**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED  SEPTEMBER 30, 2006** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                      |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                   |

 

**COMMISSIONFILE NUMBER 001-11911**

**STEINWAY MUSICAL INSTRUMENTS,INC.**

 (Exact name of registrant as specified in itscharter)

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

 

Registrant’s telephone numberincluding area code:     **(781) 894-9770**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements during thepast 90 days.

Yes x    No o

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

| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

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

Yes o    No x
| Number of shares  of Common Stock issued and outstanding as of November 7, 2006**:** |   | Class A |   | 477,952   |   |
|--------------------------------------------------------------------------------------|--------|--------------|--------|-----------|--------|
|                                                                                 |   | Ordinary     |   | 7,895,552 |   |
|                                                                                 |   | Total        |   | 8,373,504 |   |

 

 

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**FORM 10-Q**

**INDEX**
| **PART I.**  | ** ** | **UNAUDITED FINANCIAL INFORMATION**                                                                   |       |       |
|--------------|------------|-------------------------------------------------------------------------------------------------------|------------|------------|
| ** **   | ** ** | ** **                                                                                            |       |       |
| **Item 1.**  | ** ** | **Consolidated  and Condensed Consolidated Financial Statements:**                                    |       |       |
| ** **   | ** ** | ** **                                                                                            |       |       |
| ** **   |       | Consolidated  Statements of Operations                                                                |       |       |
| ** **   |       | Three months  and nine months ended September 30, 2006 and September 30, 2005                         |       |       |
| ** **   |       |                                                                                                  |       |       |
| ** **   |       | Condensed  Consolidated Balance Sheets                                                                |       |       |
| ** **   |       | September 30,  2006 and December 31, 2005                                                             |       |       |
| ** **   |       |                                                                                                  |       |       |
| ** **   |       | Consolidated  Statements of Cash Flows                                                                |       |       |
| ** **   |       | Nine months  ended September 30, 2006 and September 30, 2005                                          |       |       |
| ** **   |       |                                                                                                  |       |       |
| ** **   |       | Consolidated Statement  of Stockholders’ Equity                                                  |       |       |
| ** **   |       | Nine months  ended September 30, 2006                                                                 |       |       |
| ** **   |       |                                                                                                  |       |       |
| ** **   |       | Notes to Consolidated  and Condensed Consolidated Financial Statements                                |       |       |
| ** **   |       |                                                                                                  |       |       |
| **Item 2.**  | ** ** | **Management’s  Discussion and Analysis of Financial Condition**

**and Results of  Operations** | ** ** | ** ** |
| ** **   | ** ** | ** **                                                                                            | ** ** | ** ** |
| **Item 3.**  |       | **Quantitative  and Qualitative Disclosures about Market Risk**                                       | ** ** | ** ** |
| ** **   |       | ** **                                                                                            | ** ** | ** ** |
| **Item 4.**  |       | **Controls and  Procedures**                                                                          | ** ** | ** ** |
| ** **   |       | ** **                                                                                            | ** ** | ** ** |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                 | ** ** | ** ** |
| ** **   |       | ** **                                                                                            | ** ** | ** ** |
| **Item  6.** | ** ** | **Exhibits**                                                                                          | ** ** | ** ** |
| ** **   | ** ** | ** **                                                                                            | ** ** | ** ** |
| ** **   |       | **Signatures**                                                                                        | ** ** | ** ** |

 

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**ITEM 1                   CONSOLIDATEDAND CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**STEINWAYMUSICAL 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,** | ** ** |
|------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                          |       | $                                                        | 90,876     |                                                    | $          | 95,914 |   | $ | 278,493 |   | $ | 277,017 |   |
| Cost of sales                      |       | 64,831                                                   |       | 68,418                                                  |       | 203,307 |   | 197,698 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Gross profit                       |       | 26,045                                                   |       | 27,496                                                  |       | 75,186 |   | 79,319 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating expenses:                |       |                                                     |       |                                                    |       |   |   |   |   |
| Sales and  marketing               |       | 10,458                                                   |       | 10,730                                                  |       | 33,191 |   | 32,912 |   |
| Provision for  doubtful accounts   |       | 172                                                      |       | (143                                                    | )          | 4,734 |   | 79 |   |
| General and  administrative        |       | 8,143                                                    |       | 7,217                                                   |       | 24,332 |   | 21,152 |   |
| Amortization of  intangible assets |       | 189                                                      |       | 280                                                     |       | 615 |   | 846 |   |
| Other operating  expenses          |       | 138                                                      |       | 74                                                      |       | 253 |   | 207 |   |
| Total operating  expenses          |       | 19,100                                                   |       | 18,158                                                  |       | 63,125 |   | 55,196 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Income from operations             |       | 6,945                                                    |       | 9,338                                                   |       | 12,061 |   | 24,123 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Other income, net                  |       | (395                                                     | )          | (467                                                    | )          | (1,841 | ) | (873 | ) |
| Loss on extinguishment  of debt    |       | —                                                   |       | —                                                  |       | 9,674 |   | — |   |
| Interest income                    |       | (1,210                                                   | )          | (674                                                    | )          | (3,817 | ) | (2,367 | ) |
| Interest expense                   |       | 3,875                                                    |       | 4,236                                                   |       | 12,382 |   | 12,764 |   |
| Total non-operating  expenses      |       | 2,270                                                    |       | 3,095                                                   |       | 16,398 |   | 9,524 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Income (loss) before  income taxes |       | 4,675                                                    |       | 6,243                                                   |       | (4,337 | ) | 14,599 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Income tax provision  (benefit)    |       | 3,707                                                    |       | 2,500                                                   |       | (2,602 | ) | 5,840 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income (loss)                  |       | $                                                        | 968        |                                                    | $          | 3,743 |   | $ | (1,735 | ) | $ | 8,759 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Earnings (loss) per  share:        |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                              |       | $                                                        | 0.12       |                                                    | $          | 0.46 |   | $ | (0.21 | ) | $ | 1.09 |   |
| Diluted                            |       | $                                                        | 0.11       |                                                    | $          | 0.45 |   | $ | (0.21 | ) | $ | 1.06 |   |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average  shares:          |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                              |       | 8,357,153                                                |       | 8,088,022                                               |       | 8,280,392 |   | 8,057,106 |   |
| Diluted                            |       | 8,430,306                                                |       | 8,284,461                                               |       | 8,280,392 |   | 8,267,581 |   |

 

See notes toconsolidated and condensed consolidated financial statements.

3

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**STEINWAY MUSICAL INSTRUMENTS,INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**Unaudited**

**(InThousands)**
| ** **                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                             | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Assets                                                                                                                 |       |                   |       |                  |       |
| Current assets:                                                                                                        |       |                   |       |                  |       |
| Cash                                                                                                                   |       | $                      | 17,324     |                  | $          | 34,952 |   |
| Accounts, notes and other receivables, net of  allowances of $18,443 and $12,323 in 2006 and 2005, respectively        |       | 93,779                 |       | 81,880                |       |
| Inventories                                                                                                            |       | 151,187                |       | 159,310               |       |
| Prepaid expenses and other current assets                                                                              |       | 11,630                 |       | 11,653                |       |
| Deferred tax assets                                                                                                    |       | 16,327                 |       | 7,936                 |       |
| Total current  assets                                                                                                  |       | 290,247                |       | 295,731               |       |
|                                                                                                                   |       |                   |       |                  |       |
| Property, plant  and equipment, net of accumulated depreciation of $83,391 and $75,734 in 2006  and 2005, respectively |       | 95,367                 |       | 96,664                |       |
| Trademarks                                                                                                             |       | 13,503                 |       | 13,233                |       |
| Goodwill                                                                                                               |       | 30,948                 |       | 30,088                |       |
| Other  intangibles, net                                                                                                |       | 4,863                  |       | 4,128                 |       |
| Other assets                                                                                                           |       | 15,284                 |       | 15,811                |       |
|                                                                                                                   |       |                   |       |                  |       |
| Total assets                                                                                                           |       | $                      | 450,212    |                  | $          | 455,655 |   |
|                                                                                                                   |       |                   |       |                  |       |
| Liabilities and  stockholders’ equity                                                                             |       |                   |       |                  |       |
| Current  liabilities:                                                                                                  |       |                   |       |                  |       |
| Current portion of long-term debt                                                                                      |       | $                      | 4,861      |                  | $          | 12,977 |   |
| Accounts payable                                                                                                       |       | 13,326                 |       | 13,805                |       |
| Other current liabilities                                                                                              |       | 40,621                 |       | 45,099                |       |
| Total current  liabilities                                                                                             |       | 58,808                 |       | 71,881                |       |
|                                                                                                                   |       |                   |       |                  |       |
| Long-term debt                                                                                                         |       | 187,695                |       | 191,715               |       |
| Deferred tax  liabilities                                                                                              |       | 15,584                 |       | 15,326                |       |
| Other  non-current liabilities                                                                                         |       | 30,726                 |       | 27,903                |       |
| Total  liabilities                                                                                                     |       | 292,813                |       | 306,825               |       |
|                                                                                                                   |       |                   |       |                  |       |
| Commitments and  contingent liabilities                                                                                |       |                   |       |                  |       |
|                                                                                                                   |       |                   |       |                  |       |
| Stockholders’  equity:                                                                                            |       |                   |       |                  |       |
| Common stock                                                                                                           |       | 10                     |       | 10                    |       |
| Additional paid-in capital                                                                                             |       | 89,755                 |       | 83,062                |       |
| Retained earnings                                                                                                      |       | 124,644                |       | 126,379               |       |
| Accumulated other comprehensive loss                                                                                   |       | (9,574                 | )          | (13,185               | )          |
| Treasury stock, at cost                                                                                                |       | (47,436                | )          | (47,436               | )          |
| Total  stockholders’ equity                                                                                       |       | 157,399                |       | 148,830               |       |
|                                                                                                                   |       |                   |       |                  |       |
| Total liabilities and  stockholders’ equity                                                                       |       | $                      | 450,212    |                  | $          | 455,655 |   |

 

See notes to consolidatedand condensed consolidated financial statements.

