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, 2009 ("2009 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, 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," "our 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. This is followed by a discussion of our critical accounting policies, and then by a discussion of our results of operations for the three months ended September 30, 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 four business segments: Automotive, Consumer, Professional and Other. We then discuss our financial condition at September 30, 2009 with a comparison to June 30, 2009. 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.

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. Out fourth segment, Other, includes our QNX business, compensation, benefits and occupancy costs for 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. We previously 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. In October 2009, we sold our Automotive facility in 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.

Fiscal year 2009 was an extremely challenging year due to worldwide economic weakness which put significant pressure on our business and adversely affected our sales and profitability. Starting in the first quarter of fiscal year 2010, we believe that key markets are beginning to recover. Also, we continue to execute on our STEP Change cost savings program ahead of plan. We believe the cost savings and productivity initiatives instituted in the prior year have positioned our company to emerge from this downturn as a stronger and more profitable competitor.

Critical Accounting Policies

For the three months ended September 30, 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 2009 Form 10-K, except as discussed below:

Codification: In June 2009, the Financial Accounting Standards Board ("FASB") issued ASC 105, "Generally Accepted Accounting Principles" ("ASC 105"). The issuance of ASC 105 confirmed that the FASB ASC (the "Codification") is the single official source of authoritative generally accepted accounting principles ("GAAP"), other than guidance issued by the Securities and Exchange Commission ("SEC"), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and related literature for nongovernmental entities. The Codification does not change GAAP. Instead, it introduces a new structure that is organized in an easily accessible, user-friendly online research system. The Codification, which changes the referencing of financial standards, is effective for interim and annual periods ending on or after September 15, 2009. Thereafter, only one level of authoritative GAAP exists. All other literature is considered nonauthoritative. We adopted the Codification on July 1, 2009 and updated all disclosures to reference the Codification in this report. The adoption of the Codification did not have a significant impact on the reporting of our financial position, results of operations or cash flows.

Convertible Debt: On July 1, 2009, we adopted the new accounting guidance issued by the FASB within ASC 470-20, "Debt with Conversion and Other Options." regarding accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). The new guidance requires the issuer of convertible debt instruments with cash settlement features to account separately for the liability and equity components of the instrument. Under the new guidance, the debt should be recognized at the present value of its cash flows discounted using the issuer's nonconvertible debt borrowing rate at the time of issuance and the equity component should be recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. The reduced carrying value on the convertible debt results in a debt discount that should be accreted back to the convertible debt's principal amount through the recognition of noncash interest expense over the expected life of the debt, which results in recognizing interest expense on these borrowings at effective rates approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued.

We had $400 million of 1.25 percent convertible senior notes (the "Convertible Notes") outstanding at September 30, 2009 and June 30, 2009 which were issued on October 23, 2007 (the "Issuance Date") that are within the scope of this new guidance. The Convertible Notes were issued at par and we pay interest at a rate of 1.25 percent semi-annually. The initial conversion rate on the Convertible Notes is 9.6154 shares of our common stock per $1,000 principal amount of the Convertible Notes (which is equal to an initial conversion price of approximately $104 per share). The conversion rate is subject to adjustment in specified circumstances described in the indenture governing the Convertible Notes (the "Indenture").

In accordance with this new guidance, we measured the fair value of the debt components of the Convertible Notes at the Issuance Date using an effective interest rate of 5.6 percent. As a result, we attributed $75.7 million of the proceeds received to the conversion feature of the Convertible Notes at the Issuance Date, which is netted against the face value of the Convertible Notes as a debt discount. This amount represents the excess proceeds received over the fair value of the Convertible Notes at the Issuance Date and is included in additional paid-in capital in our Condensed Consolidated Balance Sheets for the periods presented. The discount is being accreted back to the principal amount of the Convertible Notes through the recognition of noncash interest expense over the expected life of the Convertible Notes. In addition, we recorded $48.3 million within additional paid-in capital in our Condensed Consolidated Balance Sheets representing the equity component of the Convertible Notes, which is net of tax. The implementation of this new guidance has resulted in a decrease to net income and earnings per share for all periods presented; however, there is no effect on our cash interest payments.

