UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

|ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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(State or Other Jurisdiction of
Incorporation or Organization)                     |  | 35-1910745(I.R.S. Employer
Identification No.)
|------------------------------------------------------------------------------------------ |  | ----------------------------------------------
|800 South Street, Suite 305
Waltham, Massachusetts(Address of Principal Executive Offices) |  | 02453(Zip Code)                               

Registrant's telephone number including area code:(781) 894-9770

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements during the past
90 days.    Yes ý No o

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

Large
accelerated filer o                Accelerated
filer ý                Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes o No ý

Number of shares of Common Stock issued and outstanding as of November 5, 2007:

| |  | Class A  |  | 477,952  
| |  | -------- |  | ---------
| |  | Ordinary |  | 8,099,128
| |  |          |  |          
| |  | Total    |  | 8,577,080



---



STEINWAY MUSICAL 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 and nine months ended September 30, 2007 and September 30, 2006                 |  | 3 
|         |  | Condensed Consolidated Balance Sheets                                                 |  |   
|         |  | September 30, 2007 and December 31, 2006                                              |  | 4 
|         |  | Consolidated Statements of Cash Flows                                                 |  |   
|         |  | Nine months ended September 30, 2007 and September 30, 2006                           |  | 5 
|         |  | Consolidated Statement of Stockholders' Equity                                        |  |   
|         |  | Nine months ended September 30, 2007                                                  |  | 6 
|         |  | Notes to Consolidated and Condensed Consolidated Financial Statements                 |  | 7 
|Item 2.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 22
|Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 32
|Item 4.  |  | Controls and Procedures                                                               |  | 32
|PART II. |  | OTHER INFORMATION                                                                     |  |   
|         |  | Exhibits                                                                              |  | 33
|Item 6.  |  | Signatures                                                                            |  | 34

2

---





ITEM 1    CONSOLIDATED AND CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        Unaudited        (In Thousands Except Share and Per Share Amounts)

|                                  |                                 | Three Months Ended September 30, |        | Nine Months Ended September 30, |  
|--------------------------------- | ------------------------------- | -------------------------------- | ------ | ------------------------------- | -
|
|Net sales                         |                                 | $                                | 99,293 |                                 | $
|Cost of sales                     |                                 |                                  | 71,202 |                                 |  
|                                  |                                 |                                  |        |                                 |  
|Gross profit                      |                                 |                                  | 28,091 |                                 |  
|Operating expenses:               |                                 |                                  |        |                                 |  
|                                  | Sales and marketing             |                                  |        | 11,243                          |  
|                                  | Provision for doubtful accounts |                                  |        | 794                             |  
|                                  | General and administrative      |                                  |        | 8,557                           |  
|                                  | Other operating expenses        |                                  |        | 262                             |  
|                                  |                                 |                                  |        |                                 |  
|Total operating expenses          |                                 |                                  | 20,856 |                                 |  
|                                  |                                 |                                  |        |                                 |  
|Income from operations            |                                 |                                  | 7,235  |                                 |  
|Other (income) expense, net       |                                 |                                  | 37     |                                 |  
|Loss on extinguishment of debt    |                                 |                                  |       |                                 |  
|Interest income                   |                                 |                                  | (613   | )                               |  
|Interest expense                  |                                 |                                  | 3,518  |                                 |  
|                                  |                                 |                                  |        |                                 |  
|Total non-operating expenses      |                                 |                                  | 2,942  |                                 |  
|                                  |                                 |                                  |        |                                 |  
|Income (loss) before income taxes |                                 |                                  | 4,293  |                                 |  
|Income tax provision (benefit)    |                                 |                                  | 1,285  |                                 |  
|                                  |                                 |                                  |        |                                 |  
|Net income (loss)                 |                                 | $                                | 3,008  |                                 | $
|                                  |                                 |                                  |        |                                 |  
|Earnings (loss) per share:        |                                 |                                  |        |                                 |  
|                                  | Basic                           |                                  | $      | 0.35                            |  
|                                  |                                 |                                  |        |                                 |  
|                                  | Diluted                         |                                  | $      | 0.35                            |  
|                                  |                                 |                                  |        |                                 |  
|Weighted average shares:          |                                 |                                  |        |                                 |  
|                                  | Basic                           |                                  |        | 8,569,253                       |  
|                                  | Diluted                         |                                  |        | 8,683,025                       |  

See
notes to consolidated and condensed consolidated financial statements.

3

---



STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES        CONDENSED CONSOLIDATED BALANCE SHEETS        Unaudited        (In Thousands)

|                                                                                                                     |                                                                                                                | September 30,
2007 |         | December 31,
2006 |  
|-------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ----------------- | -
|Assets                                                                                                               |                                                                                                                |                    |         |                   |  
|Current assets:                                                                                                      |                                                                                                                |                    |         |                   |  
|                                                                                                                     | Cash                                                                                                           |                    | $       | 14,988            |  
|                                                                                                                     | Accounts, notes and other receivables, net of allowances of $16,963 and $21,640 in 2007 and 2006, respectively |                    |         | 86,061            |  
|                                                                                                                     | Inventories, net                                                                                               |                    |         | 167,733           |  
|                                                                                                                     | Prepaid expenses and other current assets                                                                      |                    |         | 12,345            |  
|                                                                                                                     | Deferred tax assets                                                                                            |                    |         | 11,966            |  
|                                                                                                                     |                                                                                                                |                    |         |                   |  
|Total current assets                                                                                                 |                                                                                                                |                    | 293,093 |                   |  
|Property, plant and equipment, net of accumulated depreciation of $92,059 and $84,386 in 2007 and 2006, respectively |                                                                                                                |                    | 94,676  |                   |  
|Trademarks                                                                                                           |                                                                                                                |                    | 14,010  |                   |  
|Goodwill                                                                                                             |                                                                                                                |                    | 32,563  |                   |  
|Other intangibles, net                                                                                               |                                                                                                                |                    | 4,135   |                   |  
|Other assets                                                                                                         |                                                                                                                |                    | 12,530  |                   |  
|Long-term deferred tax assets                                                                                        |                                                                                                                |                    | 7,697   |                   |  
|                                                                                                                     |                                                                                                                |                    |         |                   |  
|Total assets                                                                                                         |                                                                                                                | $                  | 458,704 |                   | $
|                                                                                                                     |                                                                                                                |                    |         |                   |  
|Liabilities and stockholders' equity                                                                                 |                                                                                                                |                    |         |                   |  
|Current liabilities:                                                                                                 |                                                                                                                |                    |         |                   |  
|                                                                                                                     | Debt                                                                                                           |                    | $       | 3,369             |  
|                                                                                                                     | Accounts payable                                                                                               |                    |         | 13,155            |  
|                                                                                                                     | Other current liabilities                                                                                      |                    |         | 43,015            |  
|                                                                                                                     |                                                                                                                |                    |         |                   |  
|Total current liabilities                                                                                            |                                                                                                                |                    | 59,539  |                   |  
|Long-term debt                                                                                                       |                                                                                                                |                    | 194,672 |                   |  
|Deferred tax liabilities                                                                                             |                                                                                                                |                    | 11,762  |                   |  
|Pension and other postretirement benefit liabilities                                                                 |                                                                                                                |                    | 35,904  |                   |  
|Other non-current liabilities                                                                                        |                                                                                                                |                    | 9,499   |                   |  
|                                                                                                                     |                                                                                                                |                    |         |                   |  
|Total liabilities                                                                                                    |                                                                                                                |                    | 311,376 |                   |  
|                                                                                                                     |                                                                                                                |                    |         |                   |  
|Commitments and contingent liabilities                                                                               |                                                                                                                |                    |         |                   |  
|Stockholders' equity:                                                                                                |                                                                                                                |                    |         |                   |  
|                                                                                                                     | Common stock                                                                                                   |                    |         | 11                |  
|                                                                                                                     | Additional paid-in capital                                                                                     |                    |         | 94,120            |  
|                                                                                                                     | Retained earnings                                                                                              |                    |         | 105,102           |  
|                                                                                                                     | Accumulated other comprehensive loss                                                                           |                    |         | (6,595            | )
|                                                                                                                     | Treasury stock, at cost                                                                                        |                    |         | (45,310           | )
|                                                                                                                     |                                                                                                                |                    |         |                   |  
|Total stockholders' equity                                                                                           |                                                                                                                |                    | 147,328 |                   |  
|                                                                                                                     |                                                                                                                |                    |         |                   |  
|Total liabilities and stockholders' equity                                                                           |                                                                                                                | $                  | 458,704 |                   | $
|                                                                                                                     |                                                                                                                |                    |         |                   |  

See
notes to consolidated and condensed consolidated financial statements.

