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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission File Number 1-9183

(Registrant's telephone number, including area code) (414) 342-4680

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   X    No        

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).  Yes   X    No        

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock Outstanding as of July 30, 2004   295,083,331 Shares

HARLEY-DAVIDSON, INC.

Form 10-Q Index
For the Quarter Ended June 27, 2004

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PART I — FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

Harley-Davidson, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)

See accompanying notes.

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Harley-Davidson, Inc.
Condensed Consolidated Balance Sheets
(In thousands)

See accompanying notes.

4

Harley-Davidson, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

See accompanying notes.

5

HARLEY-DAVIDSON, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1 — Basis of Presentation and Use of Estimates

The condensed interim consolidated financial statements included herein have been prepared by Harley-Davidson, Inc. (the “Company”) without audit. Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission and accounting principles generally accepted in the United States for interim financial information. However, the foregoing statements contain all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of Company management, necessary to present fairly the consolidated financial position as of June 27, 2004 and June 29, 2003, the results of operations for the three- and six-month periods then ended and the statements of cash flows for the six months ended June 27, 2004 and June 29, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 2 — Inventories

The Company values its inventories at the lower of cost, principally using the last-in, first-out (LIFO) method, or market. Inventories consist of the following (in thousands):

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Note 3 — Product Warranty

The Company provides a standard limited warranty on all new motorcycles sold. The warranty coverage includes parts and labor and begins when the motorcycle is sold to a retail customer. During September 2003 (beginning with shipments of 2004 model year motorcycles), the Company extended its warranty coverage from one year to two years in all of its markets except Europe, where the term had already been extended in 2002 to comply with European regulations. The Company maintains reserves for future warranty claims using an estimated cost per unit sold, which is based on historical Company claim information. Changes in the Company’s warranty liability were as follows (in thousands):

Note 4 — Business Segments

The Company operates in two business segments: Motorcycles & Related Products (Motorcycles) and Financial Services (Financial Services). The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations. Selected segment information is set forth below (in thousands):

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Note 5 — Earnings Per Share

The following table sets forth the computation for basic and diluted earnings per share (in thousands, except per share amounts):

Note 6 — Comprehensive Income

The following table sets forth the reconciliation of net income to comprehensive income (in thousands):

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Note 7 – Employee Benefit Plans

The Company has several defined benefit pension plans and several postretirement health care benefit plans, which cover substantially all employees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993. Components of net periodic benefit costs were as follows (in thousands):

As disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2003, the Company has no minimum required pension plan contributions in 2004 and currently does not plan to make a contribution in 2004. Postretirement healthcare claims are paid as incurred.

On December 8, 2003, a bill was signed into law that expanded Medicare, primarily by adding a prescription drug benefit for Medicare-eligible retirees starting in 2006. However, the Company’s retiree medical obligations and costs currently reported do not reflect the impact of this legislation. The Company has elected to recognize the impact of the Medicare provisions on a prospective basis beginning in the third quarter of 2004. The Company expects that these changes will reduce postretirement healthcare costs by approximately $1 million (pre-tax) in each of the third and fourth quarters of 2004.

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Note 8 — Stock Options

The Company has stock option plans under which the Board of Directors may grant to employees nonqualified stock options with or without appreciation rights. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. For purposes of pro forma disclosures under SFAS No. 123, “Accounting for Stock-Based Compensation,” the estimated fair value of the options, using the Black-Scholes options pricing model, is amortized to expense over the options’ vesting period. The Company’s pro forma information follows (in thousands, except per share amounts):

Note 9 — Contingencies

The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The required reserves are monitored on an on-going basis and are updated based on new developments or new information in each matter.

