005. Net income and diluted earnings per share for 2006 were up 8.7% and 15.2%, respectively, over 2005. The increase in diluted earnings per share includes the benefit of fewer weighted-average shares outstanding when compared to the prior year. Weighted-average shares outstanding were lower in 2006 than in 2005 as a result of the Company’s repurchases of common stock occurring over the last two years.

The Company’s independent dealer network also reported growth over prior year with increases in retail motorcycle unit sales during 2006. Worldwide dealer retail sales of Harley-Davidson motorcycles were up 8.5% in 2006 over 2005. In the United States, retail sales of Harley-Davidson motorcycles grew 5.9% during 2006 when compared to the prior year. Internationally, retail sales were up 18.6% over 2005 with increases of 14.6% in Europe, 16.3% in Japan and 15.9% in Canada.

Retail sales growth during 2006 was due in part to a positive worldwide response to the Company’s new 2007 models. In July 2006, independent dealers began offering the Company’s new 2007 model year motorcycles. The Company’s 2007 model offering includes the new larger Twin Cam 96 TM engine and a new six-speed transmission for all Touring and Softail motorcycles, the addition of electronic fuel injection on all Sportster models and a number of new models and features.

In addition, the Company believes that the continued momentum in international dealer retail sales is also due in part to the strategies that it has been implementing over the last couple of years. These strategies include improvements within the international dealer base, enhanced marketing programs and a more effective and efficient distribution of motorcycles worldwide.

The Company’s collective bargaining agreement with the Pennsylvania-IAM (Union) covering approximately 2,800 workers at its assembly plant in York, Pennsylvania expired on February 2, 2007. Prior to the expiration of that contract the union voted to reject a proposed new collective bargaining agreement for employees and authorized a strike which began immediately following the expiration of the contract. On February 22, 2007, the Company reached a new agreement with the Union, ending the strike. The new contract with the York Union employees is a three-year agreement expiring in February 2010.

The Company is pleased with the agreement it has reached with its York Union employees. However, the disruption caused by the strike had a significant impact on the Company’s business. As a result of the strike, the Company lost approximately four weeks of production at its York, Pennsylvania assembly facility and interrupted production at some of the Company’s other manufacturing locations. The strike also adversely impacted its suppliers and employees and may adversely impact its independent dealers and retail customers.

As a result of the strike and its related impact, the Company will not meet previously annuounced guidance for 2007. First quarter 2007 shipments of Harley-Davidson motorcycles had been expected to be between 82,000 and 84,000 units. The Company has lowered its target range by 18,000 units, and now expects first quarter shipments of Harley-Davidson motorcycles to be between 64,000 and 66,000 units. Over the remainder of 2007, the Company expects to make up approximately 4,000 to 5,000 of these motorcycle shipments, resulting in full year shipment plans for approximately 14,000 fewer motorcycles than originally planned. The Company arrived at this decision after carefully evaluating its production constraints, supply chain issues, cost implications, timing of shipments to dealers and the delayed start of 2008 model year production caused by the strike.

The Company’s revised plan for 2007 does not affect its previously stated plan to continue to grow revenue, although revenue growth in 2007 as a result of the strike is expected to be moderate. The Company continues to believe that shipments in its international markets will grow at a faster rate than in the U.S. market. The Company’s growth will be driven by a focus on providing customers around the world with a continuous stream of exciting new motorcycles, surrounded by the unique Harley-Davidson experience. Harley-Davidson customers enjoy a unique lifestyle experience through organized rides and rallies, through membership in the Harley Owners Group ® (H.O.G. ® ) organization, and through the use of MotorClothes ® merchandise and Harley-Davidson ® Genuine Motor Accessories to personalize their experience.

In 2007, the Company will experience inefficiencies and costs associated with the strike and the related make-up plan which will have a negative impact on margins. Therefore, for 2007 the Company has revised its previous guidance of increasing margins and believes 2007 margins will be lower than margins experienced in 2006. The Company believes its manufacturing expertise and focus on operational excellence, and other factors, position it to continue to drive a net income growth rate in 2008 and 2009 that will be in excess of its revenue growth rate.

