**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-Q**
| x          | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                  |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                               |

**COMMISSION FILE NUMBER 001-11911**

**STEINWAY MUSICAL INSTRUMENTS, INC.**(Exact name of registrant as specified 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 check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements during thepast 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.  Seedefinition of “accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):
| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o    No x
| Number of shares of Common  Stock issued and outstanding as of May 6, 2007: |   | Class  A |   | 477,952   |   |
|-----------------------------------------------------------------------------|--------|----------|--------|-----------|--------|
|                                                                        |   | Ordinary |   | 8,024,144 |   |
|                                                                        |   | Total    |   | 8,502,096 |   |

 

 

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**FORM 10-Q**

**INDEX**
| **PART I.**  | ** ** | **UNAUDITED FINANCIAL INFORMATION**                                    |       |       |
|--------------|------------|------------------------------------------------------------------------|------------|------------|
| ** **   | ** ** | ** **                                                             | ** ** | ** ** |
| **Item 1.**  | ** ** | **Consolidated  and Condensed Consolidated Financial Statements:**     | ** ** | ** ** |
|         |       |                                                                   |       |       |
|         |       | Consolidated  Statements of Operations                                 |       |       |
|         |       | Three  months ended March 31, 2007 and March 31, 2006                  |       |       |
|         |       |                                                                   |       |       |
|         |       | Condensed  Consolidated Balance Sheets                                 |       |       |
|         |       | March 31,  2007 and December 31, 2006                                  |       |       |
|         |       |                                                                   |       |       |
|         |       | Consolidated  Statements of Cash Flows                                 |       |       |
|         |       | Three  months ended March 31, 2007 and March 31, 2006                  |       |       |
|         |       |                                                                   |       |       |
|         |       | Consolidated  Statement of Stockholders’ Equity                   |       |       |
|         |       | Three  months ended March 31, 2007                                     |       |       |
|         |       |                                                                   |       |       |
|         |       | 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

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**ITEM 1**

**CONSOLIDATED ANDCONDENSED CONSOLIDATED FINANCIAL STATEMENTSSTEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSUnaudited(In Thousands Except Share and Per Share Amounts)**
|                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net sales                          |       | $                                                    | 93,432     |   | $ | 95,194 |   |
| Cost of sales                      |       | 66,192                                               |       | 69,202 |   |
|                               |       |                                                 |       |   |   |
| Gross profit                       |       | 27,240                                               |       | 25,992 |   |
|                               |       |                                                 |       |   |   |
| Operating expenses:                |       |                                                 |       |   |   |
| Sales and  marketing               |       | 12,790                                               |       | 11,727 |   |
| General and  administrative        |       | 9,010                                                |       | 8,378 |   |
| Amortization of  intangible assets |       | 196                                                  |       | 229 |   |
| Other operating  expenses          |       | 877                                                  |       | 147 |   |
| Total operating  expenses          |       | 22,873                                               |       | 20,481 |   |
|                               |       |                                                 |       |   |   |
| Income from operations             |       | 4,367                                                |       | 5,511 |   |
|                               |       |                                                 |       |   |   |
| Other income, net                  |       | (170                                                 | )          | (751 | ) |
| Loss on extinguishment  of debt    |       | —                                               |       | 6,611 |   |
| Interest income                    |       | (1,096                                               | )          | (1,727 | ) |
| Interest expense                   |       | 3,248                                                |       | 4,475 |   |
| Total non-operating  expenses      |       | 1,982                                                |       | 8,608 |   |
|                               |       |                                                 |       |   |   |
| Income (loss) before  income taxes |       | 2,385                                                |       | (3,097 | ) |
|                               |       |                                                 |       |   |   |
| Income tax provision  (benefit)    |       | 955                                                  |       | (1,255 | ) |
|                               |       |                                                 |       |   |   |
| Net income (loss)                  |       | $                                                    | 1,430      |   | $ | (1,842 | ) |
|                               |       |                                                 |       |   |   |
| Earnings (loss) per  share:        |       |                                                 |       |   |   |
| Basic                              |       | $                                                    | 0.17       |   | $ | (0.23 | ) |
| Diluted                            |       | $                                                    | 0.17       |   | $ | (0.23 | ) |
|                               |       |                                                 |       |   |   |
| Weighted average  shares:          |       |                                                 |       |   |   |
| Basic                              |       | 8,419,148                                            |       | 8,152,369 |   |
| Diluted                            |       | 8,579,978                                            |       | 8,152,369 |   |

 

Seenotes to consolidated and condensed consolidated financial statements.

3

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS**

**Unaudited(In Thousands)**
| ** **                                                                                                             | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                                                                                   |       |                     |       |                        |       |
| Assets                                                                                                                 |       |                     |       |                        |       |
| Current assets:                                                                                                        |       |                     |       |                        |       |
| Cash                                                                                                                   |       | $                        | 9,449      |                        | $          | 30,409 |   |
| Accounts, notes  and other receivables, net of allowances of $15,403 and  $21,640 in 2007 and 2006, respectively       |       | 74,025                   |       | 75,161                      |       |
| Inventories, net                                                                                                       |       | 165,686                  |       | 154,623                     |       |
| Prepaid expenses  and other current assets                                                                             |       | 12,853                   |       | 12,711                      |       |
| Deferred tax  assets                                                                                                   |       | 11,479                   |       | 9,774                       |       |
| Total current assets                                                                                                   |       | 273,492                  |       | 282,678                     |       |
|                                                                                                                   |       |                     |       |                        |       |
| Property,  plant and equipment, net of accumulated depreciation of $86,730 and  $84,386 in 2007 and 2006, respectively |       | 94,900                   |       | 95,598                      |       |
| Trademarks                                                                                                             |       | 13,721                   |       | 13,671                      |       |
| Goodwill                                                                                                               |       | 31,641                   |       | 31,481                      |       |
| Other intangibles, net                                                                                                 |       | 4,528                    |       | 4,725                       |       |
| Other assets                                                                                                           |       | 13,533                   |       | 12,988                      |       |
| Long-term deferred tax  assets                                                                                         |       | 7,374                    |       | 6,034                       |       |
| Total assets                                                                                                           |       | $                        | 439,189    |                        | $          | 447,175 |   |
|                                                                                                                   |       |                     |       |                        |       |
| Liabilities and  stockholders’ equity                                                                             |       |                     |       |                        |       |
| Current liabilities:                                                                                                   |       |                     |       |                        |       |
| Debt                                                                                                                   |       | $                        | 7,330      |                        | $          | 4,595 |   |
| Accounts payable                                                                                                       |       | 16,646                   |       | 16,805                      |       |
| Other current  liabilities                                                                                             |       | 40,326                   |       | 44,648                      |       |
| Total current  liabilities                                                                                             |       | 64,302                   |       | 66,048                      |       |
|                                                                                                                   |       |                     |       |                        |       |
| Long-term debt                                                                                                         |       | 185,357                  |       | 173,816                     |       |
| Deferred tax  liabilities                                                                                              |       | 11,787                   |       | 11,754                      |       |
| Pension and other  postretirement benefit liabilities                                                                  |       | 33,433                   |       | 32,847                      |       |
| Other non-current  liabilities                                                                                         |       | 9,014                    |       | 4,709                       |       |
| Total liabilities                                                                                                      |       | 303,893                  |       | 289,174                     |       |
|                                                                                                                   |       |                     |       |                        |       |
| Commitments and  contingent liabilities                                                                                |       |                     |       |                        |       |
|                                                                                                                   |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                             |       |                     |       |                        |       |
| Common stock                                                                                                           |       | 11                       |       | 10                          |       |
| Additional  paid-in capital                                                                                            |       | 92,746                   |       | 90,266                      |       |
| Retained  earnings                                                                                                     |       | 99,056                   |       | 125,711                     |       |
| Accumulated  other comprehensive loss                                                                                  |       | (9,998                   | )          | (10,550                     | )          |
| Treasury stock,  at cost                                                                                               |       | (46,519                  | )          | (47,436                     | )          |
| Total stockholders’  equity                                                                                       |       | 135,296                  |       | 158,001                     |       |
|                                                                                                                   |       |                     |       |                        |       |
| Total liabilities and stockholders’ equity                                                                        |       | $                        | 439,189    |                        | $          | 447,175 |   |

 

See notes toconsolidated and condensed consolidated financial statements.

