**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**x****        ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIODENDED MARCH 31, 2006**

**o****           ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**COMMISSIONFILE NUMBER 001-11911**

**STEINWAY MUSICAL INSTRUMENTS, INC.**

** **(Exact name of registrant asspecified in its charter)

| **DELAWARE**                             | ** ** | **35-1910745**       |
|------------------------------------------|------------|----------------------|
| (State or Other Jurisdiction of          |       | (I.R.S. Employer     |
| Incorporation or Organization)           |       | Identification  No.) |
|                                     |       |                 |
| **800 South Street, Suite 305**     | ** ** | ** **           |
| **Waltham, Massachusetts**               | ** ** | **02453**            |
| (Address of Principal Executive Offices) |       | (Zip Code)           |

 

Registrant’s telephonenumber including area code:     **(781) 894-9770**

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements during the past 90 days.

Yes x    No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

Large acceleratedfiler o                                    Acceleratedfiler x                                             Non-acceleratedfiler o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes o    No x
| Number of shares of Common  Stock issued and outstanding as of May 5, 2006: |   | Class A |   | 477,952   |   |
|----------------------------------------------------------------------------------|--------|--------------|--------|-----------|--------|
|                                                                             |   | Ordinary     |   | 7,852,731 |   |
|                                                                             |   | Total        |   | 8,330,683 |   |

 

 

----

**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIES****FORM 10-QINDEX**
| **PART I.**  | ** ** | **UNAUDITED FINANCIAL INFORMATION**                                                                     |       |       |
|-------------------|------------|---------------------------------------------------------------------------------------------------------|------------|------------|
| ** **        | ** ** | ** **                                                                                              |       |       |
| **Item  1.**      | ** ** | **Consolidated  and Condensed Consolidated Financial Statements:**                                      |       |       |
| ** **        | ** ** | ** **                                                                                              |       |       |
|              |       | Consolidated  Statements of Operations   Three months ended March 31, 2006 and March 31, 2005 |       |       |
|              |       |                                                                                                    |       |       |
|              |       | Condensed  Consolidated Balance Sheets  March 31, 2006 and December 31, 2005                  |       |       |
|              |       |                                                                                                    |       |       |
|              |       | Consolidated  Statements of Cash Flows   Three months ended March 31, 2006 and March 31, 2005 |       |       |
|              |       |                                                                                                    |       |       |
|              |       | Consolidated Statement of Stockholders’ Equity   Three months ended March 31, 2006            |       |       |
|              |       |                                                                                                    |       |       |
|              |       | Notes to Consolidated and Condensed Consolidated  Financial Statements                             |       |       |
|              |       |                                                                                                    |       |       |
| **Item 2.**       | ** ** | **Management’s Discussion and Analysis of Financial  Condition and Results of Operations**         |       |       |
| ** **        |       |                                                                                                    |       |       |
| **Item 3.**       |       | **Quantitative and Qualitative Disclosures about Market  Risk**                                         |       |       |
| ** **        |       | ** **                                                                                              |       |       |
| **Item  4.**      |       | **Controls  and Procedures**                                                                            | ** ** | ** ** |
|              |       | ** **                                                                                              | ** ** | ** ** |
| **PART II.** | ** ** | **OTHER  INFORMATION**                                                                                  |       |       |
| ** **        | ** ** | ** **                                                                                              |       |       |
| **Item 6.**       | ** ** | **Exhibits **                                                                                      |       |       |
| ** **        | ** ** | ** **                                                                                              |       |       |
| ** **        |       | **Signatures**                                                                                          |       |       |

 

2

----

**ITEM 1 CONSOLIDATED AND CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**STEINWAY MUSICALINSTRUMENTS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSUnaudited(In Thousands Except Share and Per Share Amounts)**
| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005** | ** ** |
| Net sales                          |       | $                                | 95,194     |   | $ | 91,342 |   |
| Cost of sales                      |       | 69,202                           |       | 65,645 |   |
|                               |       |                             |       |   |   |
| Gross profit                       |       | 25,992                           |       | 25,697 |   |
|                               |       |                             |       |   |   |
| Operating expenses:                |       |                             |       |   |   |
| Sales and marketing                |       | 11,727                           |       | 11,272 |   |
| General and administrative         |       | 8,378                            |       | 6,975 |   |
| Amortization                       |       | 229                              |       | 282 |   |
| Other operating expenses           |       | 147                              |       | 110 |   |
| Total operating  expenses          |       | 20,481                           |       | 18,639 |   |
|                               |       |                             |       |   |   |
| Income from  operations            |       | 5,511                            |       | 7,058 |   |
|                               |       |                             |       |   |   |
| Other income,  net                 |       | (751                             | )          | (439 | ) |
| Loss on  extinguishment of debt    |       | 6,611                            |       | — |   |
| Interest income                    |       | (1,727                           | )          | (970 | ) |
| Interest expense                   |       | 4,475                            |       | 4,139 |   |
| Total non-operating  expenses      |       | 8,608                            |       | 2,730 |   |
|                               |       |                             |       |   |   |
| (Loss) income  before income taxes |       | (3,097                           | )          | 4,328 |   |
|                               |       |                             |       |   |   |
| Income tax (benefit)  provision    |       | (1,255                           | )          | 1,730 |   |
|                               |       |                             |       |   |   |
| Net (loss) income                  |       | $                                | (1,842     | ) | $ | 2,598 |   |
|                               |       |                             |       |   |   |
| (Loss) earnings per  share:        |       |                             |       |   |   |
| Basic                              |       | $                                | (0.23      | ) | $ | 0.32 |   |
| Diluted                            |       | $                                | (0.23      | ) | $ | 0.32 |   |
|                               |       |                             |       |   |   |
| Weighted average  shares:          |       |                             |       |   |   |
| Basic                              |       | 8,152,369                        |       | 8,030,879 |   |
| Diluted                            |       | 8,152,369                        |       | 8,241,196 |   |

 

Seenotes to consolidated and condensed consolidated financial statements.

3

----

**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETSUnaudited(In Thousands)**
| ** **                                                                                                             | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Assets                                                                                                                 |       |                         |       |                            |       |
| Current assets:                                                                                                        |       |                         |       |                            |       |
| Cash                                                                                                                   |       | $                            | 71,926     |                            | $          | 34,952 |   |
| Accounts, notes and other receivables, net of allowances  of $12,814 and $12,323 in 2006 and 2005, respectively        |       | 86,966                       |       | 81,880                          |       |
| Inventories                                                                                                            |       | 159,123                      |       | 159,310                         |       |
| Prepaid expenses and other current assets                                                                              |       | 18,206                       |       | 11,653                          |       |
| Deferred tax assets                                                                                                    |       | 8,084                        |       | 7,936                           |       |
| Total current  assets                                                                                                  |       | 344,305                      |       | 295,731                         |       |
|                                                                                                                   |       |                         |       |                            |       |
| Property, plant  and equipment, net of accumulated depreciation of $78,165 and $75,734 in 2006  and 2005, respectively |       | 96,574                       |       | 96,664                          |       |
| Trademarks                                                                                                             |       | 13,324                       |       | 13,233                          |       |
| Goodwill                                                                                                               |       | 30,376                       |       | 30,088                          |       |
| Other  intangibles, net                                                                                                |       | 5,629                        |       | 4,128                           |       |
| Other assets                                                                                                           |       | 15,950                       |       | 15,811                          |       |
| Total assets                                                                                                           |       | $                            | 506,158    |                            | $          | 455,655 |   |
|                                                                                                                   |       |                         |       |                            |       |
| Liabilities and  stockholders’ equity                                                                             |       |                         |       |                            |       |
| Current liabilities:                                                                                                   |       |                         |       |                            |       |
| Current portion of long-term debt                                                                                      |       | $                            | 58,170     |                            | $          | 12,977 |   |
| Accounts payable                                                                                                       |       | 15,836                       |       | 13,805                          |       |
| Other current liabilities                                                                                              |       | 46,788                       |       | 45,099                          |       |
| Total current  liabilities                                                                                             |       | 120,794                      |       | 71,881                          |       |
|                                                                                                                   |       |                         |       |                            |       |
| Long-term debt                                                                                                         |       | 187,717                      |       | 191,715                         |       |
| Deferred tax  liabilities                                                                                              |       | 15,444                       |       | 15,326                          |       |
| Other  non-current liabilities                                                                                         |       | 28,904                       |       | 27,903                          |       |
| Total  liabilities                                                                                                     |       | 352,859                      |       | 306,825                         |       |
|                                                                                                                   |       |                         |       |                            |       |
| Commitments and  contingent liabilities                                                                                |       |                         |       |                            |       |
|                                                                                                                   |       |                         |       |                            |       |
| Stockholders’ equity:                                                                                             |       |                         |       |                            |       |
| Common stock                                                                                                           |       | 10                           |       | 10                              |       |
| Additional paid-in capital                                                                                             |       | 88,332                       |       | 83,062                          |       |
| Retained earnings                                                                                                      |       | 124,537                      |       | 126,379                         |       |
| Accumulated other comprehensive loss                                                                                   |       | (12,144                      | )          | (13,185                         | )          |
| Treasury stock, at cost                                                                                                |       | (47,436                      | )          | (47,436                         | )          |
| Total  stockholders’ equity                                                                                       |       | 153,299                      |       | 148,830                         |       |
| Total  liabilities and stockholders’ equity                                                                       |       | $                            | 506,158    |                            | $          | 455,655 |   |

 

See notes toconsolidated and condensed consolidated financial statements.

4

----

**STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSUnaudited(In Thousands)**
| ** **                                                 | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005** | ** ** |
| Cash flows from  operating activities:                     |       |                             |       |   |   |
| Net (loss) income                                          |       | $                                | (1,842     | ) | $ | 2,598 |   |
| Adjustments to  reconcile net (loss) income to cash        |       |                             |       |   |   |
| flows from  operating activities:                          |       |                             |       |   |   |
| Depreciation and amortization                              |       | 2,667                            |       | 2,839 |   |
| Amortization of bond discount                              |       | 16                               |       | — |   |
| Amortization of bond premium                               |       | (42                              | )          | (63 | ) |
| Loss on extinguishment of debt                             |       | 6,611                            |       | — |   |
| Stock-based compensation expense                           |       | 271                              |       | — |   |
| Excess tax benefits from stock-based awards                |       | (411                             | )          | — |   |
| Tax benefit from stock option exercises                    |       | 891                              |       | 32 |   |
| Deferred tax benefit                                       |       | (111                             | )          | (159 | ) |
| Other                                                      |       | 58                               |       | 131 |   |
| Changes in  operating assets and liabilities:              |       |                             |       |   |   |
| Accounts, notes and other receivables                      |       | (4,785                           | )          | (882 | ) |
| Inventories                                                |       | 488                              |       | (7,179 | ) |
| Prepaid expenses and other assets                          |       | (3,395                           | )          | 1,548 |   |
| Accounts payable                                           |       | 1,591                            |       | (394 | ) |
| Other liabilities                                          |       | 1,855                            |       | 1,151 |   |
| Cash flows from  operating activities                      |       | 3,862                            |       | (378 | ) |
|                                                       |       |                             |       |   |   |
| Cash flows from  investing activities:                     |       |                             |       |   |   |
| Capital expenditures                                       |       | (1,144                           | )          | (1,212 | ) |
| Proceeds from disposals of property, plant, and  equipment |       | —                           |       | 304 |   |
| Cash flows from  investing activities                      |       | (1,144                           | )          | (908 | ) |
|                                                       |       |                             |       |   |   |
| Cash flows from  financing activities:                     |       |                             |       |   |   |
| Borrowings under lines of credit                           |       | 7,413                            |       | 1,349 |   |
| Repayments under lines of credit                           |       | (7,155                           | )          | (658 | ) |
| Debt issuance costs                                        |       | (4,150                           | )          | — |   |
| Proceeds from issuance of debt                             |       | 173,676                          |       | — |   |
| Repayments of long-term debt                               |       | (131,453                         | )          | (1,595 | ) |
| Premium paid on extinguishment of debt                     |       | (5,482                           | )          | — |   |
| Proceeds from issuance of common stock                     |       | 699                              |       | 252 |   |
| Excess tax benefits from stock-based awards                |       | 411                              |       | — |   |
| Cash flows from  financing activities                      |       | 33,959                           |       | (652 | ) |
|                                                       |       |                             |       |   |   |
| Effect of  foreign exchange rate changes on cash           |       | 297                              |       | (713 | ) |
|                                                       |       |                             |       |   |   |
| Increase  (decrease) in cash                               |       | 36,974                           |       | (2,651 | ) |
| Cash, beginning  of period                                 |       | 34,952                           |       | 27,372 |   |
| Cash, end of  period                                       |       | $                                | 71,926     |   | $ | 24,721 |   |
|                                                       |       |                             |       |   |   |
| Supplemental Cash Flow  Information                        |       |                             |       |   |   |
| Interest paid                                              |       | $                                | 4,210      |   | $ | 815 |   |
| Taxes paid                                                 |       | $                                | 1,582      |   | $ | 3,685 |   |

 

See notes toconsolidated and condensed consolidated financial statements.