4

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Unaudited**

**(In Thousands)**
| ** **                                                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                               |       |                                                    |       |   |   |
| Net income (loss)                                                                    |       | $                                                       | (1,735     | ) | $ | 8,759 |   |
| Adjustments to reconcile net income (loss) to cash flows  from operating activities: |       |                                                    |       |   |   |
| Depreciation and amortization                                                        |       | 8,045                                                   |       | 8,544 |   |
| Amortization of bond discount                                                        |       | 99                                                      |       | — |   |
| Amortization of bond premium                                                         |       | (42                                                     | )          | (189 | ) |
| Loss on extinguishment of debt                                                       |       | 9,674                                                   |       | — |   |
| Stock-based compensation expense                                                     |       | 891                                                     |       | — |   |
| Excess tax benefits from stock-based awards                                          |       | (419                                                    | )          | — |   |
| Tax benefit from stock option exercises                                              |       | 925                                                     |       | 151 |   |
| Deferred tax benefit                                                                 |       | (8,275                                                  | )          | (328 | ) |
| Provision for doubtful accounts                                                      |       | 4,734                                                   |       | 79 |   |
| Purchase of trading securities                                                       |       | (1,393                                                  | )          | — |   |
| Other                                                                                |       | (370                                                    | )          | (118 | ) |
| Changes in operating assets and liabilities:                                         |       |                                                    |       |   |   |
| Accounts, notes and other receivables                                                |       | (14,823                                                 | )          | (4,566 | ) |
| Inventories                                                                          |       | 9,575                                                   |       | (7,852 | ) |
| Prepaid expenses and other assets                                                    |       | (438                                                    | )          | 957 |   |
| Accounts payable                                                                     |       | (717                                                    | )          | 439 |   |
| Other liabilities                                                                    |       | (4,356                                                  | )          | (3,398 | ) |
| Cash flows from  operating activities                                                |       | 1,375                                                   |       | 2,478 |   |
|                                                                                 |       |                                                    |       |   |   |
| Cash flows from  investing activities:                                               |       |                                                    |       |   |   |
| Capital expenditures                                                                 |       | (4,014                                                  | )          | (3,582 | ) |
| Proceeds from disposals of property, plant and  equipment                            |       | 331                                                     |       | 1,379 |   |
| Proceeds from sale of available-for-sale securities                                  |       | 1,386                                                   |       | — |   |
| Cash flows from  investing activities                                                |       | (2,297                                                  | )          | (2,203 | ) |
|                                                                                 |       |                                                    |       |   |   |
| Cash flows from  financing activities:                                               |       |                                                    |       |   |   |
| Borrowings under lines of credit                                                     |       | 77,867                                                  |       | 134,073 |   |
| Repayments under lines of credit                                                     |       | (64,269                                                 | )          | (134,839 | ) |
| Debt issuance costs                                                                  |       | (4,579                                                  | )          | — |   |
| Proceeds from issuance of debt                                                       |       | 173,676                                                 |       | — |   |
| Repayments of long-term debt                                                         |       | (198,205                                                | )          | (5,650 | ) |
| Premium paid on extinguishment of debt                                               |       | (7,740                                                  | )          | — |   |
| Proceeds from issuance of common stock                                               |       | 4,877                                                   |       | 1,604 |   |
| Excess tax benefits from stock-based awards                                          |       | 419                                                     |       | — |   |
| Cash flows from  financing activities                                                |       | (17,954                                                 | )          | (4,812 | ) |
|                                                                                 |       |                                                    |       |   |   |
| Effect of  foreign exchange rate changes on cash                                     |       | 1,248                                                   |       | (1,823 | ) |
|                                                                                 |       |                                                    |       |   |   |
| Decrease in cash                                                                     |       | (17,628                                                 | )          | (6,360 | ) |
| Cash, beginning  of period                                                           |       | 34,952                                                  |       | 27,372 |   |
| Cash, end of  period                                                                 |       | $                                                       | 17,324     |   | $ | 21,012 |   |
|                                                                                 |       |                                                    |       |   |   |
| Supplemental  Cash Flow Information                                                  |       |                                                    |       |   |   |
| Interest paid                                                                        |       | $                                                       | 14,292     |   | $ | 10,539 |   |
| Taxes paid                                                                           |       | $                                                       | 6,188      |   | $ | 8,408 |   |

 

See notes toconsolidated and condensed consolidated financial statements.

5

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**STEINWAY MUSICAL INSTRUMENTS,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

**Unaudited**

**(InThousands Except Share Data)**
| ** **                                              | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Treasury  Stock** | ** ** | **Total  Stockholders'  Equity** | ** ** |
|---------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------|------------|----------------------------------|------------|
|                                                    |       |              |       |                             |       |                   |       |                                        |       |                |       |                             |       |
| Balance, January  1, 2006                               |       | $                 | 10         |                             | $          | 83,062                 |       | $                                           | 126,379    |                | $          | (13,185                          | )          | $ | (47,436 | ) | $ | 148,830 |   |
| Comprehensive income:                                   |       |              |       |                             |       |                   |       |                                        |       |                |       |                             |       |
| Net loss                                                |       |              |       |                             |       | (1,735                 | )          |                                        |       |                |       | (1,735                           | )          |
| Foreign currency translation adjustment                 |       |              |       |                             |       |                   |       | 3,739                                       |       |                |       | 3,739                            |       |
| Realized gain on available-for-sale securities          |       |              |       |                             |       |                   |       | (128                                        | )          |                |       | (128                             | )          |
| Total  comprehensive income                             |       |              |       |                             |       |                   |       |                                        |       |                |       | 1,876                            |       |
|                                                    |       |              |       |                             |       |                   |       |                                        |       |                |       |                             |       |
| Issuance of  26,121 shares of common stock              |       | —            |       | 534                              |       |                   |       |                                        |       |                |       | 534                              |       |
| Exercise of  226,373 options for shares of common stock |       | —            |       | 4,343                            |       |                   |       |                                        |       |                |       | 4,343                            |       |
| Stock-based  compensation                               |       |              |       | 891                              |       |                   |       |                                        |       |                |       | 891                              |       |
| Tax benefit of  options exercised                       |       |              |       | 925                              |       |                   |       |                                        |       |                |       | 925                              |       |
| Balance, September 30,  2006                            |       | $                 | 10         |                             | $          | 89,755                 |       | $                                           | 124,644    |                | $          | (9,574                           | )          | $ | (47,436 | ) | $ | 157,399 |   |

 

See notes to consolidatedand condensed consolidated financial statements.

6

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**STEINWAY MUSICAL INSTRUMENTS,INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED AND CONDENSED CONSOLIDATED**

**FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2006**

**Unaudited**

**(TabularAmounts In Thousands Except Share, Per Share, Option, and Per Option Data)**

**(1)           Basis of Presentation**

The accompanying consolidated and condensed consolidated financialstatements of Steinway Musical Instruments, Inc. and subsidiaries (the “Company”)for the three months and nine months ended September 30, 2006 and 2005 areunaudited.  In the opinion of management,these statements have been prepared on the same basis as the auditedconsolidated financial statements as of and for the year ended December 31,2005, and include all adjustments which are of a normal and recurring nature,necessary for the fair presentation of financial position, results ofoperations and cash flows for the interim periods.  We encourage you to read the consolidated andcondensed consolidated financial statements in conjunction with the riskfactors, consolidated financial statements and notes thereto contained in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005 filedwith the Securities and Exchange Commission (“SEC”).  The results of operations for the threemonths and nine months ended September 30, 2006 are not necessarily indicativeof the results that may be expected for the entire year.

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

**(2)           Summaryof Significant Accounting Policies**

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

**Use of Estimates****- The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americanecessarily requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements, and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

**Income Taxes** - We provide forincome taxes using an asset and liability approach.  We compute deferred income tax assets andliabilities for differences between the financial statement and tax bases ofassets and liabilities that will result in taxable or deductible amounts in thefuture based on enacted tax laws and rates applicable to the periods in whichthe differences are expected to affect taxable income.  We establish valuation allowances whennecessary to reduce deferred tax assets to the amount that more likely than notwill be realized.

**Stock-based Compensation** - Wehave an employee stock purchase plan (“Purchase Plan”) and a stock award plan (“StockPlan”).  Prior to January 1, 2006, weused the intrinsic-value method of accounting for our stock-based employeecompensation arrangements. Effective January 1, 2006, we adopted Statement ofFinancial Accounting Standard (SFAS) No. 123R, “Share-Based Payment” using themodified prospective application method. Under this transition method, we are required to record compensationcost for all awards

7

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granted after thedate of adoption and for the unvested portion of the previously granted awardsthat remain outstanding at the date of adoption.  We are not required to restate prior periodresults.

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

A reconciliation of theweighted-average shares used for the basic and diluted computations is asfollows:
| ** **                             | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted-average  shares:              |       |                                                     |       |                                                    |       |   |   |   |   |
| For basic  earnings (loss) per share   |       | 8,357,153                                                |       | 8,088,022                                               |       | 8,280,392 |   | 8,057,106 |   |
| Dilutive effect  of stock options      |       | 73,153                                                   |       | 196,439                                                 |       | — |   | 210,475 |   |
| For diluted earnings  (loss) per share |       | 8,430,306                                                |       | 8,284,461                                               |       | 8,280,392 |   | 8,267,581 |   |

 

We did not include 65,000 outstanding options topurchase shares of common stock in the computation of diluted earnings percommon share for the three months ended September 30, 2006 because their impactwould have been antidilutive.  We did notinclude any of the 623,000 outstanding options to purchase shares of commonstock in the computation of diluted loss per common share for the nine monthsended September 30, 2006 because their impact would have beenantidilutive.  All outstanding optionswere included in the computation of diluted earnings per common share for thethree and nine months ended September 30, 2005 because the exercise prices ofthe outstanding options were less than the average market price of our commonshares.

**Accumulated Other Comprehensive Income (Loss)** - Accumulated other comprehensive income(loss) is comprised of foreign currency translation adjustments, additionalminimum pension liabilities, and unrealized gain on available-for-sale (“AFS”)marketable securities.  The components ofaccumulated other comprehensive loss are as follows:
| ** **                   | ** ** | **Foreign Currency  Translation  Adjustment** | ** ** | **Unrealized  Gain on  AFS Securities** | ** ** | **Tax Impact of  Unrealized  Gain on  AFS Securities** | ** ** | **Additional  Minimum  Pension Liability** | ** ** | **Tax Impact of  Additional  Minimum  Pension Liability** | ** ** | **Accumulated Other**

**Comprehensive  Loss** | ** ** |
|------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                         |       |                                               |       |                                              |       |                                                                       |       |                                            |       |                                                                     |       |                                                |       |
| Balance, January  1, 2006    |       | $                                                  | (2,631     | )                                                 | $          | 213                                                                        |       | $                                               | (85        | )                                                                        | $          | (17,424                                             | )          | $ | 6,742 |   | $ | (13,185 | ) |
| Activity                     |       | 3,739                                              |       | (213                                              | )          | 85                                                                         |       | —                                          |       | —                                                                   |       | 3,611                                               |       |
| Balance, September 30,  2006 |       | $                                                  | 1,108      |                                              | $          | —                                                                     |       | $                                               | —     |                                                                     | $          | (17,424                                             | )          | $ | 6,742 |   | $ | (9,574 | ) |

 

During the period, we sold our Supplemental ExecutiveRetirement Plan (“SERP”) securities, which were classified asavailable-for-sale, for $1.4 million. We used these proceeds to repurchasesecurities for our SERP. These securities are classified as trading.