4

---





STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        Unaudited        (In Thousands)

|                                                |                                                                                     | Nine Months Ended September 30,              |                                      
|----------------------------------------------- | ----------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------
|
|Cash flows from operating activities:           |                                                                                     |                                              |                                      
|                                                | Net income (loss)                                                                   |                                              | $                                    
|                                                | Adjustments to reconcile net income (loss) to cash flows from operating activities: |                                              |                                      
|                                                |                                                                                     | Depreciation and amortization                |                                      
|                                                |                                                                                     | Amortization of bond discount, net           |                                      
|                                                |                                                                                     | Loss on extinguishment of debt               |                                      
|                                                |                                                                                     | Stock-based compensation expense             |                                      
|                                                |                                                                                     | Excess tax benefits from stock-based awards  |                                      
|                                                |                                                                                     | Tax benefit from stock option exercises      |                                      
|                                                |                                                                                     | Deferred tax benefit                         |                                      
|                                                |                                                                                     | Provision for doubtful accounts              |                                      
|                                                |                                                                                     | Purchase of trading securities               |                                      
|                                                |                                                                                     | Other                                        |                                      
|                                                |                                                                                     | Changes in operating assets and liabilities: |                                      
|                                                |                                                                                     |                                              | Accounts, notes and other receivables
|                                                |                                                                                     |                                              | Inventories                          
|                                                |                                                                                     |                                              | Prepaid expenses and other assets    
|                                                |                                                                                     |                                              | Accounts payable                     
|                                                |                                                                                     |                                              | Other liabilities                    
|                                                |                                                                                     |                                              |                                      
|Cash flows from operating activities            |                                                                                     |                                              | (11,374                              
|Cash flows from investing activities:           |                                                                                     |                                              |                                      
|                                                | Capital expenditures                                                                |                                              |                                      
|                                                | Proceeds from disposals of property, plant and equipment                            |                                              |                                      
|                                                | Proceeds from sale of available-for-sale securities                                 |                                              |                                      
|                                                |                                                                                     |                                              |                                      
|Cash flows from investing activities            |                                                                                     |                                              | (3,445                               
|Cash flows from financing activities:           |                                                                                     |                                              |                                      
|                                                | Borrowings under lines of credit                                                    |                                              |                                      
|                                                | Repayments under lines of credit                                                    |                                              |                                      
|                                                | Debt issuance costs                                                                 |                                              |                                      
|                                                | Proceeds from issuance of debt                                                      |                                              |                                      
|                                                | Repayments of long-term debt                                                        |                                              |                                      
|                                                | Premium paid on extinguishment of debt                                              |                                              |                                      
|                                                | Proceeds from issuance of common stock                                              |                                              |                                      
|                                                | Dividends paid                                                                      |                                              |                                      
|                                                | Excess tax benefits from stock-based awards                                         |                                              |                                      
|                                                |                                                                                     |                                              |                                      
|Cash flows from financing activities            |                                                                                     |                                              | (1,344                               
|Effect of foreign exchange rate changes on cash |                                                                                     |                                              | 742                                  
|                                                |                                                                                     |                                              |                                      
|Decrease in cash                                |                                                                                     |                                              | (15,421                              
|Cash, beginning of period                       |                                                                                     |                                              | 30,409                               
|                                                |                                                                                     |                                              |                                      
|Cash, end of period                             |                                                                                     | $                                            | 14,988                               
|                                                |                                                                                     |                                              |                                      
|Supplemental Cash Flow Information              |                                                                                     |                                              |                                      
|                                                | Interest paid                                                                       |                                              | $                                    
|                                                | Taxes paid                                                                          |                                              | $                                    

See notes to consolidated and condensed consolidated financial statements.

5

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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES        CONSOLIDATED 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                    | )    
|Comprehensive income:                                  |                                          |              |    |                            |   |                   |  |                                      |         |                |   |                            |      
|                                                       | Net income                               |              |    |                            |   |                   |  |                                      |         | 7,591          |   |                            |      
|                                                       | Foreign currency translation adjustments |              |    |                            |   |                   |  |                                      |         |                |   |                            | 3,955
|                                                       |                                          |              |    |                            |   |                   |  |                                      |         |                |   |                            |      
|Total comprehensive income                             |                                          |              |    |                            |   |                   |  |                                      |         |                |   |                            |      
|                                                       |                                          |              |    |                            |   |                   |  |                                      |         |                |   |                            |      
|FIN 48 adjustment                                      |                                          |              |    |                            |   |                   |  |                                      | (2,757  | )              |   |                            |      
|Dividends paid                                         |                                          |              |    |                            |   |                   |  |                                      | (25,187 | )              |   |                            |      
|Issuance of 26,252 shares of common stock              |                                          |              |    |                            |   | 546               |  |                                      |         |                |   |                            |      
|Exercise of 174,624 options for shares of common stock |                                          |              | 1  |                            |   | 1,720             |  |                                      | (256    | )              |   |                            |      
|Stock-based compensation                               |                                          |              |    |                            |   | 853               |  |                                      |         |                |   |                            |      
|Tax benefit of options exercised                       |                                          |              |    |                            |   | 735               |  |                                      |         |                |   |                            |      
|                                                       |                                          |              |    |                            |   |                   |  |                                      |         |                |   |                            |      
|Balance, September 30, 2007                            |                                          | $            | 11 |                            | $ | 94,120            |  | $                                    | 105,102 |                | $ | (6,595                     | )    
|                                                       |                                          |              |    |                            |   |                   |  |                                      |         |                |   |                            |      

See
notes to consolidated and condensed consolidated financial statements.

6

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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED AND CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS        SEPTEMBER 30, 2007        Unaudited
    (Tabular Amounts In Thousands Except Share, Per Share, Option, and Per Option Data)

(1) Basis of Presentation

The accompanying consolidated and condensed consolidated financial statements of Steinway Musical Instruments, Inc. and subsidiaries (the "Company") for
the three and nine months ended September 30, 2007 and 2006 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated
financial statements as of and for the year ended December 31, 2006, and include all adjustments which are of a normal and recurring nature, necessary for the fair presentation of financial
position, results of operations and cash flows for the interim periods. We encourage you to read the consolidated and condensed consolidated financial statements in conjunction with the risk factors,
consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and
Exchange Commission ("SEC"). The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the entire
year.

Throughout
this report "we," "us," and "our" refer to Steinway Musical Instruments, Inc. and subsidiaries taken as a whole.

(2) Summary of Significant Accounting Policies

Principles of ConsolidationOur consolidated financial statements include the accounts of all direct and indirect
subsidiaries, all of which are wholly owned, including the piano ("Steinway") and band ("Conn-Selmer") divisions. Intercompany balances have been eliminated in consolidation.

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America necessarily requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Income TaxesWe provide for income taxes using an asset and liability approach. We compute deferred income tax assets and
liabilities for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect taxable income. We establish valuation allowances when necessary to reduce deferred tax assets to the amount that more likely
than not will be realized.