5

----

**STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYUnaudited(In Thousands Except Share Data)**
| ** **                                              | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
| Balance,  January 1, 2006                          |       | $                 | 10         |                             | $          | 83,062                 |       | $                                           | 126,379    |                | $          | (13,185                               | )          | $ | (47,436 | ) | $ | 148,830 |   |
| Comprehensive (loss) income:                            |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Net loss                                                |       |              |       |                             |       | (1,842                 | )          |                                        |       |                |       | (1,842                                | )          |
| Foreign currency  translation adjustment                |       |              |       |                             |       |                   |       | 1,027                                       |       |                |       | 1,027                                 |       |
| Holding gain on  marketable securities, net             |       |              |       |                             |       |                   |       | 14                                          |       |                |       | 14                                    |       |
| Total  comprehensive loss                               |       |              |       |                             |       |                   |       |                                        |       |                |       | (801                                  | )          |
| Exercise of options  for 214,073 shares of common stock |       | —            |       | 4,108                            |       |                   |       |                                        |       |                |       | 4,108                                 |       |
| Stock-based  compensation                               |       |              |       | 271                              |       |                   |       |                                        |       |                |       | 271                                   |       |
| Tax benefit of  options exercised                       |       |              |       | 891                              |       |                   |       |                                        |       |                |       | 891                                   |       |
| Balance,  March 31, 2006                           |       | $                 | 10         |                             | $          | 88,332                 |       | $                                           | 124,537    |                | $          | (12,144                               | )          | $ | (47,436 | ) | $ | 153,299 |   |

 

See notes to consolidatedand condensed consolidated financial statements.

6

----

**STEINWAY MUSICALINSTRUMENTS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED AND CONDENSED CONSOLIDATEDFINANCIAL STATEMENTSMARCH 31, 2006Unaudited(Tabular Amounts In Thousands Except Share, Per Share, Option and Per OptionData)**

**(1)           Basis of Presentation**

The accompanying consolidated and condensed consolidated financialstatements of Steinway Musical Instruments, Inc. and subsidiaries (the “Company”)for the three months ended March 31, 2006 and 2005 are unaudited. In theopinion of management, these statements have been prepared on the same basis asthe audited consolidated financial statements as of and for the year ended December 31,2005, and include all adjustments which are of a normal and recurring nature,necessary for the fair presentation of financial position, results ofoperations and cash flows for the interim periods. We encourage you to read theconsolidated and condensed consolidated financial statements in conjunctionwith the risk factors, consolidated financial statements and notes theretocontained in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005 filed with the Securities and Exchange Commission(“SEC”). The results of operations for the three months ended March 31,2006 are not necessarily indicative of the results that may be expected for theentire year.

Throughout this report “we,” “us,” and “our” refer to Steinway MusicalInstruments, Inc. and subsidiaries taken as a whole.

**(2)           Summaryof Significant Accounting Policies**

**Principlesof Consolidation***—*Ourconsolidated financial statements include the accounts of all direct andindirect subsidiaries, all of which are wholly-owned, including The SteinwayPiano Company, Inc. (“Steinway”) and Conn-Selmer, Inc. (“Conn-Selmer”).Intercompany balances have been eliminated in consolidation.

**Use ofEstimates**—Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America necessarily requires us tomake estimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

**IncomeTaxes**—We provide forincome taxes using an asset and liability approach. We compute deferredincome tax assets and liabilities for differences between the financialstatement and tax bases of assets and liabilities that will result in taxableor deductible amounts in the future based on enacted tax laws and ratesapplicable to the periods in which the differences are expected to affecttaxable income. We establish valuation allowances when necessary to reducedeferred tax assets to the amount that more likely than not will be realized.

**Stock-basedCompensation**—We have an employee stock purchase plan (“PurchasePlan”) and a stock award plan (“Stock Plan”). Prior to January 1, 2006, we used the intrinsic-value method ofaccounting for our stock-based employee compensation arrangements.Effective January 1, 2006, we adopted Statement of Financial AccountingStandard (SFAS) No. 123R, “Share-Based Payment” using the modifiedprospective application method. Under this transition method, we are requiredto record compensation 

7

----

cost for all awards granted after the date of adoptionand for the unvested portion of the previously granted awards that remainoutstanding at the date of adoption. We are not required to restate priorperiod results.

**Earnings (Loss) per Common Share**—We compute basic (loss) earnings pershare using the weighted-average number of common shares outstanding duringeach period. Diluted (loss) earnings per common share reflects the effect ofour outstanding options using the treasury stock method, except when suchoptions would be antidilutive.

Areconciliation of the weighted-average shares used for the basic and dilutedcomputations is as follows:
| ** **                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| For basic (loss)  earnings  per share   |       | 8,152,369                                            |       | 8,030,879 |   |
| Dilutive effect  of stock options            |       | —                                               |       | 210,317 |   |
| For diluted (loss) earnings   per share |       | 8,152,369                                            |       | 8,241,196 |   |

 

We did not include 612,300 of outstanding options topurchase shares of common stock in the computation of diluted loss per commonshare for the three months ended March 31, 2006 because their impact wouldhave been antidilutive. All outstanding options were included in thecomputation of diluted net earnings per common share for the three months endedMarch 31, 2005 because the exercise prices of the outstanding options wereless than the average market price of our common shares.

**Accumulated Other Comprehensive Income (Loss)**—Accumulated other comprehensive income(loss) is comprised of net (loss) income, foreign currency translationadjustments, additional minimum pension liabilities, and unrealized gains andlosses on available-for-sale (“AFS”) marketable securities. The components ofaccumulated other comprehensive loss are as follows:
| ** **                     | ** ** | **Foreign  Currency  Translation  Adjustment** | ** ** | **Unrealized  Holding  Gain on  AFS Securities** | ** ** | **Tax Impact of  Unrealized  Holding  Gain on  AFS Securities** | ** ** | **Additional  Minimum  Pension  Liability** | ** ** | **Tax Impact of  Additional  Minimum  Pension  Liability** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** |
|--------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Balance,  January 1, 2006 |       | $                                              | (2,631     | )                                                          | $          | 213                                                                                 |       | $                                           | (85        | )                                                                    | $          | (17,424                                     | )          | $ | 6,742 |   | $ | (13,185 | ) |
| Activity                       |       | 1,027                                          |       | 24                                                         |       | (10                                                                                 | )          | —                                      |       | —                                                               |       | 1,041                                       |       |
| Balance, March 31,  2006  |       | $                                              | (1,604     | )                                                          | $          | 237                                                                                 |       | $                                           | (95        | )                                                                    | $          | (17,424                                     | )          | $ | 6,742 |   | $ | (12,144 | ) |

 

**Recent AccountingPronouncements** — In February 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 155, “Accounting for Certain HybridFinancial Instruments — an amendment of FASB Statements No. 133 and 140”which is effective for fiscal years beginning after September 15, 2006. Thestatement was issued to clarify the application of FASB Statement No. 133to beneficial interest in securitized financial assets and to improve theconsistency of accounting for similar financial instruments, regardless of theform of the 

8

----

instruments. We do not expect this statement to have amaterial impact on our financial position or results of operations.

**(3)           Inventories**
| ** **      | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                        | 21,585     |                        | $          | 23,218 |   |
| Work-in-process |       | 48,048                   |       | 47,511                      |       |
| Finished goods  |       | 89,490                   |       | 88,581                      |       |
|            |       | $                        | 159,123    |                        | $          | 159,310 |   |

 

**(4)           Goodwill, Trademarks, and OtherIntangible Assets**

Intangible assets other than goodwill andindefinite-lived trademarks are amortized on a straight-line basis over theirestimated useful lives. Deferred financing costs are amortized over therepayment periods of the underlying debt. We test our goodwill andindefinite-lived trademark assets for impairment annually, or on an interimbasis if events or circumstances indicate that the fair value of an asset hasdecreased below its carrying value. At July 31, 2005, we evaluated theseassets and determined that the fair value had not decreased below the carryingvalue and, accordingly, no impairments have been recognized since we ceasedamortization. The changes in carrying amounts of goodwill and trademarks are asfollows:
| ** **                           | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|
| Goodwill:                            |       |                   |       |                  |       |      |       |
| Balance,  January 1, 2006       |       | $                      | 21,533     |                  | $          | 8,555     |       | $ | 30,088 |   |
| Foreign currency  translation impact |       | 288                    |       | —                |       | 288       |       |
| Balance,  March 31, 2006        |       | $                      | 21,821     |                  | $          | 8,555     |       | $ | 30,376 |   |
|                                 |       |                   |       |                  |       |      |       |
| Trademarks:                          |       |                   |       |                  |       |      |       |
| Balance,  January 1, 2006       |       | $                      | 7,409      |                  | $          | 5,824     |       | $ | 13,233 |   |
| Foreign currency  translation impact |       | 91                     |       | —                |       | 91        |       |
| Balance, March 31,  2006        |       | $                      | 7,500      |                  | $          | 5,824     |       | $ | 13,324 |   |

 

9

----

We also carrycertain intangible assets that are amortized. Once fully amortized, theseassets are removed from both the gross and accumulated amortization balance. Theseassets consist of the following:
| ** **                      | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Gross deferred  financing costs |       | $                            | 6,869      |                            | $          | 8,467 |   |
| Accumulated  amortization       |       | (1,576                       | )          | (4,701                          | )          |
| Deferred  financing costs, net  |       | $                            | 5,293      |                            | $          | 3,766 |   |
|                            |       |                         |       |                            |       |
| Gross covenants  not to compete |       | $                            | 500        |                            | $          | 500 |   |
| Accumulated  amortization       |       | (164                         | )          | (138                            | )          |
| Covenants not to  compete, net  |       | $                            | 336        |                            | $          | 362 |   |

 

**The change in gross deferredfinancing costs and related accumulated amortization during the three monthsended March 31, 2006 is primarily attributable to the write-off of theassets associated with our term loan which we repaid, the extinguishment of alarge portion of our 8.75% Senior Notes, and the establishment of a newdeferred financing cost asset associated with the issuance of our 7.00% SeniorNotes. These events are described more fully in Note 6.**

**Theweighted-average amortization period for deferred financing costs is 7 years,and the weighted-average amortization period of covenants not to compete is 5years. Total amortization expense, which includes amortization of deferredfinancing costs, is as follows:**
| ** **            | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Amortization  expense |       | $                                                    | 229        |   | $ | 282 |   |
|                       |            |                                                      |            |  |  |  |  |

 

The following table shows the total estimatedamortization expense for 2006 and the next five succeeding fiscal years:

| Estimated amortization expense: | ** ** | ** ** | ** ** | **Amount** | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| 2006                                      |       | $          | 812        |       |
| 2007                                      |       | 768        |       |
| 2008                                      |       | 731        |       |
| 2009                                      |       | 600        |       |
| 2010                                      |       | 520        |       |
| 2011                                      |       | 517        |       |
|                                           |            |            |            |            |            |  |

 

10

----

**(5)**                                 OtherCurrent Liabilities
| ** **                            | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Accrued payroll  and related benefits |       | $                        | 20,140     |                        | $          | 17,622 |   |
| Current portion  of pension liability |       | 3,631                    |       | 3,441                       |       |
| Accrued warranty  expense             |       | 1,893                    |       | 1,857                       |       |
| Accrued interest                      |       | 3,353                    |       | 3,134                       |       |
| Deferred income                       |       | 6,190                    |       | 5,482                       |       |
| Environmental  liabilities            |       | 3,774                    |       | 3,820                       |       |
| Other accrued  expenses               |       | 7,807                    |       | 9,743                       |       |
| Total                                 |       | $                        | 46,788     |                        | $          | 45,099 |   |

 

Accrued warranty expense is recorded at the time ofsale for instruments that have a warranty period ranging from one to ten years.The accrued expense recorded is generally calculated on a ratio of warrantycosts to sales based on our warranty history and is adjusted periodicallyfollowing an analysis of actual warranty claims.