Operational excellence involves employees and suppliers continuously pursuing process improvements and innovation. Over the last several years, the Company has made considerable strides in manufacturing efficiency and automation and believes there continue to be opportunities for improvement in these areas and across other parts of the organization. The Company also expects that other factors such as increased production, quality, product mix and pricing for features will continue to have a positive impact on margins.

As the Company executes its plans, the Company believes its business model will continue to generate cash permitting it to invest in the business, fund future growth opportunities and return value to shareholders. The Company’s expected annual capital expenditures are provided under “Liquidity and Capital Resources.”

Prior to the strike, the Company had expected to deliver earnings-per-share growth of 11% to 17% annually through 2009 driven by solid revenue growth, margin improvement and the benefits of strong free cash flow. However, as a result of the strike and its related impact to the business in 2007, the Company has revised its expected earnings-per-share growth rate for 2007 to be in the range of 4% to 6%. The Company expects its earnings-per-share growth rate to return to 11% to 17% in 2008 and 2009.

Results of Operations 2006 Compared to 2005

Overall

Net revenue for 2006 totaled $5.80 billion, a $458.5 million or 8.6% increase over the prior year. Net income for 2006 was $1.04 billion compared to $959.6 million in 2005, an increase of 8.7%. Diluted earnings per share for 2006 were $3.93 representing a 15.2% increase over 2005 earnings per share of $3.41. Diluted earnings per share were positively impacted during 2006 by a decrease in the weighted-average shares outstanding, which were 265.3 million in 2006 compared to 281.0 million in 2005. The decrease in weighted-average shares outstanding was due primarily to the Company’s share repurchases. The Company repurchased 19.3 million shares of common stock during 2006. The Company’s share repurchases are discussed in further detail under “Liquidity and Capital Resources.”

The Company paid dividends in 2006 of $.18 per share in March and $.21 per share in June, September and December. The aggregate annual dividend paid in 2006 was $.81 per share, representing a 29.6% increase over the aggregate annual dividend of $.625 per share in 2005.

During 2006, the Company shipped 349,196 Harley-Davidson motorcycles, an increase of 20,179 or 6.1%, over 2005 shipments. International shipments grew faster than U.S. shipments with an increase of 21.6% in 2006, compared to a 2006 U.S. shipment increase of 2.5%. As a result, international shipments represented 21.8% of total Harley-Davidson wholesale shipments in 2006, compared to 19.0% in 2005. The increase in international shipments as a percentage of total shipments is consistent with the Company’s expectation that international growth will outpace domestic shipment growth. (1)



During 2006, net revenue for the Motorcycles segment grew 8.6% or $458.5 million over 2005. Approximately $350 million of the increase in net revenue from 2005 to 2006 resulted from the higher shipment volumes of motorcycles and related products. Net revenue also benefited during 2006 from a favorable change in product mix and wholesale price increases. The changes to product mix occurring in 2006 resulted in approximately $70 million of higher revenue and related primarily to an increase in the percentage of shipments consisting of higher-priced touring motorcycles. Touring motorcycles made up 35.4% of shipments in 2006 compared to 33.5% in 2005. During 2006, wholesale price increases on Harley-Davidson motorcycles resulted in approximately $45 million of higher revenue when compared to 2005. Changes in foreign currency exchange rates resulted in approximately $10 million of lower net revenue during 2006 when compared to 2005.