4

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**STEINWAY MUSICAL INSTRUMENTS, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

**Unaudited(In Thousands)**
| ** **                                                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                               |       |                                                 |       |   |   |
| Net income  (loss)                                                                   |       | $                                                    | 1,430      |   | $ | (1,842 | ) |
| Adjustments to  reconcile net income (loss) to cash flows from operating activities: |       |                                                 |       |   |   |
| Depreciation and  amortization                                                       |       | 2,569                                                |       | 2,667 |   |
| Amortization of  bond discount                                                       |       | 41                                                   |       | 16 |   |
| Amortization of  bond premium                                                        |       | —                                               |       | (42 | ) |
| Loss on  extinguishment of debt                                                      |       | —                                               |       | 6,611 |   |
| Stock-based  compensation expense                                                    |       | 264                                                  |       | 271 |   |
| Excess tax  benefits from stock-based awards                                         |       | (255                                                 | )          | (411 | ) |
| Tax benefit from  stock option exercises                                             |       | 496                                                  |       | 891 |   |
| Deferred tax  benefit                                                                |       | (1,352                                               | )          | (111 | ) |
| Other                                                                                |       | (109                                                 | )          | 58 |   |
| Changes in  operating assets and liabilities:                                        |       |                                                 |       |   |   |
| Accounts, notes  and other receivables                                               |       | 696                                                  |       | (4,785 | ) |
| Inventories                                                                          |       | (11,148                                              | )          | 488 |   |
| Prepaid expenses  and other assets                                                   |       | 322                                                  |       | (3,395 | ) |
| Accounts payable                                                                     |       | (209                                                 | )          | 1,591 |   |
| Other  liabilities                                                                   |       | (4,737                                               | )          | 1,855 |   |
| Cash flows from  operating activities                                                |       | (11,992                                              | )          | 3,862 |   |
|                                                                                 |       |                                                 |       |   |   |
| Cash flows from  investing activities:                                               |       |                                                 |       |   |   |
| Capital  expenditures                                                                |       | (844                                                 | )          | (1,144 | ) |
| Proceeds from  disposals of property, plant and equipment                            |       | 15                                                   |       | — |   |
| Cash flows from  investing activities                                                |       | (829                                                 | )          | (1,144 | ) |
|                                                                                 |       |                                                 |       |   |   |
| Cash flows from  financing activities:                                               |       |                                                 |       |   |   |
| Borrowings under  lines of credit                                                    |       | 23,302                                               |       | 7,413 |   |
| Repayments under  lines of credit                                                    |       | (9,147                                               | )          | (7,155 | ) |
| Debt issuance  costs                                                                 |       | —                                               |       | (4,150 | ) |
| Proceeds from  issuance of debt                                                      |       | —                                               |       | 173,676 |   |
| Repayments of  long-term debt                                                        |       | —                                               |       | (131,453 | ) |
| Premium paid on  extinguishment of debt                                              |       | —                                               |       | (5,482 | ) |
| Proceeds from  issuance of common stock                                              |       | 2,497                                                |       | 699 |   |
| Dividends paid                                                                       |       | (25,187                                              | )          | — |   |
| Excess tax  benefits from stock-based awards                                         |       | 255                                                  |       | 411 |   |
| Cash flows from  financing activities                                                |       | (8,280                                               | )          | 33,959 |   |
|                                                                                 |       |                                                 |       |   |   |
| Effect of foreign  exchange rate changes on cash                                     |       | 141                                                  |       | 297 |   |
|                                                                                 |       |                                                 |       |   |   |
| (Decrease) Increase in  cash                                                         |       | (20,960                                              | )          | 36,974 |   |
| Cash, beginning of  period                                                           |       | 30,409                                               |       | 34,952 |   |
| Cash, end of period                                                                  |       | $                                                    | 9,449      |   | $ | 71,926 |   |
|                                                                                 |       |                                                 |       |   |   |
| Supplemental Cash Flow  Information                                                  |       |                                                 |       |   |   |
| Interest paid                                                                        |       | $                                                    | 6,188      |   | $ | 4,210 |   |
| Taxes paid                                                                           |       | $                                                    | 3,571      |   | $ | 1,582 |   |

 

See notes toconsolidated and condensed consolidated financial statements.

5

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**Unaudited(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,  2007                               |       | $                 | 10         |                             | $          | 90,266                 |       | $                                           | 125,711    |                | $          | (10,550                               | )          | $ | (47,436 | ) | $ | 158,001 |   |
| Comprehensive income:                                   |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Net income                                              |       |              |       |                             |       | 1,430                  |       |                                        |       |                |       | 1,430                                 |       |
| Foreign currency  translation adjustment                |       |              |       |                             |       |                   |       | 552                                         |       |                |       | 552                                   |       |
| Total comprehensive  income                             |       |              |       |                             |       |                   |       |                                        |       |                |       | 1,982                                 |       |
|                                                    |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Dividends paid                                          |       |              |       |                             |       | (25,187                | )          |                                        |       |                |       | (25,187                               | )          |
| Exercise of 122,492  options for shares of common stock |       | 1                 |       | 1,720                            |       | (141                   | )          |                                        |       | 917                 |       | 2,497                                 |       |
| Stock-based  compensation                               |       |              |       | 264                              |       |                   |       |                                        |       |                |       | 264                                   |       |
| Tax benefit of options  exercised                       |       |              |       | 496                              |       |                   |       |                                        |       |                |       | 496                                   |       |
| FIN 48 adjustment                                       |       |              |       |                             |       | (2,757                 | )          |                                        |       |                |       | (2,757                                | )          |
| Balance, March 31, 2007                                 |       | $                 | 11         |                             | $          | 92,746                 |       | $                                           | 99,056     |                | $          | (9,998                                | )          | $ | (46,519 | ) | $ | 135,296 |   |

 

See notes to consolidatedand condensed consolidated financial statements.

6

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED AND CONDENSED CONSOLIDATED**

**FINANCIALSTATEMENTSMARCH 31, 2007Unaudited(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, 2007 and 2006 are unaudited.  In the opinion of management, these statementshave been prepared on the same basis as the audited consolidated financialstatements as of and for the year ended December 31, 2006, and include alladjustments which are of a normal and recurring nature, necessary for the fairpresentation of financial position, results of operations and cash flows forthe interim periods.  We encourage you toread the consolidated and condensed consolidated financial statements inconjunction with the risk factors, consolidated financial statements and notesthereto contained in the Company’s Annual Report on Form 10-K for the yearended December 31, 2006 filed with the Securities and Exchange Commission (“SEC”).  The results of operations for the threemonths ended March 31, 2007 are not necessarily indicative of the results thatmay be expected for the entire year.

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

**(2)           Summary of Significant AccountingPolicies**

**Principlesof Consolidation** - Our consolidated financial statementsinclude the accounts of all direct and indirect subsidiaries, all of which arewholly owned, including the piano (“Steinway”) and band (“Conn-Selmer”)divisions.  Intercompany balances havebeen 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.  Actualresults could differ from those estimates.

**IncomeTaxes** - We provide for income taxes using an asset andliability 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 valuationallowances when necessary to reduce deferred tax assets to the amount that morelikely than not will be realized.

In July 2006, the FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes -an interpretation of FASB Statement No. 109” (“FIN 48”) whichclarifies the accounting and disclosure for uncertain tax positions. Thisinterpretation is effective for fiscal years beginning after December 15,2006 and we have implemented this interpretation as of January 1, 2007.Previously, we had accounted for uncertain tax positions in accordance with Statementof Financial Accounting Standard (“SFAS”) No. 5, “Accounting for Contingencies” and recorded reserves foruncertain tax positions that may have become payable in future years as aresult of anticipated or ongoing examinations by tax authorities.

7

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FIN 48 prescribes amore-likely-than-not threshold for financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.This interpretation also provides guidance on derecognition of income taxassets and liabilities, classification of current and deferred income taxassets and liabilities, accounting for interest and penalties associated withtax positions, accounting for income taxes in interim periods and income taxdisclosures. At the adoption date, we made a comprehensive review of ouruncertain tax positions. We believe appropriate provisions for outstandingissues have been made.

The cumulative effects ofapplying this interpretation have been recorded as a decrease of $2.8 millionto retained earnings, an increase of $1.6 million to net deferred incometax assets, a net increase of $0.3 million to other current liabilities,and an increase of $4.1 million to other non-current liabilities as ofJanuary 1, 2007. In conjunction with the adoption of FIN 48 we beganreporting income tax-related interest and penalties as a component of incometax expense. In prior periods such interest was reported in interest expense.As of January 1, 2007, we have accrued $1.3 million for the paymentof interest and $0.6 million for the payment of penalties.

As of the date of adoption,the total amount of unrecognized tax benefits was $7.4 million, of which $1.9 millionwould affect the effective tax rate, if recognized.