The accrued warrantyexpense activity for the three months ended March 31, 2006 and 2005, andthe year ended December 31, 2005 is as follows:
| ** **                           | ** ** | **March 31,   2006** | ** ** | **March 31,   2005** | ** ** | **December 31,   2005** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Beginning  balance                   |       | $                              | 1,857      |                           | $          | 2,139                             |       | $ | 2,139 |   |
| Additions                            |       | 271                            |       | 235                            |       | 858                               |       |
| Claims and  reversals                |       | (249                           | )          | (215                           | )          | (1,045                            | )          |
| Foreign currency  translation impact |       | 14                             |       | (33                            | )          | (95                               | )          |
| Ending balance                       |       | $                              | 1,893      |                           | $          | 2,126                             |       | $ | 1,857 |   |

 

11

----

**(6)           Long-Term Debt**

During the three months ended March 31, 2006, wesignificantly restructured our long-term debt. We repaid our larger, higherinterest term loan, which had an outstanding balance of $16.6 million at December 31,2005. We also issued $175.0 million of 7.00% Senior Notes and extended a tenderoffer to purchase the $166.2 million of our outstanding 8.75% Senior Notes. Weissued our new 7.00% Senior Notes at 99.2435%, and received proceeds of $170.2million, net of associated fees. We used a majority of the proceeds toextinguish $114.6 million of the 8.75% Senior Notes and pay remainingoutstanding debt issuance costs. In order to extinguish the remaining $51.6million 8.75% Senior Notes outstanding at March 31, 2006, we exercised ourright to call these notes, which we extinguished subsequent to period end, on April 17,2006. As a result of these activities, our long-term debt at March 31,2006 consists of the following:

|                                        | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Term loans                             |       | $                            | 15,137     |                            | $          | 32,011 |   |
| 8.75% Senior  Notes                    |       | 51,615                       |       | 166,194                         |       |
| 7.00% Senior  Notes                    |       | 175,000                      |       | —                          |       |
| Unamortized bond  premium              |       | —                       |       | 1,332                           |       |
| Unamortized bond  discount             |       | (1,308                       | )          | —                          |       |
| Open account  loans, payable on demand |       | 5,443                        |       | 5,155                           |       |
| Total                                  |       | 245,887                      |       | 204,692                         |       |
| Less: current  portion                 |       | (58,170                      | )          | (12,977                         | )          |
| Long-term debt                         |       | $                            | 187,717    |                            | $          | 191,715 |   |

 

In conjunctionwith our debt restructuring activities, we recorded a net loss onextinguishment of debt of $6.6 million in the period ended March 31, 2006,which consists of the following:
| ** **                                               | ** ** | **March 31, 2006** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|
| Deferred  financing costs write-off - term loan          |       | $                            | 977        |   |
| Deferred  financing costs write-off - 8.75% Senior Notes |       | 1,442                        |       |
| Prepayment  premiums pursuant to the tender offer        |       | 5,482                        |       |
| Bond premium  write-off                                  |       | (1,290                       | )          |
| Total net loss  on extinguishment of debt                |       | $                            | 6,611      |   |

 

Scheduled paymentsof long-term debt are as follows:

|                    | ** ** | **March 31, 2006** | ** ** |
|--------------------|------------|------------------------------|------------|
| Remainder of  2006 |       | $                            | 57,882     |   |
| 2007               |       | 1,179                        |       |
| 2008               |       | 13,134                       |       |
| 2009               |       | —                       |       |
| 2010               |       | —                       |       |
| Thereafter         |       | 175,000                      |       |
| Total              |       | $                            | 247,195    |   |

 

12

----

**(7)           Stockholders’ Equity and Stock-basedCompensation Arrangements**

Our common stock is comprised of two classes: Class A and Ordinary.With the exception of disparate voting power, both classes are substantiallyidentical. Each share of Class A common stock entitles the holder to 98votes. Holders of Ordinary common stock are entitled to one vote per share.Class A common stock shall automatically convert to Ordinary common stockif, at any time, the Class A common stock is not owned by an original Class Aholder. As of March 31, 2006 our Chairman and Chief Executive Officerowned 100% of the Class A common shares, representing approximately 86% ofthe combined voting power of the Class A common stock and Ordinary commonstock.

**Employee Stock PurchasePlan** - We have anemployee stock purchase plan under which substantially all employees maypurchase Ordinary common stock through payroll deductions at a purchase priceequal to 85% of the lower of the fair market values as of the beginning or endof each twelve-month offering period. We have reserved 500,000 shares forissuance under this plan. Stock purchases under the Purchase Plan are limitedto 5% of an employee’s annual base earnings.

**Stock Plan** - The 1996 stock plan, as amended, providesfor the granting of up to 1,500,000 stock options (including incentivestock options and non-qualified stock options), stock appreciation rights andother stock awards to certain key employees, consultants and advisors. Ourstock options generally have five year vesting terms and ten year option terms.Upon option exercise, we issue shares of Ordinary common stock, and willcontinue to issue shares, until we have reached our registered share limitation.At that time, we will issue shares out of treasury stock. We have reserved721,750 treasury stock shares for this purpose.

EffectiveJanuary 1, 2006, we adopted SFAS No. 123R, “Share-Based Payment” toaccount for our stock compensation arrangements, using the modified prospectiveapplication transition method. Accordingly, we did not restate the results ofprior periods. Prior to January 1, 2006, we applied Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”and did not recognize any compensation cost associated with employee stockoptions because the exercise price was equal to the market price at the date ofoption grant. SFAS No. 123R requires that stock-based compensation expensebe recognized over the period from the date of grant to the date when the awardis no longer contingent upon the employee providing additional service. Thefollowing table illustrates the effect on net (loss) income and (loss) earningsper share as if we had applied the fair value method to measure stock-basedemployee compensation prior to the adoption of SFAS No. 123R and thestock-based compensation

13

----

expense whichresulted from applying the fair value method in the current period:
| ** **                                                                                                                                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Net (loss) income,  as reported                                                                                                                                               |       | $                                               | (1,842     | ) | $ | 2,598 |   |
| Add: Stock-based  compensation expense included in reported net loss, net of related tax  effects of $41                                                                      |       | 230                                             |       | — |   |
| Deduct: Total  stock-based employee compensation expense determined under fair-value based  method, net of related tax effects of $41 and $36 in 2006 and 2005,  respectively |       | (230                                            | )          | (252 | ) |
|                                                                                                                                                                          |       |                                            |       |   |   |
| Pro forma net  (loss) income                                                                                                                                                  |       | $                                               | (1,842     | ) | $ | 2,346 |   |
|                                                                                                                                                                          |       |                                            |       |   |   |
| (Loss) earnings  per share:                                                                                                                                                   |       |                                            |       |   |   |
| Basic - as reported                                                                                                                                                           |       | $                                               | (0.23      | ) | $ | 0.32 |   |
| Basic - pro forma                                                                                                                                                             |       | $                                               | (0.23      | ) | $ | 0.29 |   |
| Diluted - as reported                                                                                                                                                         |       | $                                               | (0.23      | ) | $ | 0.32 |   |
| Diluted - pro forma                                                                                                                                                           |       | $                                               | (0.23      | ) | $ | 0.28 |   |

 

As a result of adopting SFAS No. 123R, our lossbefore income taxes and net loss for the three months ended March 31, 2006are greater by approximately $0.3 million and $0.2 million,respectively, than if we had continued to account for share-basedcompensation under APB Opinion No. 25. Basic and diluted loss per shareinclude $.03 of stock-based compensation cost, and cash flows fromoperating activities for the three months ended March 31, 2006 are$0.4 million lower as a result of classifying excess tax benefits as cashflows from financing activities under SFAS No. 123R.

We measured the fair value of options on their grantdate, including the valuation of the option feature implicit in our PurchasePlan, using the Black-Scholes option-pricing model. Expected volatility isbased on historical volatility of our stock, as our options are not readilytradable. We use historical data to estimate option exercise and employeetermination behavior within our valuation model and have segregated ouremployees into groups based on similarities in historical exercise behavior. Therisk-free interest rate in the current period is based on the weighted-averageof U.S. Treasury rates over the contractual term of the option feature in thePurchase Plan. There were no stock option awards issued during the three monthsended March 31, 2006 and 2005. Key assumptions used to apply this pricingmodel to the option feature in the Purchase Plan are as follows:
| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Risk-free  interest rate                                                          |       | 3.80%                                            |       | 2.04% |   |
| Weighted-average  expected life of option feature in the Purchase Plan (in years) |       | 1.00                                             |       | 1.00 |   |
| Weighted-average  expected life of option grants (in years)                       |       | N/A                                              |       | N/A |   |
| Expected  volatility of underlying stock                                          |       | 23%                                              |       | 27% |   |

 

14

----

The weighted-average fairvalue of the option feature in the Purchase Plan is as follows:
| ** **                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Option feature  in Purchase Plan |       | $                                                    | 7.25       |   | $ | 7.33 |   |
|                                  |            |                                                      |            |  |  |  |  |

 

The following table sets forth information regardingthe Purchase Plan:
| ** **                           | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (not in 000s)** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at January 1,  2006 |       | 9,476                       |       | $                                       | 25.42      |                                         |       |                                                     |       |   |
| Shares  subscribed                   |       | 5,852                       |       | 25.42                                   |       |                                         |       |                                                     |       |
| Exercised                            |       | —                      |       | —                                  |       |                                         |       |                                                     |       |
| Canceled                             |       | (476                        | )          | 25.42                                   |       |                                         |       |                                                     |       |
| Outstanding at March 31,  2006  |       | 14,852                      |       | $                                       | 25.42      |                                         | 0.33       |                                                     | $          | 95,053 |   |
|                                      |            |                             |            |                                         |            |                                              |            |                                                          |            |  |  |

 

The followingtable sets forth information regarding the Stock Plan:
| ** **                      | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (not in 000s)** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at January  1, 2006 |       | 826,773                     |       | $                                       | 20.33      |                                         |       |                                                     |       |   |
| Granted                         |       | —                      |       | —                                  |       |                                         |       |                                                     |       |
| Exercised                       |       | (214,073                    | )          | 19.19                                   |       |                                         |       |                                                     |       |
| Forfeited                       |       | (400                        | )          | 19.04                                   |       |                                         |       |                                                     |       |
| Outstanding at March  31, 2006  |       | 612,300                     |       | $                                       | 20.73      |                                         | 6.8        |                                                     | $          | 6,788,401 |   |
|                            |       |                        |       |                                    |       |                                         |       |                                                     |       |
| Exercisable at March  31, 2006  |       | 281,400                     |       | $                                       | 19.87      |                                         | 6.1        |                                                     | $          | 3,362,158 |   |

 

The total intrinsic value of the options exercisedduring the period ended March 31, 2006 and 2005 was $2.5 million and $0.1million, respectively.

15

----

As of March 31, 2006, there was $1.9 million ofunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the Stock Plan which is expected to be recognizedover a period of 2.4 years.

As reported in the statement of cash flows, cashreceived from option exercises under the Stock Plan for the period ended March 31,2006 was $0.7 million. At March 31, 2006, we included $3.4 million ofin-transit proceeds from issuance of stock in prepaid expenses and othercurrent assets. These proceeds were received in April 2006. SFAS No. 123Rrequires that cash flows from tax benefits resulting from tax deductions inexcess of the compensation cost recognized for stock-based awards (excess taxbenefits) be classified as a cash flow from financing activities. Prior to theadoption of SFAS No. 123R, such excess tax benefits were classified asoperating cash flows. Accordingly, $0.9 million of tax benefit from stockoption exercises is presented as a cash inflow from operating activities and$0.4 million of excess tax benefits has been classified as an outflow fromoperating activities and an inflow from financing activities in the statementof cash flows.