In January 2001, the Company, on its own initiative, notified each owner of 1999 and early-2000 model year Harley-Davidson^® motorcycles equipped with Twin Cam 88 and Twin Cam 88B engines that the Company was extending the warranty for a rear cam bearing to 5 years or 50,000 miles. Subsequently, on June 28, 2001, a putative nationwide class action was filed against the Company in state court in Milwaukee County, Wisconsin, which was amended by a complaint filed September 28, 2001. The complaint alleged that this cam bearing is defective and asserted various legal theories. The complaint sought unspecified compensatory and punitive damages for affected owners, an order compelling the Company to repair the engines, and other relief. On February 27, 2002, the Company’s motion to dismiss the amended complaint was granted by the Court and the amended complaint was dismissed in its entirety. An appeal was filed with the Wisconsin Court of Appeals. On April 12, 2002, the same attorneys filed a second putative nationwide class action against the Company in state court in Milwaukee County, Wisconsin relating to this cam bearing issue and asserting different legal theories than in the first action. The complaint sought unspecified compensatory damages, an order compelling the Company to repair the engines and other relief. On September 23, 2002, the Company’s motion to dismiss was granted by the Court, the complaint was dismissed in its entirety, and no appeal was taken. On January 14, 2003, the Wisconsin Court of Appeals reversed the trial court’s February 27, 2002 dismissal of the complaint in the first action, and the Company petitioned the Wisconsin Supreme Court for review. On March 26, 2004 the Wisconsin Supreme Court reversed the Court of Appeals and dismissed the remaining claims in the action. On April 12, 2004, the same attorneys filed a third action in the state court in Milwaukee County, on behalf of the same plaintiffs from the action dismissed by the Wisconsin Supreme Court. This third action was dismissed by the court on July 26, 2004. In addition, the plaintiffs in the original case have moved to reopen that matter and to amend the complaint to add new causes of action. The Company is also opposing this motion and intends to continue to vigorously defend this matter. The Company believes that the 5 year/50,000 mile warranty extension it announced in January 2001 adequately addresses the condition for affected owners.

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The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the clean up of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection since 1986 in undertaking environmental investigation and remediation activities, including an on-going site-wide remedial investigation/feasibility study (RI/FS).

In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of future costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.

In February 2002, the Company was advised by the U.S. Environmental Protection Agency (EPA) that it considers some of the Company’s remediation activities at the York facility to be subject to the EPA’s corrective action program under the Resource Conservation and Recovery Act (RCRA) and offered the Company the option of addressing corrective action under a RCRA facility lead agreement. The objectives and procedures for facility lead corrective action under RCRA are consistent with the investigation and remediation already being conducted under the Agreement with the Navy, and the Company agreed to participate in EPA’s corrective action program under a RCRA facility lead agreement.

Although the RI/FS is still underway and substantial uncertainty exists concerning the nature and scope of the additional environmental investigation and remediation that will ultimately be required at the York facility, the Company estimates that its share of the future Response Costs at the York facility will be approximately $7.3 million. The Company has established reserves for this amount, which are included in Accrued expenses and other liabilities in the consolidated balance sheets.

The estimate of the Company’s future Response Costs that will be incurred at the York facility is based on reports of independent environmental consultants retained by the Company, the actual costs incurred to date, and the estimated costs to complete the necessary investigation and remediation activities. Response Costs are expected to be incurred over a period of several years ending in 2010.

Under the terms of the sale of the Commercial Vehicles Division in 1996, the Company has agreed to indemnify Utilimaster Corporation, until 2008, for certain claims related to environmental contamination present at the date of sale, up to $20 million. Based on the environmental studies performed as part of the sale of the Transportation Vehicles segment, the Company does not expect to incur any material expenditures under this indemnification.

Additionally, the Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures which are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability will not have a material adverse effect on the Company’s consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company, Buell Motorcycle Company and Harley-Davidson Financial Services (HDFS). Harley-Davidson Motor Company produces heavyweight motorcycles and offers a complete line of motorcycle parts, accessories, apparel and general merchandise. Harley-Davidson Motor Company manufactures five families of motorcycles: Touring, Dyna Glide, Softail^®, VRSC and Sportster^®. Buell Motorcycle Company produces sport motorcycles, including four big-twin XB models and the single-cylinder Buell^® Blast^®. Buell also offers a line of motorcycle parts, accessories, apparel and general merchandise. Harley-Davidson Financial Services provides wholesale and retail financing and insurance programs primarily to Harley-Davidson/Buell dealers and customers.

