The following discussion should be read in conjunction with the information presented in other sections of this Annual Report on Form 10-K, including "Item
1. Business," "Item 6. Selected Financial Data," and "Item 8. Financial Statements and Supplementary Data." 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. See "Risk Factors" included in Item 1A of Part I of this report. 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 fiscal years ended June 30, 2009, 2008 and 2007. We include in this discussion an analysis of certain significant period-to-period variances in our Consolidated Statements of Operations and an analysis of our restructuring program. We also provide specific information regarding our four business segments: Automotive, Consumer, Professional and Other. We then discuss our financial condition at June 30, 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 business outlook.

Executive Overview

We believe we are a worldwide leader in the development, manufacturing and marketing of high-quality, high-fidelity audio products and electronic systems. 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. We also believe that we are a leader in digitally integrated infotainment systems for the automotive industry. Our AKG, Crown, JBL, Infinity, Harman/Kardon, Lexicon, dbx, Studer/Soundcraft, Mark Levinson and Becker brand names are well-known worldwide for premium quality and performance. We have built these brands by developing our engineering, manufacturing and marketing competencies, and have employed these resources to establish our Company as a leader in the markets we serve.

We report our business on the basis of four segments. Our Automotive, Consumer and Professional segments are based on the end-user markets we serve. Our fourth segment, Other, includes our QNX business, which was previously reported in our Automotive segment. This realignment reflects our focus on growing the QNX business in other non-automotive industries. Our Professional segment now includes our Harman Specialty business which was previously reported within our Consumer segment. Our Harman Specialty business includes Mark Levinson, Revel and Lexicon branded products. This realignment reflects our focus on growing our Harman Specialty business in the Professional segment.

Fiscal year 2009 was an extremely challenging year due to worldwide economic weakness, particularly in the second half of the year. The unfavorable economic conditions, as well as the pace of the negative downturn put significant pressure on our business. The downturn in the economy adversely affected our sales and profitability. Our profitability was down in fiscal year 2009 due to lower volumes and gross profit margin, a goodwill impairment charge and restructuring charges. The decrease in gross profit margin was primarily related to several new Automotive platform launches, called "Start of Production" ("SOP"), which typically start their life cycle at their lowest margins. These negative factors were partially offset by cost-savings achieved as a result of our STEP Change program. Also, to control costs, we are maintaining strict expense controls and higher hurdle rates for capital project approvals. We believe that fiscal year 2010 will also be a challenging year as we continue to execute on our strategic plan. We feel these initiatives have positioned our Company to weather the downturn, emerge as a strong competitor and return Harman to long-term profitable growth.

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. Restructuring is further described under the caption Restructuring later in this discussion.

Recent Events

Issuance of Common Stock

On June 23, 2009, we completed a public offering of 10,667,000 shares of our common stock at the offering price of $18.75 per share, less a 4.75 percent underwriting discount. We received cash proceeds of $189.8 million, net of expenses of $0.7 million. In connection with this transaction, approximately $0.1 million was recorded as an increase in our common stock and $189.7 million was recorded as an increase in additional paid-in capital in our Consolidated Balance Sheet at June 30, 2009.

Reduction in Available Credit Under the Amended Credit Agreement

In connection with our public offering of common stock, described above and in Note 11 -Shareholder's Equity and Share-Based Compensation, in the Notes to the Consolidated Financial Statements, on June 15, 2009, we and our wholly-owned subsidiary, Harman Holding GmbH & Co. KG, entered into the First Amendment to the Second Amended and Restated Multi-Currency, Multi-Option Credit Agreement (the "First Amendment"). The purpose of the First Amendment was to reduce the Equity Prepayment Percentage, as defined in the Second Amended and Restated Multi-Currency, Multi-Option Credit Agreement dated March 31, 2009, by and among Harman International Industries, Incorporated, Harman Holding GmbH & Co. KG, JPMorgan Chase Bank, N.A., as administrative agent, and the several banks party thereto (the "Amended Credit Agreement") from 50 percent to 20 percent for a limited period of time ending June 30, 2009. The Equity Prepayment Percentage is the amount, expressed as a percentage, of net cash proceeds received from the public offering of our common stock that we had to repay under the revolving credit facility. As a result, we repaid $38 million of borrowings under the Amended Credit Agreement, which represented 20 percent of the net cash proceeds received from the public offering. In addition, our borrowing capacity under the Amended Credit Agreement was reduced by $38 million, to a net borrowing capacity of $232 million at June 30, 2009. In connection with the reduction in our borrowing capacity, we wrote off $1.2 million of debt issuance costs to interest expense in our Consolidated Statements of Operations, representing our net reduction in borrowing capacity in accordance with EITF 98-14, "Debtor's Accounting for Changes in Line-of-Credit or Revolving Debt Agreements." At June 30, 2009, the unamortized balance of debt issuance costs was $7.5 million.