In
July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan interpretation
of FASB Statement No. 109" ("FIN 48") which clarifies the accounting and disclosure for uncertain tax positions. This interpretation 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 Statement of Financial
Accounting Standard ("SFAS") No. 5, "Accounting for

7

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Contingencies"
and recorded reserves for uncertain tax positions that may have become payable in future years as a result of anticipated or ongoing examinations by tax authorities.

FIN
48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. This interpretation also provides guidance on derecognition of income tax assets and
liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim
periods and income tax disclosures. At the adoption date, we made a comprehensive review of our uncertain tax positions. We believe appropriate provisions for outstanding issues have been made.

The
cumulative effects of applying this interpretation have been recorded as a decrease of $2.8 million to retained earnings, an increase of $1.6 million to net deferred
income tax 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 of January 1, 2007.
In conjunction with the adoption of FIN 48, we began reporting income tax-related interest and penalties as a component of income tax expense. In prior periods such interest was reported
in interest expense. As of January 1, 2007, we have accrued $1.3 million for the payment of 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 million would affect our effective tax rate, if recognized.

We
file income tax returns in the U.S. federal jurisdiction 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.

There
have been no material changes to the liability for uncertain tax positions.

Stock-based CompensationWe record compensation cost on a straight-line basis over the award's requisite service
period for all share-based awards granted. We estimate the fair value of our stock option awards (less estimated forfeitures) and employee stock purchase plan rights on the date of grant using the
Black-Scholes option valuation model.

Earnings (loss) per Common ShareWe compute earnings (loss) per share using the weighted-average number of common shares
outstanding during each period. Diluted earnings (loss) per common share reflects the effect of our outstanding options using the treasury stock method, except when such options would be antidilutive.

8

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A
reconciliation of the weighted-average shares used for the basic and diluted computations is as follows:

|                                      |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|------------------------------------- |  | -------------------------------- |  | -------------------------------
|
|Weighted-average shares:              |  |                                  |  |                                
|For basic earnings (loss) per share   |  | 8,569,253                        |  | 8,357,153                      
|Dilutive effect of stock options      |  | 113,772                          |  | 73,153                         
|                                      |  |                                  |  |                                
|For diluted earnings (loss) per share |  | 8,683,025                        |  | 8,430,306                      
|                                      |  |                                  |  |                                

We
did not include 22,500 and 65,000 outstanding options to purchase shares of common stock in the computation of diluted earnings per common share for the three months ended
September 30, 2007 and 2006, respectively, because their exercise prices were more than the average market price of our common shares. We did not include 22,500 or any of the 623,000
outstanding options to purchase shares of common stock in the computation of diluted loss per common share for the nine months ended September 30, 2007 and 2006, respectively, because their
impact also would have been antidilutive.

Accumulated Other Comprehensive LossAccumulated other comprehensive loss is comprised of foreign currency translation
adjustments and pension and other post-retirement benefits. The components of accumulated other comprehensive loss are as follows:

|                           |  | Foreign Currency
Translation
Adjustments |       | 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
|Activity                   |  |                                          | 3,955 |                                          |   |                                                       |   |                                      |     
|                           |  |                                          |       |                                          |   |                                                        |   |                                      |      
|Balance September 30, 2007 |  | $                                        | 7,764 |                                          | $ | (23,235                                                | ) | $                                    | 8,876
|                           |  |                                          |       |                                          |   |                                                        |   |                                      |      

Recent Accounting PronouncementsOn September 15, 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 about fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the
impact, if any, its adoption will have on our consolidated financial position and results of operations.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 provides
entities with an option to report selected financial assets and liabilities at fair value, with the objective to reduce both the complexity in

9

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accounting
for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. We will be required to adopt SFAS No. 159 in the first
quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS No. 159 and have not yet determined the impact, if any, its adoption will have on our consolidated financial
position and results of operations.

(3) Inventories

September 30,
2007

December 31,
2006Raw materials

$
18,653

$
20,989Work-in-process


49,547


49,316Finished goods


99,533


84,318$
167,733

$
154,623


(4) Goodwill, Trademarks, and Other Intangible Assets

Intangible assets other than goodwill and indefinite-lived trademarks are amortized on a straight-line basis over their estimated useful lives.
Deferred financing costs are amortized over the repayment periods of the underlying debt. We test our goodwill and indefinite-lived trademark assets for impairment annually, or on an interim basis if
events or circumstances indicate that the fair value of an asset has decreased below its carrying value. At July 31, 2007, we evaluated these assets and determined that the fair value had not
decreased below the carrying value and, accordingly, no impairments have been recognized. The changes in carrying amounts of goodwill and trademarks are as follows:

|                                    |  | Piano Segment |        | Band Segment |   | Total
|----------------------------------- |  | ------------- | ------ | ------------ | - | -----
|Goodwill:                           |  |               |        |              |   |      
|Balance, January 1, 2007            |  | $             | 22,926 |              | $ | 8,555
|Foreign currency translation impact |  |               | 1,082  |              |   |     
|                                    |  |               |        |              |   |      
|Balance, September 30, 2007         |  | $             | 24,008 |              | $ | 8,555
|                                    |  |               |        |              |   |      
|Trademarks:                         |  |               |        |              |   |      
|Balance, January 1, 2007            |  | $             | 7,847  |              | $ | 5,824
|Foreign currency translation impact |  |               | 339    |              |   |     
|                                    |  |               |        |              |   |      
|Balance, September 30, 2007         |  | $             | 8,186  |              | $ | 5,824
|                                    |  |               |        |              |   |      

10

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We
also carry certain intangible assets that are amortized. Once fully amortized, these assets are removed from both the gross and accumulated amortization balance. These assets consist
of the following:

September 30,
2007

December 31,
2006Gross deferred financing costs:

$
5,753

$
5,750Accumulated amortization


(1,805
)

(1,287
)Deferred financing costs, net

$
3,948

$
4,463Gross covenants not to compete:

$
500

$
500Accumulated amortization


(313
)

(238
)Covenants not to compete, net

$
187

$
262


The
weighted-average amortization period for deferred financing costs is seven years, and the weighted-average amortization period of covenants not to compete is five years. Total
amortization expense, which includes amortization of deferred financing costs, is as follows:

|                     |  | Three Months Ended September 30, |     | Nine Months Ended September 30,
|-------------------- |  | -------------------------------- | --- | -------------------------------
|
|Amortization expense |  | $                                | 196 |                                

The
following table shows the total estimated amortization expense for the remainder of 2007 and beyond:

Estimated amortization expense:

Amount2007

$
1972008


7902009


7462010


6652011


6262012 and thereafter


1,111Total

$
4,135


11

---



(5) Other Current Liabilities

September 30,
2007

December 31,
2006Accrued payroll and related benefits

$
15,957

$
16,397Current portion of pension and other postretirement benefit liabilities


1,266


1,461Accrued warranty expense


1,639


1,888Accrued interest


1,088


4,178Deferred income


8,505


6,348Environmental liabilities


3,082


3,232Income and other taxes payable


864


3,012Other accrued expenses


10,614


8,132Total

$
43,015

$
44,648


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

The
accrued warranty expense activity for the nine months ended September 30, 2007 and 2006, and the year ended December 31, 2006 is as follows:

|                                    |  | September 30,
2007 |       | September 30,
2006 |   | December 31,
2006 |  
|----------------------------------- |  | ------------------ | ----- | ------------------ | - | ----------------- | -
|Beginning balance                   |  | $                  | 1,888 |                    | $ | 1,857             |  
|Additions                           |  |                    | 469   |                    |   | 605               |  
|Claims and reversals                |  |                    | (772  | )                  |   | (642              | )
|Foreign currency translation impact |  |                    | 54    |                    |   | 46                |  
|                                    |  |                    |       |                    |   |                   |  
|Ending balance                      |  | $                  | 1,639 |                    | $ | 1,866             |  
|                                    |  |                    |       |                    |   |                   |  