Harley-Davidson Motorcycle Retail Sales

The Company’s wholesale motorcycle unit shipments are retailed through an independent worldwide dealer network. Worldwide retail sales of Harley-Davidson motorcycles grew 8.5% during 2006 over the prior year. Retail sales of Harley-Davidson motorcycles increased 5.9% in the United States and 18.6% internationally, when compared to 2005. On an industry-wide basis, the heavyweight (651+cc) portion of the market was up 4.9% in the United States and up 7.5% in Europe, when compared to 2005. The following table includes retail unit sales of Harley-Davidson motorcycles for 2006 and 2005 (units in thousands):

During 2006, interest income benefited from increased retail and wholesale average outstanding receivables and higher retail and wholesale lending rates as compared to 2005. The increase in other income was primarily due to higher revenues from insurance commissions and related products and an increase in securitization servicing fee income. Interest expense was higher in 2006 due to increased borrowings, in support of higher average outstanding receivables, and higher borrowing costs as compared to 2005.

Income from securitizations in 2006 was lower due to lower gains on 2006 securitization transactions, partially offset by an increase in income on the investment in retained securitization interests. During 2006, income on the investment in retained securitization interests was $78.9 million, an increase of $2.3 million over 2005.

During 2006, HDFS sold $2.33 billion in retail motorcycle loans through securitization transactions resulting in gains of $32.3 million. This compares with gains of $46.6 million on $2.48 billion of loans securitized during 2005. The 2006 gain as a percentage of loans sold was 1.4% as compared to 1.9% for 2005. The 2006 gain as a percentage of the amount of loans securitized was lower than the prior year due to rising market interest rates and the competitive environment for motorcycle lending.

In addition, during 2006, other comprehensive income includes unrealized losses of $20.9 million (pre-tax) related to a decrease in the unrealized gain on the investment in retained securitization interests due primarily to higher expected losses on prior year securitization transactions.

Annualized losses on HDFS’ managed retail motorcycle loans totaled 1.41% in 2006 compared to 1.29% for the same period in 2005. This increase in losses reflects continued pressure on values for repossessed motorcycles. Managed retail loans include loans held by HDFS which are retained on the balance sheet as well as those sold through securitization. The 30-day delinquency rate for managed retail motorcycle loans at December 31, 2006 increased to 5.18% from 4.83% at December 31, 2005, and as a result it is expected that HDFS will experience higher credit losses as a percentage of managed retail motorcycle loans in 2007 as compared to 2006
During 2006, selling expenses were higher than the prior year due primarily to higher marketing and advertising expenses combined with increased international operating costs in connection with the Company’s growth in those markets.

The increase in administrative expenses during 2006 was driven primarily by a higher provision for future warranty costs which was approximately $44 million higher in 2006 compared to 2005. The increase in warranty costs was due primarily to higher costs associated with the Company’s second year warranty program and higher product program costs. Beginning with shipments of 2004 model year motorcycles, the Company extended its warranty coverage from one to two years. During 2006, additional claims data became available which indicated that the cost of the second year warranty was higher than originally estimated. Based on the higher actual claims, the Company adjusted warranty reserves for the motorcycles affected, which were primarily 2004, 2005 and 2006

models. In addition, the Company announced a number of product programs during 2006 to address customer concerns and promote customer satisfaction. Under a product program, the Company contacts retail customers directly and pays for non-safety related improvements that are covered by the Company’s standard warranty.

Investment Income, net

Investment income, net in 2006 was $27.1 million, compared to $22.8 million in 2005. Net investment income was higher in 2006 primarily due to a higher average return in 2006 when compared to 2005.

Other, net

Other, net expense was $5.4 million and $5.0 million in 2006 and 2005, respectively. Other, net expense consists of charitable contributions.

Provision for Income Taxes

The Company’s effective income tax rate was 35.8% during 2006 compared to 35.5% in 2005. This increase is due primarily to a relatively smaller benefit from the federal research and development tax credit and slightly higher state income taxes.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

The Company’s net revenue for the third quarter of 2007 was $1.54 billion, a decrease of 5.8% compared to the third quarter of 2006 driven by a 10.8% decrease in shipments of Harley-Davidson ® motorcycles from the same quarter last year. Net income and diluted earnings per share for the third quarter of 2007 were down 15.3% and 10.8%, respectively, compared to the third quarter of 2006. The decrease in diluted earnings per share resulting from lower net income during the third quarter of 2007 was partially offset by the positive impact of fewer weighted-average shares outstanding when compared to the same quarter last year. Weighted-average shares outstanding were 13.6 million lower in the third quarter of 2007 compared to the third quarter of 2006 due to the Company’s repurchases of common stock occurring over the last year. During the third quarter of 2007 the Company repurchased 9.7 million shares of its common stock at a cost of $509.0 million. Through the first nine-months of 2007, the Company has repurchased 17.3 million shares for a total cost of $1.00 billion.