**(8)           Other Income, Net**
| ** **                            | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| West 57th  building income            |       | $                                                    | (1,163     | ) | $ | (1,163 | ) |
| West 57th  building expenses          |       | 818                                                  |       | 814 |   |
| Foreign exchange  (gains) losses, net |       | (350                                                 | )          | (15 | ) |
| Miscellaneous                         |       | (56                                                  | )          | (75 | ) |
| Other income, net                     |       | $                                                    | (751       | ) | $ | (439 | ) |

 

16

----

**(9)           Commitments and ContingentLiabilities**

We are involved in certain legal proceedings regarding environmentalmatters, which are described below. Further, in the ordinary course ofbusiness, we are party to various legal actions that we believe are routine innature and incidental to the operation of our business. While the outcome ofsuch actions cannot be predicted with certainty, we believe that, based on ourexperience in dealing with these matters, their ultimate resolution will nothave a material adverse impact on our business, financial condition, results ofoperations or prospects.

Certain environmental laws, such as theComprehensive Environmental Response, Compensation, and Liability Act, asamended (“CERCLA”), impose strict, retroactive, joint and several liabilityupon persons responsible for releases of hazardous substances, which liabilityis broadly construed. Under CERCLA and other laws, we may have liability forinvestigation and cleanup costs and other damages relating to our current orformer properties, or third-party sites to which we sent wastes for disposal. Ourpotential liability at any of these sites is affected by many factorsincluding, but not limited to, the method of remediation, our portion of thehazardous substances at the site relative to that of other parties, the numberof responsible parties, the financial capabilities of other parties, andcontractual rights and obligations.

In this regard, we operate certain manufacturingfacilities which were previously owned by Philips Electronics North AmericaCorporation (“Philips”). When we purchased these facilities, Philips agreed toindemnify us for certain environmental matters resulting from activities ofPhilips occurring prior to December 29, 1988 (the “Environmental IndemnityAgreement”). To date, Philips has fully performed its obligations under theEnvironmental Indemnity Agreement, which terminates on December 29, 2008;however, we cannot provide assurance that it will continue to do so in thefuture. Four matters covered by the Environmental Indemnity Agreement arecurrently pending. Philips has entered into Consent Orders with theEnvironmental Protection Agency (“EPA”) for one site and the North CarolinaDepartment of Environment, Health and Natural Resources for a second site,whereby Philips has agreed to pay required response costs. On October 22,1998, we were joined as defendant in an action involving a third site formerlyoccupied by a business we acquired in Illinois. Philips has accepted thedefense of this action pursuant to the terms of the Environmental IndemnityAgreement. At the fourth site, which is a third-party waste disposal site, theEPA has named over 40 persons or entities as potentially responsible parties (“PRP”),including four Conn-Selmer predecessor entities. The four entities have beeninvolved as members of PRP group in the ongoing negotiations with the siteowners, the largest contributor, and the EPA in an attempt to reach asettlement and release PRP group members from further potential liability. Weexpect a decision on the proposed settlement to be reached within the nexttwelve months. For two of these predecessor entities, which were previouslyowned by Philips, this matter has been tendered to Philips pursuant to theEnvironmental Indemnity Agreement. With respect to the other two entities,based on current information concerning estimated cleanup costs at the site,and our share of liability, we do not believe our liability will be material.

In addition, we are continuing an existingenvironmental remediation plan at a facility we acquired in 2000. We estimateour costs, which approximate $0.9 million, over a 15 year period. We haveaccrued approximately $0.7 million for the estimated remaining cost of thisremediation program, which

17

----

represents the present value total cost using a discount rate of 4.54%.A summary of expected payments associated with this project is asfollows:

|            | ** ** | **Environmental  Payments** | ** ** |
|------------|------------|-----------------------------|------------|
| 2006       |       | $                           | 100        |   |
| 2007       |       | 78                          |       |
| 2008       |       | 56                          |       |
| 2009       |       | 56                          |       |
| 2010       |       | 56                          |       |
| Thereafter |       | 555                         |       |
|       |       | $                           | 901        |   |

 

In 2004, we acquired two manufacturing facilitiesfrom G. Leblanc Corporation, now Grenadilla, Inc. (“Grenadilla”), for whichenvironmental remediation plans had already been established. In connectionwith the acquisition, we assumed the existing accrued liability ofapproximately $0.8 million for the cost of these remediation activities. Basedon a review of past and ongoing investigatory and remedial work by ourenvironmental consultants, and discussions with state regulatory officials, aswell as recent sampling, we estimate the remaining costs of such remedial plansat $3.1 million. Pursuant to the purchase and sale agreement, we have soughtindemnification from Grenadilla for anticipated costs above the originalestimate in the amount of $2.5 million. We filed a claim against the escrow andrecorded a corresponding receivable for this amount in prepaid expenses andother current assets in the consolidated balance sheet. However, we cannot beassured that we will be able to recover such costs from Grenadilla.

Based on our past experience and currently availableinformation, the matters described above and our other liabilities andcompliance costs arising under environmental laws are not expected to have amaterial impact on our capital expenditures, earnings or competitive positionin an individual year. However, some risk of environmental liability isinherent in the nature of our current and former business and we may, in thefuture, incur material costs to meet current or more stringent compliance,cleanup, or other obligations pursuant to environmental laws.

18

----

**10)          Retirement Plans**

We have defined benefit pension plans covering themajority of our employees, including certain employees in Germany and the U.K. Thecomponents of net periodic pension cost for these plans are as follows:
| ** **                          | ** ** | **Domestic Plans**          | ** ** | **Foreign Plans**           | ** ** |
|-------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
| ** **                          | ** ** | **March 31,  2006**         | ** ** | **March 31,  2005**         | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
| Service cost                        |       | $                                | 243        |                             | $          | 126 |   | $ | 207 |   | $ | 168 |   |
| Interest cost                       |       | 785                              |       | 566                              |       | 351 |   | 325 |   |
| Expected return  on plan assets     |       | (1,151                           | )          | (782                             | )          | (74 | ) | (75 | ) |
| Amortization of  prior service cost |       | 110                              |       | 76                               |       | — |   | — |   |
| Amortization of  net loss           |       | 176                              |       | 114                              |       | — |   | — |   |
| Net periodic  benefit cost          |       | $                                | 163        |                             | $          | 100 |   | $ | 484 |   | $ | 418 |   |

 

We provide postretirement health care and lifeinsurance benefits to eligible hourly retirees and their dependents. Thecomponents of net periodic postretirement benefit cost for these benefits areas follows:
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Service cost                           |       | $                                                    | 12         |   | $ | 11 |   |
| Interest cost                          |       | 34                                                   |       | 36 |   |
| Amortization of  transition obligation |       | 9                                                    |       | 13 |   |
| Amortization of  net loss              |       | 13                                                   |       | — |   |
| Net postretirement  benefit cost       |       | $                                                    | 68         |   | $ | 60 |   |

 

Basedon federal laws and regulations, we are not required to make a contribution toour domestic pension plan in 2006 and, through March 31, 2006, we have notmade any contributions to this plan. Nevertheless, we expect to contributeapproximately $2.0 million to our domestic pension plan in the current year. Ouranticipated contributions to the pension plan of our U.K. subsidiaryapproximate $0.2 million for the current year. As of March 31, 2006, wehave made contributions of less than $0.1 million to this plan. The pensionplans of our German subsidiaries do not hold any assets and pay participantbenefits as incurred. Expected 2006 benefit payments under these plans are $1.0million. For the three months ended March 31, 2006, we have made benefitpayments of $0.2 million under these plans.

**(11)         Segment Information**

We have identified two reportable segments: the piano segment and theband & orchestral instrument segment. We consider these two segmentsreportable as they are managed separately and the operating results of eachsegment are separately reviewed and evaluated by our senior management on aregular basis. Management and the chief operating decision maker use incomefrom operations as a meaningful measurement of profit or loss for the segments.Income from operations for the reportable segments includes certain corporatecosts allocated to the segments based primarily on revenue, as well as 

19

----

intercompany profit. Amounts reported as “Other &Elim” include those corporate costs that were not allocated to the reportablesegments and the remaining intercompany profit elimination.

The following tables present information about our operating segmentsfor the three months ended March 31, 2006 and 2005:
| ** **                                 | ** ** | **Piano Segment** | ** ** | **Band & Orchestral Segment** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------|------------|--------------------------------------------------|------------|------------|------------|------------|------------|
| **Three months ended 2006** | ** ** | **U.S.**               | ** ** | **Germany**                                      | ** ** | **Other**  | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Other** | ** ** | **Total** | ** ** | **Other  & Elim** | ** ** | **Consolidated** | ** ** |
| Net sales to external customers            |       | $24,655                |       | $9,688                                           |       | $7,785     |       | $42,128    |       | $51,258 |   | $1,808 |   | $53,066 |   | $— |   | $95,194 |   |
| Income (loss)  from operations             |       | 423                    |       | 1,579                                            |       | 449        |       | 2,451      |       | 4,280 |   | (86 | ) | 4,194 |   | (1,134 | ) | 5,511 |   |

 
| ** **                                 | ** ** | **Piano Segment** | ** ** | **Band & Orchestral Segment** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------|------------|--------------------------------------------------|------------|------------|------------|------------|------------|
| **Three months ended 2005** | ** ** | **U.S.**               | ** ** | **Germany**                                      | ** ** | **Other**  | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Other** | ** ** | **Total** | ** ** | **Other  & Elim** | ** ** | **Consolidated** | ** ** |
| Net sales to external customers            |       | $25,917                |       | $10,314                                          |       | $7,544     |       | $43,775    |       | $45,751 |   | $1,816 |   | $47,567 |   | $— |   | $91,342 |   |
| Income (loss)  from operations             |       | 2,478                  |       | 2,206                                            |       | 551        |       | 5,235      |       | 2,714 |   | (54 | ) | 2,660 |   | (837 | ) | 7,058 |   |

 

**(12) Summaryof Guarantees**

Our paymentobligations under our 8.75% Senior Notes and 7.00% Senior Notes are fully andunconditionally guaranteed on a joint and several basis by Conn-Selmer,Steinway, and certain other of our direct and indirect wholly-ownedsubsidiaries, each a Guarantor (the “Guarantor Subsidiaries”). These subsidiariesrepresent all of our (the “Issuer”) operations conducted in the United States. Theremaining subsidiaries, which do not guarantee either Notes, represent non-U.S.operations (the “Non Guarantor Subsidiaries”).

**The following condensed consolidatingsupplementary data illustrates the financial position, results of operations,and cash flows of the Guarantor Subsidiaries and the Non Guarantor Subsidiaries.Separate complete financial statements of the respective Guarantors would notprovide additional material information that would be useful in assessing thefinancial composition of the Guarantor Subsidiaries. No single GuarantorSubsidiary has any significant legal restrictions on the ability of investorsor creditors to obtain access to its assets in event of default on theguarantee other than its subordination to senior indebtedness.**

We record investments in subsidiaries on the cost method for purposesof the supplemental consolidating presentation. Earnings of subsidiaries aretherefore not reflected in the parent company’s investment accounts andearnings. The principal elimination entries eliminate investments insubsidiaries and intercompany balances and transactions.

