**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 JUNE  30, 2007** |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | ** **                                                                                                                                 | ** ** | ** ** |
| **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 ofregistrant as specified in its charter)

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

 

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

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

Yes x    No o

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

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

 

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

Yes o    No x

| Number of shares of Common Stock issued and  outstanding as of August 3, 2007: | Class A  | 477,952   |   |
|--------------------------------------------------------------------------------|----------|-----------|--------|
|                                                                           | Ordinary | 8,094,928 |   |
|                                                                           | Total    | 8,572,880 |   |

 

 

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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 and six months ended June 30, 2007 and June 30, 2006 |       | 3          |
|         |       |                                                                                               |       |       |
|         |       | Condensed  Consolidated Balance Sheets   June 30, 2007 and December 31, 2006                       |       | 4          |
|         |       |                                                                                               |       |       |
|         |       | Consolidated  Statements of Cash Flows   Six months ended June 30, 2007 and June 30, 2006          |       | 5          |
|         |       |                                                                                               |       |       |
|         |       | Consolidated  Statement of Stockholders’ Equity   Six months ended June 30, 2007              |       | 6          |
|         |       |                                                                                               |       |       |
|         |       | Notes to  Consolidated and Condensed Consolidated Financial Statements                             |       | 7          |
| ** **   | ** ** | ** **                                                                                         | ** ** | ** ** |
| **Item 2.**  | ** ** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**    | ** ** | 20         |
| ** **   | ** ** | ** **                                                                                         | ** ** | ** ** |
| **Item 3.**  | ** ** | **Quantitative  and Qualitative Disclosures about Market Risk**                                    |       | 30         |
| ** **   | ** ** | ** **                                                                                         | ** ** | ** ** |
| **Item 4.**  | ** ** | **Controls and  Procedures**                                                                       |       | 30         |
| ** **   | ** ** | ** **                                                                                         | ** ** | ** ** |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                              |       |       |
| ** **   | ** ** | ** **                                                                                         | ** ** | ** ** |
| **Item 4.**  |       | **Submission  of Matters to a Vote of Security Holders**                                           |       | 31         |
| ** **   | ** ** | ** **                                                                                         | ** ** | ** ** |
| **Item  6.** | ** ** | **Exhibits**                                                                                       |       | 31         |
|         | ** ** | ** **                                                                                         | ** ** | ** ** |
|         | ** ** | **Signatures**                                                                                     |       | 32         |

 

 

2

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**ITEM 1                   CONSOLIDATEDAND CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**Unaudited**