We file income tax returns in the U.S. federaljurisdiction and various state and foreign jurisdictions. With few exceptions,our returns are no longer subject to U.S. federal, state and local, or non-U.S.income tax examinations for years before 2003.

As of March 31, 2007, there have been no material changes to theliability for uncertain tax positions.

**Stock-basedCompensation** –We record compensation cost on a straight-linebasis over the award’s requisite service period for all share-based awardsgranted.  We estimate the fair value ofour stock option awards (less estimated forfeitures) and employee stockpurchase plan rights on the date of grant using the Black-Scholes optionvaluation model.

**Earnings (loss) per Common Share** - We compute earnings (loss) per shareusing the weighted-average number of common shares outstanding during eachperiod.  Diluted earnings (loss) percommon share reflects the effect of our outstanding options using the treasurystock method, except when such options would be antidilutive.

A reconciliation of theweighted-average shares used for the basic and diluted computations is asfollows:
|                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Weighted-average  shares:              |       |                                                 |       |   |   |
| For basic  earnings (loss) per share   |       | 8,419,148                                            |       | 8,152,369 |   |
| Dilutive effect  of stock options      |       | 160,830                                              |       | — |   |
| For diluted earnings  (loss) per share |       | 8,579,978                                            |       | 8,152,369 |   |

 

We did not include 20,000outstanding options to purchase shares of common stock in the computation ofdiluted earnings per common share for the three months ended March 31, 2007because their impact would have been antidilutive. We did not include any ofthe 612,300 outstanding options to purchase shares of common stock in thecomputation of diluted loss per common share for the three months ended March31, 2006 because their impact would have been antidilutive.

8

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**AccumulatedOther Comprehensive Loss** - Accumulated other comprehensive loss is comprised of foreigncurrency translation adjustments and pension and other post-retirementbenefits.  The components of accumulatedother comprehensive loss are as follows:
| ** **               | ** ** | **Foreign Currency  Translation  Adjustment** | ** ** | **Pension & Other  Post-Retirement  Benefits** | ** ** | **Tax Impact of  Pension & Other  Post-Retirement  Benefits** | ** ** | **Accumulated Other  Comprehensive Loss** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                     |       |                                               |       |                                                         |       |                                                                                  |       |                                                |       |
| Balance January  1, 2007 |       | $                                                  | 3,809      |                                                         | $          | (23,235                                                                               | )          | $                                                   | 8,876      |   | $ | (10,550 | ) |
| Activity                 |       | 552                                                |       | —                                                       |       | —                                                                                |       | 552                                                 |       |
| Balance March 31, 2007   |       | $                                                  | 4,361      |                                                         | $          | (23,235                                                                               | )          | $                                                   | 8,876      |   | $ | (9,998 | ) |

 

**Recent Accounting Pronouncements****-**On September15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No.157”).  SFAS No. 157 defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements.  SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007.  We are currentlyevaluating the requirements of SFAS No. 157 and have not yet determined theimpact, if any, its adoption will have on our consolidated financial positionand results of operations.

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159provides entities with an option to report selected financial assets andliabilities at fair value, with the objective to reduce both the complexity inaccounting for financial instruments and the volatility in earnings caused bymeasuring related assets and liabilities differently. We will be required toadopt SFAS No. 159 in the first quarter of fiscal year 2008. We are currentlyevaluating the requirements of SFAS No. 159 and have not yet determined theimpact, if any, its adoption will have on our consolidated financial positionand results of operations.

**(3)           Inventories**
|                 | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                        | 17,654     |                        | $          | 20,989 |   |
| Work-in-process |       | 52,584                   |       | 49,316                      |       |
| Finished goods  |       | 95,448                   |       | 84,318                      |       |
|            |       | $                        | 165,686    |                        | $          | 154,623 |   |

 

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

Intangible assets other than goodwill and indefinite-lived trademarksare amortized on a straight-line basis over their estimated useful lives.  Deferred financing costs are amortized overthe repayment periods of the underlying debt. We test our goodwill and indefinite-lived trademark assets forimpairment annually, or on an interim basis if events or circumstances indicatethat the fair value of an asset has decreased below its carrying value.  At July 31, 2006, we evaluated these assetsand determined that the fair value had not decreased below

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the carrying valueand, accordingly, no impairments have been recognized.  The changes in carrying amounts of goodwilland trademarks are as follows:
|                                      | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|
| Goodwill:                            |       |                   |       |                  |       |      |       |
| Balance, January  1, 2007            |       | $                      | 22,926     |                  | $          | 8,555     |       | $ | 31,481 |   |
| Foreign currency  translation impact |       | 160                    |       | —                |       | 160       |       |
| Balance, March  31, 2007             |       | $                      | 23,086     |                  | $          | 8,555     |       | $ | 31,641 |   |
|                                 |       |                   |       |                  |       |      |       |
| Trademarks:                          |       |                   |       |                  |       |      |       |
| Balance, January  1, 2007            |       | $                      | 7,847      |                  | $          | 5,824     |       | $ | 13,671 |   |
| Foreign currency  translation impact |       | 50                     |       | —                |       | 50        |       |
| Balance, March 31, 2007              |       | $                      | 7,897      |                  | $          | 5,824     |       | $ | 13,721 |   |

 

We also carry certain intangible assets that are amortized.  Once fully amortized, these assets areremoved from both the gross and accumulated amortization balance.  These assets consist of the following:
|                                  | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                             |       |                     |       |                        |       |
| Gross deferred  financing costs: |       | $                        | 5,751      |                        | $          | 5,750 |   |
| Accumulated  amortization        |       | (1,460                   | )          | (1,287                      | )          |
| Deferred  financing costs, net   |       | $                        | 4,291      |                        | $          | 4,463 |   |
|                             |       |                     |       |                        |       |
| Gross covenants  not to compete: |       | $                        | 500        |                        | $          | 500 |   |
| Accumulated  amortization        |       | (263                     | )          | (238                        | )          |
| Covenants not to  compete, net   |       | $                        | 237        |                        | $          | 262 |   |

 

The weighted-average amortization period for deferred financing costsis seven years, and the weighted-average amortization period of covenants notto compete is five years.  Totalamortization expense, which includes amortization of deferred financing costs,is as follows:
|                      | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------|------------|------------------------------------------------------|------------|
| ** **           | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                 |       |                                                 |       |   |   |
| Amortization expense |       | $                                                    | 196        |   | $ | 229 |   |
|                      |            |                                                      |            |  |  |  |  |

 

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The following table shows the total estimated amortization expense forthe remainder of 2007 and beyond:
|                                           | ** ** | **Amount** | ** ** |
|-------------------------------------------|------------|------------|------------|
| Estimated amortization expense: |       |       |       |
| 2007                                      |       | $          | 593        |   |
| 2008                                      |       | 788        |       |
| 2009                                      |       | 746        |       |
| 2010                                      |       | 664        |       |
| 2011                                      |       | 626        |       |
| 2012 and  thereafter                      |       | 1,111      |       |
| Total                                     |       | $          | 4,528      |   |

 

**(5)****                                 OtherCurrent Liabilities**
|                                                                          | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Accrued payroll  and related benefits                                    |       | $                        | 17,452     |                        | $          | 16,397 |   |
| Current portion  of pension and other postretirement benefit liabilities |       | 1,186                    |       | 1,461                       |       |
| Accrued warranty  expense                                                |       | 1,648                    |       | 1,888                       |       |
| Accrued interest                                                         |       | 1,011                    |       | 4,178                       |       |
| Deferred income                                                          |       | 6,675                    |       | 6,348                       |       |
| Environmental  liabilities                                               |       | 3,170                    |       | 3,232                       |       |
| Income and other  taxes payable                                          |       | 2,208                    |       | 3,012                       |       |
| Other accrued  expenses                                                  |       | 6,976                    |       | 8,132                       |       |
| Total                                                                    |       | $                        | 40,326     |                        | $          | 44,648 |   |

 

Accrued warranty expense is recorded at the time ofsale for instruments that have a warranty period ranging from one to tenyears.  The accrued expense recorded isgenerally calculated on a ratio of warranty costs to sales based on ourwarranty history and is adjusted periodically following an analysis of actualwarranty claims.