20

----

**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONSOLIDATING STATEMENTS OF OPERATIONSTHREE MONTHS ENDED MARCH 31, 2006Unaudited(In Thousands)**

** **
| ** **                         | ** ** | **Issuer  of Notes** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Reclass/  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------|------------|---------------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------|------------|
| Net sales                          |       | $                         | —     |                        | $          | 77,338                           |       | $                          | 20,053     |             | $          | (2,197 | ) | $ | 95,194 |   |
| Cost of sales                      |       | —                    |       | 58,432                      |       | 12,988                           |       | (2,218                     | )          | 69,202           |       |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Gross profit                       |       | —                    |       | 18,906                      |       | 7,065                            |       | 21                         |       | 25,992           |       |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Operating expenses:                |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Sales and marketing                |       | —                    |       | 8,762                       |       | 2,965                            |       | —                     |       | 11,727           |       |
| General and administrative         |       | 2,472                     |       | 4,232                       |       | 1,674                            |       | —                     |       | 8,378            |       |
| Amortization of intangible assets  |       | 138                       |       | 88                          |       | 3                                |       | —                     |       | 229              |       |
| Other operating (income) expense   |       | (1,476                    | )          | 1,200                       |       | 423                              |       | —                     |       | 147              |       |
| Total operating  expenses          |       | 1,134                     |       | 14,282                      |       | 5,065                            |       | —                     |       | 20,481           |       |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |
| (Loss) income  from operations     |       | (1,134                    | )          | 4,624                       |       | 2,000                            |       | 21                         |       | 5,511            |       |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Other income,  net                 |       | (16                       | )          | (579                        | )          | (156                             | )          | —                     |       | (751             | )          |
| Loss on  extinguishment of debt    |       | 5,634                     |       | 977                         |       | —                           |       | —                     |       | 6,611            |       |
| Interest income                    |       | (4,978                    | )          | (1,434                      | )          | (79                              | )          | 4,764                      |       | (1,727           | )          |
| Interest expense                   |       | 3,905                     |       | 5,195                       |       | 139                              |       | (4,764                     | )          | 4,475            |       |
| Total  non-operating expenses      |       | 4,545                     |       | 4,159                       |       | (96                              | )          | —                     |       | 8,608            |       |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |
| (Loss) income  before income taxes |       | (5,679                    | )          | 465                         |       | 2,096                            |       | 21                         |       | (3,097           | )          |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Income tax  (benefit) provision    |       | (2,334                    | )          | 45                          |       | 1,026                            |       | 8                          |       | (1,255           | )          |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Net (loss)  income                 |       | $                         | (3,345     | )                           | $          | 420                              |       | $                          | 1,070      |             | $          | 13 |   | $ | (1,842 | ) |

 

21

----

**STEINWAY MUSICALINSTRUMENTS, INC. AND SUBSIDIARIESCONSOLIDATING STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2005Unaudited (In Thousands)**

** **
| ** **                         | ** ** | **Issuer  of Notes** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Reclass/  Eliminations** | ** ** | **Consolidated** | ** ** | ** ** |
|------------------------------------|------------|---------------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------|------------|------------|
| Net sales                          |       | $                         | —     |                        | $          | 74,603                           |       | $                          | 20,963     |             | $          | (4,224     | ) | $ | 91,342 |   |   |
| Cost of sales                      |       | —                    |       | 56,567                      |       | 13,371                           |       | (4,293                     | )          | 65,645           |       |       |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |       |
| Gross profit                       |       | —                    |       | 18,036                      |       | 7,592                            |       | 69                         |       | 25,697           |       |       |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |       |
| Operating expenses:                |       |                      |       |                        |       |                             |       |                       |       |             |       |       |
| Sales and marketing                |       | —                    |       | 8,318                       |       | 2,954                            |       | —                     |       | 11,272           |       |       |
| General and administrative         |       | 1,771                     |       | 3,612                       |       | 1,592                            |       | —                     |       | 6,975            |       |       |
| Amortization                       |       | 117                       |       | 162                         |       | 3                                |       | —                     |       | 282              |       |       |
| Other operating (income) expense   |       | (1,051                    | )          | 825                         |       | 336                              |       | —                     |       | 110              |       |       |
| Total operating  expenses          |       | 837                       |       | 12,917                      |       | 4,885                            |       | —                     |       | 18,639           |       |       |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |       |
| (Loss) income  from operations     |       | (837                      | )          | 5,119                       |       | 2,707                            |       | 69                         |       | 7,058            |       |       |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |       |
| Other income,  net                 |       | (8                        | )          | (416                        | )          | (15                              | )          | —                     |       | (439             | )          |       |
| Interest income                    |       | (3,665                    | )          | (5,950                      | )          | (90                              | )          | 8,735                      |       | (970             | )          |       |
| Interest expense                   |       | 3,858                     |       | 8,942                       |       | 74                               |       | (8,735                     | )          | 4,139            |       |       |
| Total  non-operating expenses      |       | 185                       |       | 2,576                       |       | (31                              | )          | —                     |       | 2,730            |       |       |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |       |
| (Loss) income  before income taxes |       | (1,022                    | )          | 2,543                       |       | 2,738                            |       | 69                         |       | 4,328            |       |       |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |       |
| Income tax  (benefit) provision    |       | 537                       |       | (30                         | )          | 1,165                            |       | 58                         |       | 1,730            |       |       |
|                               |       |                      |       |                        |       |                             |       |                       |       |             |       |       |
| Net (loss)  income                 |       | $                         | (1,559     | )                           | $          | 2,573                            |       | $                          | 1,573      |             | $          | 11         |   | $ | 2,598 |   |   |

 

22

----

**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEETSMARCH 31, 2006Unaudited(In Thousands)**

** **
| ** **                                       | ** ** | **Issuer  of Notes** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Reclass/  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------|------------|
| ASSETS                                           |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Current assets:                                  |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Cash                                             |       | $                         | —     |                        | $          | 85,481                           |       | $                          | 13,032     |             | $          | (26,587 | ) | $ | 71,926 |   |
| Accounts, notes and other receivables, net       |       | —                    |       | 79,484                      |       | 7,482                            |       | —                     |       | 86,966           |       |
| Inventories                                      |       | —                    |       | 119,214                     |       | 40,824                           |       | (915                       | )          | 159,123          |       |
| Prepaid expenses and other current assets        |       | 10,349                    |       | 6,626                       |       | 1,231                            |       | —                     |       | 18,206           |       |
| Deferred tax assets                              |       | 41                        |       | 9,272                       |       | 6,161                            |       | (7,390                     | )          | 8,084            |       |
| Total current  assets                            |       | 10,390                    |       | 300,077                     |       | 68,730                           |       | (34,892                    | )          | 344,305          |       |
|                                             |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Property, plant  and equipment, net              |       | 171                       |       | 78,838                      |       | 17,565                           |       | —                     |       | 96,574           |       |
| Investment in  subsidiaries                      |       | 69,643                    |       | 115,054                     |       | (2,082                           | )          | (182,615                   | )          | —           |       |
| Trademarks                                       |       | —                    |       | 9,319                       |       | 4,005                            |       | —                     |       | 13,324           |       |
| Goodwill                                         |       | —                    |       | 17,973                      |       | 12,403                           |       | —                     |       | 30,376           |       |
| Other  intangibles, net                          |       | 4,911                     |       | 653                         |       | 65                               |       | —                     |       | 5,629            |       |
| Other assets                                     |       | 4,430                     |       | 8,985                       |       | 2,535                            |       | —                     |       | 15,950           |       |
| TOTAL ASSETS                                     |       | $                         | 89,545     |                        | $          | 530,899                          |       | $                          | 103,221    |             | $          | (217,507 | ) | $ | 506,158 |   |
|                                             |       |                      |       |                        |       |                             |       |                       |       |             |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY       |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Current liabilities:                             |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Current portion of long-term debt                |       | $                         | 51,615     |                        | $          | 1,112                            |       | $                          | 5,443      |             | $          | — |   | $ | 58,170 |   |
| Accounts payable                                 |       | 778                       |       | 11,654                      |       | 3,404                            |       | —                     |       | 15,836           |       |
| Other current liabilities                        |       | 5,322                     |       | 26,450                      |       | 15,316                           |       | (300                       | )          | 46,788           |       |
| Total current  liabilities                       |       | 57,715                    |       | 39,216                      |       | 24,163                           |       | (300                       | )          | 120,794          |       |
|                                             |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Long-term debt                                   |       | 173,692                   |       | 40,612                      |       | —                           |       | (26,587                    | )          | 187,717          |       |
| Intercompany                                     |       | (229,091                  | )          | 228,794                     |       | 329                              |       | (32                        | )          | —           |       |
| Deferred tax  liabilities                        |       | 95                        |       | 17,732                      |       | 5,007                            |       | (7,390                     | )          | 15,444           |       |
| Other  non-current liabilities                   |       | 1,388                     |       | 4,201                       |       | 23,315                           |       | —                     |       | 28,904           |       |
| Total  liabilities                               |       | 3,799                     |       | 330,555                     |       | 52,814                           |       | (34,309                    | )          | 352,859          |       |
|                                             |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Stockholders’  equity                       |       | 85,746                    |       | 200,344                     |       | 50,407                           |       | (183,198                   | )          | 153,299          |       |
|                                             |       |                      |       |                        |       |                             |       |                       |       |             |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY |       | $                         | 89,545     |                        | $          | 530,899                          |       | $                          | 103,221    |             | $          | (217,507 | ) | $ | 506,158 |   |

 

23

----

**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEETSDECEMBER 31, 2005Unaudited(In Thousands)**

 
| ** **                                      | ** ** | **Issuer  of Notes** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Reclass/  Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------|------------|
| Assets:                                         |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Current assets:                                 |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Cash                                            |       | $                         | —     |                        | $          | 48,790                           |       | $                          | 14,190     |             | $          | (28,028 | ) | $ | 34,952 |   |
| Accounts, notes and other receivables, net      |       | —                    |       | 71,702                      |       | 10,178                           |       | —                     |       | 81,880           |       |
| Inventories                                     |       | —                    |       | 121,712                     |       | 39,279                           |       | (1,681                     | )          | 159,310          |       |
| Prepaid expenses and other current assets       |       | 3,947                     |       | 6,875                       |       | 831                              |       | —                     |       | 11,653           |       |
| Deferred tax assets                             |       | —                    |       | 9,267                       |       | 6,059                            |       | (7,390                     | )          | 7,936            |       |
| Total current  assets                           |       | 3,947                     |       | 258,346                     |       | 70,537                           |       | (37,099                    | )          | 295,731          |       |
|                                            |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Property, plant  and equipment, net             |       | 184                       |       | 79,426                      |       | 17,054                           |       | —                     |       | 96,664           |       |
| Investment in  subsidiaries                     |       | 69,643                    |       | 115,083                     |       | —                           |       | (184,726                   | )          | —           |       |
| Trademarks                                      |       | —                    |       | 9,319                       |       | 3,800                            |       | 114                        |       | 13,233           |       |
| Goodwill                                        |       | —                    |       | 17,973                      |       | 12,115                           |       | —                     |       | 30,088           |       |
| Other  intangibles, net                         |       | 2,341                     |       | 1,718                       |       | 69                               |       | —                     |       | 4,128            |       |
| Other assets                                    |       | 4,151                     |       | 9,180                       |       | 2,480                            |       | —                     |       | 15,811           |       |
| Total assets                                    |       | $                         | 80,266     |                        | $          | 491,045                          |       | $                          | 106,055    |             | $          | (221,711 | ) | $ | 455,655 |   |
|                                            |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Liabilities and  stockholders’ equity      |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Current liabilities:                            |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Current portion of long-term debt               |       | $                         | —     |                        | $          | 7,822                            |       | $                          | 5,155      |             | $          | — |   | $ | 12,977 |   |
| Accounts payable                                |       | 464                       |       | 9,598                       |       | 3,743                            |       | —                     |       | 13,805           |       |
| Other current liabilities                       |       | 4,876                     |       | 24,608                      |       | 15,923                           |       | (308                       | )          | 45,099           |       |
| Total current  liabilities                      |       | 5,340                     |       | 42,028                      |       | 24,821                           |       | (308                       | )          | 71,881           |       |
|                                            |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Long-term debt                                  |       | 167,526                   |       | 52,217                      |       | —                           |       | (28,028                    | )          | 191,715          |       |
| Intercompany                                    |       | (177,624                  | )          | 179,433                     |       | (1,674                           | )          | (135                       | )          | —           |       |
| Deferred tax  liabilities                       |       | 85                        |       | 17,768                      |       | 4,863                            |       | (7,390                     | )          | 15,326           |       |
| Other  non-current liabilities                  |       | 1,132                     |       | 4,161                       |       | 22,610                           |       | —                     |       | 27,903           |       |
| Total  liabilities                              |       | (3,541                    | )          | 295,607                     |       | 50,620                           |       | (35,861                    | )          | 306,825          |       |
|                                            |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Stockholders’  equity                      |       | 83,807                    |       | 195,438                     |       | 55,435                           |       | (185,850                   | )          | 148,830          |       |
|                                            |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Total liabilites  and stockholders’ equity |       | $                         | 80,266     |                        | $          | 491,045                          |       | $                          | 106,055    |             | $          | (221,711 | ) | $ | 455,655 |   |

 

24

----

**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONSOLIDATING STATEMENTS OF CASH FLOWSTHREE MONTHS ENDED MARCH 31, 2006Unaudited(In Thousands)**