**(In Thousands Except Share and Per Share Amounts)**
| ** **                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                          |       | $                                                   | 92,257     |                                              | $          | 92,423 |   | $ | 185,689 |   | $ | 187,617 |   |
| Cost of sales                      |       | 63,692                                              |       | 69,274                                            |       | 129,884 |   | 138,476 |   |
|                               |       |                                                |       |                                              |       |   |   |   |   |
| Gross profit                       |       | 28,565                                              |       | 23,149                                            |       | 55,805 |   | 49,141 |   |
|                               |       |                                                |       |                                              |       |   |   |   |   |
| Operating expenses:                |       |                                                |       |                                              |       |   |   |   |   |
| Sales and  marketing               |       | 11,429                                              |       | 11,063                                            |       | 24,093 |   | 22,733 |   |
| Provision for  doubtful accounts   |       | 592                                                 |       | 4,505                                             |       | 718 |   | 4,562 |   |
| General and  administrative        |       | 8,141                                               |       | 7,811                                             |       | 17,151 |   | 16,189 |   |
| Amortization of  intangible assets |       | 196                                                 |       | 197                                               |       | 392 |   | 426 |   |
| Other operating  expenses          |       | 158                                                 |       | (32                                               | )          | 1,035 |   | 115 |   |
| Total operating  expenses          |       | 20,516                                              |       | 23,544                                            |       | 43,389 |   | 44,025 |   |
|                               |       |                                                |       |                                              |       |   |   |   |   |
| Income (loss) from  operations     |       | 8,049                                               |       | (395                                              | )          | 12,416 |   | 5,116 |   |
|                               |       |                                                |       |                                              |       |   |   |   |   |
| Other income, net                  |       | (21                                                 | )          | (695                                              | )          | (191 | ) | (1,446 | ) |
| Loss on extinguishment  of debt    |       | —                                              |       | 3,063                                             |       | — |   | 9,674 |   |
| Interest income                    |       | (906                                                | )          | (880                                              | )          | (2,002 | ) | (2,607 | ) |
| Interest expense                   |       | 3,429                                               |       | 4,032                                             |       | 6,677 |   | 8,507 |   |
| Total non-operating  expenses      |       | 2,502                                               |       | 5,520                                             |       | 4,484 |   | 14,128 |   |
|                               |       |                                                |       |                                              |       |   |   |   |   |
| Income (loss) before  income taxes |       | 5,547                                               |       | (5,915                                            | )          | 7,932 |   | (9,012 | ) |
|                               |       |                                                |       |                                              |       |   |   |   |   |
| Income tax provision  (benefit)    |       | 2,394                                               |       | (5,054                                            | )          | 3,349 |   | (6,309 | ) |
|                               |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss)                  |       | $                                                   | 3,153      |                                              | $          | (861 | ) | $ | 4,583 |   | $ | (2,703 | ) |
|                               |       |                                                |       |                                              |       |   |   |   |   |
| Earnings (loss) per  share:        |       |                                                |       |                                              |       |   |   |   |   |
| Basic                              |       | $                                                   | 0.37       |                                              | $          | (0.10 | ) | $ | 0.54 |   | $ | (0.33 | ) |
| Diluted                            |       | $                                                   | 0.36       |                                              | $          | (0.10 | ) | $ | 0.53 |   | $ | (0.33 | ) |
|                               |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average  shares:          |       |                                                |       |                                              |       |   |   |   |   |
| Basic                              |       | 8,520,949                                           |       | 8,331,652                                         |       | 8,470,049 |   | 8,242,011 |   |
| Diluted                            |       | 8,662,405                                           |       | 8,331,652                                         |       | 8,621,823 |   | 8,242,011 |   |

 

Seenotes to consolidated and condensed consolidated financial statements.

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

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**Unaudited**

**(InThousands)**
| ** **                                                                                                              | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                                                                                    |       |                    |       |                        |       |
| Assets                                                                                                                  |       |                    |       |                        |       |
| Current assets:                                                                                                         |       |                    |       |                        |       |
| Cash                                                                                                                    |       | $                       | 9,701      |                        | $          | 30,409 |   |
| Accounts, notes and other receivables, net of allowances  of   $15,741 and $21,640 in 2007 and 2006, respectively       |       | 77,284                  |       | 75,161                      |       |
| Inventories, net                                                                                                        |       | 177,144                 |       | 154,623                     |       |
| Prepaid expenses and other current assets                                                                               |       | 12,529                  |       | 12,711                      |       |
| Deferred tax assets                                                                                                     |       | 12,377                  |       | 9,774                       |       |
| Total current  assets                                                                                                   |       | 289,035                 |       | 282,678                     |       |
|                                                                                                                    |       |                    |       |                        |       |
| Property, plant and equipment, net of accumulated  depreciation of   $88,991 and $84,386 in 2007 and 2006, respectively |       | 94,714                  |       | 95,598                      |       |
| Trademarks                                                                                                              |       | 13,778                  |       | 13,671                      |       |
| Goodwill                                                                                                                |       | 31,823                  |       | 31,481                      |       |
| Other  intangibles, net                                                                                                 |       | 4,329                   |       | 4,725                       |       |
| Other assets                                                                                                            |       | 12,912                  |       | 12,988                      |       |
| Long-term  deferred tax assets                                                                                          |       | 7,483                   |       | 6,034                       |       |
|                                                                                                                    |       |                    |       |                        |       |
| Total assets                                                                                                            |       | $                       | 454,074    |                        | $          | 447,175 |   |
|                                                                                                                    |       |                    |       |                        |       |
| Liabilities and  stockholders’ equity                                                                              |       |                    |       |                        |       |
| Current  liabilities:                                                                                                   |       |                    |       |                        |       |
| Debt                                                                                                                    |       | $                       | 2,889      |                        | $          | 4,595 |   |
| Accounts payable                                                                                                        |       | 15,941                  |       | 16,805                      |       |
| Other current liabilities                                                                                               |       | 44,661                  |       | 44,648                      |       |
| Total current  liabilities                                                                                              |       | 63,491                  |       | 66,048                      |       |
|                                                                                                                    |       |                    |       |                        |       |
| Long-term debt                                                                                                          |       | 194,749                 |       | 173,816                     |       |
| Deferred tax  liabilities                                                                                               |       | 11,763                  |       | 11,754                      |       |
| Pension and  other postretirement benefit liabilities                                                                   |       | 34,156                  |       | 32,847                      |       |
| Other  non-current liabilities                                                                                          |       | 9,395                   |       | 4,709                       |       |
| Total  liabilities                                                                                                      |       | 313,554                 |       | 289,174                     |       |
|                                                                                                                    |       |                    |       |                        |       |
| Commitments and  contingent liabilities                                                                                 |       |                    |       |                        |       |
|                                                                                                                    |       |                    |       |                        |       |
| Stockholders’  equity:                                                                                             |       |                    |       |                        |       |
| Common stock                                                                                                            |       | 11                      |       | 10                          |       |
| Additional paid-in capital                                                                                              |       | 93,358                  |       | 90,266                      |       |
| Retained earnings                                                                                                       |       | 102,111                 |       | 125,711                     |       |
| Accumulated other comprehensive loss                                                                                    |       | (9,534                  | )          | (10,550                     | )          |
| Treasury stock, at cost                                                                                                 |       | (45,426                 | )          | (47,436                     | )          |
| Total  stockholders’ equity                                                                                        |       | 140,520                 |       | 158,001                     |       |
|                                                                                                                    |       |                    |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                        |       | $                       | 454,074    |                        | $          | 447,175 |   |