The accrued warranty expense activity for the three months ended March31, 2007 and 2006, and the year ended December 31, 2006 is as follows:

|                                      | ** ** | **March 31,  2007** | ** ** | **March 31,  2006** | ** ** | **December 31,   2006** | ** ** |
|--------------------------------------|------------|--------------------------|------------|--------------------------|------------|-----------------------------------|------------|
| Beginning  balance                   |       | $                        | 1,888      |                     | $          | 1,857                             |       | $ | 1,857 |   |
| Additions                            |       | 8                        |       | 271                      |       | 806                               |       |
| Claims and  reversals                |       | (240                     | )          | (249                     | )          | (849                              | )          |
| Foreign currency  translation impact |       | (8                       | )          | 14                       |       | 74                                |       |
| Ending balance                       |       | $                        | 1,648      |                     | $          | 1,893                             |       | $ | 1,888 |   |

 

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**(6)           Long-Term Debt**

Ourlong-term debt consists of the following:

|                                        | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| 7.00% Senior  Notes                    |       | $                        | 175,000    |                        | $          | 175,000 |   |
| Unamortized bond  discount             |       | (1,143                   | )          | (1,184                      | )          |
| Domestic line of  credit               |       | 11,500                   |       | —                      |       |
| Open account  loans, payable on demand |       | 7,330                    |       | 4,595                       |       |
| Total                                  |       | 192,687                  |       | 178,411                     |       |
| Less: current  portion                 |       | (7,330                   | )          | (4,595                      | )          |
| Long-term debt                         |       | $                        | 185,357    |                        | $          | 173,816 |   |

 

Scheduled paymentsof debt are as follows:
|                   | ** ** | **March 31,  2007** | ** ** |
|-------------------|------------|--------------------------|------------|
| Remainder of 2007 |       | $                        | 7,330      |   |
| 2008              |       | —                   |       |
| 2009              |       | —                   |       |
| 2010              |       | —                   |       |
| 2011              |       | 11,500                   |       |
| Thereafter        |       | 175,000                  |       |
| Total             |       | $                        | 193,830    |   |

 

In conjunction with ourdebt restructuring activities, we recorded a net loss on extinguishment of debtof $9.7 million for the year ended December 31, 2006, which consists of thefollowing:
| For the year ended December 31, | ** ** | **2006** | ** ** |
|----------------------------------------------------------|------------|----------|------------|
| Deferred  financing costs write-off - term loan          |       | $        | 977        |   |
| Deferred  financing costs write-off - 8.75% Senior Notes |       | 2,247    |       |
| Premiums  pursuant to the tender offer and call          |       | 7,740    |       |
| Bond premium  write-off                                  |       | (1,290   | )          |
| Total net loss on  extinguishment of debt                |       | $        | 9,674      |   |

 

As of March 31,2006, $6.6 million of the net loss was recorded in our consolidated statementof operations.  The balance of $3.1million was recorded in the second quarter pursuant to our call of theremaining 8.75% Senior Notes which were not extinguished pursuant to our tenderoffer in February 2006.

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

Our common stock is comprised of two classes: Class A andOrdinary.  With the exception ofdisparate voting power, both classes are substantially identical.  Each share of Class A common stock entitlesthe holder to 98 votes.  Holders ofOrdinary common stock are entitled to one vote per share.  Class A common stock shall

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automaticallyconvert to Ordinary common stock if, at any time, the Class A common stock isnot owned by an original Class A holder. As of March 31, 2007 our Chairman andour Chief Executive Officer collectively owned 100% of the Class A commonshares, representing approximately 85% of the combined voting power of theClass A common stock and Ordinary common stock.

**Employee Stock Purchase Plan** - We have an employee stock purchaseplan under which substantially all employees may purchase Ordinary common stockthrough payroll deductions at a purchase price equal to 85% of the lower of thefair market values as of the beginning or end of each twelve-month offeringperiod. Stock purchases under the Purchase Plan are limited to 5% of anemployee’s annual base earnings. We have reserved 400,000 shares of commonstock for issuance under this plan.

**Stock Plan** - The 2006 StockPlan provides for the granting of 1,000,000 stock options (including incentive stock options andnon-qualified stock options), stock appreciation rights and other stock awardsto certain key employees, consultants and advisors.  Our stock options generally have five-yearvesting terms and ten-year option terms.

Prior to 2007, we hadreserved 721,750 treasury stock shares to issue under our 1996 Stock Plan, oncewe reached our registered share limitation. This plan has expired but still hasvested and unvested options outstanding. During the three months ended March 31, 2007, we reached our registeredshare limitation and issued 39,542 shares of treasury stock to cover optionsexercised.  Since the average cost of thetreasury stock exceeded the price of the options exercised, the differencebetween the proceeds received and the average cost of the treasury stock issuedresulted in a reduction of retained earnings of $0.1 million.

We account for stock-based compensation arrangements in accordance withSFAS No. 123R, “Share-Based Payment” which we adopted on January 1, 2006 usingthe modified prospective transition method. The compensation cost that has beencharged against income (loss) for these plans was $0.3 million for the threemonths ended March 31, 2007 and 2006. The income tax benefit recognized in theincome statement for share-based compensation arrangements was less than $0.1million for the three months ended March 31, 2007 and 2006. Basic and dilutedincome (loss) per share includes $0.03 of stock-based compensation cost for thethree months ended March 31, 2007 and 2006.

Wemeasured the fair value of options on their grant date, including the valuationof the option feature implicit in our Purchase Plan, using the Black-Scholesoption-pricing model. The risk-free interest rate is based on theweighted-average of U.S. Treasury rates over the expected life of the stockoption or the contractual life of the option feature in the Purchase Plan. Theexpected life of a stock option is based on historical data of similar optionholders. We have segregated our employees into two groups based on historical exerciseand termination behavior. The expected life of the option feature in thePurchase Plan is the same as its contractual life.  Expected volatility is based on historicalvolatility of our stock over the expected life of the option, as our optionsare not readily tradable.

During the three months ended March 31, 2007, wegranted stock options awards and applied a risk-free interest rate of 4.6%, aweighted-average expected life in years of 8.1, and an expected volatility of25.2% to the Black-Scholes option-pricing model. The weighted-average fairvalue of options granted during the three months ended March 31, 2007 was$13.66. No stock option awards were granted during the three months ended March31, 2006.

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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, 2007 |       | 594,500                     |       | $                                       | 20.98      |                                              |       |                                                     |       |   |
| Granted                         |       | 134,600                     |       | 32.42                                   |       |                                              |       |                                                     |       |
| Exercised                       |       | (122,492                    | )          | 20.38                                   |       |                                              |       |                                                     |       |
| Forfeited                       |       | (800                        | )          | 19.04                                   |       |                                              |       |                                                     |       |
| Outstanding at  March 31, 2007  |       | 605,808                     |       | $                                       | 23.64      |                                              | 6.9        |                                                     | $          | 5,132,328 |   |
| Exercisable at March  31, 2007  |       | 265,108                     |       | $                                       | 20.03      |                                              | 5.5        |                                                     | $          | 3,179,428 |   |

 

The total intrinsic value of the options exercisedduring the three months ended March 31, 2007 and 2006 was $1.6 million and $2.5million, respectively.

As of March 31, 2007, there was $2.7 million ofunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the Stock Plan. This compensation cost is expectedto be recognized over a period of 3.4 years.

The followingtables set forth information regarding the Purchase Plan:

|                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Risk-free interest rate                                      |       |                                                 | 5.1        | % |   |   | 3.8 | % |   |
| Weighted-average  expected life of option feature (in years) |       |                                                 | 1.0        |   |   |   | 1.0 |   |   |
| Expected  volatility of underlying stock                     |       |                                                 | 24.7       | % |   |   | 22.8 | % |   |
| Expected  dividends                                          |       |                                                 | n/a        |   |   |   | n/a |   |   |
|                                                         |       |                                                 |       |   |   |   |   |   |   |
| Weighted-average fair  value of option feature               |       |                                                 | $          | 6.22 |   |   |   | $ | 7.25 |   |   |
|                                                              |            |                                                      |            |  |  |  |  |  |  |  |  |

 

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| ** **                       | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (not in 000s)** | ** ** |
|----------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at  January 1, 2007  |       | 11,281                      |       | $                                       | 20.80      |                                              |       |                                                     |       |   |
| Shares  subscribed               |       | 7,144                       |       | 20.80                                   |       |                                              |       |                                                     |       |
| Exercised                        |       | —                      |       | —                                  |       |                                              |       |                                                     |       |
| Canceled,  forfeited, or expired |       | (186                        | )          | 20.80                                   |       |                                              |       |                                                     |       |
| Outstanding at March  31, 2007   |       | 18,239                      |       | $                                       | 20.80      |                                              | 0.33       |                                                     | $          | 204,824 |   |
|                                  |            |                             |            |                                         |            |                                                   |            |                                                          |            |  |  |

 

As reported in the statement of cash flows, cashreceived from option exercises under the Stock Plan for the periods ended March31, 2007 and 2006 was $2.5 million and $0.7 million, respectively.  SFAS No. 123R requires that cash flows fromtax benefits resulting from tax deductions in excess of the compensation costrecognized for stock-based awards under a fair value basis (excess taxbenefits) be classified as a cash flow from financing activities.  Accordingly, for the periods ended March 31,2007 and 2006, $0.5 million and $0.9 million, respectively, of tax benefit fromstock option exercises is presented as a cash inflow from operatingactivities.  For the periods ended March31, 2007 and 2006, $0.3 million and $0.4 million, respectively, of excess taxbenefits has been classified as an outflow from operating activities and aninflow from financing activities in the statement of cash flows.