At June 30, 2009, we had no available borrowing capacity under the Amended Credit Agreement and outstanding borrowings of $234.7 million, consisting of $227.3 million under the revolving credit facility and outstanding letters of credit of $7.4 million. Our total borrowings exceeded our borrowing capacity due to foreign currency translation. The Amended Credit Agreement contains a provision that allows our total outstanding borrowings to exceed the borrowing capacity by 5 percent which is equal to $243.6 million. At June 30, 2009, we had not exceeded this amount.

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 6 - Debt in our Notes to the Consolidated Financial Statements.

Critical Accounting Policies

The methods, estimates and judgments we use in applying our accounting policies, in conformity with generally accepted accounting principles in the United States ("GAAP"), have a significant impact on the results we report in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The estimates affect the carrying values of

assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Our accounting policies are more fully described in Note 1 - Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements located in Item 8 of Part II. However, we believe the following policies merit discussion due to their higher degree of judgment, estimation, or complexity.

Allowance for Doubtful Accounts

Our products are sold to customers in many different markets and geographic locations. Methodologies for estimating bad debt reserves include specific reserves for known collectability issues and percentages applied to aged receivables based on historical experience. We must make judgments and estimates regarding account receivables that may become uncollectible. These estimates affect our bad debt reserve and results of operations. We base these estimates on many factors including historical collection rates, the financial stability and size of our customers as well as the markets they serve and our analysis of aged accounts receivable. Our judgments and estimates regarding collectability of accounts receivable have an impact on our financial statements.

Inventory Valuation

Inventories are stated at the lower of cost or market. Cost is determined principally by the first-in, first-out method. The valuation of inventory requires us to make judgments and estimates regarding obsolete, damaged or excess inventory, as well as current and future demand for our products. Estimation of inventory valuation reserves requires us to analyze the aging and future demand for inventories and to forecast future product pricing trends which has an effect on our results of operations. We calculate inventory reserves using a combination of lower of cost or market analysis, analysis of historical usage data, forecast demand data and historical disposal rates. Specific product valuation analysis is applied, if practicable, to those items of inventory representing a higher portion of the value of inventory on-hand. Refer to Note 2 - Inventories, net in the Notes to the Consolidated Financial Statements for more information.

Goodwill and Other Intangible Assets

Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We estimate the fair value of each reporting unit using a discounted cash flow methodology. This requires us to use significant judgment including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, determination of our weighted average cost of capital, and relevant market data.

During the fiscal year ended June 30, 2009, we determined that goodwill related to our Automotive, Consumer and QNX reporting units was impaired and we recognized an impairment charge of $330.6 million. Goodwill was $81.9 million at June 30, 2009 compared with $436.4 million at June 30, 2008. Refer to Note 5 - Goodwill in the Notes to the Consolidated Financial Statements for more information.

Intangible assets primarily consist of patents, trademarks and distribution agreements and are amortized over periods ranging from 10 months to 17 years. We apply an impairment evaluation whenever events or changes in business circumstances indicate that the carrying value of our intangible assets may not be recoverable. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. We believe that the straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained annually by our Company.

We will continue to monitor the need for additional interim impairment tests, which could result in additional non-cash impairment charges.

Impairment of Long-Lived Assets

We review the recoverability of our long-lived assets, including buildings, equipment and other intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected future cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Our primary measure of fair value is based on undiscounted cash flows. We completed a review of the recoverability of our long-lived assets during fiscal year 2009 and determined that our long-lived assets were not impaired.

We will continue to monitor the need for additional interim impairment tests, which could result in additional non-cash impairment charges.