Interest expense for the three months ended September 30, 2009 and 2008 includes $1.3 million for both periods of contractual cash interest expense and an additional $3.7 million and $3.5 million of noncash interest expense, respectively, related to the amortization of the discount. Refer to Note 2 - New Accounting Standards in the Notes to the Condensed Consolidated Financial Statements for further information.

Noncontrolling Interests: On July 1, 2009, we adopted the updated provisions issued by the FASB within ASC 810-10-65, "Consolidation," relating to the presentation requirements for noncontrolling interests (formerly minority interests). The new guidance requires reporting entities to present noncontrolling (minority) interests as a component of equity (as opposed to as a liability) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. In addition, the new provisions also require companies to report a consolidated net income (loss) measure that includes the amount attributable to such noncontrolling interests. The adoption of the new provisions applies to noncontrolling interests prospectively from that date. However, the presentation and disclosure requirements were applied retrospectively for all periods presented. As a result of this adoption, we reclassified noncontrolling interests in the amount of $0.8 million from liabilities to equity in the June 30, 2009 Condensed Consolidated Balance Sheet and we included less than $0.1 million of income from our noncontrolling interest within the caption Net (Loss) Income Attributable to Harman International Industries, Incorporated in our Condensed Consolidated Statement of Operations for the three months ended September 30, 2008.

Earnings Per Share: On July 1, 2009, we adopted the updated provisions for earnings per share, issued by the FASB within ASC 260-10-45-61A. The new guidance provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the new provisions. The adoption of the new provisions did not have a material impact on our financial condition or results of operations.

Results of Operations

Net Sales

Net sales for the three months ended September 30, 2009 were $757.4 million compared to $869.2 million in the same period in the prior year, a decrease of 13 percent (or 10 percent when adjusted for foreign currency). Foreign currency translation adversely impacted net sales by $25.6 million compared to the same period in the prior year. All four of our reporting segments reported lower sales in the three months ended September 30, 2009 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 global financial and economic crisis, where reductions in the availability of credit and lower consumer spending resulted in lower net sales.

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

                                     Three Months Ended September 30,
              ($ in thousands)       2009         %          2008       %
              Net sales:
              Automotive         $    542,962      72 %    $ 616,924    71 %
              Consumer                 83,806      11 %      101,509    12 %
              Professional            121,491      16 %      141,268    16 %
              Other                     9,109       1 %        9,489     1 %

Automotive - Automotive net sales for the three months ended September 30, 2009 decreased $74.0 million, or 12.0 percent, compared to the same period in the prior year. Foreign currency translation adversely affected net sales by $22.1 million compared to the same period in the prior year. Since a significant percentage of our sales are to customers in Europe, the majority of our foreign currency exposure is in our Automotive segment. The decline in net sales was primarily due to continued weakness in the automotive market, as automakers cut production in response to weak economic conditions, resulting in reduced volumes at some of our major automotive customers including Audi/Volkswagen, Chrysler and Daimler AG, as well as reduced volumes at Hyundai resulting from the prior year ramp-up of infotainment business on the Genesis coupe. These reductions were partially offset by increased infotainment business at BMW and the ramp up of new infotainment business at PSA Peugeot Citroën and other automotive manufacturers.

Consumer - Consumer net sales for the three months ended September 30, 2009 decreased $17.7 million, or 17.4 percent, compared to the same period in the prior year. Foreign currency translation adversely affected net sales by $2.0 million compared to the same period in 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.

Professional - Professional net sales for the three months ended September 30, 2009 decreased $19.8 million, or 14.0 percent, compared to the same period in the prior year. Foreign currency translation adversely affected net sales by $1.4 million compared to the same period in 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.

Other - Other sales decreased 4.0 percent in the three months ended September 30, 2009 compared to the same period in the prior year due to a decline in sales in our QNX business which offers embedded operating systems software and related development tools and consulting services used in a variety of products and industries.