The Company’s 2007 third quarter financial results were consistent with its revised expectations and shipment plans for 2007. In early September 2007, the Company announced that it planned to reduce Harley-Davidson motorcycle shipments for the balance of 2007. This decision was driven by a sharp decrease in U.S. retail sales of Harley-Davidson motorcycles during August and unfavorable economic conditions in the U.S.

U.S. retail sales of Harley-Davidson motorcycles finished down 2.5% compared to the third quarter of 2006. Worldwide retail sales of Harley-Davidson motorcycles were down 0.2% for the third quarter of 2007 compared to the same quarter last year as international retail sales remained strong. Outside the U.S., retail sales of Harley-Davidson motorcycles grew 8.8% during the third quarter of 2007 compared to the third quarter of 2006. Third quarter 2007 retail sales increased 10.7% in Europe and 9.1% in Japan while third quarter 2007 retail sales decreased 7.7% in Canada. All other international markets combined were up 20.8% during the third quarter of 2007. The Company believes that the strong international retail sales growth is evidence that its investments in developing its international business are continuing to pay off.

On a year-to-date basis, worldwide retail sales of Harley-Davidson motorcycles decreased 0.9% compared to the first nine months of 2006. In the U.S., Harley-Davidson retail sales decreased 4.7% through September 2007, while international retail sales increased by 12.9% for the same period.

For the full year of 2007, the Company expects a shipment range of 328,000 to 332,000 Harley-Davidson motorcycles, compared to 349,196 units in 2006. The Company also expects a modest decline in revenue and lower operating margin in 2007. Diluted earnings per share for the full year are expected to decrease 4% to 6% compared to 2006. Looking ahead to 2008, the Company anticipates that the U.S. retail motorcycle market environment will continue to be challenging. It expects moderate revenue growth, lower operating margin, and diluted earnings per share growth between 4% and 7% compared to 2007. The Company had previously provided guidance for 2009 as well, but will not be providing that guidance at this time.

As the Company executes its plans, the Company believes its business model will continue to generate cash, permitting it to invest in the business, fund future growth opportunities and return value to shareholders. The Company’s expected annual capital expenditures are provided under “Liquidity and Capital Resources.”

Results of Operations for the Three Months Ended September 30, 2007
Compared to the Three Months Ended September 24, 2006
Overall

For the quarter ended September 30, 2007, net revenue totaled $1.54 billion, a $94.5 million or 5.8% decline from the same period last year. Net income was $265.0 million, a decrease of $47.7 million, or 15.3%. Diluted earnings per share were $1.07, a decrease of $0.13, or 10.8%. Diluted earnings per share during the third quarter of 2007 were positively impacted by a decrease in the weighted-average shares outstanding, which were 247.6 million in the third quarter of 2007 compared to 261.2 million in the same quarter last year. The decrease in weighted-average shares outstanding was driven by the Company’s repurchases of common stock over the last year. The Company’s third quarter 2007 share repurchases are discussed in further detail under “Liquidity and Capital Resources.”

uring the third quarter of 2007, the financial results of the Motorcycle segment were negatively impacted by a decrease in Harley-Davidson motorcycle shipments. This decrease was driven by an 18.2% decrease in shipments in the U.S. that was partially offset by a 24.8% increase in shipments outside the U.S. International shipments represented 24.0% of total Harley-Davidson wholesale shipments for the quarter ended September 30, 2007, compared to 17.2% for the quarter ended September 24, 2006.