Pre-Production and Development Costs

We incur pre-production and development costs related to infotainment systems that we develop for automobile manufacturers pursuant to long-term supply arrangements. Portions of these costs are reimbursable under separate agreements and are recorded as unbilled costs on our balance sheet in other current assets and other assets. We believe that the terms of our supply contracts and our established relationships with these automobile manufacturers reasonably assure that we will collect the reimbursable portions of these contracts. Accounting for development costs under the percentage of completion method requires us to make estimates of costs to complete projects. We review these estimates on a quarterly basis. Unforeseen cost overruns or difficulties experienced during development could cause losses on these contracts. Such losses are recorded once a determination is made that a loss will occur.

Accrued Warranties

We warrant our products to be free from defect in materials and workmanship for periods ranging from six months to six years from the date of purchase, depending on the business segment and product. Our dealers and warranty service providers normally perform warranty service in field locations and regional service centers, using parts and replacement finished goods we supply on an exchange basis. Our dealers and warranty service providers also install updates we provide to correct defects covered by our warranties. Estimated warranty liabilities are based upon past experience with similar types of products, the technological complexity of certain products, replacement cost and other factors. If estimates of warranty provisions are no longer adequate based on our analysis of current activity, incremental provisions are recorded as warranty expense in our Consolidated Statement of Operations. We take these factors into consideration when assessing the adequacy of our warranty provision for periods still open to claim. Refer to Note 4 - Accrued Warranties in the Notes to the Consolidated Financial Statements for more information.

Income Taxes and Tax Valuation Allowances

We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. We follow specific and detailed guidance in each tax jurisdiction regarding the recoverability of any asset recorded in our Consolidated Balance Sheets and provide valuation allowances to reduce our deferred

tax assets to an amount we believe is more likely than not to be realized. We regularly review our deferred tax assets for recoverability considering historical profitability, our ability to project future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income within the defined lives of such assets, we could be required to increase our valuation allowance against all or a significant portion of our deferred tax assets. This increase in valuation allowance could result in substantial increases in our effective tax rate and could have a material adverse impact on our operating results. Conversely, if and when our operations in some jurisdictions become sufficiently profitable before our current estimates, we would be required to reduce all or a portion of our current valuation allowance and such reversal would result in an increase in our earnings in such period. Adjustments to our valuation allowance, through charges to income tax expense were $11.4 million, $0.5 million and zero for the years ending June 30, 2009, 2008 and 2007, respectively.

The calculation of our deferred tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether and the extent to which additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in additional tax benefits recognized in the period in which we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. We recognize interest and penalties related to income tax matters in income tax expense. Refer to Note 10 - Income Taxes in the Notes to the Consolidated Financial Statements for more information.

Severance and Exit Costs

We recognize liabilities for severance and exit costs based upon the nature of the liability incurred. For involuntary separation programs that are conducted according to the guidelines of our written involuntary separation plan, we record the liability when it is probable and reasonably estimable in accordance with Statement of Financial Accounting Standard ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112"). For involuntary separation programs that are conducted according to the provisions of collective bargaining agreements or statutes, we record the liability when it is probable and reasonably estimable in accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" ("SFAS 88") For one-time termination benefits, such as additional severance pay, and other exit costs, such as lease and other contract termination costs, the liability is measured and originally recognized at fair value in the period in which the liability is incurred, with subsequent changes recognized in the period of change, in accordance with SFAS No.146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). Refer to Note 12 -Restructuring in the Notes to the Consolidated Financial Statements for more information.

Share-Based Compensation

Effective July 1, 2005, we adopted SFAS No. 123R, Share-Based Payment ("SFAS 123R"), using the modified prospective method. Under SFAS 123R, share-based compensation expense is recognized based on the estimated fair value of stock options and similar equity instruments awarded to employees. Refer to Note 11 - Shareholders' Equity and Share-Based Compensation in the Notes to the Consolidated Financial Statements for additional information.

Results of Operations

Net Sales

Fiscal year 2009 net sales were $2.891 billion, a decrease of 30 percent compared to the prior year. Foreign currency translation had a negative impact of approximately $194 million when compared to the prior year. Each of our four business segments reported lower sales compared to 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, as well as Daimler's strategic decision to move to dual-sourcing on select Mercedes models. Our Professional and Consumer segments were also negatively affected by the global financial and economic crisis, where reductions in the availability of credit and lower consumer spending resulted in lower net sales.

