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 fiscal 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 recent developments. This is followed by a discussion of our critical accounting policies, and then by a discussion of our results of operations for the three and nine months ended March 31, 2009 and 2008. 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 March 31, 2009 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 our 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 three months ended September 30, 2008, 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, electronic systems and headphones for multimedia, home and mobile applications. Multimedia applications include innovative accessories for portable electronic devices including music-enabled cell phones such as the iPhoneTM, and MP3 players including the iPodTM. 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 installed 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 our corporate employees.

Our products are sold worldwide, with the largest markets located in 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 year 2008, we announced an expansion of our restructuring program that will reduce our manufacturing footprint and resulted 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.

Recent Events

Recent Borrowings Under Revolving Credit Facility

On March 31, 2009 we and one of our wholly-owned subsidiaries, Harman Holding GmbH & Co. KG entered into a Second Amended and Restated Multi-Currency, Multi-Option Credit Agreement (the "Amended Credit Agreement"), amending and restating the Amended and Restated Multi-Currency, Multi-Option Credit Agreement dated June 22, 2006. The Amended Credit Agreement, among other things, extended the maturity date from June 28, 2010 to December 31, 2011 and reduced the maximum amount of available credit under the revolving credit facility from $300 million to $270 million. Interest rates for borrowings under the Amended Credit Agreement were increased to three percent above the applicable base rate for base rate loans and four percent over London Interbank Offered Rate ("LIBOR") for Eurocurrency loans. In addition, the annual facility fee rate payable under the Amended Credit Agreement has increased to one percent. We expect interest expense to increase due to both the increase in interest rates and the increase in borrowings under the Amended Credit Agreement.

The Amended Credit Agreement contains financial and other covenants that require us to maintain certain specified ratios and liquidity levels, and imposes certain limitations on us and certain of our subsidiaries, which are more fully described in the section entitled Financial Condition, within this Management's Discussion and Analysis and in Note 8, Debt in our Notes to the Condensed Consolidated Financial Statements.

Guarantee and Collateral Agreement

In connection with the Amended Credit Agreement, we and certain of our subsidiaries also entered into a guarantee and collateral agreement (the "Guarantee and Collateral Agreement"), which provides, among other things that the obligations under the Amended Credit Agreement are guaranteed by us and each of the subsidiary guarantors and that the obligations are generally secured by liens on substantially all of our assets and certain of our subsidiary guarantors' assets.

Chrysler Auto Supplier Support Program and Bankruptcy Filing

Subsequent to March 31, 2009, we have decided to participate in the U.S. government-backed auto supplier support program (the "Program") with Chrysler LLC ("Chrysler"). The Program covers a portion of our receivables pertaining to Chrysler shipments to U.S. assembly plants after March 19, 2009 for a fee of either two percent or three percent discount from the face value of eligible accounts receivable, depending on whether we opt for immediate payment or payment on normal trade terms.

On April 30, 2009, Chrysler and certain of its affiliates filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York to reorganize its business. Our sales to Chrysler were approximately seven percent of our total net sales for the three and nine months ended March 31, 2009. At the time of the bankruptcy filing, Chrysler and its affiliates owed us approximately $30.7 million for products shipped prior to the date of the filing, of which $34.1 million was outstanding as of March 31, 2009. Our U.S. exposure for uncollected accounts receivable prior to March 19, 2009 is $3.7 million and we have fully reserved for this exposure at March 31, 2009. We have exposure related to accounts receivable from non-U.S. Chrysler entities which we have not reserved for, as these entities have not filed for bankruptcy in their respective countries and we believe collectibility is reasonably assured as they are current on their payments. To the extent the Chrysler receivables are not paid through the Program, a portion of them still may be paid as an administrative claim in connection with the bankruptcy proceeding. The timing and extent of such administrative priority payments, if any, will depend upon whether the Chrysler bankruptcy estate is administratively solvent and whether its reorganization plan is approved. In addition, Chrysler has filed a motion in the bankruptcy court seeking approval to continue the Program on a post-petition basis and to pay pre-petition claims of its "essential suppliers." Some or all of our remaining pre-petition accounts receivable from Chrysler may be paid in the near term pursuant to that motion or later through the ordinary bankruptcy claims process.

In connection with its bankruptcy filing, Chrysler announced that most manufacturing operations will be temporarily idled until the propsed sale is complete. Consequently, as of May 1, 2009, we have also temporarily idled our Chrysler-related manufacturing operations at our Washington, Missouri facility and expect that this will continue until Chrysler emerges from bankruptcy or recommences its manufacturing operations.

Critical Accounting Policies

For the three and nine months ended March 31, 2009, 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 and our Quarterly Report on Form 10-Q for the three and six months ended December 31, 2008.