12

---





(6) Long-Term Debt

Our
long-term debt consists of the following:

September 30,
2007

December 31,
20067.00% Senior Notes

$
175,000

$
175,000Unamortized bond discount


(1,060
)

(1,184
)Domestic line of credit


20,732


Open account loans, payable on demand


3,369


4,595Total


198,041


178,411Less: current portion


(3,369
)

(4,595
)Long-term debt

$
194,672

$
173,816


Scheduled
payments of debt are as follows:

September 30,
2007Remainder of 2007

$
3,3692008


2009


2010


2011


20,732Thereafter


175,000Total

$
199,101


In
conjunction with our debt restructuring activities, we recorded a net loss on extinguishment of debt of $9.7 million for the year ended December 31, 2006, which consists of the
following:

For the year ended December 31,

2006Deferred financing costs write-offterm loan

$
977Deferred financing costs write-off8.75% Senior Notes


2,247Premiums pursuant to the tender offer and call


7,740Bond premium write-off


(1,290
)Total net loss on extinguishment of debt

$
9,674


(7) Stockholders' Equity and Stock-based Compensation Arrangements

Our common stock is comprised of two classes: Class A and Ordinary. With the exception of disparate voting power, both classes are substantially identical.
Each share of Class A common stock entitles the holder to 98 votes. Holders of Ordinary common stock are entitled to one vote per share.

13

---



Class A
common stock shall automatically convert to Ordinary common stock if, at any time, the Class A common stock is not owned by an original Class A holder. As of
September 30, 2007 our Chairman and our Chief Executive Officer collectively owned 100% of the Class A common shares, representing approximately 85% of the combined voting power of the
Class A common stock and Ordinary common stock.

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

Stock PlansThe 2006 Stock Plan provides for the granting of 1,000,000 stock options (including incentive stock options and
non-qualified stock options), stock appreciation rights and other stock awards to certain key employees, consultants and advisors. Our stock options generally have five-year
vesting terms and ten-year option terms.

Prior
to 2007, we had reserved 721,750 treasury stock shares to issue under our 1996 Stock Plan, once we reached our registered share limitation. This plan has expired but still has
vested and unvested options outstanding. In early 2007 we reached our registered share limitation and have since issued 91,674 shares of treasury stock to cover options exercised, with 418,676
remaining options outstanding. Since in most instances the average cost of the treasury stock exceeded the price of the options exercised, the difference between the proceeds received and the average
cost of the treasury stock issued resulted in a reduction of retained earnings of $0.3 million during the nine months ended September 30, 2007.

We
account for stock-based compensation arrangements in accordance with SFAS No. 123R, "Share-Based Payment," which we adopted on January 1, 2006 using the modified
prospective transition method. The compensation cost and the income tax benefit recognized for these plans is as follows:

|                                                                        |  | Three Months Ended
September 30, |      | Nine Months Ended
September 30,
|----------------------------------------------------------------------- |  | -------------------------------- | ---- | -------------------------------
|
|Compensation cost included in basic and diluted income (loss) per share |  | $                                | 0.02 |                                
|Stock-based compensation expense                                        |  |                                  | 210  |                                
|Income tax benefit                                                      |  |                                  | 48   |                                

We
measured the fair value of options on their grant date, including the valuation of the option feature implicit in our Purchase Plan, using the Black-Scholes option-pricing model. The
risk-free

14

---



interest
rate is based on the weighted-average of U.S. Treasury rates over the expected life of the stock option or the contractual life of the option feature in the Purchase Plan. The expected life
of a stock option is based on historical data of similar option holders. We have segregated our employees into two groups based on historical exercise and termination behavior. The expected life of
the option feature in the Purchase Plan is the same as its contractual life. Expected volatility is based on historical volatility of our stock over the expected life of the option, as our options are
not readily tradable.

Key
assumptions used to apply this pricing model to the Stock Plans are as follows:

|                                          |  | Three Months Ended
September 30, |  | Nine Months Ended
September 30,
|----------------------------------------- |  | -------------------------------- |  | -------------------------------
|
|Risk free interest rate                   |  | 4.7%                             |  |                               
|Weighted average expected life (in years) |  | 7.3                              |  |                               
|Expected volatility of underlying stock   |  | 24.7%                            |  |                               
|Expected dividends                        |  |                                 |  |                               
|Weighted average fair value               |  | $12.25                           |  |                               

---

The
following table sets forth information regarding the Stock Plans:

|                                  |  | 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                           |  | 142,100           |   |                                  | 32.39 |                                       |     |                                        
|Exercised                         |  | (174,624          | ) |                                  | 20.56 |                                       |     |                                        
|Forfeited                         |  | (11,400           | ) |                                  | 30.66 |                                       |     |                                        
|                                  |  |                   |   |                                  |       |                                       |     |                                        
|Outstanding at September 30, 2007 |  | 550,576           |   | $                                | 23.85 |                                       | 6.6 |                                        
|                                  |  |                   |   |                                  |       |                                       |     |                                        
|Exercisable at September 30, 2007 |  | 293,876           |   | $                                | 19.96 |                                       | 5.1 |                                        
|                                  |  |                   |   |                                  |       |                                       |     |                                        

The
total intrinsic value of the options exercised during the nine months ended September 30, 2007 and 2006 was $2.4 million and $2.7 million, respectively.

As
of September 30, 2007, there was $2.1 million of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan.
This compensation cost is expected to be recognized over a period of 3.5 years.

15

---



The
following tables set forth information regarding the Purchase Plan:

|                                                            |  | Three Months Ended
September 30, |  | Nine Months Ended
September 30,
|----------------------------------------------------------- |  | -------------------------------- |  | -------------------------------
|
|Risk-free interest rate                                     |  | 4.9%                             |  | 4.3%                           
|Weighted-average expected life of option feature (in years) |  | 1.0                              |  | 1.0                            
|Expected volatility of underlying stock                     |  | 25.5%                            |  | 23.6%                          
|Expected dividends                                          |  |                                 |  |                               
|Weighted-average fair value of option feature               |  | $7.98                            |  | $6.82                          

|                                  |  | 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                 |  | 20,411            |   |                                  | 22.54 |                                       |     |                                        
|Exercised                         |  | (26,252           | ) |                                  | 20.80 |                                       |     |                                        
|Canceled, forfeited, or expired   |  | (1,006            | ) |                                  | 21.05 |                                       |     |                                        
|                                  |  |                   |   |                                  |       |                                       |     |                                        
|Outstanding at September 30, 2007 |  | 4,434             |   | $                                | 28.73 |                                       | 0.8 |                                        
|                                  |  |                   |   |                                  |       |                                       |     |                                        

As
reported in the consolidated statements of cash flows, cash received from option exercises under the Stock Plan for the periods ended September 30, 2007 and 2006 was
$4.1 million and $4.9 million, respectively. SFAS No. 123R requires that cash flows from tax benefits resulting from tax deductions in excess of the compensation cost recognized
for stock-based awards under a fair value basis (excess tax benefits) be classified as a cash flow from financing activities. Accordingly, for the periods ended September 30, 2007 and 2006,
$0.4 million of excess tax benefits has been classified as an outflow from operating activities and an inflow from financing activities in the statement of cash flows. For the periods ended
September 30, 2007 and 2006, $0.7 million and $0.9 million, respectively, of tax benefit from stock option exercises is presented as a cash inflow from operating activities.