Overview⁽¹⁾

Management believes that the Company’s results through the second quarter of 2004 are in line with its objectives. During the second quarter of 2004 the Company shipped 82,034 Harley-Davidson units and increased diluted earnings per share by 25.8%, over the same quarter last year. This brings the Company’s 2004 year to date shipments of Harley-Davidson motorcycles to 156,124 units, and results in an 18.8% increase in diluted earnings per share in the first half of 2004 when compared to the same period last year. Harley-Davidson motorcycle shipments through the first six months of 2004 are on track with its 2004 annual objective to ship 317,000 Harley-Davidson units. ⁽¹⁾ These results, combined with the Company’s continuing effort to offer innovative products and services and to drive productivity gains in all facets of the business, are also in line with the Company’s long-term goals to satisfy demand for 400,000 Harley-Davidson units in 2007 and to achieve earnings growth rates in the mid-teens for the foreseeable future.

Results of Operations for the Three Months Ended June 27, 2004
Compared to the Three Months Ended June 29, 2003

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

Overall

For the quarter ended June 27, 2004, consolidated net revenue totaled $1.33 billion, a $108.9 million or 8.9% increase over the same period last year. Net income for the second quarter of 2004 was $247.2 million compared to $202.2 million in the second quarter of 2003, an increase of 22.3%. Diluted earnings per share for the second quarter of 2004 was $.83, representing an 25.8% increase over 2003 second quarter earnings per share of $.66. Diluted earnings per share was positively impacted during the second quarter of 2004 by a decrease in the weighted-average shares outstanding, which were 296.4 million in the second quarter of 2004 compared to 304.3 million in the same quarter last year. The decrease in weighted-average shares outstanding was driven by the Company’s share repurchases that occurred during the first six months of 2004. The Company’s share repurchases are discussed in further detail under “Liquidity and Capital Resources.”

12

Motorcycle Unit Shipments & Net Revenue

The following table includes wholesale motorcycle unit shipments and net revenue by product line for the Motorcycles segment for the three months ended June 27, 2004 and June 29, 2003 (dollars in millions):

The $108.9 million increase in net revenue during the second quarter of 2004 was driven by a $64.9 million, or 6.8%, increase in revenue from the sale of Harley-Davidson motorcycles. During the second quarter of 2004 Harley-Davidson motorcycle revenue was higher primarily as a result of the 7.9% increase in units over the same period last year, and also benefited from changes in foreign currency exchange rates. These revenue increases were partially offset by lower revenue due to changes in product mix and lower wholesale prices relative to the second quarter of 2003, as discussed below.

During the second quarter of 2004, Harley-Davidson motorcycle revenue was impacted by changes in product mix related primarily to an increase in the percentage of shipments consisting of lower priced Sportster motorcycles and a decrease in the percentage of shipments consisting of more expensive custom motorcycles. The increase in Sportster production and shipments began with the introduction of the completely redesigned 2004 Sportster models in September 2003. As a result of the increase in Sportster motorcycles, as well as the increase in Touring motorcycles, the Company’s capacity to produce custom motorcycles was limited during the second quarter of 2004. The redesigned Sportster motorcycles are an important part of the Company’s strategy to attract new customers to the Harley-Davidson family. The Company expects that Sportster motorcycles will continue to be in the range of 20% to 25% of total units shipped over the longer term. ⁽¹⁾

Finally, Harley-Davidson motorcycle revenue in the second quarter of 2004 was impacted by the lower wholesale prices associated with the 2004 model year motorcycles. Wholesale prices on the 2004 models reflect the elimination of 100^th Anniversary special edition features and as a result are slightly lower than the wholesale prices for the 100^th Anniversary models sold during the second quarter of 2003.

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During the second quarter of 2004, net revenue from Parts and Accessories (P&A) totaled $230.1 million, a $25.9 million or 12.7% increase over the second quarter of 2003. The increase in P&A revenue during the second quarter of 2004 was driven by strong U.S. retail motorcycle sales. On a long-term basis the Company expects the growth rate for P&A revenue will be slightly higher than the growth rate for Harley-Davidson^® motorcycle units.⁽¹⁾

General Merchandise revenue during the second quarter of 2004 was $53.1 million, a $9.4 million or 21.5% increase over the same period last year. The Company expects that the long-term growth rate for General Merchandise revenue will be lower than the growth rate for Harley-Davidson motorcycle units. ⁽¹⁾