**(8)           Other Income, Net**
|                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                  |       |                                                 |       |   |   |
| West 57th  building income            |       | $                                                    | (1,163     | ) | $ | (1,163 | ) |
| West 57th  building expenses          |       | 811                                                  |       | 818 |   |
| Foreign exchange  (gains) losses, net |       | 235                                                  |       | (350 | ) |
| Miscellaneous                         |       | (53                                                  | )          | (56 | ) |
| Other income, net                     |       | $                                                    | (170       | ) | $ | (751 | ) |

 

**(9)           Commitments and ContingentLiabilities**

We are involved in certain legal proceedingsregarding environmental matters, which are described below.  Further, in the ordinary course of business,we are party to various legal actions that we believe are routine in nature andincidental to the operation of our business. While the outcome of such actions cannot be predicted with certainty, webelieve that, based on our experience in dealing with these matters, theirultimate resolution will not have a material adverse impact on our business,financial condition, results of operations 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 andother laws, we may have liability for investigation and cleanup costs and otherdamages relating to our current or former properties, or third-party sites towhich 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 wepurchased these facilities, Philips agreed to indemnify us for certainenvironmental matters resulting from activities of Philips occurring prior toDecember 29, 1988 (the “Environmental Indemnity Agreement”).  To date, Philips has fully performed itsobligations under the Environmental Indemnity Agreement, which terminates onDecember 29, 2008, however, we cannot assure investors that it will continue todo so in the future.  Four matterscovered by the Environmental Indemnity Agreement are currently pending.  Philips has entered into Consent Orders withthe Environmental

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ProtectionAgency (“EPA”) for one site and the North Carolina Department of Environment,Health and Natural Resources for a second site, whereby Philips has agreed topay required response costs.  On October22, 1998, we were joined as defendant in an action involving a third siteformerly occupied by a business we acquired in Illinois.  Philips has accepted the defense of thisaction pursuant to the terms of the Environmental Indemnity Agreement.  At the fourth site, which is a third partywaste disposal site, four Conn-Selmer predecessor entities are among thepotentially responsible parties (“PRP”) group. The PRP group has recently entered into a Consent Order with the EPA,the site owners, and the largest contributor. For two of the Conn-Selmer predecessor entities, which were previouslyowned by Philips, this matter was tendered to Philips pursuant to theEnvironmental Indemnity Agreement. Philips is a party to the Consent Order and has paid its share of theliability.  The four Conn-Selmerpredecessor entities paid approximately $0.1 million in 2006 and settled thisclaim except for the possibility of a contingent remedial action, should anyadditional environmental issues be discovered. We believe the likelihood of a contingency assessment to be remote and,our share of the liability, if any, would not be material.

In addition, we are continuing an existingenvironmental remediation plan at a facility we acquired in 2000.  We estimate our costs, which approximate $0.8million, over a 14-year period.  We haveaccrued approximately $0.6 million for the estimated remaining cost of thisremediation program, which represents the present value total cost using adiscount rate of 4.54%.  A summary ofexpected payments associated with this project is as follows:
|                    | ** ** | **Environmental  Payments** | ** ** |
|--------------------|------------|-----------------------------|------------|
| Remainder of  2007 |       | $                           | 50         |   |
| 2008               |       | 60                          |       |
| 2009               |       | 61                          |       |
| 2010               |       | 61                          |       |
| 2011               |       | 60                          |       |
| Thereafter         |       | 546                         |       |
| Total              |       | $                           | 838        |   |

 

In 2004, we acquired two manufacturing facilitiesfrom G. Leblanc Corporation, now Grenadilla, Inc. (“Grenadilla”), for whichenvironmental remediation plans had already been established.  In connection with the acquisition, we assumedthe existing accrued liability of approximately $0.8 million for the cost ofthese remediation activities.  Based on areview of past and ongoing investigatory and remedial work by our environmentalconsultants, and discussions with state regulatory officials, as well as recentsampling, we estimate the remaining costs of such remedial plans to be $2.5million.  Pursuant to the purchase andsale agreement, we have sought indemnification from Grenadilla for anticipatedcosts above the original estimate 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 our consolidated balance sheet.  We have reached an agreement with Grenadillawhereby future environmental costs will be paid directly out of theescrow.  Should the escrow be reduced tozero, we would seek reimbursement from Grenadilla for these additional costs.However, we cannot be assured that we will be able to recover such costs.

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, somerisk of environmental liability is inherent in the nature of our current andformer business and we may, in the future,

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incurmaterial costs to meet current or more stringent compliance, cleanup, or otherobligations pursuant to environmental laws.

**(10)         Retirement Plans**

Wehave defined benefit pension plans covering the majority of our employees,including certain employees in Germany and the U.K.  The components of net periodic pension costfor these plans are as follows:
|                                     | ** ** | **Domestic Plans**          | ** ** | **Foreign Plans**           | ** ** |
|-------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
| ** **                          | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006**     | ** ** | **March 31, 2007** | ** ** | **March 31, 2006** | ** ** |
| Service cost                        |       | $                                | 225        |                             | $          | 243 |   | $ | 198 |   | $ | 207 |   |
| Interest cost                       |       | 814                              |       | 785                              |       | 394 |   | 351 |   |
| Expected return  on plan assets     |       | (1,250                           | )          | (1,151                           | )          | (90 | ) | (74 | ) |
| Amortization of  prior service cost |       | 108                              |       | 110                              |       | — |   | — |   |
| Recognized loss                     |       | 128                              |       | 176                              |       | 70 |   | — |   |
| Net periodic benefit  cost          |       | $                                | 25         |                             | $          | 163 |   | $ | 572 |   | $ | 484 |   |

 

We provide postretirement health care and life insurance benefits tocertain eligible hourly retirees and their dependents.  The components of net periodic postretirementbenefit cost for these benefits are as follows:

|                                        | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **March 31,**               | ** ** | **March 31,** | ** ** |
| ** **                             | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Service cost                           |       | $                                | 10         |   | $ | 12 |   |
| Interest cost                          |       | 34                               |       | 34 |   |
| Amortization of  transition obligation |       | 9                                |       | 9 |   |
| Recognized  (gain) loss                |       | (41                              | )          | 13 |   |
| Net postretirement  benefit cost       |       | $                                | 12         |   | $ | 68 |   |

 

Wehave not made any contributions to our domestic pension plan this year, butanticipate contributing approximately $2.0 million to this plan during 2007.Our anticipated contributions to the pension plan of our U.K. subsidiaryapproximate $0.2 million for the current year. As of March 31, 2007, we havemade contributions of less than $0.1 million to this plan. The pension plans ofour German entities do not hold any assets and use operating cash to payparticipant benefits as they become due. Expected 2007 benefit payments underthese plans are $1.0 million. For the three months ended March 31, 2007, wehave made benefit payments of $0.3 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 segments reportable as they are managed separatelyand the operating results

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of each segmentare separately reviewed and evaluated by our senior management on a regularbasis.  Management and the chiefoperating decision maker use income from operations as a meaningful measurementof profit or loss for the segments. Income from operations for the reportable segments includes certaincorporate costs allocated to the segments based primarily on revenue, as wellas intercompany profit.  Amounts reportedas “Other & Elim” include those corporate costs that were not allocated tothe reportable segments and the remaining intercompany profit elimination.

