So we anticipated and controlled what we could, adjusted where things were beyond our control and delivered record earnings, despite moderately declining revenues.

We reported revenues of $1,048,296,000 for the year ended December 31, 1997, a decrease of 12 percent from 1996. Net income, however, rose 5 percent to $65,383,00, compared to $62,293,000 in 1996. And net income per share of common stock was up 9 percent to $2.45, compared to $2.24 a year ago. As we expected, a continued improvement in gross margin (as a percentage of sales) enabled us to achieve our earnings growth despite a decline in sales. For the year, gross margin improved to 25.0 percent of sales from 21.1 percent of sales in 1996. These margin benefits were generated primarily by the continued expansion of our domestic engine manufacturing program and a significant reduction in warranty costs.

Our overall financial condition remains very strong. Cash flow from operating activities was $102,308,000 in 1997, an increase of 14 percent over 1996. The debt level on December 31, 1997, was $24,400,000, resulting in a favorable debt-to-total captial ratio of just 13 percent. Return on equity continued to be impressive at 40 percent.

Last year, we promised to rectify two problems that threatened our margins---and we did. The first was to deal with excess inventory levels, primarily in personal watercraft (PWC). By reducing production and the number of models, and offering aggressive promotions, we managed season-end PWC field inventories to nearly half the 1996 level. As announced in third quarter 1997, the 1998 model PWC production has been reduced in an effort to have a clean dealer pipeline by the end of the 1998 season.

We also concentrated on reducing the field inventories of our all-terrain vehicles (ATVs) by better matching the timing of our shipments to the dealer with retail sales to the consumer. And we reduced production of snowmobiles in 1997 to reflect the flat market and higher-than -normal, season-end dealer inventories. We continue to manage snowmobile inventory turnover aggressively.

Our seconed challenge in 1997 was to reduce warranty expenses. We were successful, realizing a 32 percent reduction in warranty costs in 1997 from 1996. We've corrected the problems that created the excessive warranty costs and reorganized our product lines to prevent them from occuring in the future. By focusing product development responsibilty in the business unit responsible for manufacturing and marketing the product, we've tightened accountability and control.

We also knew that the market environment in 1997 would require us to reduce costs and stimulate growth wherever possible. Here are some highlights of what we accomplished:

Reduced engine costs. We expanded our domestic engine manufacturing program in 1997 to give us more cost control and reduce currency risk. We'll continue to expand domestic engine production in 1998 and look for additional opportunities to save on our highest-cost component.

Expanded companywide cost-reduction. We've put in place numerous initiatives throughout the company that give employees, who are fellow shareholders, the freedom to explore cost-saving opportunities. In fact, more than 80 percent of employees are active in process improvment activities.

Expanded vertical intregration effort. We expect our new plastic injection molding facility in Roseau, Minnesota, to be operational in mid-1998. This latest vertical intregration effort will allow us to reduce costs and improve overall product quality.

Improved distribution. In April 1997, we opened a new, consolidated distribution center in Vermillion, South Dakota, to improve order fulfillment of our parts, garments and accessories. By consolidating five Minneapolis warehouses into one state-of-the-art facility, we're able to process customer orders faster, more accurately and more economically.

Introduced new models and features. We know from experience that product innovations provide top-line growth opportunites. In 1997, we introduced two new ATV models, and several snowmobile and PWC features. We'll continue to build on our legacy of innovation in 1998 by rolling out our new 6-wheel-drive Polaris Ranger side-by side off road utility vehicle, and we'll debut a 1999 model year snowmobile lineup that includes an astonishing 23 new models, the most product introductions we've ever had in one year. You'll see innovative new models and features in our 1999 model year ATVs and PWC, too.

Diversified into motorcycles. After five years of development, we unveiled our Victory crusier, Polairs' initial entry into the worldwide motorcycle market. Victory has received enthusiastic response from dealers, consumers and the trade press. First production models of the bike will roll out in late spring 1998. While we'll see modest production in 1998 and 1999, we expect to break even on our $20 million motorcycle investment within three years. And we're very excited about the long-term growth potential of the Victory motorcycle. Future plans call for production of models in all four major product segments, as well as distribution into all major worldwide markets.

Despite our strong earnings performance, we believe the market has been slow to recognize our company's fundamental value. So we took positive steps to use our cash flow effciently to return value to you, our investors.

We increased our ownership in Polaris Acceptance---the finance company joint venture with TransAmerica Distribution Finance---to 50 percent and realized an excellent return on that investment during 1997. Another example of effcient cash flow is our share repurchase program. The Board of Directors expanded the program in 1997; we repurchased and retired approximately 1.5 million common shares during the year, leaving approximately 1.0 million shares remaining on the Board's authorization. Polaris also paid dividends totaling $.64 per share during 1997.

So we enter 1998 optimistically. We have an exciting new product line that shows immense potential. We're number one in snowmobiles. We're number two in ATVs. And just five years after introducing PWC, we're in fourth place---and poised to capture more market share as industry sales growth resumes. We expect our 1998 performance to benefit from a rebound in sales, our ability to sustain gross margins at 1997 levels, and our continued focus on cost control and efficiencies.

Plus, we have demographics on our side. Baby Boomers---our largest group of customers who already are the most recreationally oriented generation the world has ever seen---are now entering their peak earning years and gaining more leisure time.

How quickly demand for our products will recover is not certain. But we're certian it will, and we won't relent in our mission to be the leader in every market we serve. We'll become number one by tapping our 44 years of experience in successfully engineering, manufacturing, distributing and marketing motorized vehicles. And that's also how we'll create long-term value for each of our stakeholders.

Very truly yours,