Gross Profit

Gross profit of $503.4 million for the Motorcycles segment in the second quarter of 2004 was $60.2 million, or 13.6%, higher than gross profit in the same quarter last year. The $60.2 million increase in gross profit resulted primarily from the increase in net revenue. The gross margin was 37.9% in the second quarter of 2004 compared to 36.4% in the second quarter of 2003. The increase in gross margin in the second quarter of 2004 resulted primarily from manufacturing efficiencies, including those that generally occur at the end of a model year. The Company expects that some of these efficiencies will not be maintained in the second half of 2004 due to the 2005 model year start up.⁽¹⁾

Financial Services

The following table includes the condensed statements of operations for the Financial Services segment (which consists of HDFS), for the three months ended June 27, 2004 and June 29, 2003 (in millions):

The increase in operating income from Financial Services during the second quarter of 2004 was driven by continued strong marketplace acceptance of HDFS’ finance and insurance products and increased income on investment in retained securitization interests, partially offset by a lower gain on the 2004 second quarter securitization.

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During the second quarter of 2004, HDFS sold $626.0 million of retail motorcycle loans through securitization transactions resulting in gains of $19.3 million.  During the second quarter of 2003, HDFS sold $425.0 million of retail motorcycle loans resulting in gains of $22.2 million.  The gain as a percentage of the amount of loans securitized was lower when compared with last year’s gain due to the costs of a new enhanced dealer participation program introduced during the quarter and rising market interest rates. Based on the current competitive market and interest rate environment, HDFS believes the full impact of these changes will result in future securitization gains that will be in the range of 2.0 to 2.5 percent ⁽¹⁾.

During the second quarter of 2004, income on investment in retained securitization interests increased $6.0 million over the same period in 2003, as the portfolio continued to perform better than anticipated.

Over the long-term, the Company expects the HDFS operating income growth rate to be slightly higher than the Company’s Harley-Davidson motorcycle unit growth rate.⁽¹⁾

HDFS’ periodic evaluation of the adequacy of the allowance for credit losses is generally based on HDFS’ past loan experience, known and inherent risks in the portfolio, and current economic conditions. HDFS believes the allowance is adequate to cover the losses of principal and accrued interest in the existing portfolio. Changes in HDFS’ allowance for credit losses during the three months ended June 27, 2004 and June 29, 2003 were as follows (in millions):

Operating Expenses

The following table includes operating expenses for the Motorcycles segment and Corporate for the three months ended June 27, 2004 and June 29, 2003 (in millions):

Operating expenses, which include selling, administrative and engineering expenses, were 13.1% and 14.8% of net revenue for the second quarters of 2004 and 2003, respectively. Operating expenses during the second quarter of 2004 were lower when compared to the same period last year. The decrease in operating expenses was driven by the timing of certain expenses during 2003. During the second quarter of last year, the Company accelerated some of its spending related to various marketing, advertising and program costs to support the 100th Anniversary activities. Comparatively, in 2004, operating expenses are expected to be higher in the second half of the year than in the first half, which is more typical of the Company’s operations.⁽¹⁾

Provision for income taxes

The Company’s effective income tax rate was 35.5% and 34.5% during the second quarters of 2004 and 2003, respectively. The Company’s effective income tax rate increased to 35.5% during the fourth quarter of 2003 as pre-tax income grew faster than certain tax advantage items. The Company expects that the income tax rate will be 35.5% during the remainder of 2004.⁽¹⁾

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Results of Operations for the Six months Ended June 27, 2004
Compared to the Six months Ended June 29, 2003

Overall

For the six months ended June 27, 2004, consolidated net revenue totaled $2.49 billion, a $160.9 million or 6.9% increase over the same period last year. Net income for the first half of 2004 was $451.8 million compared to $388.4 million in the first half of 2003, an increase of 16.3%. Diluted earnings per share for the first six months of 2004 were $1.52 on 298.1 million weighted average shares outstanding compared to $1.28 on 304.4 million weighted average shares outstanding during the same period last year, an increase in earnings per share of 18.8%.

