Polaris - 10-K annual report

Polaris Industries Inc. (the “Company” or “Polaris”), a Minnesota corporation, was formed in 1994 and is the successor to Polaris Industries Partners LP. The term “Polaris” as used herein refers to the business and operations of the Company, its subsidiaries and its predecessors which began doing business in the early 1950’s. Polaris designs, engineers and manufactures off-road vehicles (“ORV”) which includes all terrain vehicles (“ATV”) andside-by-sidevehicles for recreational and utility use, snowmobiles, and motorcycles and markets them, together with related replacement parts, garments and accessories (“PG&A”) through dealers and distributors principally located in the United States, Canada and Europe. Sales of ORVs, snowmobiles, motorcycles, and PG&A accounted for the following approximate percentages of Polaris’ sales for the years ended December 31:

The Company discontinued the manufacture of marine products effective September 2, 2004. The marine products division’s financial results are reported separately as discontinued operations for all periods presented. See Note 9 of Notes to Consolidated Financial Statements for a discussion of the discontinuation of marine products.

Off-road Vehicles (ORVs).  Off-road vehicles include both core ATVs andRANGER^tmside-by-sidevehicles. ATVs are four-wheel vehicles with balloon style tires designed for off-road use and traversing rough terrain, swamps and marshland.Side-by-sidevehicles are multi-passenger off-road, all terrain vehicles that can carry up to six passengers in addition to cargo. ORVs are used for recreation, in such sports as fishing and hunting, as well as for utility purposes on farms, ranches and construction sites.

ATVs were introduced to the North American market in 1971 by Honda. Other Japanese motorcycle manufacturers including Yamaha, Kawasaki and Suzuki entered the North American ATV market in the late 1970s and early 1980s. Polaris entered the ATV market in 1985, Arctic Cat entered in 1995 and Bombardier Recreational Products Inc. (“BRP”) entered in 1998. KTM Power Sports AG (“KTM”) entered the market in 2007. In addition, numerous Chinese and Taiwanese manufacturers of youth and small ATVs exist for which no industry sales data is available. By 1985, the number of three- and four-wheel ATVs sold in North America had grown to approximately 650,000 units per year, then dropped dramatically to a low of 148,000 in 1989. The industry grew each year in North America from 1990 until 2005. The market declined in 2006, 2007 and 2008, primarily due to weak overall economic conditions. Internationally, similar ATVs are also sold primarily in Western European countries by similar manufacturers as in North America. Polaris estimates that during the calendar year 2008 world-wide industry sales declined 31 percent from 2007 levels with approximately 665,000 core ATVs sold worldwide.

Polaris estimates that theside-by-sidevehicle market sales grew approximately four percent during the calendar year 2008 over 2007 levels with an estimated 290,000side-by-sidevehicles sold worldwide. The main competitors for theRANGER^tmside-by-sidevehicles are John Deere, Kawasaki, Yamaha, Arctic Cat, Kubota and Honda.

Polaris estimates that during calendar year 2008 the ORV industry sales, which includes core ATVs andside-by-sidevehicles, decreased 24 percent from 2007 levels with approximately 955,000 units sold worldwide.

Snowmobiles.  In the early 1950s, a predecessor to Polaris produced a “gas powered sled” which became the forerunner of the Polaris snowmobile. Snowmobiles have been manufactured under the Polaris name since 1954.

Originally conceived as a utility vehicle for northern, rural environments, the snowmobile gained popularity as a recreational vehicle. From the mid-1950s through the late 1960s, over 100 producers entered the snowmobile market and snowmobile sales reached a peak of approximately 495,000 units in 1971. The Polaris product survived the industry decline in which snowmobile sales fell to a low point of approximately 87,000 units in 1983 and the

Motorcycles.  Heavyweight motorcycles are over the road vehicles utilized as a mode of transportation as well as for recreational purposes. There are four segments: cruisers, touring, sport bikes, and standard motorcycles.

Polaris entered the motorcycle market in 1998 with an initial entry product in the cruiser segment. U.S. industry retail cruiser sales more than doubled from 1996 to 2006, however the motorcycle industry declined in 2007 and 2008 due to weak overall economic conditions. Polaris entered the touring segment in 2000. Polaris estimates that the 1,400cc and above cruiser and touring market segments combined, declined nine percent in 2008 compared to 2007 levels with approximately 254,000 cruiser and touring motorcycles sold in the U.S. market. Other major cruiser and touring motorcycle manufacturers include BMW, Harley Davidson, Honda, Yamaha, Kawasaki and Suzuki.

Off-road Vehicles.  Polaris entered the ORV market in the spring of 1985 with an ATV. Polaris currently produces four-wheel ATVs, which provide more stability for the rider than earlier three-wheel versions. Polaris’ line of ATVs, consisting of thirty models, includes two and four-wheel drive general purpose, sport andside-by-sidemodels, with 2009 model year suggested United States retail prices ranging from approximately $2,000 to $13,000. In 2000, Polaris introduced its first youth ATV models. In addition, Polaris also introduced a six-wheel off-road ATV utility vehicle and the PolarisRANGER^tm, an off-roadside-by-sideutility vehicle. In 2001, Polaris expanded itsside-by-sideline, the Polaris Professional Series (“PPS”), with a third party sourced all surface loader product as well as a 4X4 and 6X6 ATV (ATV Pro), which were modifications of existing products. In 2004, the PPS line was phased out and theRANGER^tmline expanded to meet both the commercial and recreational customer. In 2007, Polaris introduced its first recreationalside-by-sidevehicle, the RANGERRZR^tmand the Company’s first six-passengerside-by-sidevehicle, the RANGERCrew^tm. Additionally, in 2007, the Company introduced military version ATV andside-by-sidevehicles with features specifically designed for ultra-light tactical military applications.

Most of Polaris’ ORVs feature the totally automatic Polaris variable transmission, which requires no manual shifting, and several have a MacPherson strut front suspension, which enhances control and stability. Polaris’ on demand all-wheel drive provides industry leading traction performance and ride quality thanks to its patented on demand, easy shift on-the-fly design. Polaris’ ORVs have four-cycle engines and both shaft and concentric chain drive. In 1999, Polaris introduced its first manual transmission ATV models. In 2003, Polaris introduced the industry’s first electronic fuel injected ATV, the Sportsman 700 EFI. In 2005, Polaris introduced the industry’s first independent rear suspension on a sport ATV named the Outlaw^tm.In 2007, Polaris introduced the RANGERRZR^tm, a big bore recreationalside-by-sidemodel, and two military vehicles equipped with engines that operate on JP8 militarized fuel. In 2008, Polaris celebrated the 1 millionth unit sale of its Sportsman ATV family, which has been the industry leading big bore ATV for 13 years, by introducing the new Sportsman XP, a reengineered Sportsman from top to bottom. In 2008, Polaris also introduced an extension of its recreationalside-by-sidevehicle with the introduction of the RANGER RZR S^tm.

Snowmobiles.  Polaris produces a full line of snowmobiles, consisting of thirty-three models, ranging from youth models to utility and economy models to performance and competition models. The 2009 model year suggested United States retail prices range from approximately $2,300 to $11,200. Polaris snowmobiles are sold principally in the United States, Canada and Europe. Polaris believes its snowmobiles have a long-standing reputation for quality, dependability and performance. Polaris believes that it and its predecessors were the first to develop several features for wide commercial use in snowmobiles, including independent front suspension, long travel rear suspension, hydraulic disc brakes, liquid cooling for brakes and a three cylinder engine. In 2001, Polaris introduced a new, more environmentally-friendly snowmobile featuring a four-stroke engine designed specifically for snowmobiles.

Motorcycles.  In 1998, Polaris began manufacturing V-twin cruiser motorcycles under the Victory^®brand name. Polaris’ 2008 model year line of motorcycles consists of eleven models including its first luxury touring models, the Victory Vision Street^tmand Victory Vision Tour^tm. Suggested United States retail prices for the 2009 model year Victory motorcycles ranged from approximately $13,800 to $29,000.

Parts, Garments and Accessories.  Polaris produces or supplies a variety of replacement parts and accessories for its ORVs, snowmobiles, motorcycles and personal watercraft. ORV accessories include winches, bumper/brushguards, plows, racks, mowers, tires, pull-behinds, cabs, cargo box accessories, tracks and oil. Snowmobile accessories include products such as covers, traction products, reverse kits, electric starters, tracks, bags, windshields, oil and lubricants. Motorcycle accessories include saddle bags, handlebars, backrests, exhaust, windshields, seats, oil and various chrome accessories. Polaris also markets a full line of recreational apparel including helmets, jackets, bibs and pants, leathers and hats for its snowmobile, ORV, and motorcycle lines. The apparel is designed to Polaris’ specifications, purchased from independent vendors and sold by Polaris through its dealers and distributors, and online through itse-commercesubsidiary under the Polaris brand name.

Discontinued Operations — Marine Products.  Polaris entered the personal watercraft (“PWC”) market in 1992. On September 2, 2004, the Company announced that it had decided to cease to manufacture marine products effective immediately. As technology and the distribution channel evolved, the marine division’s lack of commonality with other Polaris product lines created challenges for Polaris and its dealer base. The marine division continued to experience escalating costs and increasing competitive pressures and was never profitable for Polaris. See Note 9 of Notes to Consolidated Financial Statements for a discussion of the discontinuation of marine products.

Polaris’ products are assembled at its original manufacturing facility in Roseau, Minnesota and at its facilities in Spirit Lake, Iowa and Osceola, Wisconsin. Since snowmobiles, ORVs and motorcycles incorporate similar technology, substantially the same equipment and personnel are employed in their production. Polaris is vertically integrated in several key components of its manufacturing process, including plastic injection molding, stamping, welding, clutch assembly and balancing, painting, cutting and sewing, and manufacture of foam seats. Fuel tanks, tracks, tires and instruments, and certain other component parts are purchased from third party vendors. Polaris manufactures a number of other components for its snowmobiles, ORVs, and motorcycles. Raw materials or standard parts are readily available from multiple sources for the components manufactured by Polaris. Polaris’ work force is familiar with the use, operation and maintenance of the products, since many employees own snowmobiles, ORVs, and motorcycles. In 1991, Polaris acquired a manufacturing facility in Osceola, Wisconsin to manufacture component parts previously produced by third party suppliers. In 1994, Polaris acquired a manufacturing facility in Spirit Lake, Iowa in order to expand the assembly capacity of the Company. Certain operations, including engine assembly and the bending of frame tubes, seat manufacturing, drivetrain and exhaust assembly and stamping are conducted at the Osceola, Wisconsin facility. In 1998, Victory motorcycle production began at Polaris’ Spirit Lake, Iowa facility. The production process in Spirit Lake includes welding, finish painting, and final assembly. In early 2002, Polaris completed the expansion and renovation of its Roseau manufacturing facility, which resulted in increased capacity and enhanced production flexibility.