Motorcycle segment net revenue declined $94.5 million, or 5.8%. Net revenue was approximately $125 million lower due to an overall decrease in sales volumes from the prior year quarter. The lower volumes were driven by the 10.8% decrease in Harley-Davidson motorcycle unit shipments, which was partially offset by higher sales volumes for P&A and General Merchandise. Changes to product mix also decreased revenue by approximately $16 million. Touring models made up 32.9% of shipments for the third quarter of 2007, compared to 37.1% of shipments for the third quarter of 2006. Additionally, during the third quarter of 2007, shipments of Custom models were flat as a percentage of total shipments while Sportster model shipments increased as a percentage of total shipments.

These decreases to net revenue were partially offset by higher revenue from wholesale price increases (including the impact of higher priced 105 th Anniversary motorcycles) of approximately $29 million and favorability resulting from changes in foreign currency exchange rates of approximately $18 million.
Cost of Goods Sold

Cost of goods sold was $950.0 million for the Motorcycles segment in the third quarter of 2007, a decrease of $33.6 million or 3.4% versus the same quarter last year. The decrease was primarily attributable to lower shipment volumes partially offset by a higher average conversion (labor and overhead) cost per unit which had a net impact of reducing cost of goods sold by approximately $46 million. The Company incurred a higher average conversion cost per unit when compared to the same quarter last year as a result of a higher fixed cost per unit associated with the lower production volume and manufacturing inefficiencies associated with the 2008 new model year launch experienced during the quarter. In addition, cost of goods sold was higher due to approximately $7 million in higher raw material surcharges and approximately $8 million resulting from changes in foreign currency exchange rates. Changes to product mix decreased cost of goods sold by approximately $3 million.
Gross Profit

Gross profit was $591.4 million for the Motorcycles segment in the third quarter of 2007, a decrease of $60.9 million or 9.3% versus the same quarter last year. Gross margin for the third quarter of 2007 was 38.4% compared to 39.9% in the third quarter of 2006. The Company’s gross margin was negatively impacted during the quarter by increased raw material surcharges, a higher conversion cost per unit and unfavorable changes in product mix, partially offset by the favorable impact of higher wholesale prices and changes resulting from foreign currency exchange rates. These and other factors affecting gross profit are detailed under “Motorcycle Unit Shipments and Net Revenue” and “Cost of Goods Sold” above.

Interest income increased due to higher average retail and wholesale outstanding receivables. The increase in other income was primarily due to higher credit card licensing income and securitization servicing income. Interest expense was higher due to increased borrowings to support growth in outstanding receivables.

Income from securitizations was lower due to a lower gain on the third quarter 2007 securitization transaction and a decrease in income on retained securitization interests. During the third quarter of 2007, HDFS sold $782.0 million in retail motorcycle loans through a securitization transaction resulting in a gain of $3.5 million. This compares with a gain of $12.8 million on $800.0 million of loans securitized during the third quarter of 2006. The 2007 third quarter gain as a percentage of loans sold was 0.45% as compared to 1.60% for same period of 2006. The lower gain percentage is primarily due to the inclusion of an increased number of shorter term, lower yielding promotional loans resulting from a finance promotion sponsored by HDMC in the months of June and July. In addition, higher market interest rates for securitization transactions, resulting from a more challenging securitization environment, also contributed to the lower gain percentage. Income from securitizations was also reduced due to lower income from retained securitization interests, which totaled $17.5 million in the third quarter of 2007 versus $19.4 million in the third quarter of 2006.

Total operating expenses, which include selling, administrative and engineering expenses, were 15.3% and 13.7% of net revenue for the third quarters of 2007 and 2006, respectively.

Selling and administrative expenses were higher due primarily to higher costs associated with information technology spending and increased international marketing and operating costs in connection with the Company’s growth in those markets. These costs were partially offset by a decrease in expense associated with the Company’s short-term incentive compensation programs.

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