PG&A sales were $76.0 million for the second quarter 2008, an increase of 24 percent from sales of $61.4 million during the second quarter 2007. This increase was driven primarily by increased sales of PG&A related to ATV and side-by-side vehicles. For the six month period ended June 30, 2008, PG&A sales increased 28 percent to $163.4 million compared to $127.1 million for the 2007 six month period.
Gross profit, as a percentage of sales, was 23.7 percent for the 2008 second quarter, an increase of 70 basis points from 23.0 percent for the second quarter of 2007. Gross profit dollars increased 25 percent to $108.0 million for the 2008 second quarter compared to $86.6 million for the second quarter of 2007. Year-to-date, as a percentage of sales, gross profit was 23.2 percent, an increase of 140 basis points compared to 21.8 percent for the same period last year. The gross profit margin and absolute dollar increase in gross profit was due to the positive mix impact of increased sales of higher gross margin products, such as RANGER side-by-side vehicles and PG&A, and favorable foreign currency fluctuations during the second quarter of 2008, which were partially offset by significantly higher commodity and transportation costs. For the second quarter of 2008, operating expenses increased 14 percent to $72.5 million compared to $63.8 million for the second quarter of 2007. For the year-to-date 2008 period, operating expenses increased nine percent to $136.9 million compared to $125.3 million for the same period in 2007. Operating expenses as a percent of sales for the second quarter and year-to-date period ending June 30, 2008 decreased to 15.9 percent and 16.2 percent, respectively, compared to 16.9 percent and 18.0 percent for the same periods last year, respectively. Operating expenses in absolute dollars increased due to: 1) higher selling and marketing expenses primarily from higher advertising costs incurred in connection with new products and to become more competitive in certain segments of the ATV industry and 2) increased research and development expenses as the Company continues to accelerate innovative new product development. Income from financial services decreased 62 percent to $5.2 million in the 2008 second quarter compared to $13.9 million in the 2007 second quarter. Income from financial services for the year-to-date period ended June 30, 2008 decreased 52 percent to $12.7 million compared to $26.5 million for the same period in 2007. The decrease in financial services income for the quarter and year-to-date periods ended June 30, 2008 is due to the Company's revolving retail credit provider, HSBC Bank Nevada, National Association ("HSBC"), discontinuing the financing of non-Polaris products at Polaris dealerships in July 2007 and eliminating the volume-based fee income payment to Polaris as of March 1, 2008 (as discussed in more detail in the Liquidity and Capital Resources section). Interest expense decreased to $2.5 million and $5.2 million for the quarter and year-to-date periods ended June 30, 2008, respectively, compared to $3.7 million and $8.5 million for the same periods last year. The decrease is due to decreased interest rates during the 2008 periods.
Gain on sale of manufacturing affiliate shares was $0.0 million for both the quarter and year-to-date periods ended June 30, 2008 compared to $1.4 million and $6.2 million for the same periods last year. 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 income/expense was a $0.2 million expense in the second quarter of 2008 and $0.9 million of income for the year-to-date period ended June 30, 2008 compared to $1.4 million and $4.2 million of income in the same periods last year. The change for the quarter and year-to-date periods was primarily due to the weakening U.S. dollar and the resulting effects of foreign currency transactions related to the international subsidiaries.
The income tax provision for the second quarter 2008 was recorded at a rate of approximately 36.0 percent of Polaris' pre-tax income, compared to 36.0 percent recorded in the second quarter 2007 and 35.8 percent for the year-to-date 2008 period.
Discontinued Operations
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 in the quarter and year-to-date periods ended June 30, 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. The Company's losses from discontinued operations during the same periods of 2007 were $0.2 million and $0.4 million, net of tax, or less than $0.01 per diluted share in each such period.

Reported Net Income
Reported net income for the second quarter 2008, including each of continuing and discontinued operations was $24.4 million, or $0.72 per diluted share, compared to $22.7 million, or $0.62 per diluted share for the second quarter 2007. Reported net income for the six months ended June 30, 2008, including each of continuing and discontinued operations was $43.5 million or $1.27 per diluted share, compared to $35.1 million, or $0.96 per diluted share for the six months ended June 30, 2007.
Weighted Average Shares Outstanding
The weighted average diluted shares outstanding for the second quarter and six months ended June 30, 2008 of 33.8 million shares and 34.2 million shares, respectively, is eight percent and seven percent lower than the comparable periods of 2007, due principally to the share repurchase activity of the Company.
Cash Dividends
Polaris paid a $0.38 per share dividend on May 15, 2008 to shareholders of record on May 1, 2008. On July 18, 2008, the Polaris Board of Directors declared a regular cash dividend of $0.38 per share payable on or about August 15, 2008 to holders of record of such shares at the close of business on August 1, 2008. Liquidity and Capital Resources
Net cash provided by operating activities of continuing operations for the second quarter of 2008 increased 46 percent, and totaled $53.3 million compared to $36.4 million in the second quarter of 2007. Year-to-date ended June 30, 2008, net cash provided by operating activities of continuing operations totaled $21.8 million compared to $21.6 million in the first half of 2007. Net cash used for investing activities was $27.5 million for the first six months of 2008 and represents the purchases of property and equipment offset somewhat by an increase in the investment in the finance affiliate. Net cash flow used for financing activities totaled $35.7 million for the first half of 2008, which primarily represents payment of dividends to shareholders and share repurchase activity during the period partially offset by increased debt borrowings. Cash and cash equivalents totaled $21.9 million at June 30, 2008 compared to $33.8 million at June 30, 2007. The trade receivables balance of $73.0 million at June 30, 2008 represents an increase of 37 percent from June 30, 2007 primarily due to a 40 percent increase in sales outside of North America during the second quarter of 2008.
The seasonality of production and shipments causes working capital requirements to fluctuate during the year. Polaris is party to an unsecured bank variable interest rate 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 the accelerated share repurchase transaction. Borrowings under the agreement bear interest based on LIBOR or "prime" rates (effective rate was 2.89 percent at June 30, 2008). At June 30, 2008, Polaris had total outstanding borrowings under the agreement of $261.0 million. The Company's debt to total capital ratio was 65 percent at June 30, 2008 and 51 percent at June 30, 2007.
The following table summarizes the Company's significant future contractual obligations at June 30, 2008 (in millions):