**Recent Accounting Pronouncements****-** InJune 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in IncomeTaxes - an interpretation of FASB Statement No. 109.” FIN 48 clarifies therecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. FIN 48 is effective for fiscal yearsbeginning after

8

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December 15, 2006. Weare evaluating the impact that this statement will have on our financialposition and results of operations.

On September 15, 2006, the FASB issued Statementof Financial Accounting Standard No. 157, “Fair Value Measurements” (“SFASNo. 157”). SFAS No. 157 defines fair value, establishes a frameworkfor measuring fair value and expands disclosures about fair value measurements.SFAS No. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. We are currently evaluating the impactthat adoption of this statement will have on our financial position and resultsof operations.

On September 29, 2006, the FASB issued SFASNo. 158, “Employers’ Accounting for Defined Benefits Pension and OtherPostretirement Plans, an amendment of FASB Statements No. 87, 88 and 106and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer torecognize the funded status of defined benefit pension and other postretirementbenefit plans as an asset or liability. SFAS No. 158 is effective for thefiscal year ending after December 15, 2006. We are currently evaluatingthe impact that adoption of this statement will have on our financial positionand results of operations.

**Reclassification** - We have reclassified our prior yearprovision for doubtful accounts and related cash flow effects to conform to thecurrent year presentation.  The provisionfor doubtful accounts was included in operating expenses within “Sales andmarketing” in the prior year.  The cashflow effects of changes in the provision for doubtful accounts were included inthe “Other” line item on our prior year cash flow.

**(3)           Inventories**
|                 | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                            | 19,494     |                        | $          | 23,218 |   |
| Work-in-process |       | 47,509                       |       | 47,511                      |       |
| Finished goods  |       | 84,184                       |       | 88,581                      |       |
|            |       | $                            | 151,187    |                        | $          | 159,310 |   |

 

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

Intangible assets other than goodwill and indefinite-lived trademarksare amortized on a straight-line basis over their estimated useful lives.  Deferred financing costs are amortized overthe repayment periods of the underlying debt. We test our goodwill and indefinite-lived trademark assets forimpairment annually, or on an interim basis if events or circumstances indicatethat the fair value of an asset has decreased below its carrying value.  At July 31, 2006, we evaluated these assetsand determined that the fair value had not decreased below the carrying valueand, accordingly, no impairments have been recognized.  The changes in carrying amounts of goodwilland trademarks are as follows:
|                                      | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|
| Goodwill:                            |       |                   |       |                  |       |      |       |
| Balance, January  1, 2006            |       | $                      | 21,533     |                  | $          | 8,555     |       | $ | 30,088 |   |
| Foreign currency  translation impact |       | 860                    |       | —                |       | 860       |       |
| Balance,  September 30, 2006         |       | $                      | 22,393     |                  | $          | 8,555     |       | $ | 30,948 |   |
|                                 |       |                   |       |                  |       |      |       |
| Trademarks:                          |       |                   |       |                  |       |      |       |
| Balance, January  1, 2006            |       | $                      | 7,409      |                  | $          | 5,824     |       | $ | 13,233 |   |
| Foreign currency  translation impact |       | 270                    |       | —                |       | 270       |       |
| Balance, September 30,  2006         |       | $                      | 7,679      |                  | $          | 5,824     |       | $ | 13,503 |   |

 

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We also carry certain intangible assets that are amortized.  Once fully amortized, these assets areremoved from both the gross and accumulated amortization balance.  These assets consist of the following:
|                                 | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                            |       |                         |       |                        |       |
| Gross deferred  financing costs |       | $                            | 5,692      |                        | $          | 8,467 |   |
| Accumulated  amortization       |       | (1,116                       | )          | (4,701                      | )          |
| Deferred  financing costs, net  |       | $                            | 4,576      |                        | $          | 3,766 |   |
|                            |       |                         |       |                        |       |
| Gross covenants  not to compete |       | $                            | 500        |                        | $          | 500 |   |
| Accumulated  amortization       |       | (213                         | )          | (138                        | )          |
| Covenants not to  compete, net  |       | $                            | 287        |                        | $          | 362 |   |

 

**Thechange in gross deferred financing costs and related accumulated amortizationduring the nine months ended September 30, 2006 is primarily attributable tothe write-off of the assets associated with our term loan which we repaid, theextinguishment of our 8.75% Senior Notes, and the recording of new deferred financingcosts associated with the issuance of our 7.00% Senior Notes and ourrenegotiated domestic credit facility. These events are described more fully in Note 6.**

**Theweighted-average amortization period for deferred financing costs is 7 years,and the weighted-average amortization period of covenants not to compete is 5years.  Total amortization expense, whichincludes amortization of deferred financing costs, is as follows:**
|                      | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **           | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Amortization expense |       | $                                                        | 189        |                                                    | $          | 280 |   | $ | 615 |   | $ | 846 |   |
|                      |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

The following table shows the total estimatedamortization expense for 2006 and the next five succeeding fiscal years:
| Estimated amortization expense: | ** ** | **Amount** | ** ** |
|-------------------------------------------|------------|------------|------------|
|                                      |       |       |       |
| 2006                                      |       |       | $          | 811 |   |
| 2007                                      |       |       | 778        |   |
| 2008                                      |       |       | 776        |   |
| 2009                                      |       |       | 734        |   |
| 2010                                      |       |       | 653        |   |
| 2011                                      |       |       | 615        |   |
|                                           |            |            |            |  |  |

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**(5)           OtherCurrent Liabilities**

 
|                                       | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accrued payroll  and related benefits |       | $                            | 16,664     |                        | $          | 17,622 |   |
| Current portion  of pension liability |       | 2,459                        |       | 3,441                       |       |
| Accrued warranty  expense             |       | 1,866                        |       | 1,857                       |       |
| Accrued interest                      |       | 931                          |       | 3,134                       |       |
| Deferred income                       |       | 6,345                        |       | 5,482                       |       |
| Environmental  liabilities            |       | 3,674                        |       | 3,820                       |       |
| Other accrued  expenses               |       | 8,682                        |       | 9,743                       |       |
| Total                                 |       | $                            | 40,621     |                        | $          | 45,099 |   |

 

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

The accrued warranty expense activity for the ninemonths ended September 30, 2006 and 2005, and the year ended December 31, 2005is as follows:
|                                      | ** ** | **September 30,   2006** | ** ** | **September 30,   2005** | ** ** | **December 31,   2005** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| Beginning  balance                   |       | $                                  | 1,857      |                               | $          | 2,139                             |       | $ | 2,139 |   |
| Additions                            |       | 605                                |       | 719                                |       | 858                               |       |
| Claims and  reversals                |       | (642                               | )          | (720                               | )          | (1,045                            | )          |
| Foreign currency  translation impact |       | 46                                 |       | (89                                | )          | (95                               | )          |
| Ending balance                       |       | $                                  | 1,866      |                               | $          | 2,049                             |       | $ | 1,857 |   |

 

**(6)           Long-Term Debt**

Duringthe nine months ended September 30, 2006, we significantly restructured ourlong-term debt.  In February 2006 werepaid our larger, higher interest term loan, which had an outstanding balanceof $16.0 million at the time of payoff. We also issued $175.0 million of 7.00% Senior Notes and extended atender offer to purchase the $166.2 million of our outstanding 8.75% SeniorNotes.  We issued our new 7.00% SeniorNotes at 99.2435%, and received proceeds of $170.2 million, net of associatedfees.  We used the proceeds from thisissuance to extinguish $114.6 million of the 8.75% Senior Notes pursuant to ourtender offer in the first quarter of 2006. The remaining proceeds, supplemented by borrowings on our line ofcredit, were used to exercise our right to call the remaining $51.6 million of8.75% Senior Notes on April 17, 2006.

OnSeptember 29, 2006 we restructured our domestic credit facility and used ourfirst borrowing, supplemented by cash on hand, to repay our remaining termloan, which had a balance of $14.6 million at the time of payoff. Ourrestructured domestic credit facility provides us with a potential borrowingcapacity of $110.0 million in revolving credit loans, and expires onSeptember 29, 2011. It also provides for borrowings at either LondonInterbank Offering Rate (“LIBOR”) plus a range from 1.25% to 1.75% or as-neededborrowings at an alternate base rate, plus a range from 0.00% to 0.25%; bothranges depend upon availablity at the time of borrowing. As a result of these debtrestructuring activities, our long-term debt at September 30, 2006 consists of the

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following:
|                                        | ** ** | **September 30, 2006** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| 7.00% Senior  Notes                    |       | 175,000                          |       |
| Unamortized bond  discount             |       | (1,225                           | )          |
| Domestic line of  credit               |       | 13,920                           |       |
| Open account  loans, payable on demand |       | 4,861                            |       |
| Total                                  |       | 192,556                          |       |
| Less: current  portion                 |       | (4,861                           | )          |
| Long-term debt                         |       | $                                | 187,695    |   |
|                                        |            |                                  |            |  |

 

Inconjunction with our debt restructuring activities, we recorded a net loss onextinguishment of debt of $9.7 million in the period ended September 30, 2006,which consists of the following:
|                                                          | ** ** | **September 30, 2006** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| Deferred  financing costs write-off - term loan          |       | $                                | 977        |   |
| Deferred financing  costs write-off - 8.75% Senior Notes |       | 2,247                            |       |
| Premiums  pursuant to the tender offer and call          |       | 7,740                            |       |
| Bond premium  write-off                                  |       | (1,290                           | )          |
| Total net loss  on extinguishment of debt                |       | $                                | 9,674      |   |

 

Scheduled paymentsof long-term debt are as follows:
|                    | ** ** | **September 30, 2006** | ** ** |
|--------------------|------------|----------------------------------|------------|
| Remainder of  2006 |       | $                                | 3,811      |   |
| 2007               |       | 1,050                            |       |
| 2008               |       | —                           |       |
| 2009               |       | —                           |       |
| 2010               |       | —                           |       |
| Thereafter         |       | 188,920                          |       |
| Total              |       | $                                | 193,781    |   |

 

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

Our common stock is comprised of two classes: Class A andOrdinary.  With the exception ofdisparate voting power, both classes are substantially identical.  Each share of Class A common stock entitlesthe holder to 98 votes.  Holders ofOrdinary common stock are entitled to one vote per share.  Class A common stock shall automaticallyconvert to Ordinary common stock if, at any time, the Class A common stock isnot owned by an original Class A holder. As of September 30, 2006 our Chairman and Chief Executive Officer owned100% of

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the Class A commonshares, representing approximately 86% of the combined voting power of theClass A common stock and Ordinary common stock.