The followingtables present information about our operating segments for the three monthsended March 31, 2007 and 2006:
|                                            | ** ** | **Piano Segment** | ** ** | **Band & Orchestral Segment** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------|------------|--------------------------------------------------|------------|------------|------------|------------|------------|
| **Three months ended 2007** | ** ** | **U.S.**               | ** ** | **Germany**                                      | ** ** | **Other**  | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Other** | ** ** | **Total** | ** ** | **Other  & Elim** | ** ** | **Consolidated** | ** ** |
| Net sales to  external customers           |       | $                      | 29,628     |                                             | $          | 13,510     |       | $          | 9,787      |   | $ | 52,925 |   | $ | 38,779 |   | $ | 1,728 |   | $ | 40,507 |   | $ | — |   | $ | 93,432 |   |
| Income (loss)  from operations             |       | 1,942                  |       | 3,601                                            |       | 793        |       | 6,336      |       | (899 | ) | 53 |   | (846 | ) |    (1,123 | ) | 4,367 |   |
|                                            |            |                        |            |                                                  |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                            | ** ** | **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 |   |
|                                            |            |                        |            |                                                  |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

**Introduction**

We are a worldleader in the design, manufacture, marketing, and distribution of high qualitymusical instruments.  Our piano divisionconcentrates on the high-end grand piano segment of the industry, handcraftingSteinway pianos in New York and Germany. We also offer upright pianos and two mid-priced lines of pianos underthe Boston and Essex brand names.  We arealso the largest domestic producer of band and orchestral instruments and offera complete line of brass, woodwind, percussion and string instruments andrelated accessories with well-known brand names such as Bach, Selmer, C.G.Conn, Leblanc, King, and Ludwig.  We sellour products through dealers and distributors worldwide. Our piano customerbase consists of professional artists, amateur pianists, and institutions suchas concert halls, universities, and music schools.  Our band and orchestral instrument customerbase consists primarily of middle school and high school students, but alsoincludes adult amateur and professional musicians.

**CriticalAccounting Policies**

TheSecurities and Exchange Commission (“SEC”) has issued disclosure guidance for “criticalaccounting policies.” The SEC defines “critical accounting policies” as thosethat require application of management’s most difficult, subjective or complexjudgments, often as a result of the need to make estimates about the effect ofmatters that are inherently uncertain and may change in subsequent periods.

Managementis required to make certain estimates and assumptions during the preparation ofthe consolidated financial statements. These estimates and assumptions impactthe reported amount of assets and liabilities and disclosures of contingentassets and liabilities as of the date of the consolidated financial statements.Estimates and assumptions are reviewed periodically and the effects ofrevisions are reflected in the consolidated financial statements in the periodthey are determined to be necessary. Actual results could differ from thoseestimates.

Thesignificant accounting policies are described in Note 2 of the Notes toConsolidated Financial Statements included in the Company’s 2006 Annual Reporton Form 10-K. Not all of these significant accounting policies requiremanagement to make difficult, subjective or complex judgments or estimates.However, management considers the following to be critical accounting policiesbased on the definition above.

**Accounts Receivable**

We establish reserves for accounts receivable and notes receivable(including recourse reserves when our customers have financed notes receivablewith a third party).  We review overallcollectibility trends and customer characteristics such as debt leverage,solvency, and outstanding balances in order to develop our reserve estimates.  Historically, a large portion of our sales atboth our piano and band divisions have been generated by our top 15customers.  As a result, we experiencesome inherent concentration of credit risk in our accounts receivable due toits composition and the relative proportion of large customer receivables tothe total. This is especially true at our band division, which typically hasthe majority of our consolidated accounts receivable balance.  We consider the credit health and solvency ofour customers when developing our receivable reserve estimates.

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**Inventory**

We establish inventory reserves for items such aslower-of-cost-or-market and obsolescence. We review inventory levels on a detailed basis, concentrating on the ageand amounts of raw materials, work-in-process, and finished goods, as well asrecent usage and sales dates and quantities to help develop our estimates.Ongoing changes in our business strategy, including a shift from batchprocessing to single piece production flow, coupled with increased offshoresourcing, could affect our ability to realize the current cost of ourinventory, and are considered by management when developing our estimates. Wealso establish reserves for anticipated book-to-physical adjustments based uponour historical level of adjustments from our annual physical inventories.  We cost our inventory using standardcosts.  Accordingly, variances betweenactual and standard costs that are not abnormal in nature are capitalized intoinventory and released based on calculated inventory turns.

**Workers’ Compensation andSelf-Insured Health Claims**

We establish workers’ compensation and self-insured health claimsreserves based on our trend analysis of data provided by third-partyadministrators regarding historical claims and anticipated future developmentof those claims.

**Warranty**

We establish reserves for warranty claims based on our analysis ofhistorical claims data, recent claims trends, and the various lengths of timefor which we warranty our products.

**Long-lived Assets**

Wereview long-lived assets, such as property, plant, and equipment, forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.  We measure recoverability by comparing thecarrying amount of the asset to the estimated future cash flows the asset isexpected 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 is based on several analyses,including multi-year cash flows and a comparison of estimated fair values toour market capitalization.

**Pensions and OtherPostretirement Benefit Costs**

We make certain assumptionswhen calculating our benefit obligations and expenses.  We base our selection of assumptions, such asdiscount rates and long-term rates of return, on information provided by ouractuaries, investment advisors, investment committee, current rate trends, andhistorical trends for our pension asset portfolio.  Our benefit obligations and expenses canfluctuate significantly based on the assumptions management selects.

**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 the realizability of deferredtax assets, we consider whether it is more likely than not that the deferredtax assets will be fully realized.  Theultimate realization of these assets is dependent upon many factors, includingthe ratio of foreign source

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income to overall income andgeneration of sufficient future taxable income in the states for which we haveloss carryforwards. When establishing or adjusting valuation allowances, weconsider these factors, as well as anticipated trends in foreign source incomeand tax planning strategies which may impact future realizability of theseassets.

A liability has been recorded for uncertain tax positions.  When analyzing these positions, we considerthe probability of various outcomes which could result from examination,negotiation, or settlement with various taxing authorities.  The final outcome on these positions coulddiffer significantly from our original estimates due to expiring statues oflimitations, availability of detailed historical data, the results of audits orexaminations conducted by taxing authorities or agents that vary frommanagement’s anticipated results, identification of new tax contingencies, therelease of applicable administrative tax guidance,  management’s decision to settle or appealassessments, or the rendering of court decisions affecting our estimates of taxliabilities, as well as other factors.

**Stock-Based Compensation**

We grant stock-based compensation awards which generally vest over aspecified period.  When determining the fairvalue of stock options and subscriptions to purchase shares under the PurchasePlan, we use the Black-Scholes option valuation model, which requires input ofcertain management assumptions, including dividend yield, expected volatility,risk-free interest rate, expected life of stock options granted during theperiod, and the life applicable to the Purchase Plan subscriptions.  The estimated fair value of the options andsubscriptions to purchase shares, and the resultant stock-based compensationexpense, 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 provide a reasonablebasis 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 and ExchangeAct of 1934, as amended. These forward-looking statements represent our presentexpectations or beliefs concerning future events. We caution that suchstatements are necessarily based on certain assumptions which are subject torisks and uncertainties which could cause actual results to differ materiallyfrom those indicated in this report. These risk factors include, but are not limited to, the following:changes in general economic conditions; geopolitical events; increased competition;work stoppages and slowdowns; ability of new workers to meet desired productionlevels; exchange rate fluctuations; variations in the mix of products sold;market acceptance of new product and distribution strategies; ability ofsuppliers to meet demand; concentration of credit risk; fluctuations ineffective tax rates resulting from shifts in sources of income; and the abilityto successfully integrate and operate acquired businesses.  Further information on these risk factors isincluded in Item 1A of our Annual Report on Form 10-K for the year ended

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December 31, 2006. We encourage you to read those descriptions carefully. We cautioninvestors not to place undue reliance on the forward-looking statementscontained in this report. These statements, like all statements contained inthis report, speak only as of the date of this report (unless another date isindicated) and we undertake no obligation to update or revise the statementsexcept as required by law.