                                      Total          <1 Year          1-3 Years          3-5 Years         >5 Years
Borrowings under credit
agreement:
Revolving loan facility              $  61.0                -                  -        $      61.0                -
Term loan                              200.0                -                  -              200.0                -
Interest expense under term
loan and swap agreements                20.8        $     6.4        $      11.7                2.7                -
Engine purchase commitments             13.4              8.3                5.1                  -                -
Operating leases                         5.8              2.9                2.2                0.7                -
Capital leases                           0.1              0.1                  -                  -                -

Total                                $ 301.1        $    17.7        $      19.0        $     264.4                -

During 2007, Polaris entered into two interest rate swap agreements to manage exposures to fluctuations in interest rates. The effect of these agreements is to fix the interest rate at 4.65 percent for $25.0 million of borrowings through December 2008 and 4.42 percent for additional $25.0 million of borrowings through December 2009.
Additionally, at June 30, 2008, Polaris had letters of credit outstanding of $12.1 million related to purchase obligations for raw materials.

The Polaris Board of Directors has authorized the cumulative repurchase of up to 37.5 million shares of the Company's common stock. Of that total, approximately 33.1 million shares have been repurchased cumulatively from 1996 through June 30, 2008. The share repurchase activity had a positive impact on earnings per share of approximately $0.03 per diluted share for the second quarter 2008 and $0.05 per diluted share for the second quarter of 2007 which included the 3.55 million shares repurchased under the accelerated share repurchase transaction in December 2006 and 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 4.4 million shares of Polaris stock as of June 30, 2008. The repurchase of any or all such shares authorized remaining for repurchase will be governed by applicable SEC rules and will be dependent on management's assessment of market conditions. Management believes that existing cash balances and bank borrowings, cash flow 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 requirements for the foreseeable future. At this time, management is not aware of any adverse factors that would have a material impact on cash flow.
In 1996, a wholly-owned subsidiary of Polaris entered into a partnership agreement with an entity that is now a subsidiary of GE Commercial Distribution Finance Corporation ("GECDF") to form Polaris Acceptance. 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 (the "Securitized Receivables") to a securitization facility ("Securitization Facility") arranged by General Electric Capital Corporation, a GECDF affiliate, 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. 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.
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 June 30, 2008 was $46.0 million. 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's subsidiary. 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 has agreed to repurchase products repossessed by Polaris Acceptance or the Securitization Facility up to an annual maximum of 15 percent of the aggregate average month-end balances outstanding during the prior calendar year with respect to receivables retained by Polaris Acceptance and Securitized Receivables. For calendar year 2008, the potential 15 percent aggregate repurchase obligation is approximately $109.3 million. Polaris' financial exposure under this arrangement is limited to the difference between the amount paid to the finance company for repurchases and the amount received on the resale of the repossessed product. No material losses have been incurred under this agreement during the periods presented.
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 June 30, 2008, Polaris Acceptance's wholesale portfolio receivables from dealers in the United States (including the Securitized Receivables) was $603.1 million, a one percent decrease from $606.3 million at June 30, 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 April 2006, a wholly owned subsidiary of Polaris entered into a multi-year contract with GE Money Bank ("GE Bank") under which GE Bank currently makes available closed-end installment consumer and commercial credit to customers of Polaris dealers for both Polaris and non-Polaris products. The agreement provides for income to be paid to Polaris based on a percentage of the volume of sales generated pursuant to the program.