**Employee Stock Purchase Plan** - We have an employee stock purchaseplan under which substantially all employees may purchase Ordinary common stockthrough payroll deductions at a purchase price equal to 85% of the lower of thefair market values as of the beginning or end of each twelve-month offeringperiod.  Stock purchases under thePurchase Plan are limited to 5% of an employee’s annual base earnings.  We had reserved 500,000 shares for issuanceunder this plan and we could grant options to purchase shares up to ten yearsfrom the plan’s commencement.  This planexpired on July 31, 2006.  Ourstockholders approved a new Purchase Plan effective August 1, 2006 during ourannual stockholders meeting.  Thecharacteristics of the plan were not changed. Our Board of Directors has authorized an aggregate of 400,000 shares ofcommon stock for issuance under this plan.

**Stock Plan** - The 1996 stockplan, as amended, provided for the granting of up to 1,500,000 stock options(including incentive stock options and non-qualified stock options), stockappreciation rights and other stock awards to certain key employees,consultants and advisors through July 31, 2006. Our stock options generally have five-year vesting terms and ten-yearoption terms.  Upon option exercise, weissue shares of Ordinary common stock, and we will continue to issue sharesuntil we have reached our registered share limitation.  At that time, we will issue shares out oftreasury stock.  We have reserved 721,750treasury stock shares under the 1996 stock plan for this purpose.  Our stockholders approved the new “2006 StockPlan” effective August 1, 2006 during our annual stockholders meeting.  The characteristics of the plan were notchanged.  Our Board of Directors hasauthorized an aggregate of 1,000,000 shares of common stock for issuance under the2006 Stock Plan.

EffectiveJanuary 1, 2006, we adopted Statement of Financial Accounting Standards(“SFAS”) No. 123R, “Share-Based Payment” to account for our stock compensationarrangements, using the modified prospective application transitionmethod.  Accordingly, we did not restatethe results of prior periods.  Prior toJanuary 1, 2006, we applied Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees” and did not recognize anycompensation expense associated with employee stock options because theexercise price was equal to the market price at the date of option grant.  SFAS No. 123R requires that stock-basedcompensation cost be recognized over the period from the date of grant to thedate when the award is no longer contingent upon the employee providing additionalservice.

The compensation cost that has been charged against income for theseplans was $0.3 million and $0.9 million for the three and nine months endedSeptember 30, 2006, respectively.  Theincome tax benefit recognized in the income statement for share-basedcompensation arrangements was less than $0.1 million for the three endedSeptember 30, 2006 and $0.1 million for the nine months ended September 30,2006.  Basic and diluted income per shareincludes $0.03 of stock based compensation cost for the three months endedSeptember 30, 2006.  Basic and dilutedloss per share includes $0.09 of stock-based compensation cost for the ninemonths ended September 30, 2006.

Thefollowing table illustrates the effect on net income and earnings per share asif we had applied the fair value method of Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-Based

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Compensation” (“SFAS123”), prior to January 1, 2006:
| ** **                                                                                                                                                                                                                          | ** ** | **Three Months   Ended  September 30, 2005** | ** ** | **Nine Months   Ended  September 30, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
|                                                                                                                                                                                                                                |       |                                                             |       |                                                            |       |
| Net income, as reported                                                                                                                                                                                                             |       | $                                                                | 3,743      |                                                            | $          | 8,759 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair-value based  method for all awards, net of related tax effects of $35 and $106 for the three  and nine months ended September 30, 2005, respectively |       | (228                                                             | )          | (700                                                            | )          |
|                                                                                                                                                                                                                                |       |                                                             |       |                                                            |       |
| Pro forma net income                                                                                                                                                                                                                |       | $                                                                | 3,515      |                                                            | $          | 8,059 |   |
|                                                                                                                                                                                                                                |       |                                                             |       |                                                            |       |
| Earnings per share:                                                                                                                                                                                                                 |       |                                                             |       |                                                            |       |
| Basic - as  reported                                                                                                                                                                                                                |       | $                                                                | 0.46       |                                                            | $          | 1.09 |   |
| Basic - pro  forma                                                                                                                                                                                                                  |       | $                                                                | 0.43       |                                                            | $          | 1.00 |   |
|                                                                                                                                                                                                                                |       |                                                             |       |                                                            |       |
| Diluted - as  reported                                                                                                                                                                                                              |       | $                                                                | 0.45       |                                                            | $          | 1.06 |   |
| Diluted - pro forma                                                                                                                                                                                                                 |       | $                                                                | 0.43       |                                                            | $          | 0.98 |   |

 

Wemeasured the fair value of options on their grant date, including the valuationof the option feature implicit in our Purchase Plan, using the Black-Scholesoption-pricing model.  The risk-freeinterest rate is based on the weighted-average of U.S. Treasury rates over theexpected life of the stock option or the contractual life of the option featurein the Purchase Plan. The expected life of a stock option is based onhistorical data of similar option holders. We have segregated our employees into two groups based on historicalexercise and termination behavior. The expected life of the option feature inthe Purchase Plan is the same as its contractual life.  Expected volatility is based on historicalvolatility of our stock over its expected life, as our options are not readilytradable.

Key assumptionsused to apply this pricing model to the option feature in the Purchase Plan areas follows:
| ** **                                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Risk-free interest rate                                                           |       |                                                 | 4.3        | %                                                   |       |   | 3.3 | % |   |   | 4.1 | % |   |   | 2.5 | % |   |
| Weighted-average  expected life of option feature in the Purchase Plan (in years) |       |                                                 | 1.0        |                                                |       |   | 1.0 |   |   |   | 1.0 |   |   |   | 1.0 |   |   |
| Expected volatility of underlying stock                                           |       |                                                 | 23.6       | %                                                   |       |   | 23.9 | % |   |   | 23.2 | % |   |   | 25.8 | % |   |

 

14

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The weighted-average fairvalue of the option feature in the Purchase Plan is as follows:
| ** **                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Option feature in  Purchase Plan |       | $                                                    | 6.82       |                                                | $          | 7.27 |   | $ | 7.02 |   | $ | 7.31 |   |
|                                  |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

During the nine months ended September 30, 2005, wegranted stock options awards and applied a risk-free interest rate of 4.1%, aweighted-average expected life in years of 7.5, and an expected volatility of26.1% to the Black-Scholes option-pricing model.  The weighted-average fair value of optionsgranted during the three and nine months ended September 30, 2005 was $10.82.

During the nine months ended September 30, 2006, wegranted stock options awards and applied a risk-free interest rate of 5.0%, aweighted-average expected life in years of 7.1, and an expected volatility of24.4% to the Black-Scholes option-pricing model.  The weighted-average fair value of optionsgranted during the nine months ended September 30, 2006 was $10.95. No stockoption awards were granted during the three months ended September 30, 2006.

The followingtable sets forth information regarding the Purchase Plan:
|                                    | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life  (in years)** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|---------------------------------------------------|------------|
| Outstanding at  January 1, 2006    |       | 9,476                       |       | $                                       | 25.42      |                                              |       |   |
| Shares  subscribed                 |       | 22,672                      |       | 20.51                                   |       |                                              |       |
| Exercised                          |       | (26,121                     | )          | 20.43                                   |       |                                              |       |
| Canceled                           |       | (1,312                      | )          | 20.44                                   |       |                                              |       |
| Outstanding at  September 30, 2006 |       | 4,715                       |       | $                                       | 20.80      |                                              | 0.8        |   |

 

The followingtable sets forth information regarding the Stock Plan:
|                                    | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (not in 000s)** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at  January 1, 2006    |       | 826,773                     |       | $                                       | 20.33      |                                              |       |                                                     |       |   |
| Granted                            |       | 25,000                      |       | 27.66                                   |       |                                              |       |                                                     |       |
| Exercised                          |       | (226,373                    | )          | 19.19                                   |       |                                              |       |                                                     |       |
| Forfeited                          |       | (2,400                      | )          | 19.95                                   |       |                                              |       |                                                     |       |
| Outstanding at  September 30, 2006 |       | 623,000                     |       | $                                       | 21.04      |                                              | 6.3        |                                                     | $          | 4,379,865 |   |
|                               |       |                        |       |                                    |       |                                              |       |                                                     |       |
| Exercisable at  September 30, 2006 |       | 346,800                     |       | $                                       | 19.90      |                                              | 5.7        |                                                     | $          | 2,834,374 |   |

 

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The total intrinsic value of the options exercisedduring the nine months ended September 30, 2006 and 2005 was $2.7 million and$0.5 million, respectively.

As of September 30, 2006, there was $1.7 million ofunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the Stock Plan. This compensation cost is expected to be recognized over a period of 2.3years.

As reported in the statement of cash flows, cashreceived from option exercises under the Stock Plan for the period endedSeptember 30, 2006 was $4.9 million. SFAS No. 123R requires that cash flows from tax benefits resulting fromtax deductions in excess of the compensation cost recognized for stock-basedawards under a fair value basis (excess tax benefits) be classified as a cashflow from financing activities.  Prior tothe adoption of SFAS No. 123R, such excess tax benefits were classified asoperating cash flows.  Accordingly, $0.9million of tax benefit from stock option exercises is presented as a cashinflow from operating activities and $0.4 million of excess tax benefits hasbeen classified as an outflow from operating activities and an inflow fromfinancing activities in the statement of cash flows.

**(8)           Other Income, Net**
|                                       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| West 57th  building income            |       | $                                                        | (1,163     | )                                                       | $          | (1,163 | ) | $ | (3,490 | ) | $ | (3,490 | ) |
| West 57th  building expenses          |       | 822                                                      |       | 819                                                     |       | 2,460 |   | 2,450 |   |
| Foreign exchange  (gains) losses, net |       | 157                                                      |       | (90                                                     | )          | (515 | ) | 352 |   |
| Miscellaneous                         |       | (211                                                     | )          | (33                                                     | )          | (296 | ) | (185 | ) |
| Other income, net                     |       | $                                                        | (395       | )                                                       | $          | (467 | ) | $ | (1,841 | ) | $ | (873 | ) |

 

**(9)           Commitments and ContingentLiabilities**

Weare involved in certain legal proceedings regarding environmental matters,which are described below.  Further, inthe ordinary course of business, we are party to various legal actions that webelieve are routine in nature and incidental to the operation of our business.  While the outcome of such actions cannot bepredicted with certainty, we believe that, based on our experience in dealingwith these matters, their ultimate resolution will not have a material adverseimpact on our business, financial condition, results of operations orprospects.

Certainenvironmental 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 releasesof hazardous substances, which liability is broadly construed.  Under CERCLA and other laws, we may haveliability for investigation and cleanup costs and other damages relating to ourcurrent or former properties, or third-party sites to which we sent wastes fordisposal.  Our potential liability at anyof these sites is affected by many factors including, but not limited to, themethod of remediation, our portion of the hazardous substances at the siterelative to that of other parties, the number of responsible parties, thefinancial capabilities of other parties, and contractual rights andobligations.