Fiscal year 2008 net sales were $4.113 billion, an increase of 16 percent compared to the prior year. Foreign currency translation contributed approximately $275 million to the increase in net sales. Each of our four business segments had higher net sales in fiscal year 2008 compared to the prior year. The strong growth in net sales was primarily due to full production of an infotainment system for Chrysler, higher infotainment systems sales to European automakers, and higher sales of professional audio products.

A summary of our net sales by business segment is presented below:

                                            Year Ended June 30,
               ($ in thousands)      2009          2008          2007
               Net sales:
               Automotive         $ 2,004,837   $ 2,929,269   $ 2,459,646
               Consumer               356,489       515,075       480,836
               Professional           492,876       627,289       577,493
               Other                   36,820        40,870        33,169

               Total              $ 2,891,022   $ 4,112,503   $ 3,551,144

Automotive-Automotive net sales decreased 32 percent in fiscal year 2009 compared to the prior year. Foreign currency translation adversely affected net sales by $160 million compared to the prior year. Since a significant percentage of our sales are to customers in Europe, the majority of our foreign currency exposure is in the Automotive segment. The decline in fiscal year 2009 net sales when compared to the prior year was primarily due to Daimler's strategic decision to move to dual-sourcing on select Mercedes models, as well as reduced production at some of our major Automotive customers including Chrysler, Toyota/Lexus, Porsche and SsangYong. These declines were partially offset by higher volumes at BMW, new infotainment business at Audi/Volkswagen and PSA Peugeot Citroën, as well as the ramp-up of the Genesis infotainment business at Hyundai/Kia.

Automotive net sales increased 19 percent in fiscal year 2008 compared to the prior year. Foreign currency translation contributed approximately $229 million to the net sales increase compared to the prior year. Net sales were higher in North America due to a full year of producing the MyGIG infotainment system for Chrysler, our first infotainment system launch in North America. We also had higher infotainment system sales to Hyundai/Kia in support of their Genesis launch and we began producing infotainment systems for SsangYong during the year. Audio system sales to Toyota were higher than fiscal year 2007 and we had increased shipments of Mark Levinson premium audio systems to Lexus. Additionally, we began a new relationship with Subaru late in fiscal year 2008 pursuant to which we provide the automaker with acoustic systems. Excluding foreign currency translation, sales in Europe were higher due to increased shipments of infotainment systems to Audi for the new A4 and A5 models. We also had higher sales to BMW supporting several mid-level platforms. These sales increases were partially offset by lower sales to Mercedes due to reduced E-Class production and price reductions. Aftermarket sales of PNDs in fiscal year 2008 were also lower than the prior year and may continue to decline as a result of our decision to focus exclusively on the automotive aftermarket premium sector.

Consumer-Consumer net sales decreased 31 percent in fiscal year 2009 compared to the prior year. Foreign currency translation adversely affected net sales by $19 million compared to the prior year. The consumer retail environment continued to be challenging in North America and Europe, 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.

Consumer net sales increased 7 percent in fiscal year 2008 compared to the prior year. Foreign currency translation contributed approximately $33 million to the net sales increase compared to the prior year. Sales were adversely affected by general economic weakness in North America and Europe. We also experienced significant competition in North America across multiple product categories including multimedia, which contributed to lower sales of iPod docking stations. In Europe, sales excluding foreign currency translation were higher than the prior year due to the popularity of certain Harman/Kardon electronic systems and increased sales of multimedia products.

Professional-Professional net sales decreased 21 percent in fiscal year 2009 compared to the prior year. Foreign currency translation contributed approximately $15 million to the net sales decrease compared to the prior year. The decline in sales compared to the prior year was due to the effect of the weak economy on both our distributors' liquidity and market demand.

Professional net sales were 9 percent higher in fiscal year 2008 compared to the prior year. Foreign currency translation contributed approximately $13 million to the net sales increase compared to the prior year. Sales growth was supported by an increasing number of HiQnet enabled products that provide audio professionals with a centralized point to monitor and control complex audio systems. JBL Professional had strong sales of products supporting the install, portable and tour sound markets. Harman Music Group had higher sales due to new product introductions. AKG sales of headphones and microphones were higher than in the prior year. Additionally, sales of Soundcraft and Studer mixing consoles were higher than the prior year, reflecting successful new product introductions.

Other-Other sales decreased 10 percent in fiscal year 2009 compared to the prior . . .