Results of Operations

Net Sales

Our net sales for the three months ended March 31, 2009 were $598.3 million, compared to $1.033 billion in the same period last year, a decrease of 42 percent. For the nine months ended March 31, 2009, net sales were $2.223 billion, compared to net sales of $3.045 billion in the same prior year period, a decrease of 27 percent. Foreign currency translation had an unfavorable impact on net sales of $86.1 million and $104.5 million, respectively, when compared to the same three and nine month periods in the prior year. For the three and nine months ended March 31, 2009, 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:

($000s omitted) Three months ended March 31, Nine months ended March 31,

                     2009              %        2008               %        2009               %        2008               %
Net sales:
Automotive         $ 405,234          68 %       758,947          73 %   $ 1,539,345          69 %     2,151,959          71 %
Consumer              71,781          12 %       112,635          11 %       297,657          13 %       415,825          14 %
Professional         111,718          19 %       150,333          15 %       357,428          16 %       447,179          15 %
Other                  9,549           1 %        10,753           1 %        28,917           2 %        30,277         --- %
Total              $ 598,282         100 %     1,032,668         100 %   $ 2,223,347         100 %     3,045,240         100 %

Automotive - Net sales for the three months ended March 31, 2009 decreased $353.7 million, or 47 percent compared to the same period in the prior year. Foreign currency translation adversely affected net sales by $72.6 million compared to the same three month period last year. Net sales for the nine months ended March 31, 2009 decreased $612.6 million, or 28 percent compared to the same period in the prior year. Foreign currency translation adversely affected sales by $83.8 million compared to the same period in the prior year.

For the three months ended March 31, 2009, the reduction in net sales versus the prior year 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, Toyota, Porsche, and Hyundai and Audi. For the nine months ended March 31, 2009, these reductions in net sales versus the prior year were also 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, Toyota, Porsche, partially offset by higher sales relating to the launch of our products in various new Audi, BMW, Hyundai and Subaru models.

Consumer - Net sales for the three months ended March 31, 2009 decreased $40.9 million, or 36 percent, compared to the same three month period in the prior year. Foreign currency translation adversely affected sales by $7.4 million compared to the same three month period in the prior year. Net sales for the nine months ended March 31, 2009 decreased $118.2 million, or 28 percent, compared to the same period in the prior year. Foreign currency translation adversely affected sales by $11.0 million compared to the same period in the prior year.

During the three and nine months ended March 31, 2009, the consumer retail environment continued to be challenging, as consumer spending has slowed and resulted in lower sales. Sales were also lower due to Consumer's exit from the PND business and other unprofitable products.

Professional - Net sales for the three months ended March 31, 2009 decreased $38.6 million, or 26 percent compared to the same period in the prior year. Foreign currency translation adversely affected sales by $6.1 million compared to the same period last year. Net sales for the nine months ended March 31, 2009 decreased $89.8 million, or 20 percent, compared to the same period in the prior year. Foreign currency translation adversely affected sales by $9.7 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 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 6.4 percentage points to 18.9 percent for the three months ended March 31, 2009 compared to 25.3 percent of net sales in the same prior year period. Gross profit as a percentage of net sales decreased 3.3 percentage points to 23.9 percent for the nine months ended March 31, 2009 compared to 27.2 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 and product mix.

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

($000s omitted)                   Three months ended March 31,                                 Nine months ended March 31,
                                     Percent                       Percent                       Percent                       Percent
                                       of                            of                            of                            of
                       2009         net sales        2008         net sales        2009         net sales        2008         net sales
Gross Profit:
Automotive           $  52,096            12.9 %     171,465            22.6 %   $ 306,978            19.9 %     531,205            24.7 %
Consumer                15,972            22.2 %      23,650            21.0 %      70,379            23.6 %     100,291            24.1 %
Professional            39,346            35.2 %      58,770            39.1 %     136,058            38.1 %     174,792            39.1 %
Other                    5,881            61.6 %       7,248            67.4 %      18,667            64.6 %      20,544            67.9 %
Total                $ 113,295            18.9 %     261,133            25.3 %   $ 532,082            23.9 %     826,832            27.2 %

Automotive - Gross profit as a percentage of net sales decreased 9.7 percentage points to 12.9 percent for the three months ended March 31, 2009 compared to the same period in the prior year. Gross profit as a percentage of net sales decreased 4.8 percentage points to 19.9 percent for the nine months ended March 31, 2009 compared to the same period in the prior year. The gross profit margin declines for the three and nine months ended March 31, 2009 were due to changes in sales mix, lower factory utilization associated with the decrease in sales, and restructuring costs incurred in connection with the announced plant downsizings or closings in California, Indiana, France and Sweden and a warranty center in New Jersey, partially offset by one-time warranty charges incurred in the three and nine months ended March 31, 2008, relating to engineering changes for one of our products. Restructuring costs recorded at these locations relate to accelerated depreciation on machinery and equipment and the reclassification of the Martinsville property as held for sale from held and used.

Consumer - Gross profit as a percentage of net sales increased 1.2 percentage points to 22.2 percent for the three months ended March 31, 2009 compared to the same period in the prior year. Gross profit as a percentage of net sales decreased 0.5 percentage points to 23.6 percent for the nine months ended March 31, 2009 compared to the same prior year period. Gross profit margins for the three months ended March 31, 2009 increased due to our favorable product mix as a result of our exit from unprofitable product lines of business. Gross profit margins decreased for the nine months ended March 31, 2009 primarily due to under-absorption of fixed costs due to lower sales volumes, offset by higher product margins due to the exit of unprofitable lines of business.

