General

The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included in Item 1 of this Quarterly Report on Form 10-Q, together with Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended June 30, 2008 ("2008 Form 10-K"). This discussion contains forward-looking statements which are based on our current expectations and experience and our perception of historical trends, current market conditions, including customer acceptance of our new products, current economic data, expected future developments, including foreign currency exchange rates, and other factors that we believe are appropriate under the circumstances. These statements involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements. Unless otherwise indicated, "Harman," "the company," "we," "our," and "us" are used interchangeably to refer to Harman International Industries, Incorporated and its consolidated subsidiaries.

We begin our discussion with an overview of our company to give you an understanding of our business and the markets we serve. We then discuss our critical accounting policies. This is followed by a discussion of our results of operations for the three and six months ended December 31, 2008 and 2007. We include in this discussion an analysis of certain significant period-to-period variances in our condensed consolidated statements of operations and an analysis of our restructuring program. We also provide specific information regarding our three reportable business segments: Automotive, Consumer and Professional. We then discuss our financial condition at December 31, 2008 with a comparison to June 30, 2008. This section contains information regarding our liquidity, capital resources and cash flows from operating, investing and financing activities. We complete our discussion with an update on recent developments and a business outlook.

Overview

We design, manufacture and market high-quality, high-fidelity audio products and electronic systems for the automotive, consumer and professional markets. We have developed, both internally and through a series of strategic acquisitions, a broad range of product offerings sold under renowned brand names in our principal markets. These brand names have a heritage of technological leadership and product innovation. Our reportable business segments, Automotive, Consumer and Professional, are based on the end-user markets we serve.

During the first quarter of fiscal 2009, we revised our business segments to align our strategic approach to the markets and customers we serve. We now report financial information for the QNX business in our "Other" segment. The QNX business was previously reported in our Automotive segment. The realignment reflects our focus to grow the QNX business in other, non-automotive industries, including networking, medical, instrumentation and industrial control. Segment information for the prior period has been reclassified to conform to the new presentation.

Automotive designs, manufactures and markets audio, electronic and infotainment systems for vehicle applications. Our systems are generally shipped directly to our automotive customers for factory installation. Infotainment systems are a combination of information and entertainment components that may include or control GPS navigation, traffic information, voice-activated telephone and climate control, rear seat entertainment, wireless Internet access, hard disk recording, MP3 playback and a premium branded audio system. We expect future infotainment systems to also provide driver safety capabilities such as lane guidance, pre-crash emergency braking, adaptive cruise control, and night vision. Automotive also provides aftermarket products such as personal navigation devices ("PNDs") to customers primarily in Europe.

Consumer designs, manufactures and markets loudspeaker and electronic systems for multimedia, home and mobile applications. Multimedia applications include innovative accessories for portable electronic devices including music-enabled cell phones such as the iPhone, and MP3 players including the iPod. Our multimedia applications also include audio systems for personal computers. Home applications include systems to provide high-quality audio throughout the home and to enhance home theatres. Aftermarket mobile products include speakers and amplifiers that deliver audio entertainment in the vehicle. Consumer products are primarily distributed through retail outlets.

Professional designs, manufactures and markets loudspeakers and electronic systems used by audio professionals in concert halls, stadiums, airports, houses of worship and other public spaces. We also develop products for recording, broadcast, cinema, touring and music reproduction applications. In addition, we have leading products in both the portable PA market and musician vertical markets serving small bands, DJs and other performers. A growing number of our products are enabled by our proprietary HiQnet protocol which provides centralized monitoring and control of both complex and simple professional audio systems.

Our Other segment includes the operations of the QNX business, which offers embedded operating system software and related development tools and consulting services used in a variety of products and industries. Our Other segment also includes compensation, benefit and occupancy costs for corporate employees.

Our products are sold worldwide, with the largest markets being the United States and Germany. In the United States, our primary manufacturing facilities are located in California, Kentucky, Missouri, Indiana and Utah. Outside of the United States, we have significant manufacturing facilities in Germany, Austria, the United Kingdom, Mexico, Hungary, France and China. During fiscal 2008, we announced an expansion of our restructuring program that will reduce our manufacturing footprint and result in the closure of our Automotive manufacturing facilities in California and Indiana.