Pursuant to informal agreements between Polaris and Fuji Heavy Industries Ltd. (“Fuji”), Fuji was the sole manufacturer of Polaris’ two-cycle snowmobile engines from 1968 to 1995. Fuji has manufactured engines for Polaris’ ATV products since their introduction in the spring of 1985. Fuji develops such engines to the specific requirements of Polaris. Polaris believes its relationship with Fuji to be excellent. If, however, Fuji terminated its relationship, interruption in the supply of engines would adversely affect Polaris’ production pending the continued development of substitute supply arrangements.

In addition, Polaris entered into an agreement with Fuji to form Robin Manufacturing, U.S.A. (“Robin”) in 1995. Under the agreement, Polaris made an investment for a 40% ownership position in Robin, which builds engines in the United States for recreational and industrial products. See Note 7 of Notes to Consolidated Financial Statements for a discussion of the Robin agreement.

Polaris has been designing and producing its own engines for select models of snowmobiles since 1995 and for all Victory motorcycles since 1998, and for select ORV models since 2001.

In 2000, Polaris entered into an agreement with a Taiwan manufacturer to co-design, develop and produce youth ATVs. Polaris expanded the agreement with the Taiwan manufacturer in 2004 to include the design, development and production of value-priced smaller adult ATV models and in 2008 to include a youthside-by-sidevehicle, the RANGER RZR 170. In 2002, Polaris entered into an agreement with a German manufacturer to co-design, develop and produce four-stroke engines for snowmobiles. In 2006, Polaris entered into a long term supply agreement with KTM Power Sports AG (“KTM”) whereby KTM supplies four-stroke engines for use in certain Polaris ATVs.

Polaris anticipates no significant difficulties in obtaining substitute supply arrangements for other raw materials or components that it generally obtains from limited sources.

Contract carriers ship Polaris’ products from its manufacturing and distribution facilities to its customers.

Polaris maintains distribution facilities in Vermillion, South Dakota; Passy, France; Askim, Norway; Ostersund, Sweden; Birmingham, United Kingdom; Griesheim, Germany; Barcelona, Spain and Ballarat, Victoria, Australia. These facilities distribute PG&A products to our North American dealers and international dealers and distributors.

Polaris’ products are produced and delivered throughout the year. Orders for ORVs are placed by the dealers and distributors periodically throughout the year. Delivery of snowmobiles to consumers begins in autumn and continues during the winter season. Orders for each year’s production of snowmobiles are placed by the dealers and distributors in the spring. Orders for Victory motorcycles are placed by the dealers in the summer after meetings with dealers. Units are built to order each year subject to fluctuations in market conditions and supplier lead times. In addition, non-refundable deposits made by consumers to dealers in the spring for pre-ordered snowmobiles assist in production planning. The anticipated volume of units to be produced is substantially committed to by dealers and distributors prior to production. Retail sales activity at the dealer level is monitored by Polaris for snowmobiles, ORVs, and motorcycles and incorporated into each product’s production scheduling. Beginning in 2008, Polaris began testing a new dealer ordering process called Maximum Velocity Program (MVP) with select dealers in North America. Under MVP, dealers place ORV orders in approximately two week intervals driven by retail sales trends at the respective dealer. If successful, the new MVP process will be rolled out to additional dealers over the next several years.

Manufacture of snowmobiles commences in late winter of the previous season and continues through late autumn or early winter of the current season. Since 1993, Polaris has manufactured ORVs year round. Victory motorcycle manufacturing began in 1998 and continues year round. Polaris has the ability to alternate production of the various products on the existing manufacturing lines as demand dictates.

Polaris products are sold through a network of 1,500 independent dealers in North America, and through seven subsidiaries and 43 distributors in approximately 130 countries outside of North America.

Polaris sells its snowmobiles directly to dealers in the snowbelt regions of the United States and Canada. Many dealers and distributors of Polaris snowmobiles also distribute Polaris’ ORVs. At the end of 2008, approximately 700 Polaris dealers were located in areas of the United States where snowmobiles are not regularly sold. Unlike its primary competitors, which market their ORV products principally through their affiliated motorcycle dealers, Polaris also sells its ORVs through lawn and garden and farm implement dealers.

With the exception of France, Great Britain, Sweden, Norway, Australia, New Zealand, Germany and Spain, sales of Polaris’ products in Europe and other offshore markets are handled through independent distributors. In 1999, Polaris acquired certain assets of its distributor in Australia and New Zealand and now distributes its products to its dealer network in those countries through a wholly-owned subsidiary. During 2000, Polaris acquired its

Victory motorcycles are distributed directly through authorized Victory dealers. Polaris has a high quality dealer network for its other product lines from which many of the approximately 315 current North American Victory dealers were selected. In 2008 Polaris expanded into Australia with one company owned retail store and expects to further expand its Victory dealer network over the next few years in North America and internationally.

Dealers and distributors sell Polaris’ products under contractual arrangements pursuant to which the dealer or distributor is authorized to market specified products and is required to carry certain replacement parts and perform certain warranty and other services. Changes in dealers and distributors take place from time to time. Polaris believes a sufficient number of qualified dealers and distributors exist in all geographic areas to permit an orderly transition whenever necessary.

In 1996, a wholly-owned subsidiary of Polaris entered into a partnership agreement with a subsidiary of Transamerica Distribution Finance (“TDF”) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to Polaris’ dealers in the United States. Under the partnership agreement, Polaris has a 50% equity interest in Polaris Acceptance. Polaris does not guarantee the outstanding indebtedness of Polaris Acceptance. In 2004, TDF was merged with a subsidiary of General Electric Company and, as a result of that merger, TDF’s name was changed to GE Commercial Distribution Finance Corporation (“GECDF”). No significant change in the Polaris Acceptance relationship resulted from the change of ownership from TDF. In November 2006, Polaris Acceptance sold a majority of its receivable portfolio to a securitization facility arranged by General Electric Capital Corporation, a GECDF affiliate (“Securitization Facility”), and the partnership agreement was amended to provide that Polaris Acceptance would continue to sell portions of its receivable portfolio to the Securitization Facility from time to time on an ongoing basis. See Notes 3 and 6 of Notes to Consolidated Financial Statements for a discussion of the financial services arrangement.

Polaris has arrangements with Polaris Acceptance (United States) and GE affiliates (Australia, Canada, France, Germany, Great Britain, Spain, Ireland, New Zealand, Norway and Sweden) to provide floor plan financing for its dealers. Substantially all of Polaris’ North American sales of snowmobiles, ORVs, motorcycles and related PG&A are financed under arrangements whereby Polaris is paid within a few days of shipment of its product. Polaris participates in the cost of dealer financing and has agreed to repurchase products from the finance companies under certain circumstances and subject to certain limitations. Polaris has not historically been required to repurchase a significant number of units. However, there can be no assurance that this will continue to be the case. If necessary, Polaris will adjust its sales return allowance at the time of sale should management anticipate material repurchases of units financed through the finance companies. See Note 6 of Notes to Consolidated Financial Statements for a discussion of this financial services arrangement.

In October 2001 Household Bank (SB), N.A. (“Household”) and a wholly-owned subsidiary of Polaris entered into a Revolving Program Agreement to provide retail financing to consumers who buy Polaris products in the United States. In August 2005, the wholly-owned subsidiary of Polaris entered into a multi-year contract with HSBC Bank Nevada, National Association (“HSBC”), formerly known as Household Bank (SB), N.A. under which HSBC is continuing to manage the Polaris private label credit card program under the StarCard label, which until July 2007 included providing retail credit for non-Polaris products. The 2005 agreement provides for income to be paid to Polaris based on a percentage of the volume of retail credit business generated. The previous agreement provided for equal sharing of all income and losses with respect to the retail credit portfolio, subject to certain limitations. The 2005 contract removed all credit, interest rate and funding risk to Polaris and also eliminated the need for Polaris to maintain a retail credit cash deposit with HSBC, which was $50.0 million at August 1, 2005. HSBC ceased financing non-Polaris products under its arrangement with Polaris effective July 1, 2007. During the first quarter of 2008, HSBC notified the Company that the profitability to HSBC of the 2005 contractual

In April 2006, a wholly-owned subsidiary of Polaris entered into a multi-year contract with GE Money Bank (“GE Bank”) under which GE Bank makes available closed-end installment consumer and commercial credit to customers of Polaris dealers for both Polaris and non-Polaris products. See Note 6 of Notes to Consolidated Financial Statements for a discussion of this financial services arrangement.

In January 2009, a wholly-owned subsidiary of Polaris entered into a multi-year contract with Sheffield Financial (“Sheffield”) pusuant to which Sheffield agreed to make available closed-end installment consumer and commercial credit to customers of Polaris dealers for Polaris products.

Polaris promotes the Polaris brand among the riding and non-riding public and provides a wide range of products for enthusiasts by licensing the name Polaris. The Company currently licenses the production and sale of a range of items, including die cast toys, ride on toys, video games, and numerous other products.

During 2000, a wholly-owned subsidiary of Polaris established ane-commercesite, purepolaris.com, to sell clothing and accessories over the Internet directly to consumers. The site has been developed with a revenue sharing arrangement with the dealers.

Polaris’ marketing activities are designed primarily to promote and communicate directly with consumers and secondarily to assist the selling and marketing efforts of its dealers and distributors. Polaris makes available and advertises discount or rebate programs, retail financing or other incentives for its dealers and distributors to remain price competitive in order to accelerate retail sales to consumers and gain market share. Polaris advertises its products directly using print advertising in the industry press and in user group publications, billboards, television and radio. Polaris also provides media advertising and partially underwrites dealer and distributor media advertising to a degree and on terms which vary by product and from year to year. From time to time, Polaris produces promotional films for its products, which are available to dealers for use in the showroom or at special promotions. Polaris also provides product brochures, leaflets, posters, dealer signs, and miscellaneous other promotional items for use by dealers.

Polaris expended approximately $137.0 million for sales and marketing in 2008, $123.9 million in 2007, and $108.9 million in 2006.

Polaris employs approximately 400 persons primarily in its Roseau and Wyoming, Minnesota facilities, who are engaged in the development and testing of existing products and research and development of new products and improved production techniques. Management believes Polaris and its predecessors were the first to develop, for wide commercial use, independent front suspensions for snowmobiles, long travel rear suspensions for snowmobiles, liquid cooled snowmobile brakes, hydraulic brakes for snowmobiles, the three cylinder engine in snowmobiles, the adaptation of the MacPherson strut front suspension, “on demand” four-wheel drive systems and the Concentric Drive System for use in ORVs, the application of a forced air cooled variable power transmission system to ORVs and the use of electronic fuel injection for ORVs.