** **
| ** **                                    | ** ** | **Issuer  of Notes** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Reclass/  Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------|------------|
| Cash flows from  operating activities:        |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Net (loss)  income                            |       | $                         | (3,345     | )                           | $          | 420                              |       | $                          | 1,070      |             | $          | 13 |   | $ | (1,842 | ) |
| Adjustments to  reconcile net (loss) income   |       |                      |       |                        |       |                             |       |                       |       |             |       |
| to cash flows  from operating activities:     |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Depreciation and amortization                 |       | 160                       |       | 2,065                       |       | 442                              |       | —                     |       | 2,667            |       |
| Amortization of bond discount                 |       | 16                        |       | —                      |       | —                           |       | —                     |       | 16               |       |
| Amortization of bond premium                  |       | (42                       | )          | —                      |       | —                           |       | —                     |       | (42              | )          |
| Loss on extinguishment of debt                |       | 5,634                     |       | 977                         |       | —                           |       | —                     |       | 6,611            |       |
| Stock-based compensation expense              |       | 103                       |       | 152                         |       | 16                               |       | —                     |       | 271              |       |
| Excess tax benefits from stock-based awards   |       | (411                      | )          | —                      |       | —                           |       | —                     |       | (411             | )          |
| Tax benefit from stock option exercises       |       | 891                       |       | —                      |       | —                           |       | —                     |       | 891              |       |
| Deferred tax benefit                          |       | (31                       | )          | (41                         | )          | (39                              | )          | —                     |       | (111             | )          |
| Other                                         |       | —                    |       | 61                          |       | (3                               | )          | —                     |       | 58               |       |
| Changes in  operating assets and liabilities: |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Accounts, notes and other receivables         |       | —                    |       | (7,649                      | )          | 2,864                            |       | —                     |       | (4,785           | )          |
| Inventories                                   |       | —                    |       | 2,125                       |       | (1,521                           | )          | (116                       | )          | 488              |       |
| Prepaid expenses and other assets             |       | (3,258                    | )          | 250                         |       | (387                             | )          | —                     |       | (3,395           | )          |
| Accounts payable                              |       | 314                       |       | 1,686                       |       | (409                             | )          | —                     |       | 1,591            |       |
| Other liabilities                             |       | 702                       |       | 1,882                       |       | (737                             | )          | 8                          |       | 1,855            |       |
| Cash flows from  operating activities         |       | 733                       |       | 1,928                       |       | 1,296                            |       | (95                        | )          | 3,862            |       |
|                                          |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Cash flows from  investing activities:        |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Capital expenditures                          |       | (9                        | )          | (940                        | )          | (195                             | )          | —                     |       | (1,144           | )          |
| Cash flows from  investing activities         |       | (9                        | )          | (940                        | )          | (195                             | )          | —                     |       | (1,144           | )          |
|                                          |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Cash flows from  financing activities:        |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Borrowings under lines of credit              |       | —                    |       | (1,441                      | )          | 7,413                            |       | 1,441                      |       | 7,413            |       |
| Repayments under lines of credit              |       | —                    |       | —                      |       | (7,155                           | )          | —                     |       | (7,155           | )          |
| Debt issuance costs                           |       | (4,150                    | )          | —                      |       | —                           |       | —                     |       | (4,150           | )          |
| Proceeds from issuance of debt                |       | 173,676                   |       | —                      |       | —                           |       | —                     |       | 173,676          |       |
| Repayments of long-term debt                  |       | (114,579                  | )          | (16,874                     | )          | —                           |       | —                     |       | (131,453         | )          |
| Premium paid on extinguishment of debt        |       | (5,482                    | )          | —                      |       | —                           |       | —                     |       | (5,482           | )          |
| Proceeds from issuance of common stock        |       | 699                       |       | —                      |       | —                           |       | —                     |       | 699              |       |
| Excess tax benefits from stock-based awards   |       | 411                       |       | —                      |       | —                           |       | —                     |       | 411              |       |
| Intercompany transactions                     |       | (51,299                   | )          | 54,018                      |       | (2,814                           | )          | 95                         |       | —           |       |
| Cash flows from  financing activities         |       | (724                      | )          | 35,703                      |       | (2,556                           | )          | 1,536                      |       | 33,959           |       |
|                                          |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Effect of  exchange rate changes on cash      |       | —                    |       | —                      |       | 297                              |       | —                     |       | 297              |       |
|                                          |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Decrease in cash                              |       | —                    |       | 36,691                      |       | (1,158                           | )          | 1,441                      |       | 36,974           |       |
| Cash, beginning  of year                      |       | —                    |       | 48,790                      |       | 14,190                           |       | (28,028                    | )          | 34,952           |       |
|                                          |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Cash, end of  period                          |       | $                         | —     |                        | $          | 85,481                           |       | $                          | 13,032     |             | $          | (26,587 | ) | $ | 71,926 |   |

 

25

----

 

**STEINWAY MUSICALINSTRUMENTS, INC. AND SUBSIDIARIESCONSOLIDATING STATEMENTS OF CASH FLOWSTHREE MONTHS ENDED MARCH 31, 2005Unaudited (In Thousands)**

** **
| ** **                                   | ** ** | **Issuer  of Notes** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Reclass/  Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------|------------|
| Cash flows from  operating activities:       |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Net (loss) income                            |       | $                         | (1,559     | )                           | $          | 2,573                            |       | $                          | 1,573      |             | $          | 11 |   | $ | 2,598 |   |
| Adjustments to  reconcile net (loss) income  |       |                      |       |                        |       |                             |       |                       |       |             |       |
| to cash flows from operating activities:     |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Depreciation and amortization                |       | 136                       |       | 2,237                       |       | 467                              |       | (1                         | )          | 2,839            |       |
| Amortization of bond premium                 |       | (63                       | )          | —                      |       | —                           |       | —                     |       | (63              | )          |
| Tax benefit from stock option exercises      |       | 32                        |       | —                      |       | —                           |       | —                     |       | 32               |       |
| Deferred tax benefit                         |       | (18                       | )          | (65                         | )          | (76                              | )          | —                     |       | (159             | )          |
| Other                                        |       | —                    |       | 183                         |       | (52                              | )          | —                     |       | 131              |       |
| Changes in operating assets and liabilities: |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Accounts, notes and other receivables        |       | —                    |       | (4,027                      | )          | 3,145                            |       | —                     |       | (882             | )          |
| Inventories                                  |       | —                    |       | (4,325                      | )          | (2,786                           | )          | (68                        | )          | (7,179           | )          |
| Prepaid expenses and other assets            |       | 97                        |       | 2,146                       |       | (695                             | )          | —                     |       | 1,548            |       |
| Accounts payable                             |       | (436                      | )          | (829                        | )          | 871                              |       | —                     |       | (394             | )          |
| Other liabilities                            |       | 1,632                     |       | (285                        | )          | (254                             | )          | 58                         |       | 1,151            |       |
| Cash flows from  operating activities        |       | (179                      | )          | (2,392                      | )          | 2,193                            |       | —                     |       | (378             | )          |
|                                         |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Cash flows from  investing activities:       |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Capital expenditures                         |       | (74                       | )          | (808                        | )          | (330                             | )          | —                     |       | (1,212           | )          |
| Proceeds from disposal of fixed assets       |       | —                    |       | —                      |       | 304                              |       | —                     |       | 304              |       |
| Cash flows from  investing activities        |       | (74                       | )          | (808                        | )          | (26                              | )          | —                     |       | (908             | )          |
|                                         |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Cash flows from  financing activities:       |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Borrowings under lines of credit             |       | —                    |       | —                      |       | 1,349                            |       | —                     |       | 1,349            |       |
| Repayments under lines of credit             |       | —                    |       | (852                        | )          | (658                             | )          | 852                        |       | (658             | )          |
| Repayments of long-term debt                 |       | —                    |       | (1,595                      | )          | —                           |       | —                     |       | (1,595           | )          |
| Proceeds from issuance of stock              |       | 252                       |       | —                      |       | —                           |       | —                     |       | 252              |       |
| Intercompany transactions                    |       | 1                         |       | 2,942                       |       | (2,943                           | )          | —                     |       | —           |       |
| Cash flows from  financing activities        |       | 253                       |       | 495                         |       | (2,252                           | )          | 852                        |       | (652             | )          |
|                                         |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Effect of  exchange rate changes on cash     |       | —                    |       | —                      |       | (713                             | )          | —                     |       | (713             | )          |
|                                         |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Increase  (decrease) in cash                 |       | —                    |       | (2,705                      | )          | (798                             | )          | 852                        |       | (2,651           | )          |
| Cash, beginning  of period                   |       | —                    |       | 44,990                      |       | 14,238                           |       | (31,856                    | )          | 27,372           |       |
|                                         |       |                      |       |                        |       |                             |       |                       |       |             |       |
| Cash, end of period                          |       | $                         | —     |                        | $          | 42,285                           |       | $                          | 13,440     |             | $          | (31,004 | ) | $ | 24,721 |   |

 

26

----

 

**(13)**                          SubsequentEvents

On April 1, 2006, the employees at our Elkhart,Indiana brass instrument manufacturing facility went on strike. These 230employees are members of Local 364 of the United Auto Workers (“UAW”) andrepresent approximately 19% of our band division’s workforce. We will incurunabsorbed overhead costs during the strike. Although our ability to producecertain instruments may be adversely impacted, based on our existinginventories, other brass instrument facilities, and foreign sources at ourdisposal we should be able to meet demand for most brass instruments in thenear-term.

On April 17, 2006, we redeemedthe remaining outstanding 8.75% Senior Notes pursuant to our exercise of theright to call this debt. This transaction resulted in a loss on extinguishmentof $3.1 million, comprised of $2.3 million in call premiums and $0.8 million inthe write-off of associated deferred financing costs.

27

----

**ITEM 2**                     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Tabular Amounts in Thousands Except Share and Per Share Data)

**Introduction**

**We area world leader in the design, manufacture, marketing, and distribution of high qualitymusical instruments. Our piano division concentrates on the high-end grandpiano segment of the industry, handcrafting Steinway pianos in New York andGermany. We also offer upright pianos and two mid-priced lines of pianos underthe Boston and Essex brand names. We are also the largest domestic producer ofband and orchestral instruments and offer a complete line of brass, woodwind,percussion and string instruments and related accessories with well-known brandnames such as Bach, Selmer, C.G. Conn, Leblanc, King, and Ludwig. We sell ourproducts through dealers and distributors worldwide. Our piano customer baseconsists of professional artists, amateur pianists, and institutions such asconcert halls, universities, and music schools. Our band and orchestralinstrument customer base consists primarily of middle school and high schoolstudents, but also includes adult amateur and professional musicians.**

**CriticalAccounting Policies**

The Securities and Exchange Commission (“SEC”) hasissued disclosure guidance for “critical accounting policies.” The SEC defines “criticalaccounting policies” as those that require application of management’s mostdifficult, subjective or complex judgments, often as a result of the need tomake estimates about the effect of matters that are inherently uncertain andmay change in subsequent periods.

Management is required to make certain estimates andassumptions during the preparation of the consolidated financial statements.These estimates and assumptions impact the reported amount of assets andliabilities and disclosures of contingent assets and liabilities as of the dateof the consolidated financial statements. Estimates and assumptions arereviewed periodically and the effects of revisions are reflected in theconsolidated financial statements in the period they are determined to benecessary. Actual results could differ from those estimates.

The significant accounting policies are described inNote 2 of the Notes to Consolidated Financial Statements included in theCompany’s 2005 Annual Report on Form 10-K. Not all of thesesignificant accounting policies require management to make difficult,subjective or complex judgments or estimates. However, management considers thefollowing estimates to be critical based on the definition above.

**Accounts Receivable**

We establish reserves for accounts receivable andnotes receivable (including recourse reserves when our customers have financednotes receivable with a third party). We review overall collectibility trendsand customer characteristics such as debt leverage, solvency, and outstandingbalances in order to develop our reserve estimates.

**Inventory**

We establish inventory reserves for items such aslower-of-cost-or-market and obsolescence. We review inventory levels on adetailed basis, concentrating on the age and amounts of raw materials,work-in-process, and finished goods, as well as recent usage and sales datesand quantities to help develop our estimates. We also establish reserves foranticipated book-to-physical adjustments based upon our historical level ofadjustments from our annual physical inventories. We cost our inventory using 

28

----

standard costs. Accordingly, variances between actualand standard costs that are not abnormal in nature are capitalized intoinventory and released based on calculated inventory turns.