Our sales and earnings may vary due to the production schedules of our automotive customers, customer acceptance of our products, the timing of new product introductions, product offerings by our competitors and general economic conditions. Since our businesses operate using local currencies, our reported sales and earnings may also fluctuate due to foreign currency exchange rates, especially for the Euro.

Critical Accounting Policies

For the three and six months ended December 31, 2008, there were no significant changes to our critical accounting policies and estimates from those disclosed in the consolidated financial statements and the related notes included in our 2008 Form 10-K or our Quarterly Report on Form 10-Q for the three months ended September 30, 2008.

Results of Operations

Net Sales

Our net sales for the three months ended December 31, 2008 were $755.9 million, compared to $1.066 billion in the same period last year, a decrease of 29 percent. For the six months ended December 31, 2008, net sales were $1.625 billion, compared to net sales of $2.013 billion in the same prior year period, a decrease of 19 percent. Foreign currency translation had an unfavorable impact on net sales of $66.7 million and $18.4 million, respectively, when compared to the same three and six month periods in the prior year. For the three and six months ended December 31, 2008, each of our reporting segments reported lower sales compared to the same period in the prior year. The decline in overall net sales was attributable to continued weakness in the automotive market as automakers cut production in response to weak economic conditions. Our Professional and Consumer segments were also negatively affected by the financial and economic crisis, where reductions in the availability of credit and lower consumer spending resulted in lower net sales.

Presented below is a summary of our net sales by reporting segment:

                                  Three months ended                                      Six months ended
($000s omitted)                      December 31,                                           December 31,

                     2008              %        2007               %        2008               %        2007               %
Net sales:
Automotive         $ 517,187          68 %       719,778          68 %   $ 1,134,110          70 %     1,393,012          69 %
Consumer             119,959          16 %       183,752          17 %       225,877          14 %       303,190          15 %
Professional         108,851          15 %       151,625          14 %       245,710          15 %       296,846          15 %
Other                  9,878           1 %        10,455           1 %        19,368           1 %        19,524           1 %
Total              $ 755,875         100 %     1,065,610         100 %   $ 1,625,065         100 %     2,012,572         100 %

Automotive - Net sales for the three months ended December 31, 2008 decreased $202.6 million, or 28 percent compared to the same period in the prior year. Foreign currency translation adversely affected net sales by $52.4 million compared to the same three month period last year. Net sales for the six months ended December 31, 2008 decreased $258.9 million, or 19 percent compared to the same period in the prior year. Foreign currency translation adversely affected sales by $11.2 million compared to the same period in the prior year.

For both the three and six months ended December 31, 2008, the reduction in net sales was primarily attributable to Daimler's strategic decision to move to dual sourcing on select Mercedes models, as well as reduced production by some of our major automotive customers, including Chrysler and Toyota. These reductions were partially offset by higher sales relating to the launch of our products in various new Audi, BMW and Hyundai models.

Consumer - Net sales for the three months ended December 31, 2008 decreased $63.8 million, or 35 percent, compared to the same three month period last year. Foreign currency translation adversely affected sales by $9.2 million compared to the same three month period last year. Net sales for the six months ended December 31, 2008 decreased $77.3 million, or 26 percent, compared to the same period in the prior year. Foreign currency translation adversely affected sales by $3.6 million compared to the same period in the prior year.

The consumer retail environment continues to be challenging as consumer spending has slowed and resulted in lower sales. Sales were also lower due to Consumer's exit of the PND business and other unprofitable products.

Professional - Net sales for the three months ended December 31, 2008 decreased $42.8 million, or 28 percent compared to the same period in the prior year. Foreign currency translation adversely affected sales by $5.0 million compared to the same period last year. Net sales for the six months ended December 31, 2008 decreased $51.1 million, or 17 percent, compared to the same period in the prior year. Foreign currency translation adversely affected sales by $3.6 million when compared to the same period in the prior year.