16

---





(8) Other (Income) Expense, Net

|                                     |  | Three Months Ended
September 30, |        | Nine Months Ended
September 30, |  
|------------------------------------ |  | -------------------------------- | ------ | ------------------------------- | -
|
|West 57th building income            |  | $                                | (1,163 | )                               | $
|West 57th building expenses          |  |                                  | 823    |                                 |  
|Foreign exchange losses (gains), net |  |                                  | 111    |                                 |  
|Miscellaneous                        |  |                                  | 266    |                                 |  
|                                     |  |                                  |        |                                 |  
|Other (income) expense, net          |  | $                                | 37     |                                 | $
|                                     |  |                                  |        |                                 |  

(9) Commitments and Contingent Liabilities

We are involved in certain legal proceedings regarding 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 and incidental to the operation of our business. While the outcome of such actions cannot be predicted with certainty, we believe that,
based on our experience in dealing with these matters, their ultimate resolution will not have a material adverse impact on our business, financial condition, results of operations or prospects.

Certain
environmental laws, such as the Comprehensive Environmental Response, Compensation, and Liability Act, as amended ("CERCLA"), impose strict, retroactive, joint and several
liability upon persons responsible for releases of hazardous substances, which liability is broadly construed. Under CERCLA and other laws, we may have liability for investigation and cleanup costs
and other damages relating to our current or former properties, or third-party sites to which we sent wastes for disposal. Our potential liability at any of these sites is affected by many factors
including, but not limited to, the method of remediation, our portion of the hazardous substances at the site relative to that of other parties, the number of responsible parties, the financial
capabilities of other parties, and contractual rights and obligations.

In
this regard, we operate certain manufacturing facilities which were previously owned by Philips Electronics North America Corporation ("Philips"). When we purchased these facilities,
Philips agreed to indemnify us for certain environmental matters resulting from activities of Philips occurring prior to December 29, 1988 (the "Environmental Indemnity Agreement"). To date,
Philips has fully performed its obligations under the Environmental Indemnity Agreement, which terminates on December 29, 2008, however, we cannot assure investors that it will continue to do
so in the future. Four matters covered by the Environmental Indemnity Agreement are currently pending. Philips has entered into Consent Orders with the Environmental Protection Agency ("EPA") for one
site and the North Carolina Department of Environment, Health and Natural Resources for a second site, whereby Philips has agreed to pay required response costs. On October 22, 1998, we were
joined as defendant in an action involving a third site formerly occupied by a business we acquired in Illinois. Philips has accepted the defense of this action pursuant to the terms of the
Environmental Indemnity Agreement.

17

---



At
the fourth site, which is a third party waste disposal site, four Conn-Selmer predecessor entities are among the potentially 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 previously owned by Philips,
this matter was tendered to Philips pursuant to the Environmental Indemnity Agreement. Philips is a party to the Consent Order and has paid its share of the liability. The four Conn-Selmer
predecessor entities paid approximately $0.1 million in 2006 and settled this claim except for the possibility of a contingent remedial action, should any additional 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 existing environmental remediation plan at a facility we acquired in 2000. We estimate our costs, which approximate $0.8 million, over a
14-year period. We have accrued approximately $0.6 million for the estimated remaining cost of this remediation program, which represents the present value total cost using a
discount rate of 4.54%. A summary of expected payments associated with this project is as follows:

Environmental
PaymentsRemainder of 2007

$
42008


612009


612010


612011


61Thereafter


545Total

$
793


In
2004, we acquired two manufacturing facilities from G. Leblanc Corporation, now Grenadilla, Inc. ("Grenadilla"), for which environmental remediation plans had already been
established. In connection with the acquisition, we assumed the existing accrued liability of approximately $0.8 million for the cost of these remediation activities. Based on a review of past
and ongoing investigatory and remedial work by our environmental consultants, and discussions with state regulatory officials, as well as recent sampling, we estimate the remaining costs of such
remedial plans to be $2.5 million. Pursuant to the purchase and sale agreement, we have sought indemnification from Grenadilla for anticipated costs above the original estimate in the amount of
$2.5 million. We filed a claim against the escrow and recorded a corresponding receivable for this amount in prepaid expenses and other current assets in our consolidated balance sheet. We have
reached an agreement with Grenadilla whereby future environmental costs will be paid directly out of the escrow. Should the escrow be reduced to zero, we would seek reimbursement from Grenadilla for
these additional costs. However, we cannot be assured that we will be able to recover such costs.

18

---



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

(10) Retirement Plans

We have 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 cost for these plans are as follows:

|                                   |  | Domestic Plans                  |        | Foreign Plans                   |  
|---------------------------------- |  | ------------------------------- | ------ | ------------------------------- | -
|
|
|Service cost                       |  | $                               | 236    |                                 | $
|Interest cost                      |  |                                 | 807    |                                 |  
|Expected return on plan assets     |  |                                 | (1,242 | )                               |  
|Amortization of prior service cost |  |                                 | 108    |                                 |  
|Amortization of net loss           |  |                                 | 137    |                                 |  
|                                   |  |                                 |        |                                 |  
|Net periodic benefit cost          |  | $                               | 46     |                                 | $
|                                   |  |                                 |        |                                 |  
|                                   |  |                                 |        |                                 |  
|
|                                   |  | Nine Months Ended
September 30, |        | Nine Months Ended
September 30, |  
|
|Service cost                       |  | $                               | 707    |                                 | $
|Interest cost                      |  |                                 | 2,422  |                                 |  
|Expected return on plan assets     |  |                                 | (3,726 | )                               |  
|Amortization of prior service cost |  |                                 | 324    |                                 |  
|Amortization of net loss           |  |                                 | 413    |                                 |  
|                                   |  |                                 |        |                                 |  
|Net periodic benefit cost          |  | $                               | 140    |                                 | $
|                                   |  |                                 |        |                                 |  

19

---



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

|                                      |  | Three Months Ended
September 30, |     | Nine Months Ended
September 30,
|------------------------------------- |  | -------------------------------- | --- | -------------------------------
|
|Service cost                          |  | $                                | 11  |                                
|Interest cost                         |  |                                  | 33  |                                
|Amortization of transition obligation |  |                                  | 8   |                                
|Recognized (gain) loss                |  |                                  | (41 | )                              
|                                      |  |                                  |     |                                
|Net postretirement benefit cost       |  | $                                | 11  |                                
|                                      |  |                                  |     |                                

We
do not intend to make any contributions to our domestic pension plan this year. Our anticipated contributions to the pension plan of our U.K. subsidiary approximate
$0.2 million for the current year. As of September 30, 2007, we have made contributions of less than $0.2 million to this plan. The pension plans of our German entities do not
hold any assets and use operating cash to pay participant benefits as they become due. Expected 2007 benefit payments under these plans are $1.2 million. For the nine months ended
September 30, 2007, we have made benefit payments of $0.8 million under these plans.

(11) Segment Information

We have identified two reportable segments: the piano segment and the band & orchestral instrument segment. We consider these two segments reportable as
they are managed separately and the operating results of each segment are separately reviewed and evaluated by our senior management on a regular basis. Management and the chief operating decision
maker use income from operations as a meaningful measurement of profit or loss for the segments. Income from operations for the reportable segments includes certain corporate costs allocated to the
segments based primarily on revenue, as well as intercompany profit. Amounts reported as "Other & Elim" include those corporate costs that were not allocated to the reportable segments and the
remaining intercompany profit elimination.