**Workers’ Compensation and Self-Insured HealthClaims**

We establish workers’ compensation and self-insuredhealth claims reserves based on our trend analysis of data provided by thirdparty administrators regarding historical claims and anticipated future claims.

**Warranty**

We establish reserves for warranty claims based on ouranalysis of historical claims data, recent claims trends, and the variouslengths of time for which we warranty our products.

**Long-lived Assets**

We review long-lived assets, such as property,plant, and equipment, for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. We measure recoverability by comparing the carrying amount of theasset to the estimated future cash flows the asset is expected to generate.

Wetest our goodwill and indefinite-lived trademark assets for impairment annuallyor on an interim basis if events or circumstances indicate that the fair valueof an asset may have decreased below its carrying value. Our assessment isbased on several analyses, including multi-year cash flows and comparison ofestimated fair values to our market capitalization.

**Pensionsand Other Post Retirement Benefit Costs**

We make certain assumptions when calculating our benefit obligationsand expenses.  We base our selection ofassumptions, such as discount rates and long-term rates of return, oninformation provided by our actuaries, investment advisors, investmentcommittee, current rate trends, and historical trends for our pension assetportfolio. Our benefit obligations and expenses can fluctuate significantlybased on the assumptions management selects.

**Deferred Income Taxes**

A valuation allowance hasbeen recorded for certain deferred tax assets related to foreign tax creditcarryforwards and state net operating loss carryforwards. When assessing therealizability of deferred tax assets, we consider whether it is more likelythan not that the deferred tax assets will be fully realized. The ultimaterealization of these assets is dependent upon many factors, including the ratioof foreign source income to overall income and generation of sufficient futuretaxable income in the states for which we have loss carryforwards. Whenestablishing or adjusting valuation allowances, we consider these factors, aswell as anticipated trends in foreign source income and tax planning strategieswhich may impact future realizability of these assets.

29

----

**Stock-basedCompensation**

Wegrant stock-based compensation awards which generally vest over a specifiedperiod. When determining the fair value of stock options and subscriptions topurchase shares under the Purchase Plan, we use the Black-Scholes optionvaluation model, which requires input of certain management assumptions,including dividend yield, expected volatility, risk-free interest rate,expected life of stock options granted during the period, and the lifeapplicable to the Purchase Plan subscriptions. The estimated fair value of theoptions and subscriptions to purchase shares, and the resultant stock-basedcompensation expense can fluctuate based on the assumptions used by management.

**Environmental Liabilities**

We make certain assumptions when calculating our environmentalliabilities. We base our selection of assumptions, such as cost and length oftime for remediation, on data provided by our environmental consultants, aswell as information provided by regulatory authorities. We also make certainassumptions regarding the indemnifications we have received from others,including whether remediation costs are within the scope of theindemnification, the indemnifier’s ability to perform under the agreement, andwhether past claims have been successful. Our environmental obligations andexpenses can fluctuate significantly based on management’s assumptions.

We believe the assumptions made by management providea reasonable basis for the estimates reflected in our financial statements.

**Forward-LookingStatements**

Certain statements contained in this document are “forward-lookingstatements” within the meaning of Section 21E of the Securities andExchange Act of 1934, as amended. These forward-looking statements representour present expectations or beliefs concerning future events. We caution thatsuch statements are necessarily based on certain assumptions which are subjectto risks and uncertainties which could cause actual results to differmaterially from those indicated in this report. These risk factors include, butare not limited to, the following: changes in general economic conditions; geopolitical events; increasedcompetition; work stoppages and slowdowns; exchange rate fluctuations;variations in the mix of products sold; market acceptance of new band instrumentproduct and distribution strategies; ability of suppliers to meet demand;fluctuations in effective tax rates resulting from shifts in sources of income;and the ability to successfully integrate and operate acquired businesses. Furtherinformation on these risk factors is included in Item 1A of our AnnualReport on Form 10-K for the year ended December 31, 2005, andin our Final Prospectus filed in August 1996. We encourage you to readthose descriptions carefully. We caution investors not to place undue relianceon the forward-looking statements contained in this report. These statements,like all statements contained in this report, speak only as of the date of thisreport (unless another date is indicated) and we undertake no obligation toupdate or revise the statements except as required by law.

30

----

**Resultsof Operations**

Three Months EndedMarch 31, 2006 Compared to Three Months Ended March 31, 2005

* *
| ** **                         | ** ** | **Three Months Ended March 31,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **2006**                                             | ** ** | ** ** | ** ** | **2005**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
| Net sales                          |       |                                                 |       |       |       |       |       |   |   |   |   |   |   |
| Band                               |       | $                                                    | 53,066     |       |       |       | $          | 47,567 |   |   |   | 5,499 |   | 11.6 |   |
| Piano                              |       | 42,128                                               |       |       |       | 43,775     |       |   |   | (1,647 | ) | (3.8 | ) |
| Total sales                        |       | 95,194                                               |       |       |       | 91,342     |       |   |   | 3,852 |   | 4.2 |   |
|                               |       |                                                 |       |       |       |       |       |   |   |   |   |   |   |
| Cost of sales                      |       |                                                 |       |       |       |       |       |   |   |   |   |   |   |
| Band                               |       | 41,005                                               |       |       |       | 37,814     |       |   |   | 3,191 |   | 8.4 |   |
| Piano                              |       | 28,197                                               |       |       |       | 27,831     |       |   |   | 366 |   | 1.3 |   |
| Total cost of  sales               |       | 69,202                                               |       |       |       | 65,645     |       |   |   | 3,557 |   | 5.4 |   |
|                               |       |                                                 |       |       |       |       |       |   |   |   |   |   |   |
| Gross profit                       |       |                                                 |       |       |       |       |       |   |   |   |   |   |   |
| Band                               |       | 12,061                                               |       | 22.7%      |       | 9,753      |       | 20.5% |   | 2,308 |   | 23.7 |   |
| Piano                              |       | 13,931                                               |       | 33.1%      |       | 15,944     |       | 36.4% |   | (2,013 | ) | (12.6 | ) |
| Total gross  profit                |       | 25,992                                               |       |       |       | 25,697     |       |   |   | 295 |   | 1.1 |   |
|                               |       | 27.3%                                                |       |       |       | 28.1%      |       |   |   |   |   |   |   |
|                               |       |                                                 |       |       |       |       |       |   |   |   |   |   |   |
| Operating  expenses                |       | 20,481                                               |       |       |       | 18,639     |       |   |   | 1,842 |   | 9.9 |   |
|                               |       |                                                 |       |       |       |       |       |   |   |   |   |   |   |
| Income from  operations            |       | 5,511                                                |       |       |       | 7,058      |       |   |   | (1,547 | ) | (21.9 | ) |
|                               |       |                                                 |       |       |       |       |       |   |   |   |   |   |   |
| Other income,  net                 |       | (751                                                 | )          |       |       | (439       | )          |   |   | (312 | ) | 71.1 |   |
| Loss on  extinguishment of debt    |       | 6,611                                                |       |       |       | —     |       |   |   | 6,611 |   | 100.0 |   |
| Net interest  expense              |       | 2,748                                                |       |       |       | 3,169      |       |   |   | (421 | ) | (13.3 | ) |
| Non-operating  expenses            |       | 8,608                                                |       |       |       | 2,730      |       |   |   | 5,878 |   | 215.3 |   |
|                               |       |                                                 |       |       |       |       |       |   |   |   |   |   |   |
| (Loss) income before  income taxes |       | (3,097                                               | )          |       |       | 4,328      |       |   |   | (7,425 | ) | (171.6 | ) |
|                               |       |                                                 |       |       |       |       |       |   |   |   |   |   |   |
| Income tax  (benefit) provision    |       | (1,255                                               | )          | 40.5%      |       | 1,730      |       | 40.0% |   | (2,985 | ) | (172.5 | ) |
|                               |       |                                                 |       |       |       |       |       |   |   |   |   |   |   |
| Net (loss) income                  |       | $                                                    | (1,842     | )          |       |       | $          | 2,598 |   |   |   | (4,440 | ) | (170.9 | ) |

 

31

----

**Overview**— Band divisionrevenues increased as a result of promotional efforts geared towardsprofessional instruments. The manufacturing inefficiencies and supply issuesfor certain woodwind and sourced products that we experienced in the year-agoperiod have been corrected, enabling us to reduce production variances and improvedelivery of these products. Band margins also improved as we have sold throughour purchased Leblanc inventory, which was written up to fair value uponacquisition.

Domesticpiano revenues declined primarily on downturns in demand for our Bostonproducts. Overseas piano revenue remained relatively stable due to wholesaledemand in Europe. Margins deteriorated from the year-ago period due largely tothe two-week shutdown of our domestic piano facility, which was done to controlinventory.

**Net Sales***—*Theincrease in net sales of $3.9 million resulted from improved performance in theband segment. Total unit shipments increased 4%, driven by an increase in bandunit shipments. An increase in accessory sales and student woodwind productsalso contributed to the revenue improvement. Piano sales decreased $1.6 millionas a result of the adverse foreign currency translation impact of$1.6 million. Standard price increases on Steinway and Boston products andan improvement in overseas Steinway grand unit shipments of 8% helped mitigatethe decrease in domestic sales of Boston products of $1.5 million, whichcorresponded to a decrease in domestic unit shipments of 17%. Although domesticretail sales increased $1.1 million, this was offset by a deterioration ofdomestic sales to dealers in the current period.

**Gross Profit***—*Gross profit improved $0.3 million driven by an increase in band sales andmargin improvements. Lower charges ($0.1 million as opposed to $0.7 million)arising from the sell-through of purchased Leblanc inventory, which was writtenup to fair value upon acquisition, drove the band margin increase from 20.5% to22.7%. An increase in production efficiencies and a corresponding$0.4 million reduction in production variances, particularly at thewoodwind manufacturing facility, also contributed to the improvement. In aneffort to control inventories, we shut down production for two weeks at ourdomestic piano manufacturing facility, which resulted in underabsorption ofoverhead of approximately $0.9 million. This, coupled with the revenuedecrease, resulted in the deterioration of piano division gross profit of $2.0million in the current period.

**Operating Expenses** — Operatingexpenses increased $1.8 million as a result of increased personnel expenses,including stock-based compensation expense of $0.3 million, bonuses of $0.5million, severance of $0.1 million, recruiting costs of $0.1 million,as well as legal fees of $0.3 million. Increased sales and marketing costsof $0.5 million associated with tradeshows, travel, and direct marketingcampaigns also caused the increase in costs.

**Non-operating Expenses** —Non-operating expenses increased $5.9 million due to the loss on extinguishmentof debt of $6.6 million resulting from the refinancing of our 8.75% SeniorNotes and the early repayment of our acquisition term loan. This net loss wascomprised of $5.5 million in premiums paid to bondholders, the write-off ofterm loan related deferred financing fees of $1.0 million, and thewrite-off of bond related deferred financing fees of $1.4 million, which wereoffset in part by the write-off of bond premium of $1.3 million.

Otherincome, net increased $0.3 million due to foreign exchange gains. Net interestexpense decreased $0.4 million mainly due to the interest earned on theresidual proceeds from the issuance of 7.00% Senior Notes of $46.6 million. Subsequentto quarter-end, these proceeds were used to redeem the remaining 8.75% SeniorNotes.

32

----

**Income Taxes***—*Our effective tax rate of 40.5% is relatively consistentwith the 40.0% rate in the prior comparative period.