The decrease in sales compared to the same periods last year was due to continued softness in the small project contracting business and the effect of the weak economy on both our distributors' liquidity and market demand.

Gross Profit

Gross profit as a percentage of net sales decreased 4.9 percentage points to 23.4 percent for the three months ended December 31, 2008 compared to 28.3 percent of net sales in the same prior year period. Gross profit as a percentage of net sales decreased 2.3 percentage points to 25.8 percent for the six months ended December 31, 2008 compared to 28.1 percent of net sales in the same prior year period. Gross profit margins were lower than the same periods in the prior year due to decreased factory utilization associated with lower sales and increased restructuring costs.

Presented below is a summary of our gross profit by reporting segment:

                                       Three months ended                                           Six months ended
($000s omitted)                           December 31,                                                December 31,
                                   Percent of                    Percent of                    Percent of                    Percent of
                       2008         net sales        2007         net sales        2008         net sales        2007         net sales
Gross Profit:
Automotive           $ 101,295            19.6 %     185,198            25.7 %   $ 254,882            22.5 %     359,740            25.8 %
Consumer                27,429            22.9 %      48,534            26.4 %      54,406            24.1 %      76,641            25.3 %
Professional            41,879            38.5 %      60,140            39.7 %      96,712            39.4 %     116,022            39.1 %
Other                    6,254            63.3 %       7,252            69.4 %      12,787            66.0 %      13,296            68.1 %
Total                $ 176,857            23.4 %     301,124            28.3 %   $ 418,787            25.8 %     565,699            28.1 %

Automotive - Gross profit as a percentage of net sales decreased 6.1 percentage points to 19.6 percent for the three months ended December 31, 2008 compared to the same period in the prior year. Gross profit as a percentage of net sales decreased 3.3 percentage points to 22.5 percent for the six months ended December 31, 2008 compared to the same period last year. The gross margin decline was due to lower factory utilization associated with the decrease in sales, changes in sales mix and restructuring costs incurred in connection with the announced plant closings in Northridge, California and Martinsville, Indiana. Restructuring costs recorded at these locations relate to accelerated depreciation on machinery and equipment and the classification of the Martinsville property as held for sale from held and used.

Consumer - Gross profit as a percentage of net sales decreased 3.5 percentage points to 22.9 percent for the three months ended December 31, 2008 compared to the same period in the prior year. Gross profit as a percentage of net sales decreased 1.2 percentage points to 24.1 percent for the six months ended December 31, 2008 compared to the same prior year period. Gross profit margins for the three and six months ended December 31, 2008 declined primarily due to PND inventory write-downs associated with Consumer's exit of the PND business.

Professional - Gross profit as a percentage of net sales decreased 1.2 percentage points to 38.5 percent for the three months ended December 31, 2008 compared to the same period in the prior year. Gross profit as a percentage of net sales increased 0.3 percentage points to 39.4 percent for the six months ended December 31, 2008 compared to the same prior year period. Lower factory utilization associated with the sales decline reduced gross margins for the three months ended December 31, 2008 compared to the same period in the prior year. For the six months ended December 31, 2008, favorable product mix and lower factory overhead costs offset the effect of the volume shortfall.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") were $218.0 million for the three months ended December 31, 2008 compared to $240.3 million in the same period in the prior year. Despite the decline in the amount of SG&A expense, SG&A as a percentage of net sales for the three months ended December 31, 2008 increased 6.3 percentage points to 28.8 percent compared to the same prior year period due to the decrease in sales. Foreign currency translation contributed $14.4 million to the decrease in SG&A expenses during the quarter. Other factors contributing to the decrease in SG&A included $9.1 million of merger costs incurred in the three months ended December 31, 2007 and a $3.2 million reduction in share-based compensation expense compared to the same prior year period. The decrease also reflects a reduction in research and development ("R&D") costs. R&D, a significant component of our SG&A expenses, decreased to $84.3 million for the quarter compared to $100.4 million in the same period last year.