In August 2005, a wholly owned subsidiary of Polaris entered into a multi-year contract with HSBC under which HSBC manages the Polaris private label revolving credit card program under the StarCard label. The 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 current contract removes all credit, interest rate and funding risk to Polaris and also eliminates the need for Polaris to maintain a retail credit cash deposit with HSBC. During the first quarter of 2008, HSBC claimed that it was no longer satisfied with its profitability from the 2005 contractual arrangement currently in place. HSBC threatened to significantly tighten the underwriting standards for Polaris customers and this tightening would have reduced the number of qualified retail credit customers that would be able to obtain credit from HSBC to purchase Polaris products. To ensure that retail customers would continue to be able to finance the purchase of the Company's products, Polaris began foregoing its volume-based fee income under the HSBC arrangement effective March 1, 2008. The Company was not obligated to do so under the terms of the 2005 agreement with HSBC and has filed a lawsuit against HSBC to protect its rights under the 2005 revolving agreement. To help offset some of the impact caused by the unilateral action of HSBC, Polaris has encouraged its dealers to increase utilization of the installment retail credit agreement between Polaris and GE Bank in addition to investigating alternative revolving retail credit arrangements during 2008. Management currently anticipates the income generated from these retail credit agreements for calendar 2008, reported as a component of Income from financial services, to be significantly less than the $28.2 million recorded for the full year 2007. Although difficult to predict in the current volatile and uncertain credit market environment, these less favorable terms combined with the decision by HSBC to cease financing of non-Polaris products effective July 1, 2007, will likely result in income generated from the HSBC and GE Bank retail credit agreements for the full year 2008 to be in the range of $5.0 million to $10.0 million.
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 at a purchase price of $77.1 million which was completed in two transactions during the second half of 2007. The gain on sale of manufacturing affiliate shares was $0.0 million for the second quarter of 2008 compared to $1.4 million in the second quarter 2007. For the year-to-date period ended June 30, 2008 the gain on sale of manufacturing affiliate shares was $0.0 million compared to $6.2 million for the same period last year. The gain in the second quarter and year-to-date periods in 2007 is related to the sale of a portion of the KTM shares that occurred in the first and second quarters of 2007. Polaris now holds ownership of approximately 0.34 million shares, representing slightly less than 5 percent of KTM's outstanding shares.
Inflation and Foreign Exchange Rates
Commodity inflation has had an impact on the results of Polaris' recent operations. The changing relationships of the U.S. dollar to the Japanese yen, Canadian dollar and Euro have also had a material impact from time to time. During calendar year 2007, purchases totaling eight percent of Polaris' cost of sales were from yen-denominated suppliers. Polaris' cost of sales in the second quarter ended June 30, 2008 was negatively impacted by the Japanese yen-U.S. dollar exchange rate fluctuation when compared to the same period in 2007. At June 30, 2008 Polaris had open Japanese yen foreign exchange hedging contracts in place through the third quarter 2008 with notional amounts totaling $12.2 million with an average rate of approximately 103 Japanese yen to the U.S. dollar. In view of current exchange rates and the foreign exchange hedging contracts currently in place, Polaris anticipates that the Japanese yen-U.S. dollar exchange rate will have a negative impact on cost of sales for the hedged periods of 2008 when compared to the same periods in the prior year. Polaris operates in Canada through a wholly owned subsidiary. The weakening of the U.S. dollar in relation to the Canadian dollar has resulted in higher sales and gross margin levels in the second quarter ended June 30, 2008 when compared to the same period in 2007. At June 30, 2008 Polaris had open Canadian dollar foreign exchange hedging contracts in place through the fourth quarter 2008 with notional amounts totaling $66.1 million with an average rate of approximately 0.99 U.S. dollar to Canadian dollar. In view of current exchange rates and the foreign exchange hedging contracts currently in place, Polaris anticipates that the Canadian dollar-U.S. dollar exchange rate will have a positive impact on net income for the hedged periods of 2008 when compared to the same periods in the prior year.
Polaris operates in various countries in Europe through wholly owned subsidiaries and also sells to certain distributors in other countries and purchases components from certain suppliers directly from its U.S. operations in Euro denominated transactions. The

fluctuation of the U.S. dollar in relation to the Euro has resulted in a neutral impact on gross margins for the second quarter of 2008 when compared to the same period in 2007. Polaris currently does not have any Euro currency hedging contracts in place for 2008.
The assets and liabilities in all Polaris foreign entities are translated at the foreign exchange rate in effect at the balance sheet date. Translation gains and losses are reflected as a component of Accumulated other comprehensive income, net in the Shareholders' Equity section of the accompanying consolidated balance sheets. Revenues and expenses in all Polaris foreign entities are translated at the average foreign exchange rate in effect for each month of the quarter. Polaris is subject to market risk from fluctuating market prices of certain purchased commodities and raw materials including steel, aluminum, diesel 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. Throughout 2007 and the first half of 2008 the Company experienced commodity price increases with some of these key raw materials and from time to time will enter into derivative contracts to hedge a portion of the exposure to commodity risk. At June 30, 2008 there were no derivative contracts in place for key commodities or raw materials.
Significant Accounting Policies
See Polaris' most recent Annual Report on Form 10-K for the year ended December 31, 2007 for a discussion of its critical accounting policies. In September 2006, the Financial Accounting Standards Board (FASB) issued . . .