Gross Profit

Gross profit as a percentage of net sales decreased 1.5 percentage points to 26.3 percent in the three months ended September 30, 2009 compared to 27.8 percent in the same period in the prior year. The decline in gross profit margin was primarily due to decreased factory utilization associated with lower sales and unfavorable product mix, partially offset by higher restructuring expenses in the same period in the prior year, as well as reduced warranty expense and lower manufacturing costs resulting from our STEP Change cost reduction program ("STEP Change program").

A summary of our gross profit by business segment is presented below:

                                      Three Months Ended September 30,
                                        Percentage                    Percentage
        ($ in thousands)     2009      of net sales        2008      of net sales
        Gross Profit:
        Automotive         $ 125,895           23.2 %    $ 153,587           24.9 %
        Consumer              21,887           26.1 %       26,281           25.9 %
        Professional          46,355           38.2 %       55,529           39.3 %
        Other                  5,405           59.3 %        6,533           68.8 %

        Total              $ 199,542           26.3 %    $ 241,930           27.8 %

Automotive - Automotive gross profit as a percentage of net sales declined 1.7 percentage points to 23.2 percent in the three months ended September 30, 2009 compared to the same period in the prior year. The decline in gross margin was primarily due to unfavorable product mix, partially offset by reduced warranty costs and lower manufacturing costs resulting from our STEP Change program.

Consumer - Consumer gross profit as a percentage of net sales increased 0.2 percentage points to 26.1 percent in the three months ended September 30, 2009 compared to the same period in the prior year. The slight increase in gross margin was primarily due to our focus on a more favorable product mix.

Professional - Professional gross profit as a percentage of net sales decreased 1.1 percent for the quarter ended September 30, 2009 compared to the same period in the prior year. The decrease in gross margin was primarily due to reductions in volumes.

Other - Other gross profit as a percentage of net sales declined 9.5 percentage points to 59.3 percent in the three months ended September 30, 2009 compared to the same period in the prior year primarily due to vacant facility costs retained at corporate.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses were $201.0 million in the three months ended September 30, 2009 compared to $209.5 million in the same period in the prior year, a decrease of $8.5 million. Despite the decline in SG&A expenses, SG&A as a percentage of net sales increased 2.4 percentage points in the three months ended September 30, 2009 compared with the same period in the prior year. Foreign currency translation contributed $5.8 million to the decrease in SG&A expenses when compared to the same period in the prior year.

Other factors contributing to the decline in SG&A expenses included a reduction in research and development expenses ("R&D") of $6.2 million, lower restructuring charges, as well as an overall reduction in selling, advertising, promotion and other general and administrative expenses resulting from prior restructuring actions, partially offset by an $11.7 million settlement of a claim associated with an automotive supply arrangement, an increase in share-based compensation expense of $8.6 million and a $3.0 million goodwill impairment charge.

Below is a summary of our SG&A expenses by business segment:

                                     Three Months Ended September 30,
                                         Percentage                Percentage
                                           of Net                    of Net
          ($ in thousands)     2009        Sales          2008       Sales
          SG&A Expenses:
          Automotive         $ 130,593         24.1 %    133,122         21.6 %
          Consumer              21,132         25.2 %     27,662         27.3 %
          Professional          29,536         24.3 %     34,356         24.3 %
          Other                 19,780           -        14,333           -

          Total              $ 201,041         26.5 %    209,473         24.1 %

Automotive - Automotive SG&A expenses decreased $2.5 million to $130.6 million in the three months ended September 30, 2009 compared to the same period in the prior year. As a percentage of net sales, SG&A expenses increased 2.5 percentage points compared to the same period in the prior year, primarily due to the decline in net sales and the impact of an $11.7 million settlement of a claim associated with an automotive supply arrangement. Foreign currency translation contributed $4.9 million to the decrease in SG&A expenses when compared to the same period in the prior year. R&D expenses decreased $3.5 million to $66.1 million or 12.2 percent of net sales, compared to $69.6 million or 11.3 percent of net sales in the same period in the prior year, primarily due to favorable foreign currency and lower gross spending, partially offset by higher amortization expense. Other factors contributing to the decline in SG&A expenses included lower selling, advertising, promotion and other general and administrative expenses resulting from prior restructuring actions.