Polaris utilizes internal combustion engine testing facilities to design and optimize engine configurations for its products. Polaris utilizes specialized facilities for matching engine, exhaust system and clutch performance parameters in its products to achieve desired fuel consumption, power output, noise level and other objectives. Polaris’ engineering department is equipped to make small quantities of new product prototypes for testing by

Polaris expended for research and development approximately $77.5 million in 2008, $73.6 million in 2007, and $73.9 million in 2006.

In 2005 Polaris purchased a 25 percent interest in Austrian motorcycle manufacturer KTM and began several important strategic projects with KTM intended to strengthen the competitive position of both companies and provide tangible benefits to their respective customers, dealers, suppliers and shareholders. Additionally, Polaris and KTM’s largest shareholder, Cross Industries AG (“Cross”), entered into an option agreement, which provided that under certain conditions in 2007, either Cross could purchase Polaris’ interest in KTM or, alternatively, Polaris could purchase Cross’ interest in KTM. In December 2006, Polaris and Cross cancelled the option agreement and entered into a share purchase agreement for the sale by the Company of approximately 1.38 million shares of KTM, or approximately 80 percent of its investment in KTM, to a subsidiary of Cross. The agreement provided for completion of the sale of the KTM shares in two stages. In the first half of 2007, the Company completed both stages of its sale of KTM shares generating proceeds of $77.1 million. Polaris now holds ownership of approximately 0.34 million shares, representing slightly less than 5 percent of KTM’s outstanding shares.

The ORV, snowmobile and motorcycle vehicle markets in the United States and Canada are highly competitive. Competition in such markets is based upon a number of factors, including price, quality, reliability, styling, product features and warranties. At the dealer level, competition is based on a number of factors including sales and marketing support programs (such as financing and cooperative advertising). Certain Polaris competitors are more diversified and have financial and marketing resources which are substantially greater than those of Polaris.

Management believes Polaris’ products are competitively priced and Polaris’ sales and marketing support programs for dealers are comparable to those provided by its competitors. Polaris’ products compete with many other recreational products for the discretionary spending of consumers, and, to a lesser extent, with other vehicles designed for utility applications.

Safety regulation.  The federal government and individual states have promulgated or are considering promulgating laws and regulations relating to the use and safety of Polaris products. The federal government is the primary regulator of product safety. The Consumer Product Safety Commission (“CPSC”) has federal oversight over product safety issues related to ATVs, snowmobiles and off-roadside-by-sidevehicles. The National Highway Transportation Safety Administration (“NHTSA”) has federal oversight over product safety issues related to on-road motorcycles.

In 1988, Polaris, five competitors and the CPSC entered into a ten-year consent decree settling litigation involving CPSC’s attempt to force an industry-wide recall of all three-wheel ATVs and four-wheel ATVs sold that could be used by children under 16 years of age. The settlement required, among other things, that ATV purchasers receive “hands on” training. In April 1998, this consent decree expired and Polaris entered into a voluntary action plan under which Polaris agreed to continue various activities previously required under the consent decree, including age recommendations, warning labels, point of purchase materials, hands on training and an information and education effort. Polaris also agreed to continue dealer monitoring to ascertain dealer compliance with safety obligations including age recommendations and training requirements.

Polaris does not believe that its voluntary action plan has had or will have a material adverse effect on Polaris or negatively affect its business to any greater degree than those of its competitors who have undertaken similar action

In August 2006, the CPSC issued a Notice of Proposed Rulemaking to establish mandatory standards for ATVs and to ban three-wheeled ATVs. The proposed rules in large part would require all ATV manufacturers to comply with ANSI/SVIA safety standards which are now voluntary. Polaris currently complies with these standards. Polaris no longer makes three-wheeled ATVs so a three-wheeled ban would not affect Polaris production. Polaris does not believe that the rules will negatively affect its business to any greater degree than those of its competitors who would also be subject to the same mandatory standards. The CPSC has not issued a final rule in this matter.

In August 2008, the Consumer Product Safety Improvement Act (“Act”) was passed. The Act includes a provision that requires all manufacturers and distributors who import into or distribute ATVs in the United States to comply with the ANSI/SVIA safety standards which were previously voluntary. The Act also requires the same manufacturers and distributors to have ATV action plans filed with the CPSC that are substantially similar to the voluntary action plans that were previously in effect. Polaris currently complies with the ANSI/SVIA standard and has had an action plan filed with the CPSC since 1998 when the Consent Decree expired so it does not believe the new law will negatively affect its business.

The Act also includes provisions which limit the amount of lead paint and lead content that can in exist in the ATVs, off-roadside-by-sideand snowmobiles Polaris sells for children twelve years of age and younger. Under the law, products that have lead in excess of these limits may not be sold in the United States starting February 10, 2009. Polaris is currently conducting testing to determine the level of lead existing in these children’s products. Polaris, along with others in the recreational products industry, has also filed a petition for exclusion with the CPSC which, if approved, will exempt certain metal alloys and battery terminals from the requirements of the law. Polaris does not believe any of its children’s products present a harmful risk of lead exposure but until its testing is complete, or an exclusion is granted by the CPSC, Polaris and its dealers will be restricted from selling some of its children’s product in the United States. Polaris does not believe that this restriction has had or will have a material adverse effect on Polaris or negatively impact its business to any greater degree than those of its competitors who sell children’s products in the United States.

Polaris is a member of the International Snowmobile Manufacturers Association (“ISMA”), a trade association formed to promote safety in the manufacture and use of snowmobiles, among other things. ISMA members include all of the major snowmobile manufacturers. The ISMA members are also members of the Snowmobile Safety and Certification Committee, which promulgated voluntary sound and safety standards for snowmobiles that have been adopted as regulations in some U.S. states and in Canada. These standards require testing and evaluation by an independent testing laboratory. Polaris believes that its snowmobiles have always complied with safety standards relevant to snowmobiles.

Victory motorcycles are subject to federal vehicle safety standards administered by NHTSA. Victory motorcycles are also subject to various state vehicle safety standards. Polaris believes that its motorcycles have always complied with safety standards relevant to motorcycles.

Polaris products are also subject to international standards related to safety in places where it sells its products outside the United States. Polaris believes that its Victory motorcycles, ATVs, off-roadside-by-sidevehicles and snowmobiles have always complied with applicable safety standards in the United States and internationally.

Emissions.  The federal Environmental Protection Agency (“EPA”) and the California Air Resources Board (“CARB”) have adopted emissions regulations applicable to Polaris products.

CARB has emission regulations for ATVs and off-roadside-by-sidevehicles which the Company already meets. In October 2002, the EPA established new corporate average emission standards effective for model years 2006 through 2012 for non-road recreational vehicles including ATVs, off roadside-by-sidevehicles and snowmobiles. The Company has developed engine and emission technologies along with its existing technology base to meet current and future requirements. In 2002, Polaris entered into an agreement with a German

Victory motorcycles are also subject to EPA and CARB emission standards. Polaris believes that its motorcycles have always complied with these standards. The CARB regulations require additional motorcycle emission reductions in model year 2008 which the Company meets. The EPA adopted the CARB emission limits in a January 2004 rulemaking that allows an additional two model years to meet these new CARB emission requirements on a nationwide basis. The Company has developed engine and emission technologies to meet these requirements nationwide by 2010.

Polaris products are also subject to international laws and regulations related to emissions in places where it sells its products outside the United States. Europe currently regulates emissions from certain of the Company’s ATV-based products and motorcycles and the Company meets these requirements. Canada’s emission regulations for motorcycles are similar to those in the U.S. In December 2006 Canada proposed a new regulation that would essentially adopt the U.S. emission standards for ATVs, off-roadside-by-sidevehicles, and snowmobiles. These regulations are expected to become effective in 2009.

Polaris believes that its Victory motorcycles, ATVs, off-roadside-by-sidevehicles and snowmobiles have always complied with applicable emission standards and related regulations in the United States and internationally. Polaris is unable to predict the ultimate impact of the adopted or proposed regulations on Polaris and its business. Polaris is currently developing and obtaining engine and emission technologies to meet the requirements of the future emission standards.

Use regulation.  State and federal laws and regulations have been promulgated or are under consideration relating to the use or manner of use of Polaris’ products. Some states and localities have adopted, or are considering the adoption of, legislation and local ordinances which restrict the use of ATVs, snowmobiles and off-roadside-by-sidevehicles to specified hours and locations. The federal government also has restricted the use of ATVs, snowmobiles andside-by-sidevehicles in some national parks and federal lands. In several instances this restriction has been a ban on the recreational use of these vehicles.

Polaris is unable to predict the outcome of such actions or the possible effect on its business. Polaris believes that its business would be no more adversely affected than those of its competitors by the adoption of any pending laws or regulations. Polaris continues to monitor these activities in conjunction with industry associations and supports balanced and appropriate programs that educate the product user on safe use of its products and how to protect the environment.

Due to the seasonality of the Polaris business and certain changes in production cycles, total employment levels vary throughout the year. Despite such variations in employment levels, employee turnover has not been high. During 2008, Polaris employed an average of approximately 3,300 persons. Approximately 1,250 of its employees are salaried. Polaris considers its relations with its employees to be excellent. Polaris’ employees have not been represented by a union since July 1982.

Polaris’ Internet website ishttp://www.polarisindustries.com.Polaris makes available free of charge, on or through its website, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. Polaris also makes available through its website its corporate governance materials, including its Corporate Governance Guidelines, the charters of the Audit Committee, Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee of its Board of Directors and its Code of Business Conduct and Ethics. Any shareholder or other interested party wishing to receive a copy of these corporate governance

This 2008 Annual Report contains not only historical information, but also “forward-looking statements” intended to qualify for the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These “forward-looking statements” can generally be identified as such because the context of the statement will include words such as the Company or management “believes,” “anticipates,” “expects,” “estimates” or words of similar import. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking. Forward-looking statements may also be made from time to time in oral presentations, including telephone conferencesand/orwebcasts open to the public. Shareholders, potential investors and others are cautioned that all forward-looking statements involve risks and uncertainties that could cause results in future periods to differ materially from those anticipated by some of the statements made in this report, including the risks and uncertainties described below under the heading entitled “Item 1A — Risk Factors” and elsewhere in this report. The risks and uncertainties discussed in this report are not exclusive and other factors that the Company may consider immaterial or do not anticipate may emerge as significant risks and uncertainties.

Any forward-looking statements made in this report or otherwise speak only as of the date of such statement, and Polaris undertakes no obligation to update such statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. Polaris advises you, however, to consult any further disclosures made on related subjects in future quarterly reports onForm 10-Qand current reports onForm 8-Kthat are filed with or furnished to the Securities and Exchange Commission.