Motorcycle Unit Shipments & Net Revenue

The following table includes wholesale motorcycle unit shipments and net revenue by product line for the Motorcycles segment for the six months ended June 27, 2004 and June 29, 2003 (dollars in millions):

The $160.9 million increase in net revenue for the Motorcycles segment during the first half of 2004 was driven by a $107.2 million, or 5.8% increase in Harley-Davidson motorcycle net revenue. Harley-Davidson motorcycle revenue was higher primarily as a result of the 6.5% increase in units shipped and also benefited from changes in foreign currency exchange rates. These increases were partially offset by lower revenue due to changes in product mix and lower wholesale prices, as discussed below.

During the first half of 2004, Harley-Davidson motorcycle revenue was impacted by changes in product mix related primarily to an increase in the percentage of shipments consisting of lower priced Sportster motorcycles and a decrease in the percentage of shipments consisting of more expensive custom motorcycles. The increase in Sportster production and shipments began with the introduction of the completely redesigned 2004 Sportster models in September 2003. As a result of the increase in Sportster motorcycles, as well as the increase in Touring motorcycles, the Company’s capacity to produce custom motorcycles was limited during the first six months of 2004.

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Harley-Davidson motorcycle revenue was also impacted by the lower wholesale prices associated with the 2004 model year motorcycles. Wholesale prices on the 2004 models reflect the elimination of 100^th Anniversary special edition features and as a result are slightly lower than the wholesale prices for the 100^th Anniversary models sold during the first half of 2003.

During the first half of 2004, net revenue from Parts and Accessories (P&A) totaled $399.3 million, a 9.7% increase over the first half of 2003. Total P&A revenue for the first six months of 2003 included $30.4 million from sales of 100th Anniversary P&A products. Excluding revenue from the sale of 100th Anniversary products from the first half of 2003, the P&A revenue growth rate for the first half of 2004 was 19.7%.

General Merchandise revenue during the first six months of 2004 was $107.5 million, up 7.3% over the same period last year. Revenue from 100th Anniversary General Merchandise products accounted for $9.0 million of total General Merchandise revenue during the first half of 2003. Excluding revenue from the sale of 100^th Anniversary products from the first half of 2003, the General Merchandise revenue growth rate for the first half of 2004 was 17.9%.

Harley-Davidson Retail Motorcycle Sales

Retail sales of the Company’s Harley-Davidson motorcycles in the United States were up 16.5% for the first six months of 2004, when compared to the same period last year. Through June 2004, retail sales of the Company’s Harley-Davidson motorcycles in Europe and Japan were up .7% and down 7.3%, respectively, when compared with the same period in 2003. During the first six months of 2004, changes in retail sales rates for Harley-Davidson motorcycles in Europe and Japan have generally tracked with changes in overall industry motorcycle retail sales rates in those markets. Heavyweight (651+cc) motorcycle retail registrations data available to the Company, for the United States, Europe and Japan, through the month indicated, is as follows:

Gross Profit

Gross profit for the first six months of 2004 totaled $943.5 million, an increase of $97.3 million or 11.5% over the same period in 2003. The $97.3 million increase in gross profit resulted primarily from the increase in net revenue. The gross margin was 37.8% in the first half of 2004 compared to 36.3% in the first half of 2003. The increase in gross margin during the first six months of 2004 was driven primarily by manufacturing efficiencies, including those that generally occur at the end of a model year, and also benefited from favorable foreign currency exchange rates.

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Financial Services

The following table includes the condensed statements of operations for the Financial Services segment, for the six months ended months June 27, 2004 and June 29, 2003 (in millions):

The increase in operating income during the first six months of 2004 was primarily driven by strong marketplace acceptance of HDFS’ finance and insurance products and increased income on investment in retained securitization interests, partially offset by lower gains on current year securitization transactions.

During the first six months of 2004, HDFS sold $1,251.0 million of retail motorcycle loans through securitization transactions resulting in gains of $44.5 million.  During the first six months of 2003, HDFS sold approximately $975.0 million of retail motorcycle loans resulting in gains of $48.6 million.  The gain as a percentage of the amount of loans securitized was lower when compared with last year’s gain due to the cost of a new enhanced dealer participation program that was introduced during the second quarter of 2004 and rising market interest rates throughout the first six months of 2004.