Consumer - Consumer SG&A expenses decreased $6.5 million to $21.1 million in the three months ended September 30, 2009 compared to the same period in the prior year. As a percentage of net sales, SG&A expenses decreased 2.1 percentage points compared to the same period in the prior year, primarily due to lower trade show expenses and productivity improvements resulting from our STEP Change program. R&D expenses decreased $0.9 million to $3.7 million or 4.4 percent of net sales, compared to $4.6 million or 4.5 percent of net sales in the same period in the prior year. Other factors contributing to the decline in SG&A included lower compensation and benefit expenses resulting from restructuring actions taken in prior periods.

Professional - Professional SG&A expenses decreased $4.8 million to $29.5 million in the three months ended September 30, 2009 compared to the same period in the prior year. As a percentage of net sales, SG&A expenses were flat compared to the same period in the prior year. Foreign currency translation contributed $0.7 million to the decrease from the same period in the prior year. R&D expenses decreased $1.9 million to $8.7 million or 7.1 percent of net sales, compared to $10.6 million or 7.5 percent of net sales in the same period in the prior year, primarily due to savings resulting from our STEP Change program. Other factors contributing to the decrease in SG&A were lower selling expenses due to tighter cost controls.

Other - Other SG&A expenses include SG&A expenses related to our QNX business, as well as compensation, benefit and occupancy costs for corporate employees. Other SG&A expenses increased $5.4 million to $19.8 million in the three months ended September 30, 2009 primarily due to an increase in share-based compensation expense of $8.6 million. The increase was due to the current period expense of $5.2 million in the three months ended September 30, 2009 compared with a benefit of $3.4 million resulting from stock option forfeitures associated with the retirement of senior executives, recognized in the same period in the prior year.

Restructuring - We announced a restructuring program in June 2006 designed to increase efficiency in our manufacturing, engineering and administrative organizations. The implementation of this program has continued through fiscal year 2010, as we expanded our restructuring actions to improve global footprint, cost structure, technology portfolio, human resources, and internal processes.

In fiscal year 2009, programs initiated included the closure of the Woodbury, New York facility and numerous headcount reductions across our business units to reduce excess capacity due to decreased sales. The most significant of these programs were in Germany, Austria, the United Kingdom and various locations in the United States. In fiscal year 2010, we announced the relocation of certain manufacturing activities from the United Kingdom to Hungary.

For the three months ended September 30, 2009, we recorded $3.5 million for our restructuring program, primarily within SG&A, of which $3.2 million was related to employee termination benefits. Cash paid for these initiatives was $20.8 million. In addition, we have recorded $0.5 million of accelerated depreciation primarily in cost of sales.

For the three months ended September 30, 2008, we recorded $4.9 million for our restructuring program, primarily within SG&A, of which $2.2 million related to employee termination benefits. Cash paid for these initiatives was $7.0 million. In addition, we recorded $5.6 million, primarily in cost of sales, relating to accelerated depreciation and the classification of the Martinsville property from held and used to held for sale.

Below is a rollforward of our restructuring accrual for the three months ended September 30, 2009 and 2008:

                                                Three Months Ended
                                                   September 30,
                                                2009           2008
                Beginning accrued liability   $  77,454      $ 35,601
                Expense                           3,468         4,869
                Utilization(1)                  (18,826 )      (7,847 )

                Ending accrued liability      $  62,096      $ 32,623

(1) Includes cash payments and the effects of foreign currency translation.

Restructuring expenses by reporting segment are as follows:

                                               Three Months Ended
                                                  September 30,
                                               2009           2008
                  Automotive                 $   3,260      $  3,618
                  Consumer                         (17 )         415
                  Professional                      39            19
                  Other                            186           817

                  Total expense                  3,468         4,869
                  Accelerated depreciation         481         5,611

                  Total                      $   3,949      $ 10,480

Refer to Note 14 - Restructuring in the Notes to the Condensed Consolidated Financial Statements for additional information.

Goodwill

During the three months ended September 30, 2009, we recognized $3.0 million of goodwill associated with the prior year acquisition of Innovative Systems GmbH. . . .