The following are significant factors known to Polaris that could materially adversely affect the Company’s business, financial condition, or operating results, as well as adversely affect the value of an investment in Polaris common stock.

Polaris products are subject to extensive laws and regulations relating to safety, environmental and other regulations promulgated by the U.S. federal government and individual states as well as international regulatory authorities. Although Polaris believes that its snowmobiles, ORVs, and motorcycles have always complied with applicable vehicle safety and emissions standards and related regulations, there can be no assurance that future regulations will not require additional safety standards or emission reductions that would require additional expensesand/ormodification of product offerings in order to maintain such compliance. Although Polaris is unable to predict the ultimate impact of adopted or proposed regulations on its business and operating results, Polaris believes that its business would be no more adversely affected than those of its competitors by the adoption of any pending laws or regulations. Polaris products are also subject to laws and regulations that restrict the use or manner of use during certain hours and locations. Polaris continues to monitor these activities in conjunction with industry associations and supports balanced and appropriate programs that educate the product user on safe use of its products and how to protect the environment.

Polaris’ product liability insurance limits and coverage were adversely affected by the general decline in the availability of liability insurance starting in 1985. As a result of the high cost of premiums, and the historically insignificant amount of claims paid by Polaris, Polaris was self-insured from June 1985 to June 1996. In June 1996, Polaris purchased excess insurance coverage for catastrophic product liability claims for incidents occurring subsequent to the policy date that exceeded its self-insured retention levels. In September 2002, due to insurance

Polaris had a product liability reserve accrual on its balance sheet of $11.1 million at December 31, 2008 for the possible payment of pending claims related to continuing operations and $1.9 million for discontinued operations for product liability, regulatory and other legal costs related to marine products. Polaris believes such accruals are adequate. Polaris does not believe the outcome of any pending product liability litigation will have a material adverse effect on the operations of Polaris. However, no assurance can be given that its historical claims record, which did not include ATVs prior to 1985 or motorcycles andside-by-sidevehicles prior to 1998, will not change or that material product liability claims against Polaris will not be made in the future. Adverse determination of material product liability claims made against Polaris would have a material adverse effect on Polaris’ financial condition. See Note 8 of Notes to Consolidated Financial Statements.

Polaris provides a limited warranty for ORVs for a period of six months and for a period of one year for its snowmobiles and motorcycles. Polaris may provide longer warranties related to certain promotional programs, as well as longer warranties in certain geographical markets as determined by local regulations and market conditions. Although Polaris employs quality control procedures, sometimes a product is distributed which needs repair or replacement. Polaris’ standard warranties require the Company or its dealers to repair or replace defective products during such warranty periods at no cost to the consumer. Historically, product recalls have been administered through Polaris’ dealers and distributors and have not had a material effect on Polaris’ business. See Note 1 of Notes to Consolidated Financial Statements.

Lack of snowfall in any year in any particular geographic region may adversely affect snowmobile retail sales and related PG&A sales in that region. Polaris seeks to minimize this potential effect by stressing pre-season sales (see “Business — Production Scheduling”) and facilitate the transfer of dealer inventories from one location to another and by balancing production to retail sales and industry conditions. However, there is no assurance that weather conditions would not have a material effect on Polaris’ sales of ORVs, snowmobiles, motorcycles, or PG&A.

The snowmobile, ORV and motorcycle markets are highly competitive. Competition in such markets is based upon a number of factors, including price, quality, reliability, styling, product features and warranties. At the dealer level, competition is based on a number of factors including sales and marketing support programs (such as financing and cooperative advertising). Certain Polaris competitors are more diversified and have financial and marketing resources which are substantially greater than those of Polaris. In addition, Polaris’ products compete with many other recreational products for the discretionary spending of consumers, and, to a lesser extent, with other vehicles designed for utility applications. Although Polaris has been able to effectively compete with its numerous competitors, failure to do so could have a material adverse effect on future business performance.

Pursuant to informal agreements between Polaris and Fuji in Japan, Fuji was the sole manufacturer of Polaris two-cycle snowmobile engines from 1968 to 1995. Fuji has manufactured engines for Polaris’ ATV products since their introduction in the spring of 1985. Such engines are developed by Fuji to the specific requirements of Polaris.

The changing relationships of primarily the U.S. dollar to the Canadian dollar, the Euro and the Japanese yen have from time to time had a negative impact on results of operations. While Polaris actively manages the exposure to fluctuating foreign currency exchange rates by entering into foreign exchange hedging contracts from time to time, these contracts hedge foreign currency denominated transactions and any change in the fair value of the contracts would be offset by changes in the underlying value of the transactions being hedged.

Polaris’ results of operations may be sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending. Future weakening of economic conditions affecting disposable consumer income such as employment levels, business conditions, changes in housing market conditions, capital markets, tax rates, savings rates, interest rates, fuel and energy costs, the impacts of natural disasters and acts of terrorism and other matters including the availability of consumer credit could reduce consumer spending or reduce consumer spending on powersports products. A general reduction in consumer spending or a reduction in consumer spending on powersports products could adversely affect Polaris’ sales growth and profitability.

The Company distributes its products through numerous dealers and distributors, sources component parts and raw materials through numerous suppliers and has relationships with a limited number of sources of product financing for its dealers and consumers. The Company’s sales growth and profitability could be adversely affected if a further deterioration of economic or business conditions results in a weakening of the financial condition of a material number of the Company’s dealers and distributors, suppliers or financing sources or if uncertainty about the economy or the demand for the Company’s products causes these business partners to voluntarily or involuntarily reduce or terminate their relationship with the Company.

The Company has arrangements with each of HSBC and GE Bank to make retail financing available to consumers who purchase Polaris products in the United States. During 2008 consumers financed approximately 39 percent of the Polaris vehicles sold in the United States through the HSBC revolving retail credit and GE Bank installment retail credit programs. There can be no assurance that retail financing will continue to be available in the same amounts and under the same terms that had previously been available to Polaris customers. HSBC ceased financing non-Polaris products under its arrangement with Polaris effective July 1, 2007 resulting in a significant decline in the income from financial services reported by Polaris in the second half of 2007. During the first quarter of 2008, HSBC notified the Company that the profitability to HSBC of the 2005 contractual arrangement was unacceptable and, absent some modification of that arrangement, HSBC might significantly tighten its underwriting standards for Polaris customers, reducing the number of qualified retail credit customers who would be able to obtain credit from HSBC. In order to avoid the potential reduction of revolving retail credit available to Polaris consumers, Polaris agreed to forgo the receipt of a volume based fee provided for under its agreement with HSBC effective March 1, 2008. Management anticipates that the elimination of the volume based fee will continue and that

Not Applicable.

The following sets forth the Company’s material facilities as of December 31, 2008.

Polaris owns substantially all tooling and machinery (including heavy presses, conventional and computer-controlled welding facilities for steel and aluminum, assembly lines, paint lines, and sewing lines) used in the manufacture of its products. Polaris makes ongoing capital investments in its facilities. These investments have increased production capacity for ORVs, snowmobiles and motorcycles. The Company believes Polaris’ manufacturing and distribution facilities are adequate in size and suitable for its present manufacturing and distribution needs.

Pursuant to the joint Stipulation for Dismissal filed by the Company and HSBC on November 6, 2008 with the United States District Court for the Northern District of Illinois, Eastern Division, the parties requested that the action be dismissed with prejudice and that each party bear its own costs and attorneys’ fees. The Court granted this request by entry of an Agreed Order on November 12, 2008.

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

Set forth below are the names of the executive officers of the Company as of February 17, 2009, their ages, titles, the year first appointed as an executive officer of the Company, and employment for the past five years:

Executive officers of the Company are elected at the discretion of the Board of Directors with no fixed terms with the exception of Mr. Bjorkman who has a letter agreement with the Company providing that he will continue to serve as Vice President — Operations of the Company until the earlier of the appointment of his successor or May 1, 2009 and that he will thereafter serve as Senior Operations Advisor until January 31, 2010. Each of Messrs. Wine and Morgan has an employment agreement with no expiration date. There are no family relationships between or among any of the executive officers or directors of the Company.

Mr. Wine joined Polaris Industries Inc. as Chief Executive Officer on September 1, 2008. Prior to joining Polaris, Mr. Wine was President of Fire Safety Americas, a division of United Technologies from 2007 to August 2008. Prior to that, Mr. Wine held senior leadership positions at Danaher Corp. in the United States and Europe from 2003 to 2007, including President of its Jacob Vehicle Systems and Veeder-Roots subsidiaries, and Vice President and General Manger, Manufacturing Programs in Europe. From 1996 to 2003, Mr. Wine held a number of operations and executive posts, both international and domestic with Allied Signal Corporations’ Aerospace Division.

Mr. Morgan has been President and Chief Operating Officer of the Company since April 2005; prior to that he was Vice President and General Manager of the ATV Division of Polaris. Prior to managing the ATV Division, Mr. Morgan was General Manager of the PG&A Division for Polaris from 1997 to 2001. He joined Polaris in 1987 and spent his early career in various product development, marketing and operations management positions of increasing responsibility.

Mr. Bjorkman has been Vice President — Operations of the Company since July 2000. Mr. Bjorkman had been Vice President — Manufacturing since January 1995, and prior to that held positions of Plant Manager and Manufacturing Engineering Manager. Prior to joining Polaris in July 1990, Mr. Bjorkman was employed by General Motors Corporation in various management positions for nine years. In January 2009, Mr. Bjorkman announced that he will be stepping down as Vice President — Operations upon the earlier of the appointment of his successor or May 1, 2009.

Mr. Blackwell has been Vice President — Victory Motorcycles since October 2005, and was also Vice President — International Operations from October 2005 to December 2008. Mr. Blackwell joined Polaris in September 2000 as General Manager for Victory Motorcycles. Mr. Blackwell has over 30 years of progressive experience in the powersports industry, beginning in retail and working through a variety of assignments at the distributor and manufacturer levels for Japanese, European and American companies.

Mr. Corness has been Vice President — Human Resources of the Company since January 1999. Prior to joining Polaris, Mr. Corness was employed by General Electric Company in various human resource positions for nine years. Before that time, Mr. Corness held various human resource positions with Maple Leaf Foods and Transalta Utilities.

Mr. Dougherty is Vice President — Global New Market Development as of December 2008. Prior to this, Mr. Dougherty was Vice President and General Manager of the ATV Division since November 2007, and was General Manager of the ATV Division since April 2005. In 1998, Mr. Dougherty joined Polaris as the International Sales Manager for Europe, Mid East and Africa. In 2002, Mr. Dougherty accepted the position of General Manager, International Operations. Prior to Polaris, he was employed at Trident Medical International, a trading company.