**Results of Operations**

Three Months EndedMarch 31, 2007 Compared to Three Months Ended March 31, 2006
| ** **                         | ** ** | **Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2007**                                             | ** ** | ** ** | ** ** | **2006** | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
|                               |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Net sales                          |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Band                               |       | $                                                    | 40,507     |       |       |   | $ | 53,066 |   |   |   | (12,559 | ) | (23.7 | ) |
| Piano                              |       | 52,925                                               |       |       |       | 42,128 |   |   |   | 10,797 |   | 25.6 |   |
| Total sales                        |       | 93,432                                               |       |       |       | 95,194 |   |   |   | (1,762 | ) | (1.9 | ) |
|                               |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Cost of sales                      |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Band                               |       | 32,305                                               |       |       |       | 41,005 |   |   |   | (8,700 | ) | (21.2 | ) |
| Piano                              |       | 33,887                                               |       |       |       | 28,197 |   |   |   | 5,690 |   | 20.2 |   |
| Total cost of  sales               |       | 66,192                                               |       |       |       | 69,202 |   |   |   | (3,010 | ) | (4.3 | ) |
|                               |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Gross profit                       |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Band                               |       | 8,202                                                |       | 20.2%      |       | 12,061 |   | 22.7% |   | (3,859 | ) | (32.0 | ) |
| Piano                              |       | 19,038                                               |       | 36.0%      |       | 13,931 |   | 33.1% |   | 5,107 |   | 36.7 |   |
| Total gross  profit                |       | 27,240                                               |       |       |       | 25,992 |   |   |   | 1,248 |   | 4.8 |   |
|                               |       | 29.2%                                                |       |       |       | 27.3% |   |   |   |   |   |   |   |
|                               |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Operating  expenses                |       | 22,873                                               |       |       |       | 20,481 |   |   |   | 2,392 |   | 11.7 |   |
|                               |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Income from  operations            |       | 4,367                                                |       |       |       | 5,511 |   |   |   | (1,144 | ) | (20.8 | ) |
|                               |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Other income,  net                 |       | (170                                                 | )          |       |       | (751 | ) |   |   | 581 |   | (77.4 | ) |
| Loss on  extinguishment of debt    |       | —                                               |       |       |       | 6,611 |   |   |   | (6,611 | ) | (100.0 | ) |
| Net interest  expense              |       | 2,152                                                |       |       |       | 2,748 |   |   |   | (596 | ) | (21.7 | ) |
| Non-operating  expenses            |       | 1,982                                                |       |       |       | 8,608 |   |   |   | (6,626 | ) | (77.0 | ) |
|                               |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Income (loss)  before income taxes |       | 2,385                                                |       |       |       | (3,097 | ) |   |   | 5,482 |   | (177.0 | ) |
|                               |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Income tax  provision (benefit)    |       | 955                                                  |       | 40.0%      |       | (1,255 | ) | 40.5% |   | 2,210 |   | (176.1 | ) |
|                               |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |
| Net income (loss)                  |       | $                                                    | 1,430      |       |       |   | $ | (1,842 | ) |   |   | 3,272 |   | (177.6 | ) |

 

**Overview***-*Salesat our piano division significantly surpassed the prior year period due toimproved demand for Steinways and the re-launched Essex line of pianos.  Piano margins also improved, due largely tohigher margin sales overseas and increased production days at our domesticmanufacturing facility.  Managementestimates that band division revenues from professional brass instrument saleswere negatively

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impacted by approximately$7.2 million caused by the strike at our Elkhart, Indiana brass instrumentmanufacturing facility, which began on April 1, 2006.  Band margins also deteriorated over theyear-ago period.  Although we continuenegotiations with the union, a sufficient number of replacement workers havebeen hired as of period end.  We arecurrently producing professional instruments at pre-strike levels, andanticipate a return to desired production levels in the second half of 2007.

**Net Sales** -**Thedecrease in net sales of $1.8 million occurred despite the 26% increase inpiano revenues, due largely to the lower band sales caused by the strike at ourElkhart, Indiana brass instrument plant. Band revenues were also adversely impacted by approximately $3.5 millionin reduced order volume caused by previous dealer bankruptcies and resultantdealer consolidations. These factors caused a decrease in band unit shipmentsof 23% over the year-ago period.  Pianosales increased $5.0 million domestically, largely due to increased demand atthe wholesale level, resulting from a large institutional sale and shipments ofour Essex pianos.  Domestically, Steinwaygrand unit shipments improved 8%, and mid-priced piano line shipments improved66%.  Overseas, revenues increased $5.8million, of which $1.5 million is attributable to changes in foreign currencyexchange rates. The remaining $4.3 million improvement is due to the 16% risein Steinway grand unit shipments and the 160% increase in mid-price pianoshipments.

**Gross Profit***-*Gross profit improved $1.2 million due to higher sales and margins at our pianodivision.  Overseas, margins increased duelargely to the shift in mix to higher-margin units. Domestically, marginsimproved due to the absence of two weeks of plant shutdown, which occurred inthe year-ago period.  The band division’sgross profit deteriorated $3.9 million. This resulted from an estimated $4.6million of lower gross profit from the strike at our Elkhart, Indiana brassinstrument manufacturing facility, comprised of $2.6 million in lost profit onlost sales and $2.0 million in unabsorbed overhead. Lower sales resulting fromdealer consolidations also adversely affected band gross profit, although theincreased sales volume of imported student brass instruments helped mitigatethis impact.

**Operating Expenses** - Operatingexpenses increased $2.4 million due to an increase of $1.1 million in sales andmarketing costs, the majority of which resulted from the introduction of alimited edition piano by our domestic division. Other operating expenses increased $0.5 million, as we reserved aportion of the $2.0 million escrowed deposit relating to a terminated assetpurchase agreement. The remaining increase is largely attributable to legalfees associated with the strike and environmental escrow activities, andsalaries due to increased headcount at the band division.

**Non-operating Expenses** -Non-operating expenses decreased $6.6 million due to the absence of $6.6million in debt extinguishment costs, which occurred as a result of our SeniorNote refinancing in February 2006.  The$0.6 million decrease in net interest expense, which resulted largely from thisrefinancing, was offset by a shift from foreign exchange gains to foreignexchange losses of a comparable amount.

**Income Taxes** -**Our effective tax rate is relatively consistent with theyear-ago period.  The impact of changesin uncertain tax position liabilities, which we record in the income taxprovision since the adoption of FIN 48, was not material to the effective taxrate.

**Liquidityand Capital Resources**

We have reliedprimarily upon cash provided by operations, supplemented as necessary byseasonal borrowings under our working capital line, to finance our operations,repay long-term indebtedness and fund capital expenditures.

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Our statements ofcash flows for the three months ended March 31, 2007 and 2006 are summarized asfollows:
|                                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net income  (loss):                                                                 |       | $        | 1,430      |     | $          | (1,842     | )          | $ | 3,272 |   |
| Changes in operating assets and liabilities                                         |       | (15,076  | )          | (4,246   | )          | (10,830    | )          |
| Other adjustments to reconcile net (loss) income to  cash from operating activities |       | 1,654    |       | 9,950    |       | (8,296     | )          |
| Cash flows from  operating activities                                               |       | (11,992  | )          | 3,862    |       | (15,854    | )          |
|                                                                                |       |     |       |     |       |       |       |
| Cash flows from  investing activities                                               |       | (829     | )          | (1,144   | )          | 315        |       |
|                                                                                |       |     |       |     |       |       |       |
| Cash flows from  financing activities                                               |       | (8,280   | )          | 33,959   |       | (42,239    | )          |
|                                                                                     |            |          |            |          |            |            |            |  |  |  |

 

Cash flowsgenerated from operating activities decreased $15.9 million due primarily tothe increase in purchased finished goods inventory, including mid-priced pianosand certain brass instruments. Cash provided by accounts receivable improvedsignificantly despite the increase in accounts receivable at our domestic pianodivision, due to stricter credit policies and focused cash collections by ourband division.  Adjustments to cash flowsfrom operating activities were atypically high in the prior year due to the$6.6 million adjustment for the loss on extinguishment of debt.

The use of cashfor investing activities decreased $0.3 million due to reduced capitalexpenditures. This reduction is primarily timing, as we continue to expectcapital expenditures to be in the range of $5.0 - $7.0 million in 2007.

Cash flows fromfinancing activities decreased $42.2 million due to the $28.3 million decreasein cash provided by debt activities.  In2006, we refinanced our Senior Notes, which generated proceeds of $173.7million, offset by the repayment of our acquisition term loan of $16.6 millionand extinguishment of $114.6 of our 8.75% Senior Note debt.  Premiums paid on the extinguishment of debtof $5.5 million and costs related to the 7.00% Senior Note offering of $4.2million also offset our bond refinancing proceeds. We also used a significantportion of our cash to pay a $25.2 million dividend in March 2007.

**Borrowing Activities and Availability** - We have a domestic creditfacility with a syndicate of domestic lenders (the “Credit Facility”).  The Credit Facility provides us with apotential borrowing capacity of $110.0 million in revolving credit loans, andexpires on September 29, 2011. It also provides for periodic borrowings ateither London Interbank Offering Rate (“LIBOR”) plus a range from 1.25% to1.75%, or as-needed borrowings at an alternate base rate, plus a range from0.00% to 0.25%; both ranges depend upon borrowing availability at the time ofborrowing. The Credit Facility is collateralized by our domestic accountsreceivable, inventory, and fixed assets. As of March 31, 2007, there was $11.5 million in revolving credit loansoutstanding, as we used borrowings on the Credit Facility to partially fund ourdividend payment and the March interest payment on our Senior Notes.  As a result, the remaining availability basedon eligible accounts receivable and inventory balances was approximately $85.7million, net of letters of credit.