In this regard, we operate certain manufacturingfacilities which were previously owned by Philips Electronics North AmericaCorporation (“Philips”).  When wepurchased these facilities, Philips agreed to indemnify us for certainenvironmental matters resulting from activities of Philips occurring prior toDecember 29, 1988 (the “Environmental Indemnity Agreement”).  To date, Philips has fully performed itsobligations 

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underthe Environmental Indemnity Agreement, which terminates on December 29, 2008;however, we cannot provide assurance that it will continue to do so in thefuture.  Four matters covered by theEnvironmental Indemnity Agreement are currently pending.  Philips has entered into Consent Orders withthe Environmental Protection Agency (“EPA”) for one site and the North CarolinaDepartment of Environment, Health and Natural Resources for a second site,whereby Philips has agreed to pay required response costs.  On October 22, 1998, we were joined asdefendant in an action involving a third site formerly occupied by a businesswe acquired in Illinois.  Philips hasaccepted the defense of this action pursuant to the terms of the EnvironmentalIndemnity Agreement.  At the fourth site, which is a third-partywaste disposal site, the EPA has named over 40 persons or entities aspotentially responsible parties (“PRP”), including four Conn-Selmer predecessorentities, two of which were previously owned by Philips and thus covered by theEnvironmental Indemnity Agreement.  The PRP group, which includes the fourentities, has reached a settlement with the largest contributor and is awaitingfinal settlement between the site owners, the largest contributor, and theEPA.  We expect a final settlement and consent decree to be reached withinthe next two to three months.  We have escrowed our share of thesettlement, approximately $0.1 million and recognized this amount as an expensein the current quarter.  Once the consentdecree is finalized, we will remain liable for our share of any contingentremedial actions at the site.  However,we believe any further remediation to be remote and, in any case, do notbelieve our share of contingent remediation liability would be material.

In addition, we are continuing an existing environmental remediationplan at a facility we acquired in 2000. We estimate our costs, which approximate $0.9 million, over a 15-yearperiod.  We have accrued approximately$0.7 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 asfollows:
|            | ** ** | **Environmental  Payments** | ** ** |
|------------|------------|-----------------------------|------------|
| 2006       |       |                        | 54         |   |
| 2007       |       |                        | 95         |   |
| 2008       |       |                        | 56         |   |
| 2009       |       |                        | 56         |   |
| 2010       |       |                        | 56         |   |
| Thereafter |       |                        | 554        |   |
|       |       | 871                         |       |

 

In2004, we acquired two manufacturing facilities from G. Leblanc Corporation, nowGrenadilla, Inc. (“Grenadilla”), for which environmental remediation plans hadalready been established.  In connectionwith the acquisition, we assumed the existing accrued liability ofapproximately $0.8 million for the cost of these remediation activities.  Based on a review of past and ongoinginvestigatory and remedial work by our environmental consultants, anddiscussions with state regulatory officials, as well as recent sampling, weestimate the remaining costs of such remedial plans at $3.0 million.  Pursuant to the purchase and sale agreement,we have sought indemnification from Grenadilla for anticipated costs above theoriginal estimate in the amount of $2.5 million.  We filed a claim against the escrow andrecorded a corresponding receivable for this amount in prepaid expenses andother current assets in the consolidated balance sheet.  However, we cannot be assured that we will beable to recover such costs from Grenadilla.

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Basedon our past experience and currently available information, the mattersdescribed above and our other liabilities and compliance costs arising underenvironmental laws are not expected to have a material impact on our capitalexpenditures, earnings or competitive position in an individual year.  However, some risk of environmental liabilityis inherent in the nature of our current and former business and we may, in thefuture, incur material costs to meet current or more stringent compliance,cleanup, or other obligations pursuant to environmental laws.

**(10)         Retirement Plans**

Wehave defined benefit pension plans covering the majority of our employees,including certain employees in Germany and the U.K.  The components of net periodic pension costfor these plans are as follows:
| ** **                          | ** ** | **Domestic Plans**            | ** ** | **Foreign Plans**             | ** ** |
|-------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended**   | ** ** | **Three Months Ended**   | ** ** |
| ** **                          | ** ** | **September 30,   2006** | ** ** | **September 30,   2005** | ** ** | **September 30,   2006** | ** ** | **September 30,   2005** | ** ** |
| Service cost                        |       | $                                  | 216        |                               | $          | 296 |   | $ | 220 |   | $ | 171 |   |
| Interest cost                       |       | 737                                |       | 881                                |       | 375 |   | 329 |   |
| Expected return on plan  assets     |       | (1,084                             | )          | (1,312                             | )          | (79 | ) | (70 | ) |
| Amortization of prior  service cost |       | 108                                |       | 157                                |       | — |   | — |   |
| Amortization of net  loss           |       | 161                                |       | 74                                 |       | — |   | — |   |
| Net periodic benefit cost           |       | $                                  | 138        |                               | $          | 96 |   | $ | 516 |   | $ | 430 |   |

 
| ** **                          | ** ** | **Domestic Plans**         | ** ** | **Foreign Plans**          | ** ** |
|-------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **Nine Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **                          | ** ** | **September 30,  2006**    | ** ** | **September 30,  2005**    | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| Service cost                        |       | $                               | 649        |                            | $          | 548 |   | $ | 642 |   | $ | 510 |   |
| Interest cost                       |       | 2,212                           |       | 2,013                           |       | 1,092 |   | 984 |   |
| Expected return on plan  assets     |       | (3,253                          | )          | (2,876                          | )          | (230 | ) | (218 | ) |
| Amortization of prior  service cost |       | 323                             |       | 309                             |       | — |   | — |   |
| Amortization of net  loss           |       | 483                             |       | 302                             |       | — |   | 1 |   |
| Net periodic benefit cost           |       | $                               | 414        |                            | $          | 296 |   | $ | 1,504 |   | $ | 1,277 |   |

 

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We provide postretirement health care and life insurance benefits toeligible hourly retirees and their dependents. The components of net periodic postretirement benefit cost for thesebenefits are as follows:
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                             | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                           |       | $                                | 12         |                            | $          | 10 |   | $ | 37 |   | $ | 30 |   |
| Interest cost                          |       | 34                               |       | 32                              |       | 102 |   | 97 |   |
| Amortization of  transition obligation |       | 9                                |       | 11                              |       | 26 |   | 34 |   |
| Amortization of net  loss              |       | 13                               |       | —                          |       | 38 |   | — |   |
| Net postretirement benefit cost        |       | $                                | 68         |                            | $          | 53 |   | $ | 203 |   | $ | 161 |   |

 

Asof September 30, 2006 we have made contributions of $1.5 million to ourdomestic pension plan.  We do notanticipate any further contribution to this plan during the current year.  Our anticipated contributions to the pensionplan of our U.K. subsidiary approximate $0.2 million for the current year.  As of September 30, 2006, we have madecontributions of $0.1 million to this plan. The pension plans of our German subsidiaries do not hold any assets andpay participant benefits as they become due by using operating cash.  Expected 2006 benefit payments under theseplans are $1.1 million.  For the ninemonths ended September 30, 2006, we have made benefit payments of $0.8 millionunder these plans.

**(11)         Segment Information**

We have identifiedtwo reportable segments: the piano segment and the band & orchestralinstrument segment.  We consider thesetwo segments reportable as they are managed separately and the operatingresults of each segment are separately reviewed and evaluated by our seniormanagement on a regular basis. Management and the chief operating decision maker use income fromoperations as a meaningful measurement of profit or loss for the segments.  Income from operations for the reportablesegments includes certain corporate costs allocated to the segments basedprimarily on revenue, as well as intercompany profit.  Amounts reported as “Other & Elim”include those corporate costs that were not allocated to the reportablesegments and the remaining intercompany profit elimination.

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The followingtables present information about our operating segments for the three monthsand nine months ended September 30, 2006 and 2005:
|                                            | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|------------|------------|
| **Three months ended 2006** | ** ** | **U.S.**               | ** ** | **Germany**           | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Other** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
|                                       |       |                   |       |                  |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net sales to external customers            |       | $                      | 27,100     |                  | $          | 12,174    |       | $          | 10,029     |   | $ | 49,303 |   | $ | 39,487 |   | $ | 2,086 |   | $ | 41,573 |   | $ | — |   | $ | 90,876 |   |
| Income (loss) from  operations             |       | 1,693                  |       | 3,384                 |       | 1,055     |       | 6,132      |       | 1,325 |   | 153 |   | 1,478 |   | (665 | ) | 6,945 |   |
|                                       |       |                   |       |                  |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| ** **                                 | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
| **Three months ended 2005** | ** ** | **U.S.**               | ** ** | **Germany**           | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Other** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
|                                       |       |                   |       |                  |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net sales to external customers            |       | $                      | 28,781     |                  | $          | 11,858    |       | $          | 8,332      |   | $ | 48,971 |   | $ | 44,923 |   | $ | 2,020 |   | $ | 46,943 |   | $ | — |   | $ | 95,914 |   |
| Income (loss) from  operations             |       | 2,890                  |       | 3,241                 |       | 588       |       | 6,719      |       | 2,827 |   | 263 |   | 3,090 |   | (471 | ) | 9,338 |   |
|                                       |       |                   |       |                  |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| ** **                                 | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
| **Nine months ended 2006**  | ** ** | **U.S.**               | ** ** | **Germany**           | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Other** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
|                                       |       |                   |       |                  |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net sales to external customers            |       | $                      | 81,667     |                  | $          | 36,298    |       | $          | 25,130     |   | $ | 143,095 |   | $ | 129,703 |   | $ | 5,695 |   | $ | 135,398 |   | $ | — |   | $ | 278,493 |   |
| Income (loss) from  operations             |       | 4,362                  |       | 8,501                 |       | 1,778     |       | 14,641     |       | (328 | ) | 113 |   | (215 | ) | (2,365 | ) | 12,061 |   |
|                                       |       |                   |       |                  |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| ** **                                 | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
| **Nine months ended 2005**  | ** ** | **U.S.**               | ** ** | **Germany**           | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Other** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
|                                       |       |                   |       |                  |       |      |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net sales to external customers            |       | $                      | 80,187     |                  | $          | 35,911    |       | $          | 23,041     |   | $ | 139,139 |   | $ | 132,441 |   | $ | 5,437 |   | $ | 137,878 |   | $ | — |   | $ | 277,017 |   |
| Income (loss) from operations              |       | 7,240                  |       | 8,589                 |       | 1,410     |       | 17,239     |       | 8,990 |   | (8 | ) | 8,982 |   | (2,098 | ) | 24,123 |   |

 

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

**Introduction**

**We area world leader in the design, manufacture, marketing, and distribution of highquality musical instruments.  Our pianodivision 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 twomid-priced lines of pianos under the Boston and Essex brand names.  We are also the largest domestic producer ofband and orchestral instruments and offer a complete line of brass, woodwind,percussion and string instruments and related accessories with well-known brandnames such as Bach, Selmer, C.G. Conn, Leblanc, King, and Ludwig.  We sell our products through dealers anddistributors worldwide. Our piano customer base consists of professionalartists, amateur pianists, and institutions such as concert halls,universities, and music schools.  Ourband and orchestral instrument customer base consists primarily of middleschool and high school students, but also includes adult amateur andprofessional musicians.**

**CriticalAccounting Policies**

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

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

Thesignificant accounting policies are described in Note 2 of the Notes toConsolidated Financial Statements included in the Company’s 2005 Annual Reporton Form 10-K. Not all of these significant accounting policies requiremanagement to make difficult, subjective or complex judgments or estimates.However, management considers the following to be critical accounting policiesbased on the definition above.