Professional - Gross profit as a percentage of net sales decreased 3.9 percentage points to 35.2 percent for the three months ended March 31, 2009 compared to the same period in the prior year. Gross profit as a percentage of net sales decreased 1.0 percentage point to 38.1 percent for the nine months ended March 31, 2009 compared to the same prior year period. Lower factory utilization associated with the sales decline reduced gross margins for the three months and nine months ended March 31, 2009 compared to the same period in the prior year. For the nine months ended March 31, 2009, favorable product mix and lower factory overhead costs partially offset the effect of the volume shortfall.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") were $203.4 million for the three months ended March 31, 2009 compared to $267.7 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 March 31, 2009 increased 8.1 percentage points to 34.0 percent compared to the same prior year period due to the decrease in sales. Foreign currency translation contributed $20.2 million to the decrease in SG&A expenses during the quarter. Other factors contributing to the decrease in SG&A included $17.5 million of restructuring costs incurred in the three months ended March 31, 2009 compared with $33.4 million of restructuring in the same period in the prior year, and a $2.0 million decrease 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 by $24.7 million to $79.4 million for the three months ended March 31, 2009 compared to $104.1 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 $17.5 million in the three months ended March 31, 2009. Restructuring costs are further described under the caption Restructuring Programs later in this discussion.

For the nine months ended March 31, 2009, SG&A expenses were $630.9 million compared to $731.2 million in the same period in the prior year. As a percentage of net sales, SG&A increased 4.4 percentage points to 28.4 percent for the nine months ended March 31, 2009 compared to the same prior year period due to the decrease in sales. Foreign currency translation contributed $24.6 million to the decrease in SG&A expenses when compared to the prior year period. Other factors contributing to the decrease in SG&A included a reduction in R&D costs of $41.9 million, $13.6 million lower share-based compensation and benefits expenses, primarily reflecting a benefit from stock option forfeitures due to executive retirements, a benefit from adjusting our profit sharing accrual as the fiscal 2008 contribution was not approved and reductions in advertising and promotion expenses. These decreases were partially offset by $44.6 million of restructuring expenses compared with $34.1 million in the same period in the prior year. SG&A expenses for the nine months ended March 31, 2008 included $13.8 million in merger costs.

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

($000s omitted)                   Three months ended March 31,                                 Nine months ended March 31,
                                     Percent                       Percent                       Percent                       Percent
                                       of                            of                            of                            of
                       2009         net sales        2008         net sales        2009         net sales        2008         net sales
SG&A Expenses:
Automotive           $ 133,589            33.0 %     166,536            21.9 %   $ 398,213            25.9 %     447,767            20.8 %
Consumer                23,394            32.6 %      36,994            32.8 %      80,775            27.1 %      99,294            23.9 %
Professional            31,334            28.0 %      42,828            28.5 %     101,232            28.3 %     115,418            25.8 %
Other                   15,117             ---        21,376             ---        50,642             ---        68,674             ---
Total                $ 203,434            34.0 %     267,734            25.9 %   $ 630,862            28.4 %     731,153            24.0 %

Automotive - SG&A expenses were $133.6 million for the three months ended March 31, 2009, compared to $166.5 million for the same period in the prior year. As a percentage of net sales, SG&A expenses increased 11.1 percentage points to 33.0 percent for the three months ended March 31, 2009 compared to the same period in the prior year. Foreign currency translation contributed $15.8 million to the decrease in SG&A expenses during the quarter. R&D expenses decreased to $66.0 million, or 16.3 percent of net sales, for the three months ended March 31, 2009 compared to $84.8 million, or 11.2 percent of net sales, in the same prior year period. Approximately $9.6 million of the decrease in R&D expenses was due to changes in currency exchange rates.

SG&A expenses were $398.2 million for the nine months ended March 31, 2009 compared to $447.8 million for the same period in the prior year. As a percentage of net sales, SG&A expenses increased 5.1 percentage points to 25.9 percent for the nine months ended March 31, 2009 compared to the same period in the prior year. Foreign currency translation contributed $19.3 million to the decrease in SG&A expenses when compared to the prior year period. R&D expenses decreased by $32.4 million to $203.7 million, or 13.2 percent of net sales, for the quarter ended March 31, 2009 compared to $236.1 million, or 11.0 percent of net sales, in the same prior year period.

Consumer - SG&A expenses were $23.4 million for the three months ended March 31, 2009 compared to $37.0 million for the same period in the prior year. As a percentage of net sales, SG&A expenses decreased 0.2 percentage points to 32.6 percent for the three months ended March 31, 2009 compared to the same period in the prior year. Foreign currency translation contributed $2.4 million to the decrease in SG&A when compared to the prior year period. R&D expenses were $5.1 million for the quarter ended March 31, 2009 compared to $8.6 million in the same period last year. SG&A as a percent of sales decreased due to lower R&D expenses, partially offset by the decrease in net sales. . . .