During the first six months of 2004, income on investment in retained securitization interests increased $11.8 million over the same period in 2003 as the portfolio continued to perform better than anticipated. Changes in HDFS’ allowance for finance credit losses during the six-month periods ended June 27, 2004 and June 29, 2003 were as follows (in millions):

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Operating Expenses

The following table includes operating expenses for the Motorcycles segment and Corporate for the six months ended June 27, 2004 and June 29, 2003 (in millions):

Operating expenses were 14.1% and 14.9% of net revenue for the first six months of 2004 and 2003, respectively. Operating expenses during the first half of 2004 were up less than 1% when compared to the same period last year. The first half increase in 2004 operating expenses was small, relative to the Company’s revenue growth during that same period, due to a change in the timing of certain expenses during 2003. Operating expenses in the first half of 2003 were higher due to an acceleration of spending related to various marketing, advertising and program costs to support the 100th Anniversary activities.

Provision for income taxes

The Company’s effective income tax rate was 35.5% and 34.5% during the first six months of 2004 and 2003, respectively.

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Other Matters

Commitments and Contingencies

The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The required reserves are monitored on an on-going basis and are updated based on new developments or new information in each matter.

In January 2001, the Company, on its own initiative, notified each owner of 1999 and early-2000 model year Harley-Davidson^® motorcycles equipped with Twin Cam 88 and Twin Cam 88B engines that the Company was extending the warranty for a rear cam bearing to 5 years or 50,000 miles. Subsequently, on June 28, 2001, a putative nationwide class action was filed against the Company in state court in Milwaukee County, Wisconsin, which was amended by a complaint filed September 28, 2001. The complaint alleged that this cam bearing is defective and asserted various legal theories. This complaint and a second lawsuit filed on April 12, 2002 in state court in Milwaukee County, Wisconsin were dismissed as reported in more detail in Note 9 to the Condensed Consolidated Financial Statements included in this report (Note 9). On April 12, 2004, the same attorneys filed a third action in state court in Milwaukee County on behalf of the same plaintiffs from the action dismissed by the Wisconsin Supreme Court. This third action was dismissed by the court on July 26, 2004. In addition, the plaintiffs in the original case have moved to reopen that matter and to amend the complaint to add new causes of action. The Company is also opposing this motion and intends to continue to vigorously defend this matter. The Company believes that the 5 year/50,000 mile warranty extension it announced in January 2001 adequately addresses the condition for affected owners.

The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the clean up of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection since 1986 in undertaking environmental investigation and remediation activities, including an on-going site-wide remedial investigation/feasibility study (RI/FS). Note 9 includes a discussion of the history of this matter in more detail.

Although the RI/FS is still underway and substantial uncertainty exists concerning the nature and scope of the additional environmental investigation and remediation that will ultimately be required at the York facility, the Company estimates that its share of the future costs associated with environmental investigation and remediation activities at the York facility (Response Costs) will be approximately $7.3 million. The Company has established reserves for this amount, which are included in Accrued expenses and other liabilities in the consolidated balance sheets.

The estimate of the Company’s future Response Costs that will be incurred at the York facility is based on reports of independent environmental consultants retained by the Company, the actual costs incurred to date, and the estimated costs to complete the necessary investigation and remediation activities. Response Costs are expected to be incurred over a period of several years ending in 2010.

Additionally, the Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures which are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability will not have a material adverse effect on the Company’s consolidated financial statements.

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Liquidity and Capital Resources

Operating Activities

The Company’s main source of liquidity is cash from operating activities which consists of net income adjusted for non-cash operating activities, collections of retained securitization interests, pension plan contributions, the tax benefit of stock option exercises and changes in current assets and liabilities.

The Company generated $608.6 million of cash from operating activities during the first half of 2004 compared to $609.9 million in the first half of 2003. The largest component of cash from operating activities is net income adjusted for depreciation, which was $556.7 million in the first half of 2004 compared to $483.7 million in the first half of 2003. However, cash flows provided by operating activities were negatively impacted by changes in current assets and liabilities by approximately $24.9 million in the first half of 2004 compared to the positive impact of $92.3 million during the same period last year. Changes in current assets and liabilities during the first six months of 2004 and 2003 consisted of the following (in millions):