We also havecertain non-domestic credit facilities originating from two German banks thatprovide for borrowings by foreign subsidiaries of up to €17.5 million ($23.4million at the March 31,2007 exchange rate), net of borrowing restrictions of €0.7 million ($0.9million at the March 31, 2007exchange rate) and are payable on demand. These borrowings are collateralized by most of the assets of theborrowing subsidiaries.  A portion of theloans can be converted into a maximum of £0.5 million ($1.0 million at the March 31, 2007 exchange rate) for useby our U.K. branch and ¥300 million ($2.5 million at the March 31, 2007 exchange rate) for use by our Japanesesubsidiary. Our Chinese subsidiary also has the ability to convert theequivalent of up to €2.5

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million into U.S. dollarsor Chinese yuan ($3.3 million at the March 31, 2007 exchange rate). Euro loans bear interest at ratesof Euro Interbank Offered Rate (“EURIBOR”) plus a margin determined at the timeof borrowing. Margins fluctuate based on the loan amount and the borrower’sbank rating. The remaining demand borrowings bear interest at fixed margins atrates of LIBOR plus 0.8% for British pound loans (6.0% at March 31, 2007), LIBOR plus 1.0% forU.S. dollar loans of our Chinese subsidiary (6.3%-6.4% at March 31, 2007), and TokyoInterbank Offered Rate (“TIBOR”) plus 0.9% for Japanese yen loans (1.6% at March 31, 2007). We had $5.2 millionoutstanding as of March 31, 2007on these credit facilities.

Our Japanesesubsidiary also maintains a separate revolving loan agreement that providesadditional borrowing capacity of up to ¥460 million ($3.9 million at the March 31, 2007 exchange rate) basedon eligible inventory balances. The revolving loan agreement bears interest atan average 30-day TIBOR rate plus 0.9% (1.5% at March 31, 2007) and expires on January 31, 2010.  As of March31, 2007, we had $2.1 million outstanding on this revolving loanagreement.

At March 31, 2007,our total outstanding indebtedness amounted to $193.8 million, consisting of$175.0 million of 7.00% Senior Notes, $11.5 million on the Credit Facility, and$7.3 million of notes payable to foreign banks.

All of our debt agreements contain covenantsthat place certain restrictions on us, including our ability to incur additionalindebtedness, to make investments in other entities, and limitations on cashdividend payments. We were in compliance with all such covenants as of March31, 2007 and do not anticipate any compliance issues in the future.  Our bond indenture contains limitations,based on net income (among other things), on the amount of discretionaryrepurchases we may make 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.

We experience longproduction and inventory turnover cycles, which we constantly monitor sincefluctuations in demand can have a significant impact on these cycles. We expectto effectively utilize cash flow from operations to fund our debt and capitalrequirements and pay off our seasonal borrowings on our domestic line ofcredit.  Currently we anticipate both ourpiano and band divisions to be stable or improve throughout the period.  Our intention is to manage accountsreceivable and customer credit, reduce inventory levels, and repay creditfacility borrowings.

We do not have any current plans or intentions that will have amaterial adverse impact on our liquidity in 2007, although we may consider acquisitionsthat may require funding from operations or from our credit facilities.  Other than those described, we are not awareof any trends, demands, commitments, or costs of resources that are expected tomaterially impact our liquidity or capital resources.  Accordingly, we believe that cash on hand,together with cash flows anticipated from operations and available borrowingsunder the Credit Facility, will be adequate to meet our debt servicerequirements, fund continuing capital requirements and satisfy our workingcapital and general corporate needs through the remainder of 2007.

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**ContractualObligations** - Thefollowing table provides a summary of our contractual obligations at March 31,2007.
|                                  | ** ** | **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)              |       | $                                         | 282,035    |   | $ | 20,411 |   | $ | 26,011 |   | $ | 37,134 |   | $ | 198,479 |   |
| Capital leases                   |       | 49                                        |       | 14 |   | 32 |   | 3 |   | — |   |
| Operating leases  (2)            |       | 265,915                                   |       | 5,125 |   | 8,785 |   | 8,202 |   | 243,803 |   |
| Purchase  obligations (3)        |       | 21,115                                    |       | 21,086 |   | 24 |   | 5 |   | — |   |
| Other long-term  liabilities (4) |       | 38,023                                    |       | 4,454 |   | 3,941 |   | 3,859 |   | 25,769 |   |
| Total                            |       | $                                         | 607,137    |   | $ | 51,090 |   | $ | 38,793 |   | $ | 49,203 |   | $ | 468,051 |   |

 

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**Notes toContractual 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 futurevariable interest obligation using the applicable March 31, 2007 rates.  The nature of our long-term debt obligations,including changes to our long-term debt structure, is described more fully inthe “Borrowing Availability and Activities” section of “Liquidity and CapitalResources.”

(2)   Approximately $252.7 million of ouroperating lease obligations are attributable to the ninety-nine year land leaseassociated with the purchase of Steinway Hall; the remainder is attributable tothe leasing of other facilities and equipment.

(3)   Purchase obligations consist of firmpurchase commitments for raw materials, finished goods, and equipment.

(4)   Our other long-term liabilities consist primarily ofthe long-term portion of our pension obligations, which are described in Note10 in the Notes to Consolidated Financial Statements included within thisfiling, liabilities relating to uncertain tax positions which are expected tobe settled within one year, and obligations under employee and consultantagreements. We have not included $4.1 million of liabilities relating touncertain tax positions within this schedule due to the uncertainty of thepayment date, if any.

**Recent Accounting Pronouncements**

On September 15, 2006, theFASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “FairValue Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuringfair value and expands disclosures about fair value measurements.  SFAS No. 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007.  We are currently evaluating the requirementsof SFAS No. 157 and have not yet determined the impact, if any, its adoptionwill have on our consolidated financial position and results of operations.

In February 2007, the FASBissued SFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS No. 159”). SFAS No. 159 provides entities with an option toreport selected financial assets and liabilities at fair value, with theobjective to reduce both the complexity in accounting for financial instrumentsand the volatility in earnings caused by measuring related assets andliabilities differently. We will be required to adopt SFAS No. 159 in the firstquarter of fiscal year 2008. We are currently evaluating the requirements ofSFAS No. 159 and have not yet determined the impact, if any, its adoption willhave on our consolidated financial position and results of operations.

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**ITEM 3****                  ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

We are exposed to marketrisk associated with changes in foreign currency exchange rates and interestrates.  We mitigate a portion of ourforeign currency exchange rate risk by maintaining foreign currency cashbalances and holding option and forward foreign currency contracts.  They are not designated as hedges foraccounting purposes.  These contractsrelate primarily to intercompany transactions and are not used for trading orspeculative purposes.  The fair value ofthe option and forward foreign currency exchange contracts is sensitive tochanges in foreign currency exchange rates. The impact of an adverse change in foreign currency exchange rates wouldnot be materially different than that disclosed in our Annual Report on Form10-K for the year ended December 31, 2006.

Our revolving loans bearinterest at rates that fluctuate with changes in Prime, LIBOR, TIBOR, andEURIBOR.  As such, our interest expenseon our revolving loans and the fair value of our fixed long-term debt aresensitive to changes in market interest rates. The effect of an adverse change in market interest rates on our interestexpense would not be materially different than that disclosed in our AnnualReport on Form 10-K for the year ended December 31, 2006.

The majority of ourlong-term debt is at a fixed interest rate. Therefore, the associated interest expense is not sensitive tofluctuations in market interest rates. However, the fair value of our fixed interest debt would be sensitive tomarket rate changes.  Such fair value changesmay affect our decision whether to retain, replace, or retire this debt.

**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 controls and procedures are thecontrols and other procedures that we designed to ensure that we record,process, summarize and report in a timely manner the information we mustdisclose in reports that we file with or submit to the SEC. Our Chief ExecutiveOfficer and Chief Financial Officer reviewed and participated in thisevaluation. Based on this evaluation the Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective.  In designing the Company’sdisclosure controls and procedures, the Company’s management recognizes thatany controls, no matter how well designed and operated, can only providereasonable, not absolute, assurance of achieving the desired controlobjectives.

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.

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**PART II****                ****OTHER INFORMATION**

**ITEM 6****                  ****EXHIBITS**

(i)            Exhibits

31.1    Certification of the PrincipalExecutive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2    Certification of the PrincipalFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1    Certification of the PrincipalExecutive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

32.2    Certification of the PrincipalFinancial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on their behalf by the undersigned, thereuntoduly 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 10,  2007 |                                             |

 

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