Mr. Fisher has been Vice President and Chief Information Officer since November 2007, and has been Chief Information Officer since July 1999. He has also served as General Manager of Service overseeing all technical, dealer, and consumer service operations since 2005. Prior to joining Polaris, Mr. Fisher was employed by MTS Systems for 15 years in various positions in information services, software engineering, control product development, and general management. Before that time, Mr. Fisher worked as a civil engineer for Anderson-Nichols and he later joined Autocon Industries, where he developed process control software.

Mr. Homan has been Vice President — Off-Road Vehicle Division since December 2008. Prior to this, Mr. Homan was Vice President and General Manager of theSide-by-SideDivision since August 2008, General Manager of theSide-by-SideDivision since December 2005, and was Director of Marketing for the All-Terrain Vehicle Division since joining Polaris in 2002. Prior to working at Polaris, Mr. Homan spent nearly seven years at General Mills working in various marketing and brand management positions.

Mr. Jonikas has been Vice President — Sales and Marketing since November 2007, and was the General Manager of Sales and Marketing since April 2005. Mr. Jonikas joined Polaris Industries in May 2000 as Director of Marketing and Product Management for the ATV Division. In 2003 he was promoted to General Manager of theside-by-sidevehicle product line. Prior to joining Polaris, Mr. Jonikas spent 12 years at General Mills in numerous general management positions.

Mr. Longren has been Vice President and Chief Technical Officer since November 2007, and has been the Chief Technical Officer since May 2006. Mr. Longren joined Polaris in January 2003 as the Director of Engineering for the ATV Division. Prior to joining Polaris, Mr. Longren was a Vice President in the Weapons Systems Division of Alliant Tech System and Vice President, Engineering and Marketing at Blount Spotting Equipment Group.

Mr. Malone has been Vice President — Finance, Chief Financial Officer and Secretary of the Company since January 1997. Mr. Malone was Vice President and Treasurer of the Company from December 1994 to January 1997 and was Chief Financial Officer and Treasurer of a predecessor company of Polaris from January 1993 to December 1994. Prior thereto and since 1986, he was Assistant Treasurer of a predecessor company of Polaris. Mr. Malone joined Polaris in 1984 after four years with Arthur Andersen LLP.

Ms. McConnell has been Vice President — General Counsel since March 2003, and has been the Compliance Officer since 2006. Just prior to joining Polaris, Ms. McConnell was General Counsel for the Control Products Division of Honeywell. From 1995 to 2002, Ms. McConnell was the Senior Vice President, General Counsel and Secretary of Genmar Holdings, Inc. Before that time, Ms. McConnell was a partner with the law firm of Lindquist & Vennum, and held various positions with the Dakota County Attorneys’ Office and the U.S. Corps of Engineers.

Mr. Swenson has been Vice President — Snowmobile and PG&A Divisions since November 2007. Prior to his current position, Mr. Swenson was General Manager of the Snowmobile Division since April 2006 and General Manager of the PG&A Division beginning in May 2001. In 1998 Mr. Swenson joined Polaris as Assistant Treasurer. Prior to joining Polaris, Mr. Swenson was employed in various finance positions at General Electric and Shell Oil Company.

The information under the caption “Other Investor Information” appearing on the inside back cover of the Company’s 2008 Annual Report is incorporated herein by reference.

The graph below compares the five-year cumulative total return to shareholders (stock price appreciation plus reinvested dividends) for the Company’s common stock with the comparable cumulative return of two indexes: Russell 2000 Index and Morningstar’s Recreational Vehicles Industry Group Index. The graph assumes the investment of $100 on January 1, 2004 in common stock of the Company and in each of the indexes, and the reinvestment of all dividends. Points on the graph represent the performance as of the last business day of each of the years indicated.

The table below sets forth the information with respect to purchases made by or on behalf of Polaris during the fourth quarter of the fiscal year ended December 31, 2008.

The information under the caption“11-YearSelected Financial Data” appearing on pages 10 and 11 of the Company’s 2008 Annual Report is incorporated herein by reference.

The following discussion pertains to the results of operations and financial position of the Company for each of the three years in the period ended December 31, 2008, and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report. On September 2, 2004, the Company announced its decision to discontinue the manufacture of marine products effective immediately. The marine products division’s financial results are reported separately as discontinued operations for all periods presented.

The Company delivered record sales and earnings per share in 2008. The Company’s innovative product portfolio, led by the Ranger and RZRside-by-sideproducts, enabled Polaris to deliver six percent sales growth in the United States as well as the Canadian and International businesses each delivering 18 percent sales growth for 2008. Polaris’side-by-sideproducts performed well, providing a positive sales mix and more than offsetting the steep declines in the core ATV business. The Company experienced sales growth in most product lines in 2008, with the exception of Victory and core ATVs, although even they managed to gain share in a difficult retail environment. Polaris did not entirely escape the weakness in the powersports industry markets in 2008, as noted by a two percent decline in volume for the year. However, Polaris did benefit from a mix shift due to higher sales ofside-by-sideproducts, higher PG&A sales and increased pricing, which combined to drive total Company sales up nine percent in 2008 over 2007. In 2008, the Company’s largest division, the off-road vehicle (“ORV”) business, which combines the core ATV andside-by-sidebusinesses into a single division, achieved the #1 market share position in both North America and Europe for the first time.

For the full year ended December 31, 2008, Polaris reported net income from continuing operations of $117.4 million, or $3.50 per diluted share, compared to $112.6 million, or $3.10 per diluted share for the year ended December 31, 2007, representing a 13 percent increase on a per diluted share basis. Sales for the full year 2008 totaled $1,948.3 million, an increase of nine percent compared to sales of $1,780.0 million for the full year 2007.

The Company’s product lines consist of ORVs, snowmobiles, motorcycles and their related parts, garments and accessories (PG&A). ORVs is the largest product line representing 67 percent of Polaris’ sales in 2008, snowmobiles accounted for ten percent of 2008 total sales, Victory motorcycles was five percent and PG&A represented 18 percent of 2008 total Company sales. The Company sells its products through a network of 1,500

During 2008, the Company repurchased and retired 2.5 million shares of its common stock for a total of $107.2 million. Since inception of the share repurchase program in 1996, approximately 33.7 million shares have been repurchased. As of December 31, 2008, the Company has authorization from its Board of Directors to repurchase up to an additional 3.8 million shares of Polaris stock.

On January 22, 2009, the Company announced that its Board of Directors approved a three percent increase in the regular quarterly cash dividend to $0.39 per share per quarter, representing the 14th consecutive year of increased dividends.

Sales were $1,948.3 million for total year 2008, a nine percent increase from $1,780.0 million in sales for the same period in 2007.

The following table is an analysis of the percentage change in total Company sales for 2008 compared to 2007 and 2007 compared to 2006:

Volume for the full year 2008 decreased two percent compared to the same period last year as the Company shipped fewer core ATVs and Victory motorcycles to dealers given the continued weak core ATV industry and heavy weight cruiser and touring segment of the motorcycle industry. The lower shipments of core ATVs and Victory motorcycles during 2008 were partially offset by higher shipments of RANGER^tmside-by-sidevehicles, snowmobiles and increased PG&A sales. Product mix and price increased for 2008 compared to 2007 primarily due to the positive benefit of a greater number ofside-by-sidevehicles sold to dealers, which typically have a higher selling price than core ATVs, and select selling price increases on several of the new model year 2009 products.

Volume for the full year 2007 increased two percent compared to 2006 as the Company experienced higher shipments of RANGER^tmside-by-sidevehicles and increased PG&A sales during 2007 compared to 2006 partially offset by fewer shipments of core ATVs given the continued weak core ATV industry. Product mix and price increased for 2007 compared to 2006 primarily due to the positive benefit of a greater number ofside-by-sidevehicles sold to dealers, which typically have a higher selling price than core ATVs. Currency rate changes increased sales by two percent for the full year 2007 compared to 2006 due to the positive impact of the Canadian dollar and the Euro.

Total Company sales by product line are as follows:

ORV (off-road vehicles) sales of $1,305.8 million in 2008, which includes both core ATV (all-terrain vehicles) andRANGER^tmside-by-sidevehicles, increased nine percent from 2007. The increase in sales was due to the Company’s growingside-by-sidebusiness with the RANGER RZR^tmside-by-siderecreation vehicles continuing to sell well along with theRANGERCrew^tmsix passengerside-by-sideutility vehicles and the new RANGER RZR S^tm. Additionally, the Company’s newly redesignedRANGER^tmutility vehicle for model year 2009, which has a number of new and popular features including improved handling and suspension, a new rider ergonomics package, power steering and a dramatic new design, was well received in 2008. The overall growth inside-by-sidevehicles was partially offset by fewer shipments of Polaris core ATVs to North American dealers as they continued to reduce their core ATV inventory levels in a tough economic environment. Although the core ATV market continued to be weak, the Company remained active in new product development with the introduction of an all new Sportsman XP for model year 2009, in both 550cc and 850cc engine displacement sizes. For 2007, sales of ORVs were $1,194.6 million, an increase of seven percent from $1,117.3 million in 2006. This increase reflects the success of the new RANGER RZR^tmside-by-siderecreation vehicle and the initial success of the new RANGERCrew^tmsix passengerside-by-sideutility vehicle which began shipping late in the fourth quarter 2007. Additionally, the Company continued to experience growth in demand for its baseRANGER^tmside-by-sideutility vehicles during 2007 in an overallside-by-sideindustry that continued to expand. Core ATV shipments to dealers decreased in 2007, resulting in dealer inventories at year-end finishing at much lower levels than year-end 2006. The Company gained a modest amount of market share in core ATVs despite a declining overall core North American ATV market during each of 2007 and 2008.

Snowmobile sales increased 15 percent to $205.3 million for 2008 compared to 2007. The increase reflects the lower beginning snowmobile dealer inventory levels in 2008 compared to the prior year, good snowfall during last year’s riding season and a benefit of product mix as more higher priced snowmobiles were shipped in 2008 compared to 2007. Sales of snowmobiles of $179.2 million in 2007 were 14 percent higher than $156.9 million in 2006. The increase reflects the impact of significantly reduced beginning snowmobile dealer inventory levels in 2007 compared to the prior year and a return of more normal snowfall levels in North America in the2007-2008riding season.