**Accounts Receivable**

We establish reserves for accounts receivable andnotes receivable (including recourse reserves when our customers have financednotes receivable with a third party).  Wereview overall collectibility trends and customer characteristics such as debtleverage, solvency, and outstanding balances in order to develop our reserve estimates.  Historically, a large portion of our saleshave been generated by our top 15 customers. As a result, we experience some inherent concentration of credit risk inour accounts receivable due to its composition and the relative proportion oflarge customer receivables to the total. This is especially true at our banddivision, which characteristically has the majority of our consolidatedaccounts receivable balance.  We considerthe credit health and solvency of our customers when developing our receivablereserve estimates.

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**Inventory**

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

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

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

**Warranty**

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

**Long-lived Assets**

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

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

**Pensions and Other Postretirement Benefit Costs**

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

**IncomeTaxes**

Our effective tax rate at an interim period is basedupon an estimate of expected foreign source income to U.S. income and ourcorresponding ability to utilize foreign tax credits effectively.  We consider shifts in sources of income whendeveloping our estimated effective tax rate.

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A valuation allowance has been recorded for certaindeferred tax assets related to foreign tax credit carryforwards and state netoperating loss carryforwards.  Whenassessing the realizability of deferred tax assets, we consider whether it ismore likely than not that the deferred tax assets will be fully realized.  The ultimate realization of these assets isdependent upon many factors, including the ratio of foreign source income tooverall income and generation of sufficient future taxable income in the statesfor which we have loss carryforwards. When establishing or adjusting valuation allowances, we consider thesefactors, as well as anticipated trends in foreign source income and taxplanning strategies which may impact future realizability of these assets.

**Stock-based Compensation**

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

**Environmental Liabilities**

We make certain assumptions when calculating ourenvironmental liabilities.  We base ourselection of assumptions, such as cost and length of time for remediation, ondata provided by our environmental consultants, as well as information providedby regulatory authorities. We also make certain assumptions regarding theindemnifications we have received from others, including whether remediationcosts are within the scope of the indemnification, the indemnifier’s ability toperform under the agreement, and whether past claims have been successful.  Our environmental obligations and expensescan fluctuate significantly based on management’s assumptions.

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

**Forward-LookingStatements**

Certain statements contained in this document are “forward-lookingstatements” within the meaning of Section 21E of the Securities and ExchangeAct of 1934, as amended.  Theseforward-looking statements represent our present expectations or beliefsconcerning future events.  We cautionthat such statements are necessarily based on certain assumptions which aresubject to risks and uncertainties which could cause actual results to differmaterially from those indicated in this report. These risk factors include, but are not limited to, the following:  changes in general economic conditions; geopoliticalevents; increased competition; work stoppages and slowdowns; exchange ratefluctuations; variations in the mix of products sold; market acceptance of newproduct and distribution strategies; ability of suppliers to meet demand;fluctuations in effective tax rates resulting from shifts in sources of income;and the ability to successfully integrate and operate acquired businesses.  Further information on these risk factors isincluded in Item 1A of our Annual Report on Form 10-K for the year ended December31, 2005.  We encourage you to read thosedescriptions carefully.  We cautioninvestors not to place undue reliance on the forward-looking statementscontained in this report.  Thesestatements, like all statements contained in this report, speak only as of thedate of this report (unless another date is indicated) and we undertake noobligation to update or revise the statements except as required by law.

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**Results of Operations**

Three Months EndedSeptember 30, 2006 Compared to Three Months Ended September 30, 2005
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **2006**                                                 | ** ** | ** ** | ** ** | **2005**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
|                        |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Net sales                   |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Band                        |       | $                                                        | 41,573     |       |       |       | $          | 46,943 |   |   |   | (5,370 | ) | (11.4 | ) |
| Piano                       |       | 49,303                                                   |       |       |       | 48,971     |       |   |   | 332 |   | 0.7 |   |
| Total sales                 |       | 90,876                                                   |       |       |       | 95,914     |       |   |   | (5,038 | ) | (5.3 | ) |
|                        |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Cost of sales               |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Band                        |       | 32,962                                                   |       |       |       | 37,231     |       |   |   | (4,269 | ) | (11.5 | ) |
| Piano                       |       | 31,869                                                   |       |       |       | 31,187     |       |   |   | 682 |   | 2.2 |   |
| Total cost of sales         |       | 64,831                                                   |       |       |       | 68,418     |       |   |   | (3,587 | ) | (5.2 | ) |
|                        |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Gross profit                |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Band                        |       | 8,611                                                    |       | 20.7       | %          | 9,712      |       | 20.7 | % | (1,101 | ) | (11.3 | ) |
| Piano                       |       | 17,434                                                   |       | 35.4       | %          | 17,784     |       | 36.3 | % | (350 | ) | (2.0 | ) |
| Total gross profit          |       | 26,045                                                   |       |       |       | 27,496     |       |   |   | (1,451 | ) | (5.3 | ) |
|                        |       | 28.7%                                                    |       |       |       | 28.7%      |       |   |   |   |   |   |   |
|                        |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Operating expenses          |       | 19,100                                                   |       |       |       | 18,158     |       |   |   | 942 |   | 5.2 |   |
|                        |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Income from operations      |       | 6,945                                                    |       |       |       | 9,338      |       |   |   | (2,393 | ) | (25.6 | ) |
|                        |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Other income, net           |       | (395                                                     | )          |       |       | (467       | )          |   |   | 72 |   | (15.4 | ) |
| Net interest expense        |       | 2,665                                                    |       |       |       | 3,562      |       |   |   | (897 | ) | (25.2 | ) |
| Non-operating expenses      |       | 2,270                                                    |       |       |       | 3,095      |       |   |   | (825 | ) | (26.7 | ) |
|                        |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Income before income  taxes |       | 4,675                                                    |       |       |       | 6,243      |       |   |   | (1,568 | ) | (25.1 | ) |
|                        |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Income tax provision        |       | 3,707                                                    |       | 79.3       | %          | 2,500      |       | 40.0 | % | 1,207 |   | 48.3 |   |
|                        |       |                                                     |       |       |       |       |       |   |   |   |   |   |   |
| Net income                  |       | $                                                        | 968        |       |       |       | $          | 3,743 |   |   |   | (2,775 | ) | (74.1 | ) |

 

**Overview***-*Salesat our piano division were on par with the prior period. Market feedback aboutour Essex piano line, which was re-launched in June, continues to be positive.Although our domestic piano operations experienced decreases in retail salesvolume, this was more than offset by the improvement in sales for ouroperations in Europe and Asia. Band division revenues from professional brassinstrument sales were negatively impacted by the strike at our Elkhart, Indianabrass instrument manufacturing facility, which began on April 1st. However, band margins remained stable as margins realized on studentproducts improved over the year-ago period. Although we continue negotiations with the union, a significant numberof replacement workers have been hired as of period end.  We anticipate a return to normal productionlevels by the middle of 2007.

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**Net Sales** -**Thedecrease in net sales of $5.0 million resulted from an estimated $6.8 millionin lower sales caused by the strike at our Elkhart, Indiana brass instrumentmanufacturing facility.  The strikeimpact was partially offset by slight improvements in percussion, woodwind, andbackground brass sales.  Overseas pianosales increased $1.9 million, reflecting improved performances by both ourEuropean and Asian divisions.  During thequarter, overseas Steinway grand unit shipments increased 8% and mid-pricedgrand unit shipments increased 30%, supported largely by the re-launch of ourEssex piano line.  These results morethan offset the impact of a 10% decrease in domestic Steinway grand shipments,which resulted largely in the $1.5 million decrease in domestic retail sales inthe current period.

**Gross Profit***-*Gross profit decreased $1.5 million resulting primarily from lower salesgenerated by our band division, as well as lower margins at our pianodivision.  An estimated $3.1 million of lowergross profit resulted from the strike at our Elkhart, Indiana brass instrumentmanufacturing facility, comprised of $2.2 million in profit on lost sales and$0.9 million in unabsorbed overhead.  Thedecrease in band division gross profit was somewhat offset by improvements inmost student band instrument margins and $0.3 million in lower chargesassociated with the sell-through of purchased Leblanc inventory, which waswritten up to fair value upon acquisition. Despite the revenue increase, piano segment gross profit decreased, aswe had fewer domestic retail sales and experienced a shift in mix towards ourmid-priced piano lines.

**Operating Expenses** - Operatingexpenses increased $0.9 million due to an increase of $0.3 million in bad debtexpense, $0.3 million in stock-based compensation, and $0.2 million inrecruiting costs.

**Non-operating Expenses** -Non-operating expenses decreased $0.8 million due to the $0.9 million decrease ininterest expense. This improvement resulted from our long-term debtrestructuring and repayment of our larger term loan in the first quarter of2006, as well as lower borrowings on our domestic line of credit.

**Income Taxes** -**Our effective tax rate has increased from the year agoperiod due to the significant shift in the ratio of foreign source income toworldwide income.  This shift is duelargely to the adverse impact of the loss on extinguishment of our 8.75% SeniorNotes, the additional inventory and accounts receivable reserve charges takenin the prior quarter, and the estimated loss in income due to the strike at ourElkhart brass facility.  We currentlyanticipate that virtually all of our consolidated income for the year will bederived from foreign entities and that the vast majority of this income will besubject to both U.S. and foreign tax. Accordingly, we expect to generate significantly more foreign taxes thanwe will be able to utilize as credits against U.S. tax liabilities and ourhigher effective rate reflects this.   Although we continue to investigate acceptable tax planning strategiesin an effort to reduce our rate, we currently expect our effective tax rate for2006 to be 60%.

