This report is illustrated with reproductions of advertisements from our current campaign. Icons of the entertainment age (Carlos Santana and Jerry Bruckheimer) are paired with less famous but very appealing young people — all enraptured as they listen to music.

Message from the Chairman

Our annual report title may need clarification. Last year’s report cautioned that the “New New Thing” culture threatened to ignore fundamentals of good business while in thrall to the new new technology's luster and enormous promise. We also cautioned of the “tyranny of the technology” The fact that engineers know how to design something is insufficient reason to simply plunge ahead. An anthropologist’s viewpoint is critical. Will people embrace the idea and the product? Does the product respond to how the customer lives?**

Events of the past year confirm the first caution and raise the second to a state of high alert. The bursting of the dot-com bubble is not without precedent. Previous examples of the phenomenon of “irrational exuberance” abound, from the Dutch tulip madness of the seventeenth century to the frenzy of Japanese real estate buying in the United States in the late 1980’s. In each case, otherwise prudent people suspended disciplined judgment on the assumption that the experience and wisdom of the past were no longer relevant.

Convergence had become the rallying cry of the technical community. “Merge the computer with multimedia and home entertainment,” the masters of the technical universe argued, “and they will come and they will buy.” As far back as 1980, Magnavox was certain that Odyssey, a product combining a game system with a keyboard, would win. After all, it offered game playing along with computer functionality. It lost. The Mazda talking car turned people off. Silicon Graphics’ disastrous foray into interactive TV was chronicled in tortured detail in Michael Lewis’ book, The New New Thing. The list is lengthy and instructive. Assume at your risk that consumers want it simply because you are able to do it. As Paul Liao, Chief Technology Officer at Matsushita, told the Wall Street Journal, “Every engineer would love to design a product that does everything. It is an engineer’s dream but a consumer’s nightmare.”

It seemed to us that the magic of the new digital technology required, more than ever, a devotion to the fundamentals in business management: quality, service, prudent investment, appropriate advertising and the determination that what we make must match real consumer needs. In the last year we have taken a very hard look at all of our businesses and made tough decisions about those that did not meet our standards.

And we operate with the conviction that if we stick to the fundamentals, marry them to the new technology and confirm that people want the great systems we make, we will prosper. We are proceeding that way in each of our three interrelated businesses. As the “New New Thing” meltdown shook the markets and converted dot-com millionaires to jobseekers, our people stuck to their knitting. We have emerged, we think, stronger than ever and at the dawn of a new era.

In our professional business (the Pros) and in our consumer business (the Cons), we have built and we continue to build a portfolio of great brand names, including JBL, Harman/Kardon, Infinity, Lexicon and Mark Levinson. And we associate those brands with the highly sophisticated multifunctional systems we produce for the world’s leading automakers. Because the automakers have been known as the OEMs (the original equipment makers), we now identify our systems as POEMS (products for the original equipment makers). Thus, the Pros the Cons and the POEMS of our business.

Our professional business produces JBL products and systems to serve the needs of many clients: motion picture and legitimate theaters, athletic stadiums, auditoriums, performing arts centers, museums, hospitals and schools. In brief, venues that require sound reinforcement and distribution to support and facilitate performance. Harman Professional audio systems serve Washington’s Kennedy Center, the home of the arts in the nation’s capital. They serve the American Airlines Center in Dallas, home of the NBA Mavericks and NHL Stars, the new Ford Field in Detroit, home of the Lions NFL Football team, and the USTA Center, site of the U.S. Open tennis tournament in New York.

Harman/JBL provides surround sound in thousands of motion picture theaters. That activity suffered from the sharp decline of the cinema industry last year as theater chain owners seriously overbuilt. It cost us sales and profits, but we now see that part of the business reawakening. And we see our position everywhere else in the professional-equipment world as stronger and growing.