Sales of Victory motorcycles decreased 17 percent during 2008 compared to 2007 to $93.6 million. The decrease is the result of weak North American motorcycle industry retail sales for heavyweight cruiser and touring motorcycles in 2008, which negatively impacted Polaris’ retail and wholesale sales during the year. In 2008, although North American retail sales were down for the overall motorcyle industry and Victory motorcycles, Victory gained market share for the fifth consecutive year. In 2007 sales of Victory motorcycles were $113.1 million compared to $112.8 million in 2006. Victory motorcycle sales to dealers grew less than one percent during 2007 compared to 2006 primarily due to the impact of the slowing overall motorcycle industry during 2007. Although overall motorcycle industry retail sales in North America declined during 2007, Victory continued to increase retail sales to consumers, expand market share and maintain its industry-leading quality position while entering the luxury touring segment of motorcycles in 2007 with the new introduction of the Victory Vision^tm.

Parts, Garments, and Accessories (“PG&A”) sales increased 17 percent during 2008 to $343.6 million. The increase in 2008 reflects PG&A related sales growth from all product lines and geographic regions. During 2008, the Company introduced over 260 new accessory items for 2009 model year ATV,side-by-sideand Victory

Sales by geographic region for the 2008, 2007 and 2006 year end periods were as follows:

Significant regional trends were as follows:

Sales in the United States for 2008 and 2007 increased six percent and five percent, respectively, when compared to the same prior year periods. Lower shipments of core ATVs in the United States for 2008 were more than offset by increased shipments ofRANGER^tmside-by-sidevehicles. The United States represented 70 percent of total Company sales in 2008 compared to 73 percent of total Company sales for 2007 and 74 percent in 2006. The decrease in the percentage of total sales in the United States for the 2008 year is primarily the result of faster growth in the International and Canadian operations compared to the United States where the Company has experienced lower sales of core ATVs due to the continued weak core ATV market in the United States.

Canadian sales increased 18 percent and 16 percent for the 2008 and 2007 periods, respectively, as compared to the same prior year periods. Fluctuations in the Canadian currency rate compared to the U.S. dollar accounted for a one percent reduction in sales for 2008 and a six percent increase in sales for 2007, respectively, as compared to the same prior periods. Increased volume was the primary contributor for the remainder of the increase in 2008 and 2007, as the strong Canadian economy contributed to increased core ATV,RANGER^tmside-by-sideand snowmobile sales.

Sales in other foreign countries, primarily in Europe, increased 18 percent and 11 percent for the 2008 and 2007 periods, respectively, as compared to the same prior year periods. Favorable currency rates accounted for three percent and seven percent of the change for the 2008 and 2007 year periods, respectively, as compared to the same prior year periods. The remainder of the increase was primarily driven by volume gains as the Company increased market share, increased distribution points and in 2008, increased shipments ofRANGER RZR^tmside-by-sidevehicles in markets outside of North America.

The following table reflects the Company’s gross profits in dollars and as a percentage of sales for the 2008, 2007 and 2006 year end periods:

For the full year 2008 gross profit dollars increased 13 percent to $445.7 million compared to 2007. Gross profit, as a percentage of sales, improved 80 basis points to 22.9 percent compared to 22.1 percent for the full year 2007. The increase in the gross profit margin percentage for the full year 2008 was the result of favorable product mix from higher sales ofside-by-sidevehicles, PG&A and international sales and higher selling prices, offset somewhat by higher commodity and transportation costs during 2008 compared to 2007. Gross profit was $393.0 million in 2007, representing a nine percent increase compared to $359.4 million gross profit in 2006. The gross profit margin percentage was 22.1 percent in 2007, an increase of 40 basis points from 21.7 percent for the full year 2006. The increase was due to a favorable product mix change as the Company sold moreside-by-sidevehicles, which typically have higher margins, as well as favorable foreign currency fluctuations, offset somewhat by increased promotional and warranty costs.

The following table reflects the Company’s operating expenses in dollars and as a percentage of sales for 2008, 2007 and 2006 periods:

Operating expenses for 2008 increased eight percent to $284.1 million or 14.6 percent of sales compared to $262.3 million or 14.7 percent of sales for 2007. The increase in operating expenses was primarily due to higher advertising, product launch costs and research and development expenses for several key new product introductions in 2008. Additionally, general and administrative expenses increased in 2008 due to increased performance-based incentive compensation expenses as the Company’s financial performance improved in 2008. Operating expenses in 2007 increased ten percent to $262.3 million from $238.4 million in 2006. Expressed as a percentage of sales, operating expenses increased to 14.7 percent in 2007 from 14.4 percent in 2006. Research and development expenses for 2007 were approximately flat with 2006. Sales and marketing expenses increased 14 percent in 2007 primarily due to increased advertising costs. General and administrative expenses increased 17 percent in 2007 primarily due to more normalized performance-based incentive compensation expenses resulting from improved financial performance during 2007 compared to 2006.

The following table reflects the Company’s income from financial services for the 2008, 2007 and 2006 year end periods:

Income from financial services decreased 53 percent to $21.2 million compared to $45.3 million in 2007. The decrease was primarily due to the Company’s revolving retail credit provider, HSBC eliminating the volume-based

Interest expense decreased to $9.6 million in 2008 compared to $15.1 million in 2007. The decrease in interest expense is due to lower interest rates on the Company’s bank borrowings during the 2008 period. Interest expense increased to $15.1 million for 2007 compared to $9.8 million in 2006 due to higher debt levels maintained during 2007 related to the accelerated share repurchase transaction completed in December 2006.

Gain on sale of manufacturing affiliate shares was $0.0 million for 2008, $6.2 million for 2007 and $0.0 for 2006. In the first and second quarters of 2007, Polaris sold shares of its KTM investment and recorded a gain on the sale of the investment.

Non-operating other expense (income) was $4.0 million of income in 2008 compared to $2.7 million of income for 2007. The increase in income for 2008 was primarily due to the weakening U.S. dollar and the resulting effects on Canadian dollar hedging activities and foreign currency transactions related to the foreign subsidiaries. Non-operating other) expense (income) was income of $2.7 million in 2007 compared to income of $1.9 million in 2006, primarily due to the weakening of the U.S. dollar and the resulting effects of foreign currency transactions related to the foreign subsidiaries.

The Income tax provision for 2008 was recorded at a rate of 33.7 percent of pretax income, similar to the 33.9 percent of pretax income recorded for 2007. The Income tax provision for the full year 2006 was recorded at a rate of 31.1 percent. The higher income tax provision rate in 2007 is primarily due to the resolution of certain tax issues in 2007 compared to more favorable tax events in 2006.

The Company ceased manufacturing marine products on September 2, 2004. As a result, the marine products division’s financial results have been reported separately as discontinued operations for all periods presented. In 2007 the Company substantially completed the exit of the marine products division, therefore for 2008, there were no additional material charges incurred related to this discontinued operations event and the Company does not expect any additional material charges in the future. For the year ended December 31, 2007, the loss from discontinued operations was $0.9 million, after tax, or $0.03 per diluted share. During 2006, the Company recorded an additional loss on disposal of discontinued operations of $8.1 million before tax, or $5.4 million after tax, or $0.13 per diluted share. This loss includes the estimated costs required to resolve past and potential future product liability litigation claims and warranty expenses related to marine products.

Polaris adopted SFAS 123(R) “Accounting for Stock-Based Compensation” effective the beginning of fiscal year 2006 using the modified retrospective method. In connection with the adoption of this new accounting standard, Polaris recorded an after tax benefit of $0.4 million or $0.01 per diluted share on its income statement for the first quarter 2006 resulting from the cumulative effect of the accounting change.

The following table reflects the Company’s reported net income for the 2008, 2007 and 2006 periods:

Reported net income for 2008, including each of continuing and discontinued operations was $117.4 million or $3.50 per diluted share, compared to $111.7 million or $3.07 per diluted share for the same period in 2007. Reported net income for the full year ended December 31, 2006, including each of continuing and discontinued operations, the loss on disposal of discontinued operations and the cumulative effect of adopting SFAS 123(R) was $107.0 million or $2.58 per diluted share.

The weighted average diluted shares outstanding for 2008, 2007 and 2006 were 33.6 million shares, 36.3 million shares and 41.5 million shares, respectively. The decrease in the average diluted shares outstanding for each of the years is due principally to the share repurchase activity of the Company.

The significant accounting policies that management believes are the most critical to aid in fully understanding and evaluating the Company’s reported financial results include the following: revenue recognition, sales promotions and incentives, share-based employee compensation, dealer holdback programs, product warranties and product liability.

Revenue recognition:  Revenues are recognized at the time of shipment to the dealer, distributor or other customers. Historically, product returns, whether in the normal course of business or resulting from repurchases made under the floorplan financing program have not been material. However, Polaris has agreed to repurchase products repossessed by the finance companies up to certain limits. Polaris’ financial exposure is limited to the difference between the amount paid to the finance companies and the amount received on the resale of the repossessed product. No material losses have been incurred under these agreements. Polaris has not historically recorded any significant sales return allowances because it has not been required to repurchase a significant number of units. However, an adverse change in retail sales could cause this situation to change.

Sales promotions and incentives:  Polaris generally provides for estimated sales promotion and incentive expenses, which are recognized as a reduction to sales, at the time of sale to the dealer or distributor. Examples of sales promotion and incentive programs include dealer and consumer rebates, volume incentives, retail financing programs and sales associate incentives. Sales promotion and incentive expenses are estimated based on current programs and historical rates for each product line. Polaris records these amounts as a liability in the consolidated balance sheet until they are ultimately paid. At December 31, 2008 and 2007, accrued sales promotions and incentives were $75.2 million and $79.2 million, respectively, reflecting a reduction in units in dealer inventory and an increase in the core ATV and snowmobile sales promotions and incentives cost environment during 2007. Actual results may differ from these estimates if market conditions dictate the need to enhance or reduce sales promotion and incentive programs or if the customer usage rate varies from historical trends. Adjustments to sales promotions and incentives accruals are made from time to time as actual usage becomes known in order to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date. Historically, sales promotion and incentive expenses have been within the Company’s expectations and differences have not been material.

Share-Based Employee Compensation:  In the first quarter 2006 Polaris adopted SFAS 123(R), which requires companies to recognize in the financial statements the grant-date fair value of stock options and other equity-based compensation issued to employees. Polaris adopted SFAS 123(R) using the modified retrospective

SFAS 123(R) requires the Company to develop an estimate of the number of share-based awards which will be forfeited due to employee turnover. Changes in the estimated forfeiture rate can have a significant effect on reported share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher or lower than the estimated forfeiture rate, then an adjustment is made to increase or decrease the estimated forfeiture rate, which will result in a decrease or increase to the expense recognized in the financial statements. If forfeiture adjustments are made, they would affect the Company’s gross margin and operating expenses. The effect of forfeiture adjustments subsequent to the adoption of SFAS 123(R) in the first quarter of 2006 have been immaterial.