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**Results of Operations**

Nine months endedSeptember 30, 2006 Compared to Nine months ended September 30, 2005
| ** **                         | ** ** | **Nine months ended September 30,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **2006**                                                | ** ** | ** ** | ** ** | **2005**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
|                               |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Net sales                          |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Band                               |       | $                                                       | 135,398    |       |       |       | $          | 137,878 |   |   |   | (2,480 | ) | (1.8 | ) |
| Piano                              |       | 143,095                                                 |       |       |       | 139,139    |       |   |   | 3,956 |   | 2.8 |   |
| Total sales                        |       | 278,493                                                 |       |       |       | 277,017    |       |   |   | 1,476 |   | 0.5 |   |
|                               |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Cost of sales                      |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Band                               |       | 109,291                                                 |       |       |       | 108,754    |       |   |   | 537 |   | 0.5 |   |
| Piano                              |       | 94,016                                                  |       |       |       | 88,944     |       |   |   | 5,072 |   | 5.7 |   |
| Total cost of sales                |       | 203,307                                                 |       |       |       | 197,698    |       |   |   | 5,609 |   | 2.8 |   |
|                               |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Gross profit                       |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Band                               |       | 26,107                                                  |       | 19.3       | %          | 29,124     |       | 21.1 | % | (3,017 | ) | (10.4 | ) |
| Piano                              |       | 49,079                                                  |       | 34.3       | %          | 50,195     |       | 36.1 | % | (1,116 | ) | (2.2 | ) |
| Total gross profit                 |       | 75,186                                                  |       |       |       | 79,319     |       |   |   | (4,133 | ) | (5.2 | ) |
|                               |       | 27.0%                                                   |       |       |       | 28.6%      |       |   |   |   |   |   |   |
|                               |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Operating expenses                 |       | 63,125                                                  |       |       |       | 55,196     |       |   |   | 7,929 |   | 14.4 |   |
|                               |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Income from operations             |       | 12,061                                                  |       |       |       | 24,123     |       |   |   | (12,062 | ) | (50.0 | ) |
|                               |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Other income, net                  |       | (1,841                                                  | )          |       |       | (873       | )          |   |   | (968 | ) | 110.9 |   |
| Loss on extinguishment  of debt    |       | 9,674                                                   |       |       |       | —     |       |   |   | 9,674 |   | 100.0 |   |
| Net interest expense               |       | 8,565                                                   |       |       |       | 10,397     |       |   |   | (1,832 | ) | (17.6 | ) |
| Non-operating expenses             |       | 16,398                                                  |       |       |       | 9,524      |       |   |   | 6,874 |   | 72.2 |   |
|                               |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| (Loss) income before  income taxes |       | (4,337                                                  | )          |       |       | 14,599     |       |   |   | (18,936 | ) | (129.7 | ) |
|                               |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Income tax (benefit)  provision    |       | (2,602                                                  | )          | 60.0       | %          | 5,840      |       | 40.0 | % | (8,442 | ) | (144.6 | ) |
|                               |       |                                                    |       |       |       |       |       |   |   |   |   |   |   |
| Net (loss) income                  |       | $                                                       | (1,735     | )          |       |       | $          | 8,759 |   |   |   | (10,494 | ) | (119.8 | ) |

 

**Overview***—*Consolidatedsales have remained stable over the period. The piano division’s domestic Steinway sales at wholesale have improved,and the sales of our mid-priced lines have been positively impacted by there-launch of our Essex line in June 2006. Inventory levels have been reduced as a result of the additionalshutdown weeks at our domestic manufacturing facility in the first half of theyear.  Our overseas piano divisionscontinue to have improved sales and stable margins.  Band division unit volume has increased despitethe impact of the strike at our Elkhart brass instrument facility, which hasadversely affected sales for the year-to-date period.  Band margin improvements made during thefirst quarter were more than offset by estimated lost profit and unabsorbedoverhead from the strike, higher inventory reserves, and additional sales discounts.

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**Net Sales** -**Theincrease in net sales of $1.5 million was driven by improved sales at our pianodivision.  Domestic Steinway grand pianosales at wholesale increased $2.2 million year-to-date, which helped to offseta decrease of $1.0 million in domestic mid-priced product sales todealers.  Sales incentives offered todealers as part of the June Essex re-launch contributed largely to the salesimprovement.  Total overseas piano salesincreased $2.7 million as a 20% increase in total unit shipments was partiallyoffset by an unfavorable foreign currency translation of $1.2 million.  The decrease in band division sales of $2.5million resulted from the strike at our Elkhart brass instrument manufacturingfacility, which commenced April 1st.  We estimate lost sales of $11.7 millionmostly due to low availability of professional instruments which aremanufactured at this location.  However,the strike’s impact was mitigated by the availability of imported student brassinstruments, student woodwind product and the introduction of new percussionproducts.

**Gross Profit****-Gross profit decreased by $4.1 million from deterioration in both the band andpiano division margins.  Our banddivision gross margin declined from 21.1% to 19.3% primarily as a result of a$2.3 million charge to inventory reserves during the second quarter and thestrike at the Elkhart brass instrument facility during the second and thirdquarters.  The strike resulted in $2.0million of unabsorbed overhead and lost profit on the lost sales describedabove.  However, the deterioration wasminimized by $1.4 million in lower charges associated with Leblanc inventorystep-up.  Our piano division gross profitdecreased $1.1 million despite increased sales, due to three additional weeksof production shutdown at our domestic piano manufacturing facility, whichresulted in $1.3 million of unabsorbed overhead.

**Operating Expenses** - Operatingexpenses increased $7.9 million due largely to an increase of $4.7 million inour provision for doubtful accounts primarily as a result of the bankruptcy ofone of our major band division customers in July 2006. Stock-based compensationcost for the period was $0.7 million, legal fees at our band division increased$0.6 million, and recruiting costs increased $0.4 million.  Increases in salaries, commissions, andbonuses, as well as costs associated with the re-launch of our Essex line,accounted for a large portion of the remaining increase.

**Non-operating Expenses** -Non-operating expenses increased $6.9 million due largely to the loss onextinguishment of debt of $9.7 million resulting from the refinancing of our8.75% Senior Notes and the early repayment of our acquisition term loan.  This net loss was comprised of $7.7 millionin premiums paid to bondholders, the write-off of term loan related deferredfinancing fees of $1.0, and the write-off of bond related deferred financingfees of $2.2 million, which were offset in part by the write-off of bondpremium of $1.3 million.

Otherincome, net increased $1.0 million due to largely to a shift from foreignexchange losses to foreign exchange gains during the period.  Net interest expense decreased $1.8 milliondue to the reduction in interest rates on our outstanding Senior Notes from8.75% to 7.00% for a portion of the period and the repayment of our acquisitionterm loan in the first quarter of 2006. The remaining decrease was due to interest earned for two months on$51.6 million in residual proceeds from the issuance of our 7.00% Senior Notes.

**Income Taxes** -**Our effective rate has increased from the year ago perioddue to the significant shift in the ratio of foreign source income to worldwideincome.  This shift is due largely to theadverse impact of the loss on extinguishment of our 8.75% Senior Notes, theadditional reserve charges taken in the second quarter, and the estimated lossin income due to the strike at our Elkhart brass facility, all of which affectour domestic sourced income.  Wecurrently anticipate that virtually all of our consolidated income for the yearwill be derived from foreign entities and that the vast majority of this incomewill be subject to both U.S. and foreign tax. Accordingly, we expect to generate significantly more foreign taxes thanwe will be able to utilize as credits against U.S. tax liabilities and ourhigher effective rate reflects this.  Although we continue to

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investigateacceptable tax planning strategies in an effort to reduce our rate, wecurrently expect our effective tax rate for 2006 to be 60%.

**Liquidity and Capital Resources**

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

Our statements ofcash flows for the nine months ended September 30, 2006 and 2005 are summarizedas follows:
|                                                                                     | ** ** | **2006** | ** ** | **2005** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net (loss)  income:                                                                 |       | $        | (1,735     | )        | $          | 8,759      |       | $ | (10,494 | ) |
| Changes in operating assets and liabilities                                         |       | (10,759  | )          | (14,420  | )          | 3,661      |       |
| Other adjustments to reconcile net (loss) income to  cash from operating activities |       | 13,869   |       | 8,139    |       | 5,730      |       |
| Cash flows from  operating activities                                               |       | 1,375    |       | 2,478    |       | (1,103     | )          |
|                                                                                |       |     |       |     |       |       |       |
| Cash flows from  investing activities                                               |       | (2,297   | )          | (2,203   | )          | (94        | )          |
|                                                                                |       |     |       |     |       |       |       |
| Cash flows from  financing activities                                               |       | (17,954  | )          | (4,812   | )          | (13,142    | )          |
|                                                                                     |            |          |            |          |            |            |            |  |  |  |

 

Cash flowsgenerated from operating activities decreased $1.1 million due primarily tochanges in working capital accounts. Cash provided by inventory increased $17.4 million due to increasedpiano sales combined with reduced production at both our Elkhart brassinstrument facility and our domestic piano manufacturing facility.  Cash used by accounts receivable increased$10.3 million due to increased sales and extended payment terms offered as partof the Essex re-launch promotional activities. An increase in our band division aged receivable balance was also afactor.

Cash flows fromoperating activities was also impacted by the $1.4 million purchase ofsecurities (which are classified as trading) for our supplemental executiveretirement plan (“SERP”). This purchase was funded by the sale of existing SERPsecurities and is described below. We realized gains of $0.2 million on thesale of these securities. Unrealized gains on the newly purchased securitieswas less than $0.1 million.

The use of cashfor investing activities remained comparable to the year-ago period as the $1.0million decrease in proceeds from sales of assets, including an acquiredmanufacturing facility in Wisconsin and acquired property in France, was offsetby proceeds from sales of securities in the current period.  We sold all of the securities in our SERP,which were classified as available-for-sale securities, recognizing$1.4 million in gross proceeds in the current period. Capital expenditureswere $0.4 million higher than the year-ago period.

Cash used forfinancing activities increased $13.1 million due largely to our debtrestructuring activities in the current year. We refinanced our bonds, which generated proceeds of $173.7 million,offset by the extinguishment of $166.2 million of our 8.75% Senior Note debt, andthe repayment of our acquisition and real estate term loans.  Although we had additional proceeds from theissuance of stock of $3.3 million and $14.4 million of net borrowings on our creditfacilities, premiums paid on the extinguishment of debt of $7.7 million andcosts related to the bond and domestic credit facility refinancings of $4.6million also resulted in the increased use of cash in the current period.