Harman Kardon, Infinity, JBL and Mark Levinson high-fidelity products are internationally honored for their stunning reproduction of video, audio and recorded and broadcast music. They are legendary among those who demand the very best performance at home. Because our brands are associated with superior performance, the Harman branded multifunctional systems we design and build for the automakers (our POEMS) are accepted with confidence. Indeed, more and more consumers acknowledge that the Harman system in the car is a major influence in their buying decisions.

The POEM business remains the centrality of this company and it had an excellent year despite difficulties at Chrysler. There, we are confident, the worst is history. We expect to see a renascent Chrysler over the next several years. We will benefit from that new vigor even as our many other automotive customers continue to expand the use of our systems in more and more models and at higher rates of penetration.

To build and support our product leadership, we have developed digital engineering centers in Villingen, Germany, and Farmington Hills, Michigan. Hundreds of extremely talented engineers have been creating the complex systems that will appear in new car models beginning this year. That work has been quietly but earnestly in process for four and five years. It is vividly illustrated by the worldwide success of our MOST optical bus, a digital platform that permits the seamless networking of many functions within the car. Those functions include music reproduction, video, multimedia, telephone, telematics, navigation and wireless Internet access.

The first of our integrated infotainment systems will appear in the United States in January 2002 when BMW introduces its all-new 7 series. Other major automakers, including Porsche, Audi, Mercedes and Renault, will follow in the next two years.

In association with the carmakers, we have carefully explored the anthropology factor. Do people want these systems? Will they pay the extra price? After lengthy study we are convinced that they will. Early hard evidence is also available because our music and navigation systems have prospered in Europe. That success encourages optimism and promise for the new systems in the United States.

These systems will employ the new software and hardware that our R&D has developed. The hardware includes special new AKG microphones to facilitate hands-free operation and multiplexed Becker audio and video tuners to assure uninterrupted reception anywhere. The world’s most advanced media displays add to the total performance.

In late July, the Company received major new awards from Mercedes-Benz. Rolling forward from the fiscal year, which begins July 1, 2002, Harman/Becker will supply all Mercedes-Benz’ requirements for navigation systems. The new awards are for integrated infotainment systems with display for all E Class, and DVD navigation systems for all S Class vehicles. The awards are significant in many ways. They represent approximately $150 million in incremental sales for fiscal 2003, $300 million for fiscal 2004 and more than $400 million in fiscal 2005. And they confirm our technological leadership in this critical area: We are now the primary supplier of such sophisticated systems to Mercedes-Benz, BMW, Audi, Porsche and Renault.

We also reached agreement with a number of major electronic manufacturers to license our Traffic Pro® hardware and software beginning in 2003. This is an important addition to our growing activity in intellectual property trade.

We have come through a year that has been both challenging and promising. The market for all consumer products everywhere in the world has been soft and continues soft even as I write this memorandum. Still, we bring wonderful new products to that market and we refuse to yield to the panic marketing engaged in by some competitors. We need our consumer business. It fuels the rapidly growing and very exciting POEM business. We need it and expect that, over time, consumer markets will regain their vigor and that we will prosper in them.

We have eschewed dot-com madness, concentrated on our established and growing skills, and built factories that translate those skills into real products that real people want to own.

Our factories everywhere in Europe, the United States and Asia reveal the same viewpoint and the same character. Each is fully automated and substantially interchangeable. Standardization in manufacturing is crucial in the new digital world.

Our future is firmly grounded in reality. We know what our customers want and we know what we do well. Now we must execute. If we do, as we have prepared ourselves to, we will launch a vital new Harman era this year.

Sidney Harman
Executive Chairman

** Last year's report played off the theme of Micahel Lewis' best seller, "The New New Thing." Lewis now has a book, "Next: The Future Just Happened." In it he explores the ways in which the Internet is changing the world. He applauds Nokia, one of our excellent customers, and notes that Nokia designs its many successful products through consolidation with anthropologists. It is a progressive marketing approach that we applaud. And it is consistent with our determination to make products that real people really want.