We continue to incur costs relating to our restructuring program, which is designed to address our global footprint, cost structure, technology portfolio, human resources and internal processes. We recorded restructuring charges in SG&A of $22.3 million in the three months ended December 31, 2008. Restructuring costs are further described under the caption Restructuring Programs later in this discussion.

For the six months ended December 31, 2008, SG&A expenses were $427.4 million compared to $463.4 million in the same period in the prior year. As a percentage of net sales, SG&A increased 3.3 percentage points to 26.3 percent for the six months ended December 31, 2008 compared to the same prior year period due to the decrease in sales. Foreign currency translation contributed $4.4 million to the decrease in SG&A expenses when compared to the prior year period. For the six months ended December 31, 2008, SG&A expenses included $27.1 million of restructuring costs, $17.2 million lower R&D costs, and $11.5 million lower share-based compensation expenses, primarily reflecting a benefit from stock option forfeitures due to executive retirements. SG&A expenses for the six months ended December 31, 2007 included $13.8 million in merger costs.

Presented below is a summary of SG&A expenses by reporting segment:

                                       Three months ended                                           Six months ended
($000s omitted)                           December 31,                                                December 31,
                                   Percent of                    Percent of                    Percent of                    Percent of
                       2008         net sales        2007         net sales        2008         net sales        2007         net sales
SG&A Expenses:
Automotive           $ 131,501            25.4 %     151,226            21.0 %   $ 264,624            23.3 %     281,231            20.2 %
Consumer                29,405            24.5 %      31,100            16.9 %      57,381            25.4 %      62,300            20.5 %
Professional            35,856            32.9 %      37,096            24.5 %      69,898            28.5 %      72,590            24.5 %
Other                   21,193             ---        20,863             ---        35,525             ---        47,298             ---
Total                $ 217,955            28.8 %     240,285            22.5 %   $ 427,428            26.3 %     463,419            23.0 %

Automotive - SG&A expenses were $131.5 million for the three months ended December 31, 2008, compared to $151.2 million for the same period in the prior year. As a percentage of net sales, SG&A expenses increased 4.4 percentage points to 25.4 percent for the three months ended December 31, 2008 compared to the same period in the prior year. Foreign currency translation contributed $11.6 million to the decrease in SG&A expenses during the quarter. R&D expenses decreased to $68.1 million, or 13.2 percent of net sales, for the quarter ended December 31, 2008 compared to $82.4 million, or 11.4 percent of net sales, in the same prior year period. Approximately $7 million of the decrease in R&D expenses was due to changes in currency exchange rates.

SG&A expenses were $264.6 million for the six months ended December 31, 2008 compared to $281.2 million for the same period in the prior year. As a percentage of net sales, SG&A expenses increased 3.1 percentage points to 23.3 percent for the six months ended December 31, 2008 compared to the same period in the prior year. Foreign currency translation contributed $3.5 million to the decrease in SG&A expenses when compared to the prior year period. R&D expenses decreased to $137.7 million, or 12.1 percent of net sales, for the quarter ended December 31, 2008 compared to $151.1 million, or 10.9 percent of net sales, in the same prior year period. The decrease in R&D expenses primarily occurred in the three months ended December 31, 2008 as noted above.

Consumer - SG&A expenses were $29.4 million for the three months ended December 31, 2008 compared to $31.1 million for the same period in the prior year. As a percentage of net sales, SG&A expenses increased 7.6 percentage points to 24.5 percent for the three months ended December 31, 2008 compared to the same period in the prior year. R&D expenses were $5.4 million for the quarter ended December 31, 2008 compared to $8.7 million in the same period last year. SG&A as a percent of sales increased due to the decrease in net sales, partially offset by lower R&D expenses and currency translation effects.

SG&A expenses were $57.4 million for the six months ended December 31, 2008 compared to $62.3 million for the same period in the prior year. As a percentage of net sales, SG&A expenses increased 4.9 percentage points to 25.4 percent for the six months ended December 31, 2008 compared to the same period in the prior year. The decrease in SG&A expenses was primarily due to lower R&D expenses, which decreased to $11.2 million compared to $17.5 million for the same period in the prior year.