20

---



The
following tables present information about our operating segments for the three and nine months ended September 30, 2007 and 2006:

|                                |  | Piano Segment |        | Band Segment |   |        |  |  
|------------------------------- |  | ------------- | ------ | ------------ | - | ------ |  | -
|
|
|Net sales to external customers |  | $             | 28,087 |              | $ | 13,673 |  | $
|Income (loss) from operations   |  |               | 2,669  |              |   | 2,408  |  |  

|                                |  | Piano Segment |        | Band Segment |   |        |  |  
|------------------------------- |  | ------------- | ------ | ------------ | - | ------ |  | -
|
|
|Net sales to external customers |  | $             | 27,100 |              | $ | 12,174 |  | $
|Income (loss) from operations   |  |               | 1,693  |              |   | 3,384  |  |  

|                                |  | Piano Segment |        | Band Segment |   |        |  |  
|------------------------------- |  | ------------- | ------ | ------------ | - | ------ |  | -
|
|
|Net sales to external customers |  | $             | 82,519 |              | $ | 42,944 |  | $
|Income (loss) from operations   |  |               | 5,537  |              |   | 10,971 |  |  

|                                |  | Piano Segment |        | Band Segment |   |        |  |  
|------------------------------- |  | ------------- | ------ | ------------ | - | ------ |  | -
|
|
|Net sales to external customers |  | $             | 81,667 |              | $ | 36,298 |  | $
|Income (loss) from operations   |  |               | 4,362  |              |   | 8,501  |  |  

21

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ITEM 2    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  (Tabular Amounts in Thousands Except Percentages, Share and Per Share Data)

Introduction

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

Critical Accounting Policies

The Securities and Exchange Commission ("SEC") has issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies"
as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.

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

The
significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements included in the Company's 2006 Annual Report on
Form 10-K. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management considers the
following to be critical accounting policies based on the definition above.



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

22

---





We establish inventory reserves for items such as lower-of-cost-or-market and obsolescence. We review inventory
levels on a detailed basis, concentrating on the age and amounts of raw materials, work-in-process, and finished goods, as well as recent usage and sales dates and quantities
to help develop our estimates. Ongoing changes in our business strategy, including a shift from batch processing to single piece production flow, coupled with increased offshore sourcing, could affect
our ability to realize the current cost of our inventory, and are considered by management when developing our estimates. We also establish reserves for anticipated
book-to-physical adjustments based upon our historical level of adjustments from our annual physical inventories. We cost our inventory using standard costs.
Accordingly, variances between actual and standard costs that are not abnormal in nature are capitalized into inventory and released based on calculated inventory turns.



We establish workers' compensation and self-insured health claims reserves based on our trend analysis of data provided by third-party administrators
regarding historical claims and anticipated future development of those claims.



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



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

We
test our goodwill and indefinite-lived trademark assets for impairment annually or on an interim basis if events or circumstances indicate that the fair value of 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 to our market capitalization.



We make certain assumptions when calculating our benefit obligations and expenses. We base our selection of assumptions, such as discount rates and
long-term rates of return, on information provided by our actuaries, investment advisors, investment committee, current rate trends, and historical trends for our pension asset portfolio.
Our benefit obligations and expenses can fluctuate significantly based on the assumptions management selects.



A valuation allowance has been recorded for certain deferred tax assets related to foreign tax credit carryforwards and state net operating loss carryforwards.
When assessing the realizability of deferred tax assets, we consider whether it is more likely than not that the deferred tax assets will be fully realized. The ultimate realization of these assets is
dependent upon many factors, including the ratio of foreign source income to overall income and generation of sufficient future taxable income in the states for which we have loss carryforwards. When
establishing or adjusting valuation allowances, we consider these factors, as well as anticipated trends in foreign source income and tax planning strategies which may impact future realizability of
these assets.

23

---



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



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



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

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

Forward-Looking Statements

Certain statements contained in this document are "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of
1934, as amended. These forward-looking statements represent our present expectations or beliefs concerning future events. We caution that such statements are necessarily based on certain assumptions
which are subject to risks and uncertainties which could cause actual results to differ materially from 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; impact of dealer consolidations on orders; ability of new workers to meet
desired production levels; exchange rate fluctuations; variations in the mix of products sold; market acceptance of new product and distribution strategies; ability of suppliers to meet demand;
concentration of credit risk; fluctuations in effective tax rates resulting from shifts in sources of income; and the ability to successfully integrate and operate acquired businesses. Further
information on these risk factors is included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006. We encourage you to read those descriptions
carefully. We caution investors not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements contained in this report, speak only as of
the date of this report (unless another date is indicated) and we undertake no obligation to update or revise the statements except as required by law.

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Results of Operations

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

|                            |       | Three Months Ended September 30, |        | Change |     
|--------------------------- | ----- | -------------------------------- | ------ | ------ | ----
|
|Net sales                   |       |                                  |        |        |     
|                            | Band  |                                  | $      | 47,308 |     
|                            | Piano |                                  |        | 51,985 |     
|                            |       |                                  |        |        |     
|Total sales                 |       |                                  | 99,293 |        |     
|Cost of sales               |       |                                  |        |        |     
|                            | Band  |                                  |        | 38,099 |     
|                            | Piano |                                  |        | 33,103 |     
|                            |       |                                  |        |        |     
|Total cost of sales         |       |                                  | 71,202 |        |     
|Gross profit                |       |                                  |        |        |     
|                            | Band  |                                  |        | 9,209  |     
|                            | Piano |                                  |        | 18,882 |     
|                            |       |                                  |        |        |     
|Total gross profit          |       |                                  | 28,091 |        |     
|                            |       |                                  | 28.3%  |        |     
|Operating expenses          |       |                                  | 20,856 |        |     
|                            |       |                                  |        |        |     
|Income from operations      |       |                                  | 7,235  |        |     
|Other (income) expense, net |       |                                  | 37     |        |     
|Net interest expense        |       |                                  | 2,905  |        |     
|                            |       |                                  |        |        |     
|Non-operating expenses      |       |                                  | 2,942  |        |     
|Income before income taxes  |       |                                  | 4,293  |        |     
|Income tax provision        |       |                                  | 1,285  |        | 29.9
|                            |       |                                  |        |        |     
|Net income                  |       | $                                | 3,008  |        |     
|                            |       |                                  |        |        |     

OverviewSales at our piano division benefited from improvements in domestic retail sales and foreign currency exchange rate
changes. Piano margins also improved due to the shift towards retail sales. Band division revenues grew due to higher step-up and professional instruments sales due largely to the
continued increase in productivity of the replacement workers at our Elkhart, Indiana brass instrument manufacturing facility. However, band division margins deteriorated due to unabsorbed overhead at
certain other plants in which production was reduced in response to lower order volume.

Net SalesNet sales improved $8.4 million largely due to the $5.7 million improvement in band division revenues.
The band division continues to recover from the ongoing strike at our Elkhart, Indiana brass instrument manufacturing facility. As a result, step-up and professional trumpet and trombone
sales increased $4.2 million and $1.8 million, respectively. However, band division revenues continue to be impacted by dealer consolidations, causing sales of student instruments, most
notably saxophones and clarinets, to decline. Overall, band unit shipments increased 2% over the year-ago period. Piano division revenues improved $2.7 million. Our overseas piano
division revenues increased $1.7 million, $1.4 million of which was attributable to foreign exchange. Steinway grand unit shipments overseas decreased 7%, but the impact was mitigated by
a 38% increase in mid-priced piano line shipments and better performance at our domestic retail stores.

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Gross ProfitGross profit improved $2.0 million due to higher revenues at our piano and band divisions, and higher
margins at our piano division. Band gross margin deteriorated as a result of $1.3 million in unabsorbed overhead and production variances caused by the decrease in production levels at certain
plants. The impact of these variances was more than offset by improved sales and a shift in mix towards higher margin step-up and professional instruments during the period. The increase
in piano margins is attributable to the domestic division, which had higher retail sales and a shift in wholesale mix towards larger, higher margin models including limited edition pianos. Margins on
domestic sales of our mid-priced piano lines also improved, due largely to a similar shift in mix. Overseas, margins deteriorated due to a shift in mix towards smaller, lower margin
Steinway grand models.

Operating ExpensesOperating expenses increased $1.8 million due in part to the $0.8 million increase in sales
and marketing expenses related to piano division advertising, promotional costs, and sponsorships. An increase in bad debt expense of $0.6 million, most of which is attributable to
at-risk receivables from one piano division dealer, was also a factor. Operating expenses for the band division were flat compared to the year-ago period.