**BorrowingActivities and Availability** - During the period we restructured our long-termdebt, issuing $175.0 million of 7.00% Senior Notes due 2014.  We used the proceeds from this issuance torepay $114.6 million of the 8.75% Senior Notes pursuant to a tender offer.  The remaining proceeds, supplemented by 

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borrowings on our line ofcredit, were used to exercise our right to call the remaining $51.6 million of8.75% Senior Notes.  This resulted in aloss on extinguishment of $8.7 million, comprised of $7.7 million in premiumspaid to existing holders of 8.75% Senior Notes, $1.3 million of bond premiumwrite-off, and $2.3 million in the write-off of associated deferred financingcosts. We recorded interest on both the remaining 8.75% Senior Notes and the7.00% Senior Notes for the February – April timeframe during which both seriesof notes were outstanding. This double interest expense was partially offset byinterest income on the unused debt issuance proceeds during the first quarter,and is not material to our liquidity.  Weexpect interest payment savings of approximately $2.3 million per year based onthe difference in interest rates on the Senior Notes.

InSeptember, we amended and restated our domestic credit facility, which we havewith a syndicate of domestic lenders (the “Credit Facility”).  The Credit Facility provides us with apotential borrowing capacity of $110.0 million in revolving credit loans, andexpires on September 29, 2011. It also provides for periodic borrowings ateither London Interbank Offering Rate (“LIBOR”) plus a range from 1.25% to1.75% or as-needed borrowings at an alternate base rate, plus a range from0.00% to 0.25%; both ranges depend upon availability at the time of borrowing.The Credit Facility is collateralized by our domestic accounts receivable,inventory, and fixed assets.  As ofSeptember 30, 2006, there was $13.9 million in revolving credit loansoutstanding, as we used borrowings on the Credit Facility to repay our realestate term loan, which had a balance of $14.6 million at the time ofrepayment.  As a result, the remainingavailability based on eligible accounts receivable and inventory balances wasapproximately $94.0 million, net of letters of credit.

We also havecertain non-domestic credit facilities originating from two German banks thatprovide for borrowings by foreign subsidiaries of up to €17.7 million ($22.4million at the September30, 2006 exchange rate), net of borrowing restrictions of €0.8 million($1.1 million at the September 30,2006 exchange rate) and are payable on demand. These borrowings are collateralized by most of the assets of theborrowing subsidiaries.  A portion of theloans can be converted into a maximum of £0.5 million ($0.9 million at the September 30, 2006 exchange rate) foruse by our U.K. branch and ¥300 million ($2.5 million at the September 30, 2006 exchange rate) foruse by our Japanese subsidiary. Our Chinese subsidiary also has the ability toconvert the equivalent of up to €1.8 million into U.S. dollars or Chinese yuan($2.3 million at the September 30,2006 exchange rate). Euro loans bear interest at rates of Euro InterbankOffered Rate (“EURIBOR”) plus a margin determined at the time of borrowing.Margins fluctuate based on the loan amount and the borrower’s bank rating. Theremaining demand borrowings bear interest at fixed margins at rates of LIBORplus 1% for British pound loans (6.4% at September30, 2006), LIBOR plus 1% for U.S. dollar loans of our Chinese subsidiary(6.3% - 6.4% at September 30,2006), and Tokyo Interbank Offered Rate (“TIBOR”) plus 0.9% for Japanese yenloans (1.3% at September 30,2006). We had $1.9 million outstanding as of September 30, 2006 on these credit facilities.

Our Japanesesubsidiary also maintains a separate revolving loan agreement that providesadditional borrowing capacity of up to ¥460 million ($3.9 million at the September 30, 2006 exchange rate)based on eligible inventory balances. The revolving loan agreement bearsinterest at an average 30-day TIBOR rate plus 0.9% (1.2% at September 30, 2006) and expires onJanuary 31, 2010.  As of September 30, 2006, we had $3.0million outstanding on this revolving loan agreement.

At September 30,2006, our total outstanding indebtedness amounted to $193.8 million, consistingof $175.0 million of 7.00% Senior Notes, $13.9 million on the Credit Facility,and $4.9 million of notes payable to foreign banks.

All of our debt agreements contain covenants that place certainrestrictions on us, including our ability to incur additional indebtedness, tomake investments in other entities and to pay cash dividends. We were incompliance with all such covenants as of September 30, 2006 and do not anticipate anycompliance issues in 2006.

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Our bond indenture contains limitations, based on netincome (among other things), on the amount of discretionary repurchases we maymake of our Ordinary common stock.  Ourintent and ability to repurchase additional Ordinary common stock eitherdirectly from shareholders or on the open market is directly affected by thislimitation.

We have reserved721,750 shares of our existing treasury stock to be utilized for the exerciseof outstanding stock options under our Amended and Restated 1996 StockPlan.  As of September 30, 2006, weestimate 529,550 shares of reserved treasury stock will be utilized.  These options have no impact on our cash flowor the number of shares outstanding unless and until the options are exercised.

We experience long production and inventory turnover cycles,which we constantly monitor since fluctuations in demand can have a significantimpact on these cycles.  Three weeks ofadditional shutdown at our domestic piano manufacturing facility and the strikeat the Elkhart brass instrument facility have had an adverse impact onoperations; however, we do not anticipate any material changes to liquidity asa result of these events.

Other than the restructuring of our long-term debt as described above,we do not have any current plans or intentions that will have a material impacton our liquidity in 2006, although we may consider acquisitions that mayrequire funding from operations or from our credit facilities.  Other than those described, we are not awareof any trends, demands, commitments, or costs of resources that are expected tomaterially impact our liquidity or capital resources.  Accordingly, we believe that cash on hand,together with cash flows anticipated from operations and available borrowingsunder the Credit Facility, will be adequate to meet our debt servicerequirements, fund continuing capital requirements and satisfy our workingcapital and general corporate needs through 2006.

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**Contractual Obligations** - The following table provides a summary ofour contractual obligations at September 30, 2006.
|                                  | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                 | ** ** | **Less than   1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **More than   5 years** | ** ** |
|                             |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt (1)               |       | $                                         | 286,150    |   | $ | 18,339 |   | $ | 24,787 |   | $ | 38,420 |   | $ | 204,604 |   |
| Capital leases                   |       | 55                                        |       | 13 |   | 32 |   | 10 |   | — |   |
| Operating leases  (2)            |       | 267,029                                   |       | 5,035 |   | 8,278 |   | 8,115 |   | 245,601 |   |
| Purchase  obligations (3)        |       | 17,862                                    |       | 17,699 |   | 152 |   | 11 |   | — |   |
| Other long-term  liabilities (4) |       | 30,153                                    |       | 3,432 |   | 3,563 |   | 3,357 |   | 19,801 |   |
| Total                            |       | $                                         | 601,249    |   | $ | 44,518 |   | $ | 36,812 |   | $ | 49,913 |   | $ | 470,006 |   |

 

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**Notes toContractual Obligations:**

(1)    Long-term debt represents long-term debtobligations, the fixed interest on our Notes, and the variable interest on ourother loans.  We estimated the futurevariable interest obligation using the applicable September 30, 2006rates.  The nature of our long-term debtobligations, including changes to our long-term debt structure, is describedmore fully in the “Borrowing Availability and Activities” section of “Liquidityand Capital Resources.”

(2)    Approximately $253.7 million of ouroperating lease obligations are attributable to the ninety-nine year land leaseassociated with the purchase of Steinway Hall; the remainder is attributable tothe leasing of other facilities and equipment.

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

(4)    Our other long-term liabilities consist primarily ofthe long-term portion of our pension obligations, which are described in Note10 in the Notes to Consolidated Financial Statements included within thisfiling, and obligations under employee and consultant agreements.

**Recent Accounting Pronouncements**

In June 2006, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accountingfor Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.”FIN 48 clarifies the recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. FIN 48 iseffective for fiscal years beginning after December 15, 2006. We are evaluatingthe impact that this statement will have on our financial position and resultsof operations.

On September 15, 2006, the FASB issued Statementof Financial Accounting Standard No. 157, “Fair Value Measurements” (“SFASNo. 157”). SFAS No. 157 defines fair value, establishes a frameworkfor measuring fair value and expands disclosures about fair value measurements.SFAS No. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. We are currently evaluating the impactthat adoption of this statement will have on our financial position and resultsof operations.

On September 29, 2006, the FASB issued SFAS No.** **158, “Employers’ Accounting for Defined BenefitsPension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFASNo. 158 requires an employer to recognize the funded status of definedbenefit pension and other postretirement benefit plans as an asset orliability. SFAS No. 158 is effective for the fiscal year ending afterDecember 15, 2006. We are currently evaluating the impact that adoption ofthis statement will have on our financial position and results of operations.

**ITEM 3**                                                        QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

**We are exposed to market risk associated with changes inforeign currency exchange rates and interest rates.  We mitigate a portion of our foreign currencyexchange rate risk by maintaining foreign currency cash balances and holding optionand forward foreign currency contracts. They are not designated as hedges for accounting purposes.  These contracts relate primarily tointercompany transactions and are not used for trading or speculative purposes.  The fair value of the option and forwardforeign currency exchange contracts is sensitive to changes in foreign currencyexchange rates.  The impact of an adversechange in foreign currency exchange rates would not be materially differentthan that disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2005.**

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**Our revolving loans bear interest at rates that fluctuatewith changes in PRIME, LIBOR, TIBOR, and EURIBOR.  As such, our interest expense on ourrevolving loans and the fair value of our fixed long-term debt are sensitive tochanges in market interest rates.  Theeffect of an adverse change in market interest rates on our interest expensewould not be materially different than that disclosed in our Annual Report onForm 10-K for the year ended December 31, 2005.**

**The majority of our long-term debt is at a fixed interestrate.  Therefore, the associated interestexpense is not sensitive to fluctuations in market interest rates.  However, the fair value of our fixed interestdebt 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 theperiod covered by this report, we evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)). Our disclosure controls and procedures are thecontrols and other procedures that we designed to ensure that we record,process, summarize and report in a timely manner the information we mustdisclose in reports that we file with or submit to the SEC. Our Chief ExecutiveOfficer and Chief Financial Officer reviewed and participated in thisevaluation. Based on this evaluation the Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective.  In designing the Company’sdisclosure controls and procedures, the Company’s management recognizes thatany controls, no matter how well designed and operated, can only providereasonable, not absolute, assurance of achieving the desired controlobjectives.

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

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

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

(i)             Exhibits

31.1         Certification of thePrincipal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Actof 2002

31.2         Certification of thePrincipal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Actof 2002

32.1         Certification of thePrincipal Executive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2         Certification of thePrincipal Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon their behalf by the undersigned, thereunto duly authorized.

 
|        | STEINWAY MUSICAL  INSTRUMENTS, INC.              |
|--------|--------------------------------------------------|
|   |                                             |
|   | /s/ Dana D.  Messina                             |   |
|   | Dana D. Messina                                  |
|   | Director,  President and Chief Executive Officer |
|   |                                             |
|   | /s/ Dennis M.  Hanson                            |   |
|   | Dennis M. Hanson                                 |
|   | Senior Executive  Vice President and             |
|   | Chief Financial  Officer                         |

 

Date: November 9,2006

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