Professional - SG&A expenses were $35.9 million for the three months ended December 31, 2008, compared to $37.1 million for the same period in the prior year. SG&A expenses as a percentage of net sales increased 8.4 percentage points to 32.9 percent for the three months ended December 31, 2008 compared to the same period in the prior year. The increase as a percentage of net sales resulted primarily from higher R&D expenses related to new product launches and lower sales results. R&D expenses were $9.4 million for the quarter ended December 31, 2008 compared to $8.9 million in the same period last year.

SG&A expenses were $69.9 million for the six months ended December 31, 2008 compared to $72.6 million in the same period last year. As a percentage of net sales, SG&A expenses increased 4.0 percentage points to 28.5 percent for the six months ended December 31, 2008 compared to the same period in the prior year, primarily due to the decrease in net sales. R&D expenses were $18.7 million for the six months ended December 31, 2008 compared to $18.1 million for the same period last year.

Other - SG&A expenses of $21.2 million for the three months ended December 31, 2008 approximated the amount in the prior year period of $20.9 million. Increases in the current year due to restructuring costs were offset by the prior year effect of merger costs.

SG&A expenses were $35.5 million for the six months ended December 31, 2008 compared to $47.3 million in the same period last year, primarily reflecting an $11.5 million reduction in share-based compensation expense due to stock option forfeitures associated with executive retirements.

Restructuring Program - We announced a restructuring program in June 2006 designed to increase efficiency in our manufacturing, engineering and administrative organizations. During the third quarter of fiscal 2008, we expanded our restructuring actions to improve our global footprint, cost structure, technology portfolio, human resources and internal processes. These actions will reduce the number of our manufacturing, engineering and operating locations.

In the prior fiscal year we announced plant closings in Northridge, California and Martinsville, Indiana and closed a plant in South Africa and a small facility in Massachusetts. We have completed the transition of our corporate headquarters from Washington D.C. to Stamford, Connecticut and have initiated numerous other actions to reduce cost and improve operating efficiency in our businesses.

For the six months ended December 31, 2008, SG&A expenses included $27.1 million for our restructuring program, of which $20.9 million was recorded for employee termination benefits. Cash paid for restructuring actions for the six months ended December 31, 2008 totaled $17.6 million. We also recorded $8.7 million primarily in cost of sales for accelerated depreciation and the reclassification of the Martinsville property from held and used to held for sale, both of which were recorded in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Below is a rollforward of our restructuring accrual, accounted for in accordance with SFAS 88, SFAS 112 and SFAS 146:

                                 Six months ended
                                   December 31,
($000s omitted)                    2008         2007

Beginning accrued liability   $  35,601        7,527
Expense                          27,147          706
Utilization(1)                  (18,852 )     (4,429 )
Ending accrued liability      $  43,896        3,804

(1) Includes amounts representing adjustments to the liability for changes in foreign currency exchange rates.

Please also see Note 11, Restructuring Program, for additional information.

Goodwill Impairment

Presented below is a summary of goodwill impairment charges by reporting
segment:

                                Three months ended                                 Six months ended
($000s omitted)                    December 31,                                      December 31,
                     2008           %         2007          %          2008           %         2007          %
Goodwill
Impairment
Charges:
Automotive         $ 289,962        89.0 %       ---         ---     $ 289,962        89.0 %       ---         ---
Consumer              22,663         7.1 %       ---         ---        22,663         7.1 %       ---         ---
Professional             ---         ---         ---         ---           ---         ---         ---         ---
Other                 12,820         3.9 %       ---         ---        12,820         3.9 %       ---         ---
Total              $ 325,445       100.0 %       ---         ---     $ 325,445       100.0 %       ---         ---

During the three months ended December 31, 2008, we performed an interim period goodwill impairment test. Based on the preliminary results, as discussed in Note 19, we recognized a non-cash goodwill impairment charge of $325.4 million. Due to the complexity of the analysis, involving the completion of fair value analyses and the resolution of certain significant assumptions, we will finalize the goodwill impairment charge in the three months ending March 31, 2009. Please . . .