Non-operating ExpensesNon-operating expenses increased $0.7 million due to $0.4 million
in increased legal costs. Net interest expense increased $0.2 million due to lower domestic cash balances and increased borrowings on our domestic line of credit. Foreign exchange losses were
comparable to the year-ago period.

Income TaxesOur effective tax rate of 29.9% is significantly lower than the year-ago period. In 2006, we had an abnormally
high effective rate of 79.3% due to our low domestic income. In the current year, we anticipate our effective tax rate to approximate 40% exclusive of discrete items such as the German Tax Reform Act
discussed below which impact the rate during the current period.

The
enactment this quarter of the German Tax Reform Act, which will reduce the tax rate on most of our German pretax income from 41% to 32.8% as of January 1, 2008 was beneficial
to our tax rate. We adjusted our long-term deferred taxes to their new realizable amount by decreasing our tax provision by $0.3 million in the current period. The impact of changes in
uncertain tax position liabilities, which we recorded in the income tax provision per FIN 48, was not material to the effective tax rate.

26

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']

Results of Operations

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

|                                  |       | Nine months ended September 30, |         | Change  |     
|--------------------------------- | ----- | ------------------------------- | ------- | ------- | ----
|
|Net sales                         |       |                                 |         |         |     
|                                  | Band  |                                 | $       | 125,690 |     
|                                  | Piano |                                 |         | 159,292 |     
|                                  |       |                                 |         |         |     
|Total sales                       |       |                                 | 284,982 |         |     
|Cost of sales                     |       |                                 |         |         |     
|                                  | Band  |                                 |         | 99,678  |     
|                                  | Piano |                                 |         | 101,408 |     
|                                  |       |                                 |         |         |     
|Total cost of sales               |       |                                 | 201,086 |         |     
|Gross profit                      |       |                                 |         |         |     
|                                  | Band  |                                 |         | 26,012  |     
|                                  | Piano |                                 |         | 57,884  |     
|                                  |       |                                 |         |         |     
|Total gross profit                |       |                                 | 83,896  |         |     
|                                  |       |                                 | 29.4%   |         |     
|Operating expenses                |       |                                 | 64,245  |         |     
|                                  |       |                                 |         |         |     
|Income from operations            |       |                                 | 19,651  |         |     
|Other income, net                 |       |                                 | (154    | )       |     
|Loss on extinguishment of debt    |       |                                 |        |         |     
|Net interest expense              |       |                                 | 7,580   |         |     
|                                  |       |                                 |         |         |     
|Non-operating expenses            |       |                                 | 7,426   |         |     
|Income (loss) before income taxes |       |                                 | 12,225  |         |     
|Income tax provision (benefit)    |       |                                 | 4,634   |         | 37.9
|                                  |       |                                 |         |         |     
|Net income (loss)                 |       | $                               | 7,591   |         |     
|                                  |       |                                 |         |         |     

OverviewSales at our piano division exceeded the prior year period due to improved demand overseas for Steinways and the
re-launched Essex line of pianos. Piano margins also improved, due largely to higher margin sales at our European division during the first half of 2007. Band division revenues decreased
$9.7 million due to lower student woodwind and percussion instrument sales, which have suffered due to the dealer consolidations and reduced order volume. Sales of certain brass instruments
improved slightly ($0.5 million) as we continue to recover from the residual effects of the strike. We are currently producing professional instruments at pre-strike levels.

Net SalesThe increase in net sales of $6.5 million is entirely attributable to the 11% increase in piano revenues.
Dealer bankruptcies, consolidations, and inventory management caused a decrease in band division revenue of $9.7 million. Percussion, woodwind, and some student brass instrument sales lagged
behind the year-ago period, although step-up and professional brass instrument sales have recovered due to improved production at our Elkhart facility. As a result of these
factors, overall unit shipments decreased 15% as compared to the year-ago period. Domestic piano sales were up slightly

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($0.9 million)
from the prior year period as the impact of a decrease in Steinway grand unit shipments of 15% was offset by mid-priced piano line shipment improvement of 40%.
Overseas, revenues increased $15.3 million, of which $4.5 million is attributable to foreign currency exchange rates. Increased demand at the wholesale level, resulting in part from a
large mid-year institutional sale and shipments of our Essex pianos, caused the remaining improvement. Overseas Steinway grand unit shipments rose 11%, and mid-priced piano
line shipments rose 144%.

Gross ProfitGross profit improved $8.7 million due to higher sales and margin at our piano division. The band division
margin improvement (most notably in trumpets and student trombones) effectively offset the impact of lower sales on gross profit. Piano division margins increased domestically as we took one less week
of plant shutdown than in the year-ago period and were therefore better able to absorb our overhead costs. A shift towards retail sales and larger, higher margin units also contributed to
the improvement. The margin increases overseas in the first half of the year were offset by the recent shift in mix to smaller, lower margin models.

Operating ExpensesOperating expenses increased $1.1 million despite the $3.2 million decrease in bad debt
expense as compared to the year-ago period. Sales and marketing expenses increased $2.1 million due to advertising and promotional activities at our European division, and costs
associated with the introduction of a limited edition piano by our domestic division. We reserved $0.5 million against the $2.0 million escrowed deposit relating to a terminated asset
purchase agreement, which contributed to the $1.0 million increase in other operating expenses. The remaining increase in operating expenses is attributable to consulting costs, legal fees, and
salaries due to increased headcount at the band division, as well as $1.0 million in foreign currency exchange rate impact.

Non-operating ExpensesNon-operating expenses decreased $9.0 million due to the absence of
$9.7 million in debt extinguishment costs, which occurred as a result of our Senior Note refinancing in February 2006. Legal fees of $0.6 million also impacted
non-operating expenses. The $1.0 million decrease in net interest expense, which resulted largely from our debt refinancing activities, was offset by a shift from foreign exchange
gains to foreign exchange losses of a comparable amount.

Income TaxesOur effective tax rate of 37.9% is significantly lower than the year-ago period. In 2006, our
effective tax rate of 60% was caused by low domestic income. In the current year, we anticipate our effective tax rate to approximate 40% exclusive of discrete items such as the German Tax Reform Act
discussed below which impact the rate during the period.

The
German Tax Reform Act, which will effectively reduce the tax rate on most of our German pretax income from 41% to 32.8% as of January 1, 2008 was beneficial to our tax rate by
2.7% in the current period.

Liquidity and Capital Resources

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

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Our
statements of cash flows for the nine months ended September 30, 2007 and 2006 are summarized as follows:

|                                     |                                                                                    | 2007 |         | 2006    |   | Change  |        
|------------------------------------ | ---------------------------------------------------------------------------------- | ---- | ------- | ------- | - | ------- | -------
|Net income (loss):                   |                                                                                    | $    | 7,591   |         | $ | (1,735  | )      
|                                     | Changes in operating assets and liabilities                                        |      |         | (27,104 | ) |         | (10,759
|                                     | Other adjustments to reconcile net income (loss) to cash from operating activities |      |         | 8,139   |   |         | 13,869 
|                                     |                                                                                    |      |         |         |   |         |        
|Cash flows from operating activities |                                                                                    |      | (11,374 | )       |   | 1,375   |        
|Cash flows from investing activities |                                                                                    |      | (3,445  | )       |   | (2,297  | )      
|Cash flows from financing activities |                                                                                    |      | (1,344  | )       |   | (17,954 | )      

Cash
flows generated from operating activities decreased $12.7 million due to the $20.6 million increase in cash used for inventory. The increase in inventory is comprised
mostly of mid-priced pianos, and some brass and woodwind instruments. Mid-priced piano inventory has increased due to the additional Essex models which were introduced in 2006.
Certain band instrument inventory has increased due to lower order volume, and the adverse impact of foreign currency exchange rates on imported European instruments. Cash used by accounts receivable
decreased $4.1 million despite the increase in revenue due to the timing of piano receivable collections. Adjustments to cash flows from operating activities were atypically high in the prior
year due to the $9.7 million adjustment for the loss on extinguishment of debt and provision for doubtful accounts.