**Liquidity and Capital Resources**

**Wehave relied primarily upon cash provided by operations, supplemented asnecessary by seasonal borrowings under our working capital line, to finance ouroperations, repay long-term indebtedness and fund capital expenditures.**

Our statements of cash flows for the three monthsended March 31, 2006 and 2005 are summarized as follows:
| ** **                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net (loss) income:                                                                  |       | $        | (1,842     | )        | $          | 2,598      |       | $ | (4,440 | ) |
| Changes in operating assets and liabilities                                         |       | (4,246   | )          | (5,756   | )          | 1,510      |       |
| Other adjustments to reconcile net (loss) income to  cash from operating activities |       | 9,950    |       | 2,780    |       | 7,170      |       |
| Cash flows from  operating activities                                               |       | 3,862    |       | (378     | )          | 4,240      |       |
|                                                                                |       |     |       |     |       |       |       |
| Cash flows from  investing activities                                               |       | (1,144   | )          | (908     | )          | (236       | )          |
|                                                                                |       |     |       |     |       |       |       |
| Cash flows from  financing activities                                               |       | 33,959   |       | (652     | )          | 34,611     |       |
|                                                                                |       |     |       |     |       |       |       |
|                                                                                     |            |          |            |          |            |            |            |  |  |  |

 

Cash flowsgenerated from operating activities increased $4.2 million. Cash used foraccounts receivable increased $3.9 million in conjunction with the increase inband sales, many of which resulted from March promotional activities.However, these activities contributed to the improvement in cash provided byinventories of $7.7 million.  The use ofcash for investing activities increased $0.2 million despite consistent capitalexpenditures each period, as we benefited from $0.3 million of proceeds from disposalsof property in the prior period. Cash provided by financing activitiesincreased $34.6 million due to our bond refinancing, which generated proceedsof $173.7 million, offset by the repayment of our acquisition term loan of$16.6 million and extinguishment of $114.6 of our 8.75% Senior Note debt. Premiumspaid on the extinguishment of debt of $5.5 million and costs related to the 7.00%Senior Note offering of $4.2 million also offset our bond refinancing proceeds.

**BorrowingActivities and Availability —**During the period we restructured our long-term debtand issued $175.0 million of 7.00% Senior Notes due 2014. We used the proceedsfrom this issuance to repay $114.6 million of our 8.75% Senior Notes pursuantto our tender offer to repurchase these notes from existing holders. Theremaining proceeds, supplemented by borrowings on our line of credit, were usedto extinguish the remaining $51.6 million of the 8.75% Senior Notes subsequent toMarch 31, 2006. This resulted in an additional loss on extinguishment of$3.1 million, comprised of $2.3 million in premiums paid to existingholders of 8.75% Senior Notes and $0.8 million in the write-off of associateddeferred financing costs. We recorded interest on both the 8.75% Senior Notes and the 7% SeniorNotes for the February — April timeframe during which both series ofnotes were outstanding. This double interest expense was partially offset by interestincome on the unused debt issuance proceeds during the first quarter, and isnot material to the financial statements. Once the double interest period haspassed, we expect interest payment savings of approximately $2.3 million peryear based on the difference in interest rates on the Senior Notes.

Our real estate termloan and domestic, seasonal borrowing requirements are accommodated through acommitted credit facility with a syndicate of domestic lenders (the “CreditFacility”). The Credit Facility provides us with a potential borrowing capacityof $85.0 million in revolving credit loans, and expires on September 14,2008. Borrowings are collateralized by our domestic accounts receivable,inventory, and fixed assets. As of March 31, 2006, there were no revolvingcredit loans outstanding and availability based on eligible accounts receivableand inventory balances was approximately $83.6 million, net of letters ofcredit. The real estate term loan is payable in monthly installments of $0.2million and includes interest at average 30-day London Interbank OfferedRate (“LIBOR”) (4.75% at March 31, 2006) plus 1.5%. This term loan issecured by all of our interests in the Steinway Hall property. The acquisitionterm loan was repaid during the period. All of our borrowings under the CreditFacility are secured by a first lien on our domestic inventory, receivables,and fixed assets.

33

----

We also have certain non-domestic credit facilities originating fromtwo German banks that provide for borrowings by foreign subsidiaries of up to €16.4million ($19.9 million at the March 31, 2006 exchange rate), net ofborrowing restrictions of €0.7 million ($0.9 million at the March 31, 2006exchange rate) and are payable on demand. These borrowings are collateralizedby most of the assets of the borrowing subsidiaries. A portion of the loans canbe converted into a maximum of £0.5 million ($0.9 million at the March 31,2006 exchange rate) for use by our U.K. branch and ¥300 million ($2.5 millionat the March 31, 2006 exchange rate) for use by our Japanese subsidiary.Our Chinese subsidiary also has the ability to convert the equivalent of up to €1.8million into U.S. dollars or Chinese yuan ($2.2 million at the March 31,2006 exchange rate). Euro loans bear interest at rates of Euro InterbankOffered Rate (“EURIBOR”) plus a margin determined at the time of borrowing.Margins fluctuate based on the loan amount and the borrower’s bank rating. Theremaining demand borrowings bear interest at fixed margins at rates of LIBORplus 1% for British pound loans (6.0% at March 31, 2006), LIBOR plus 1%for U.S. dollar loans of our Chinese subsidiary (5.57% to 6.11% at March 31,2006), and Tokyo Interbank Offered Rate (“TIBOR”) plus 0.9% for Japanese yenloans (0.965% at March 31, 2006). We had $2.9 million outstanding as of March 31,2006 on these credit facilities.

Our Japanese subsidiary also maintains a separate revolving loanagreement that provides additional borrowing capacity of up to ¥460 million($3.9 million at the March 31, 2006 exchange rate) based on eligibleinventory balances. The revolving loan agreement bears interest at an average 30-dayTIBOR rate plus 0.9% (0.965% at March 31, 2006) and expires on January 31,2010. As of March 31, 2006, we had $2.5 million outstanding on thisrevolving loan agreement.

At March 31, 2006, our total outstanding indebtedness amounted to$247.2 million, consisting of $51.6 million of 8.75% Senior Notes, $175.0 millionof 7.00% Senior Notes, $15.1 million on the real estate term loan, and $5.4million of notes payable to foreign banks.

All of our debt agreements contain covenants that place certainrestrictions on us, including our ability to incur additional indebtedness, tomake investments in other entities and to pay cash dividends. We were incompliance with all such covenants as of March 31, 2006 and do notanticipate any compliance issues in 2006.

Our bond indenture contains limitations, based on netincome (among other things), on the amount of discretionary repurchases we maymake of our Ordinary common stock. Our intent and ability to repurchaseadditional Ordinary common stock either directly from shareholders or on theopen market is directly affected by this limitation.

34

----

We have reserved 721,750 shares of our existingtreasury stock to be utilized for the exercise of outstanding stock optionsunder our Amended and Restated 1996 Stock Plan. These options have no impact onour cash flow or the number of shares outstanding unless and until the optionsare exercised.

We experience long production and inventory turnovercycles, which we constantly monitor since fluctuations in demand can have asignificant impact on these cycles. We were able to effectively utilize cashflow from operations to fund our capital requirements and pay off our seasonalborrowings on our domestic line of credit.

Other than the restructuring of our long-term debt as described above,we do not have any current plans or intentions that will have a material impacton our liquidity in 2006, although we may consider acquisitions that mayrequire funding from operations or from our credit facilities. Other than thosedescribed, we are not aware of any trends, demands, commitments, or costs ofresources that are expected to materially impact our liquidity or capitalresources. Accordingly, we believe that cash on hand, together with cash flowsanticipated from operations and available borrowings under the Credit Facility,will be adequate to meet our debt service requirements, fund continuing capitalrequirements and satisfy our working capital and general corporate needsthrough 2006.

**Contractual Obligations —**The following table provides a summary ofour contractual obligations at March 31, 2006.
| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                 | ** ** | **Less than   1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **More than   5 years** | ** ** |
| Long-term debt  (1)              |       | $                                         | 346,367    |   | $ | 71,605 |   | $ | 39,703 |   | $ | 24,500 |   | $ | 210,559 |   |
| Capital leases                   |       | 62                                        |       | 13 |   | 30 |   | 19 |   | — |   |
| Operating leases  (2)            |       | 268,267                                   |       | 4,911 |   | 8,145 |   | 7,949 |   | 247,262 |   |
| Purchase  obligations (3)        |       | 11,279                                    |       | 11,099 |   | 163 |   | 17 |   | — |   |
| Other long-term  liabilities (4) |       | 28,536                                    |       | 3,335 |   | 3,642 |   | 3,357 |   | 18,202 |   |
| Total                            |       | $                                         | 654,511    |   | $ | 90,963 |   | $ | 51,683 |   | $ | 35,842 |   | $ | 476,023 |   |

 

**Notes to Contractual Obligations:**

(1) Long-term debt represents long-term debtobligations, the fixed interest on our Notes, and the variable interest on ourother loans. We estimated the future variable interest obligation using theapplicable March 31, 2006 rates. The nature of our long-term debtobligations, including changes to our long-term debt structure which occurredsubsequent to March 31, 2006 is described more fully in the “BorrowingAvailability and Activities” section of “Liquidity and Capital Resources.”

(2) Approximately$254.8 million of our operating lease obligations are attributable to theninety-nine year land lease associated with the purchase of Steinway Hall; theremainder is attributable to the leasing of other facilities and equipment.

(3) Purchaseobligations consist of firm purchase commitments for raw materials, finishedgoods, and equipment.

(4) Our other long-term liabilities consist primarily of thelong-term portion of our pension obligations, which are described in Note 10 inthe Notes to Consolidated Financial Statements included within this filing, andobligations under employee and consultant agreements.

35

----

**RecentAccounting Pronouncements**

In February 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 155, “Accounting for Certain HybridFinancial Instruments — an amendment of FASB Statements No. 133 and 140”which is effective for fiscal years beginning after September 15, 2006. Thestatement was issued to clarify the application of FASB Statement No. 133to beneficial interest in securitized financial assets and to improve theconsistency of accounting for similar financial instruments, regardless of theform of the instruments. We do not expect this statement to have a materialimpact on our financial position or results of operations.

**ITEM 3**                       QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

**We are exposed to market risk associated with changes inforeign currency exchange rates and interest rates. We mitigate a portion ofour foreign currency exchange rate risk by maintaining foreign currency cashbalances and holding option and forward foreign currency contracts. They arenot designated as hedges for accounting purposes. These contracts relateprimarily to intercompany transactions and are not used for trading orspeculative purposes. The fair value of the option and forward foreign currencyexchange contracts is sensitive to changes in foreign currency exchange rates. Theimpact of an adverse change in foreign currency exchange rates would not bematerially different than that disclosed in our Annual Report on Form 10-Kfor the year ended December 31, 2005.**

**Our revolving loans and term loans bear interest at ratesthat fluctuate with changes in LIBOR, TIBOR, and EURIBOR. As such, our interestexpense on our revolving loans and term loans and the fair value of our fixedlong-term debt are sensitive to changes in market interest rates. The effect ofan adverse change in market interest rates on our interest expense would not bematerially different than that disclosed in our Annual Report on Form 10-Kfor the year ended December 31, 2005.**

**The majority of our long-term debt is at a fixed interestrate. Therefore, the associated interest expense is not sensitive tofluctuations in market interest rates. However, the fair value of our fixedinterest debt would be sensitive to market rate changes. Such fair valuechanges may affect our decision whether to retain, replace, or retire thisdebt.**

36

----

**ITEM 4.**     CONTROLS AND PROCEDURES

As of the end of theperiod covered by this report, we evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)). Our disclosure controlsand procedures are the controls and other procedures that we designed to ensurethat we record, process, summarize and report in a timely manner theinformation we must disclose in reports that we file with or submit to the SEC.Our Chief Executive Officer and Chief Financial Officer reviewed and participatedin this evaluation. Based on this evaluation the Chief Executive Officer andChief Financial Officer concluded that our disclosure controls and procedureswere effective. In designing the Company’s disclosure controls and procedures,the Company’s management recognizes that any controls, no matter how welldesigned and operated, can only provide reasonable, not absolute, assurance ofachieving the desired control objectives.

During the quartercovered by this report, there were no significant changes in our internalcontrols that materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

**PART II**                                                OTHERINFORMATION

**ITEM 6.**                    EXHIBITS

(i)             Exhibits

31.1 Certificationof the Principal Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002

31.2 Certificationof the Principal Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002

32.1 Certificationof the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certificationof the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

37

----

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon their behalf by the undersigned, thereunto duly authorized.
|        |   | STEINWAY MUSICAL INSTRUMENTS, INC.               |
|--------|--------|--------------------------------------------------|
|   |   |                                             |
|   |   | /s/ DANA D.  MESSINA                             |
|   |   | Dana D. Messina                                  |
|   |   | Director,  President and Chief Executive Officer |
|   |   |                                             |
|   |   | /s/ DENNIS M.  HANSON                            |
|   |   | Dennis M. Hanson                                 |
|   |   | Senior Executive  Vice President and             |
|   |   | Chief Financial  Officer                         |

 

Date:  May 9,2006

38

----