Dealer holdback programs:  Polaris provides dealer incentive programs whereby at the time of shipment Polaris withholds an amount from the dealer until ultimate retail sale of the product. Polaris records these amounts as a liability on the consolidated balance sheet until they are ultimately paid. Payments are generally made to dealers twice each year, in the first quarter and the third quarter, subject to previously established criteria. Polaris recorded accrued liabilities of $80.9 million and $83.9 million for dealer holdback programs in the consolidated balance sheets as of December 31, 2008 and 2007, respectively.

Product warranties:  Polaris provides a limited warranty for ORVs for a period of six months and for a period of one year for its snowmobiles and motorcycles. Polaris may provide longer warranties related to certain promotional programs, as well as longer warranties in certain geographical markets as determined by local regulations and market conditions. Polaris’ standard warranties require the Company or its dealers to repair or replace defective products during such warranty periods at no cost to the consumer. The warranty reserve is established at the time of sale to the dealer or distributor based on management’s best estimate using historical rates and trends. Polaris records these amounts as a liability in the consolidated balance sheet until they are ultimately paid. At December 31, 2008 and 2007, the warranty reserve was $28.6 million and $31.8 million, respectively. Adjustments to the warranty reserve are made from time to time based on actual claims experience in order to properly estimate the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. While management believes that the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future.

Product liability:  Polaris is subject to product liability claims in the normal course of business. Polaris self insures its product liability claims. The estimated costs resulting from any losses are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is reasonably determinable. The Company utilizes historical trends and actuarial analysis tools to assist in determining the appropriate loss reserve levels. At December 31, 2008 and 2007 the Company had accruals of $11.1 million and $9.3 million, respectively, for the possible payment of pending claims related to continuing operations. These accruals are included in other accrued expenses in the accompanying consolidated balance sheets. In addition, the Company had accruals of $1.9 million and $2.3 million at December 31, 2008 and 2007, respectively, for the possible payment of pending claims related to discontinued operations. While management believes the product liability reserves are adequate, adverse determination of material product liability claims made against the Company could have a material adverse effect on Polaris’ financial condition.

Accounting for Uncertainty in Income Taxes:  In 2006, the FASB issued Interpretation No. 48,“Accounting for Uncertainty in Income Taxes(“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.”FIN 48 describes when an uncertain tax item should be recorded in the financial statements and for how much, provides guidance on recording interest and penalties and accounting and reporting for income taxes in interim periods. FIN 48 was effective for the Company’s year beginning January 1, 2007. The adoption of FIN 48 had no material impact on the Company’s financial position or results of operations for 2007. See Note 4 of notes to consolidated financial statements for further discussion on Income Taxes.

Fair Value Measurements:  In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. The FASB has deferred the implementation of SFAS No. 157 for non-financial assets and liabilities until fiscal years beginning after November 15, 2008. The remaining provisions of SFAS No. 157 were required for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 did not have a material impact on the consolidated financial statements.

Fair Value Option for Assets and Liabilities:  In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115.” SFAS No. 159 permits companies, at their election, to measure specified financial instruments and warranty and insurance contracts at fair value on acontract-by-contractbasis, with changes in fair value recognized in earnings each reporting period. The election, called the “fair value option,” will enable some companies to reduce the volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company did not elect to apply the provisions of SFAS No. 159 to any financial assets or liabilities.

Disclosures about Derivative Instruments and Hedging Activities: In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early adoption is permitted. The Company does not expect the provisions of FASB 161 to have a material impact on the Company’s consolidated financial statements.

Business Combinations:  In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. FAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008 and will impact the Company’s financial statements only in the event of such a business combination.

Polaris’ primary sources of funds have been cash provided by operating activities and borrowings under its credit arrangements. Polaris’ primary uses of funds have been for repayments under the credit agreement, repurchase and retirement of common stock, capital investments, cash dividends to shareholders and new product development.

The following chart summarizes the cash flows from operating, investing and financing activities for the twelve months ended December 31, 2008 and 2007 ($ in millions):

For the year-to-date period ended December 31, 2008, Polaris generated net cash from total operating activities of $175.7 million, including net cash from continuing operating activities of $176.2 million compared to net cash from continuing operating activities of $213.2 million in the same period of 2007, a decrease of 17 percent. The $37.0 million decrease in net cash provided by operating activities from continuing operations for the year-to-date 2008 period compared to the same period in 2007 is primarily due to a $5.7 million increase in net income offset by the following changes in working capital:

Net cash used by investing activities was $69.7 million for 2008 compared to cash provided of $20.4 million for 2007. The primary use of cash in 2008 was the investment of $76.6 million for capital expenditures. During 2007, the Company received $77.1 million in proceeds from the sale of KTM shares, and used $63.7 million for capital expenditures.

Net cash used for financing activities was $142.2 million for 2008 compared to $186.9 million in 2007. In 2008, the Company used cash for financing activities to pay cash dividends of $49.6 million and repurchase shares of common stock for $107.2 million. In 2007, the Company used cash for financing activities to pay cash dividends of $47.7 million, reduce borrowings under its credit arrangements of $50.0 million and repurchase shares of common stock for $103.1 million.

The seasonality of production and shipments causes working capital requirements to fluctuate during the year. Polaris is party to an unsecured variable interest rate bank lending agreement that matures on December 2, 2011, comprised of a $250 million revolving loan facility for working capital needs and a $200 million term loan. The $200 million term loan was utilized in its entirety in December 2006 principally to fund an accelerated share repurchase transaction. Borrowings under the agreement bear interest based on LIBOR or “prime” rates (effective rate was 0.77 percent at December 31, 2008). At December 31, 2008, Polaris had total outstanding borrowings under the agreement of $200.0 million. The Company’s debt to total capital ratio was 59 percent at December 31, 2008 and 54 percent at December 31, 2007. As of December 31, 2008, Polaris had two interest rate swaps outstanding to manage exposures to fluctuations in interest rates. The effect of these agreements was to fix the interest rate at 4.42% for $25 million of borrowings through December 2009 and 3.19% for $25 million of borrowings through October 2010.

The following table summarizes the Company’s significant future contractual obligations at December 31, 2008 (in millions):

Additionally, at December 31, 2008, Polaris had letters of credit outstanding of $12.4 million related to purchase obligations for raw materials. Not included in the above table is unrecognized tax benefits of $5.1 million.

The Polaris Board of Directors authorized the cumulative repurchase of up to 37.5 million shares of the Company’s common stock through December 31, 2008. Of that total, approximately 33.7 million shares were repurchased cumulatively from 1996 through December 31, 2008. Polaris paid $107.2 million to repurchase and retire approximately 2.5 million shares during 2008. The share repurchase activity during 2008 had a positive impact on earnings per share of approximately $0.16 per diluted share for the year ended December 31, 2008 before taking into consideration the interest cost of funding the repurchase activity. The Company has authorization from its Board of Directors to repurchase up to an additional 3.8 million shares of Polaris stock at December 31, 2008, which represents approximately 12 percent of the total shares currently outstanding.

Polaris has arrangements with certain finance companies (including Polaris Acceptance) to provide secured floor plan financing for its dealers. These arrangements provide liquidity by financing dealer purchases of Polaris products without the use of Polaris’ working capital. During 2006 Polaris modified its agreement with GE Commercial Distribution Finance Corporation (“GECDF”) to finance Polaris’ Canadian dealers’ purchases of PG&A in addition to financing the Canadian dealers’ wholegood purchases. A significant majority of the worldwide sales of snowmobiles, ORVs, motorcycles and related PG&A are financed under these arrangements whereby Polaris receives payment within a few days of shipment of the product. The amount financed by worldwide dealers under these arrangements at December 31, 2008 and 2007, was approximately $829.1 million and $853.6 million, respectively. Polaris participates in the cost of dealer financing up to certain limits. Polaris has agreed to repurchase products repossessed by the finance companies up to an annual maximum of no more than 15 percent of the average month-end balances outstanding during the prior calendar year. Polaris’ financial exposure under these agreements is limited to the difference between the amounts unpaid by the dealer with respect to the repossessed product plus costs of repossession and the amount received on the resale of the repossessed product. No material losses have been incurred under these agreements. However, an adverse change in retail sales could cause this situation to change and thereby require Polaris to repurchase repossessed units subject to the annual limitation referred to above.

In 1996, a wholly-owned subsidiary of Polaris entered into a partnership agreement with a subsidiary of TDF to form Polaris Acceptance. In 2004, TDF was merged with a subsidiary of General Electric Company and, as a result of that merger, TDF’s name was changed to GECDF. Polaris Acceptance provides floor plan financing to Polaris’ dealers in the United States. Polaris’ subsidiary has a 50 percent equity interest in Polaris Acceptance. In November 2006, Polaris Acceptance sold a majority of its receivable portfolio to a securitization facility arranged by General Electric Capital Corporation, a GECDF affiliate (“Securitization Facility”), and the partnership agreement was amended to provide that Polaris Acceptance would continue to sell portions of its receivable portfolio to the Securitization Facility from time to time on an ongoing basis. At December 31, 2008 and 2007, the outstanding balance of receivables sold by Polaris Acceptance to the Securitization Facility (the “Securitized Receivables”) amounted to approximately $509.0 million and $547.0 million, respectively. The sale of receivables from Polaris Acceptance to the Securitization Facility is accounted for in Polaris Acceptance’s financial statements as a “true-sale” under SFAS 140: Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Polaris Acceptance is not responsible for any continuing servicing costs or obligations with respect to the Securitized Receivables. The remaining portion of the receivable portfolio is recorded on Polaris Acceptance’s books, and is funded to the extent of 85 percent through a loan from an affiliate of GECDF (which at December 31, 2008 and 2007 was approximately $78.0 million and $66.2 million, respectively). Polaris has not guaranteed the outstanding indebtedness of Polaris Acceptance or the Securitized Receivables. In addition, the two partners of Polaris Acceptance share equally an equity cash investment equal to 15 percent of the sum of the portfolio balance in Polaris Acceptance plus the Securitized Receivables. Polaris’ total investment in Polaris Acceptance at December 31, 2008 and 2007, was $51.6 million and $53.8 million, respectively. The Polaris Acceptance partnership agreement provides for periodic options for renewal, purchase, or termination by either party. Substantially all of Polaris’ U.S. sales are financed through Polaris Acceptance and the Securitization Facility whereby Polaris receives payment within a few days of shipment of the product. The partnership agreement provides that all income and losses of the Polaris Acceptance portfolio and income and losses realized by GECDF’s affiliates with respect to the Securitized Receivables are shared 50 percent by Polaris’ wholly-owned subsidiary and 50 percent by GECDF. Polaris’ exposure to losses associated with respect to the Polaris Acceptance Portfolio and the Securitized Receivables is limited to its equity in its wholly -owned subsidiary that is a partner in Polaris Acceptance.