The
use of cash for investing activities increased $1.1 million, despite the reduction in capital expenditures due to the absence of $1.4 million in proceeds from sales of
available-for-sale securities. We expect capital expenditures to be in the range of $5.0 to $6.0 million in 2007.

The
use of cash for financing activities decreased $16.6 million as compared to the year-ago period. In 2006, we refinanced our Senior Notes, which generated proceeds
of $173.7 million, offset by the repayment of our real estate and acquisition term loans ($32.0 million) and extinguishment of $166.2 of our 8.75% Senior Note debt. Premiums paid on the
debt extinguishment of $7.7 million and costs related to the 7.00% Senior Note offering and domestic line of credit renewal of $4.6 million also offset our bond refinancing proceeds. In
2007, we used a significant portion of our cash to pay a $25.2 million dividend in March 2007, and have made net borrowings of $19.3 million on our lines of credit.

Borrowing Activities and AvailabilityWe have a domestic credit facility with a syndicate of domestic lenders (the "Credit
Facility"). The Credit Facility provides us with a potential borrowing capacity of $110.0 million in revolving credit loans, and expires on September 29, 2011. It also provides
for periodic borrowings at either London Interbank Offering Rate ("LIBOR") plus a range from 1.25% to 1.75%, or as-needed borrowings at an alternate base rate, plus a range from 0.00% to
0.25%; both ranges depend upon borrowing availability at the time of borrowing. The Credit Facility is collateralized by our domestic accounts receivable, inventory, and fixed assets. As of
September 30, 2007, there was $20.7 million in revolving credit loans outstanding, as we used borrowings on the Credit Facility to partially fund our dividend payment, inventory
purchases, and interest payments on our Senior Notes. As a result, the remaining availability based on eligible accounts receivable and inventory balances was approximately $87.9 million, net
of letters of credit.

We
also have certain non-domestic credit facilities originating from two German banks that provide for borrowings by foreign subsidiaries of up to
€17.4 million ($24.8 million at the September 30, 2007 exchange rate), net of borrowing restrictions of €0.8 million ($1.1 million at
the September 30, 2007 exchange rate) and are payable on demand. These borrowings are collateralized by most of the assets of the borrowing subsidiaries. A portion of the loans can be converted
into a maximum of £0.5 million ($1.0 million at the September 30, 2007 exchange rate) for use by our U.K.

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branch
and ¥300 million ($2.6 million at the September 30, 2007 exchange rate) for use by our Japanese subsidiary. Our Chinese subsidiary also has the ability to
convert the equivalent of up to €2.5 million into U.S. dollars or Chinese yuan ($3.6 million at the September 30, 2007 exchange rate). Euro loans bear interest at
rates of Euro Interbank Offered Rate ("EURIBOR") plus a margin determined at the time of borrowing. Margins fluctuate based on the loan amount and the borrower's bank rating. The remaining demand
borrowings bear interest at fixed margins at rates of LIBOR plus 0.8% for British pound loans (no outstanding borrowings at September 30, 2007), LIBOR plus 1.0% for U.S. dollar loans of our
Chinese subsidiary (outstanding borrowings at 6.4% at September 30, 2007), and Tokyo Interbank Offered Rate ("TIBOR") plus 0.8% for Japanese yen loans (borrowings at 1.6% at
September 30, 2007). We had $0.8 million outstanding as of September 30, 2007 on these credit facilities.

Our
Japanese subsidiary also maintains a separate revolving loan agreement that provides additional borrowing capacity of up to ¥460 million ($4.0 million at
the September 30, 2007 exchange rate) based on eligible inventory balances. The revolving loan agreement bears interest at an average 30-day TIBOR rate plus 0.8% (outstanding
borrowings at 1.6% at September 30, 2007) and expires on January 31, 2010. As of September 30, 2007, we had $2.6 million outstanding on this revolving loan agreement.

At
September 30, 2007, our total outstanding indebtedness amounted to $199.1 million, consisting of $175.0 million of 7.00% Senior Notes, $20.7 million on the
Credit Facility, and $3.4 million of notes payable to foreign banks.

All
of our debt agreements contain covenants that place certain restrictions on us, including our ability to incur additional indebtedness, to make investments in other entities, and
limitations on cash dividend
payments. We were in compliance with all such covenants as of September 30, 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 discretionary repurchases we may make of our Ordinary common stock. Our intent and ability to repurchase additional Ordinary common stock either directly
from shareholders or on the open market is directly affected by this limitation.

We
experience long production and inventory turnover cycles, which we constantly monitor since fluctuations in demand can have a significant impact on these cycles. We expect to
effectively utilize cash flow from operations to fund our debt and capital requirements and pay off our seasonal borrowings on our domestic line of credit. Currently we anticipate both our piano and
band divisions to be stable or improve throughout the period. Our intention is to manage accounts receivable and customer credit, reduce inventory levels, and repay credit facility borrowings.

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

30

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Contractual ObligationsThe following table provides a summary of our contractual obligations at September 30, 2007.

|                               |  | Payments due by period
|------------------------------ |  | ----------------------
|
|Long-term debt(1)              |  | $                     
|Capital leases                 |  |                       
|Operating leases(2)            |  |                       
|Purchase obligations(3)        |  |                       
|Other long-term liabilities(4) |  |                       
|                               |  |                       
|Total                          |  | $                     
|                               |  |                       

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Notes to Contractual Obligations:

Recent Accounting Pronouncements

On September 15, 2006, the FASB issued Statement of Financial Accounting Standard ("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 about fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the impact, if
any, its adoption will have on our consolidated financial position and results of operations.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 provides
entities with an option to report selected financial assets and liabilities at fair value, with the objective to reduce both the complexity in accounting for financial instruments and the volatility
in earnings caused by measuring related assets and liabilities differently. We will be required to adopt SFAS No. 159 in the first quarter of fiscal year 2008. We are currently evaluating the
requirements of SFAS No. 159 and have not yet determined the impact, if any, its adoption will have on our consolidated financial position and results of operations.

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ITEM 3    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk associated with changes in foreign currency exchange rates and interest rates. We mitigate a portion of our foreign currency
exchange rate risk by maintaining foreign currency cash balances and holding option and forward foreign currency contracts. They are not designated as hedges for accounting purposes. These contracts
relate primarily to intercompany transactions and are not used for trading or speculative purposes. The fair value of the option and forward foreign currency exchange contracts is sensitive to changes
in foreign currency exchange rates. The impact of an adverse change in foreign currency exchange rates would not be materially different than that disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2006.

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

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

ITEM 4    CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we
record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the SEC. Our Chief Executive Officer and Chief Financial Officer
reviewed and participated in this evaluation. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. In
designing the Company's disclosure
controls and procedures, the Company's management recognizes that any controls, no matter how well designed and operated, can only provide reasonable, not absolute, assurance of achieving the desired
control objectives.

During
the quarter covered by this report, there were no significant changes in our internal controls that materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

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PART II    OTHER INFORMATION

ITEM 6    EXHIBITS



|31.1 |  | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|31.2 |  | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|32.1 |  | Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2 |  | Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

33

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SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.

|                       |  | STEINWAY MUSICAL INSTRUMENTS, INC.                                                              
|---------------------- |  | ------------------------------------------------------------------------------------------------
|                       |  | /s/ Dana D. MessinaDana D. Messina
Director, President and Chief Executive Officer              
|                       |  | /s/ Dennis M. HansonDennis M. Hanson
Senior Executive Vice President and
Chief Financial Officer
|Date: November 9, 2007 |  |                                                                                                 

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