Polaris’ investment in Polaris Acceptance is accounted for under the equity method, and is recorded as Investments in finance affiliate in the accompanying consolidated balance sheets. Polaris’ allocable share of the income of Polaris Acceptance and the Securitized Receivables has been included as a component of Income from financial services in the accompanying consolidated statements of income. At December 31, 2008, Polaris Acceptance’s wholesale portfolio receivables from dealers in the United States (excluding the Securitized Receivables) was $199.0 million, a 16 percent increase from $172.3 million at December 31, 2007. Including the Securitized Receivables, the wholesale receivables from dealers in the United States at December 31, 2008 was $709.7 million, a two percent decrease from $722.8 million at December 31, 2007. Credit losses in the Polaris Acceptance portfolio have been modest, averaging less than one percent of the portfolio over the life of the partnership.

In October 2001 Household and a subsidiary of Polaris entered into a Revolving Program Agreement to provide retail financing to consumers who buy Polaris products in the United States. In August 2005, the wholly-owned subsidiary of Polaris entered into a multi-year contract with HSBC, formerly known as Household Bank (SB), N.A., under which HSBC is continuing to manage the Polaris private label credit card program under the StarCard label, which until July 2007 included providing retail credit for non-Polaris products. The 2005 agreement provides for income to be paid to Polaris based on a percentage of the volume of revolving retail credit business generated. The previous agreement provided for equal sharing of all income and losses with respect to the retail credit portfolio, subject to certain limitations. The 2005 contract removed all credit, interest rate and funding risk to Polaris and also eliminated the need for Polaris to maintain a retail credit cash deposit with HSBC, which was $50.0 million at August 1, 2005. HSBC ceased financing non-Polaris products under its arrangement with Polaris effective July 1, 2007 resulting in a significant decline in the income from financial services reported by Polaris in the second half of 2007. During the first quarter of 2008, HSBC notified the Company that the profitability to HSBC of the 2005 contractual arrangement was unacceptable and, absent some modification of that arrangement, HSBC might significantly tighten its underwriting standards for Polaris customers, reducing the number of qualified retail

In April 2006, a wholly-owned subsidiary of Polaris entered into a multi-year contract with GE Money Bank (“GE Bank”) under which GE Bank makes available closed-end installment consumer and commercial credit to customers of Polaris dealers for both Polaris and non-Polaris products. Polaris’ income generated from the GE Bank agreement has been included as a component of Income from financial services in the accompanying consolidated statements of income.

During 2008 consumers financed approximately 39 percent of Polaris vehicles sold in the United States through the combined HSBC revolving retail credit and GE Bank installment retail credit arrangements, while the volume of revolving and installment credit contracts written in calendar year 2008 was $638.0 million, a 25 percent decrease from 2007. This negative trend combined with the less favorable terms imposed by HSBC discussed above, will likely result in significantly lower income generated from the HSBC and GE Bank retail credit agreements again in 2009.

In January 2009, a wholly owned subsidiary of Polaris entered into a multi-year contract with Sheffield Financial (“Sheffield”) pursuant to which Sheffield agreed to make available closed-end installment consumer and commercial credit to customers of Polaris dealers for Polaris products in the United States.

In 2005 Polaris invested in Austrian motorcycle manufacturer KTM by purchasing a 25 percent interest in that company from a third party for $85.4 million including transaction costs. Additionally, Polaris and KTM’s largest shareholder, Cross Industries AG (“Cross”), entered into an option agreement which provided that under certain conditions in 2007, either Cross could purchase Polaris’ interest in KTM or, alternatively, Polaris could purchase Cross’ interest in KTM. In December 2006, Polaris and Cross cancelled the option agreement and entered into a share purchase agreement for the sale by the Company of approximately 1.38 million shares of KTM, or approximately 80 percent of its investment in KTM, to a subsidiary of Cross. The agreement provided for completion of the sale of the KTM shares in two stages during the first half of 2007. On June 15, 2007, Polaris completed the second and final closing of its sale of KTM shares to Cross under the terms of the December 2006 agreement as supplemented on February 20, 2007, generating combined proceeds of $77.1 million including a total gain of $6.2 million. Polaris now holds ownership of approximately 0.34 million shares, representing slightly less than 5 percent of KTM’s outstanding shares.

Improvements in manufacturing capacity and product development during 2008 included $29.0 million of tooling expenditures for new product development across all product lines. Polaris anticipates that capital expenditures for 2009, including tooling and research and development equipment, will range from $50.0 million to $60.0 million.

Management believes that existing cash balances, cash flows to be generated from operating activities and available borrowing capacity under the line of credit arrangement will be sufficient to fund operations, regular dividends, share repurchases, and capital expenditure requirements for 2009. At this time, management is not aware of any factors that would have a material adverse impact on cash flow beyond 2009.

Commodity inflation has had an impact on the Company’s results of operations in 2008. The changing relationships of the U.S. dollar to the Canadian dollar, Euro and Japanese yen have also had a material impact fromtime-to-time.

During 2008, purchases totaling seven percent of Polaris’ cost of sales were from Japanese yen denominated suppliers. The impact of the Japanese yen exchange rate fluctuation on Polaris’ raw material purchase prices and cost of sales in 2008 had a negative financial impact when compared to the prior year. Polaris had no foreign exchange hedging contracts in place for the Japanese Yen as of December 31, 2008. Polaris anticipates that the yen-dollar exchange rate fluctuation will again have a negative impact on cost of sales during 2009 when compared to 2008.

Polaris operates in Canada through a wholly-owned subsidiary. Sales of the Canadian subsidiary comprised 14 percent of total Polaris sales in 2008. From time to time, Polaris utilizes foreign exchange hedging contracts to manage its exposure to the Canadian dollar. The U.S. dollar strengthened in relation to the Canadian dollar in the latter part of 2008 which resulted in a net negative financial impact on Polaris sales and gross margins for the full year 2008 when compared to 2007. As of December 31, 2008, Polaris had no Canadian dollar hedging contracts in place. In January 2009, Polaris entered into Canadian dollar hedge contracts through June 2009 to hedge approximately 20 percent of the estimated exposure for the first half of 2009. Polaris anticipates that the Canadian dollar exchange rate fluctuation will have a negative impact on sales and gross margins during 2009 when compared to 2008.

During each year Polaris sells its products to certain international distributors and certain Polaris subsidiaries sell to its dealers in Euros. The Company also purchases components from European suppliers in Euros. The Euro-denominated sales and purchases are approximately equal on an annual basis creating a natural hedge for the Euro. At December 31, 2008 the Company had no Euro foreign exchange hedging contracts in place.

In the past, Polaris has been a party to, and in the future may enter into, foreign exchange hedging contracts for the Japanese yen, Euro, and the Canadian dollar to minimize the impact of exchange rate fluctuations within each year. At December 31, 2008, the Company had no foreign hedging contracts outstanding.

Polaris is subject to market risk from fluctuating market prices of certain purchased commodities and raw materials including steel, aluminum, fuel, natural gas, and petroleum-based resins. In addition, the Company is a purchaser of components and parts containing various commodities, including steel, aluminum, rubber and others which are integrated into the Company’s end products. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. The Company generally buys these commodities and components based upon market prices that are established with the vendor as part of the purchase process.

The Company generally attempts to obtain firm pricing from most of its suppliers for volumes consistent with planned production. To the extent that commodity prices increase and the Company does not have firm pricing from its suppliers, or its suppliers are not able to honor such prices, the Company may experience gross margin declines to the extent it is not able to increase selling prices of its products. During the first three quarters of 2008 the Company experienced commodity price increases with some of its key raw materials although some of the raw materials prices began to decline in the 2008 fourth quarter. During the fourth quarter of 2008, Polaris entered into diesel fuel hedging contracts to hedge approximately 50 percent of the Company’s expected exposure for the first half of 2009. These diesel fuel contracts did not meet the criteria for hedge accounting and the resulting unrealized loss as of December 31, 2008 was $0.6 million pretax, which was included in the consolidated statements of income as a component of cost of sales.

Polaris is a party to a credit agreement with various lenders consisting of a $250 million revolving loan facility and a $200 million term loan. Interest accrues on both the revolving loan and the term loan at variable rates based on LIBOR or “prime.” Additionally, as of December 31, 2008, Polaris is a party to two interest rate swap agreements that lock in a fixed interest rate on a total of $50.0 million of borrowings. The Company is exposed to interest rate changes on any borrowings during the year in excess of $50.0 million. Based upon the average outstanding line of credit borrowings of $282.6 million during 2008 and the interest rate swap agreements, a one-percent fluctuation in interest rates would have had an approximately $2.3 million impact on interest expense in 2008.

Polaris has been manufacturing its own engines for selected models of snowmobiles since 1995, motorcycles since 1998 and ORVs since 2001 at its Osceola, Wisconsin facility. Also, in 1995, Polaris entered into an agreement with Fuji to form Robin. Under the terms of the agreement, Polaris has a 40 percent ownership interest in Robin,

Polaris holds approximately 0.3 million KTM shares which have been classified as available for sale securities under FASB Statement 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). The shares have a fair value equal to the trading price of KTM shares on the Vienna stock exchange, (26.50 Euros as of December 31, 2008). The total fair value of these securities as of December 31, 2008 is $12.9 million and unrealized holding losses of $6.7 million and unrealized currency translation gains of $1.8 million relating to these securities are included as a component of Accumulated other comprehensive income (loss) in the December 31, 2008 consolidated balance sheet. In accordance with SFAS 115, the Company assessed the situation where the fair value of the KTM shares has dropped below the cost basis of the shares. Based upon the expected limited duration of the KTM share price decline and the Company’s ability and intent to retain this investment, the Company has classified the impairment of this investment as temporary and has recorded the unrealized holding loss as a component of Accumulated other comprehensive income (loss) rather than in the income statement.

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting of the Company. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles.

The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting as of December 31, 2008. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on management’s evaluation and those criteria, management concluded that the Company’s system of internal control over financial reporting was effective as of December 31, 2008.

Management’s internal control over financial reporting as of December 31, 2008 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report in which they expressed an unqualified opinion, which report appears on the following page.

Further discussion of the Company’s internal controls and procedures is included in Item 9A of this report, under the caption “Controls and Procedures.”

We have audited Polaris Industries Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Polaris Industries Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Company Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

In our opinion, Polaris Industries Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Polaris Industries Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2008, and our report dated February 26, 2009, expressed an unqualified opinion thereon.

We have audited the accompanying consolidated balance sheets of Polaris Industries Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the index at Item 15. These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Polaris Industries Inc. and subsidiaries at December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Polaris Industries Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2009, expressed an unqualified opinion thereon.

All periods presented reflect the classification of the marine division’s financial results as discontinued operations.

All periods presented reflect the classification of the marine division’s financial results as discontinued operations.