 

See notes toconsolidated and condensed consolidated financial statements.

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**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Unaudited**

**(In Thousands)**
| ** **                                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                               |       |                                              |       |   |   |
| Net income (loss)                                                                    |       | $                                                 | 4,583      |   | $ | (2,703 | ) |
| Adjustments to reconcile net income (loss) to cash flows  from operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                        |       | 5,213                                             |       | 5,439 |   |
| Amortization of bond discount                                                        |       | 83                                                |       | 57 |   |
| Amortization of bond premium                                                         |       | —                                            |       | (42 | ) |
| Loss on extinguishment of debt                                                       |       | —                                            |       | 9,674 |   |
| Stock-based compensation expense                                                     |       | 643                                               |       | 566 |   |
| Excess tax benefits from stock-based awards                                          |       | (402                                              | )          | (417 | ) |
| Tax benefit from stock option exercises                                              |       | 726                                               |       | 917 |   |
| Deferred tax benefit                                                                 |       | (1,907                                            | )          | (10,227 | ) |
| Provision for doubtful accounts                                                      |       | 718                                               |       | 4,562 |   |
| Other                                                                                |       | (340                                              | )          | (85 | ) |
| Changes in operating assets and liabilities:                                         |       |                                              |       |   |   |
| Accounts, notes and other receivables                                                |       | (2,261                                            | )          | (11,582 | ) |
| Inventories                                                                          |       | (22,778                                           | )          | 6,020 |   |
| Prepaid expenses and other assets                                                    |       | 63                                                |       | (423 | ) |
| Accounts payable                                                                     |       | (953                                              | )          | 1,014 |   |
| Other liabilities                                                                    |       | 73                                                |       | 1,619 |   |
| Cash flows from  operating activities                                                |       | (16,539                                           | )          | 4,389 |   |
|                                                                                 |       |                                              |       |   |   |
| Cash flows from  investing activities:                                               |       |                                              |       |   |   |
| Capital expenditures                                                                 |       | (2,394                                            | )          | (2,565 | ) |
| Proceeds from disposals of property, plant and  equipment                            |       | 90                                                |       | 331 |   |
| Cash flows from  investing activities                                                |       | (2,304                                            | )          | (2,234 | ) |
|                                                                                 |       |                                              |       |   |   |
| Cash flows from  financing activities:                                               |       |                                              |       |   |   |
| Borrowings under lines of credit                                                     |       | 81,656                                            |       | 37,401 |   |
| Repayments under lines of credit                                                     |       | (62,532                                           | )          | (37,779 | ) |
| Debt issuance costs                                                                  |       | —                                            |       | (4,145 | ) |
| Proceeds from issuance of debt                                                       |       | —                                            |       | 173,676 |   |
| Repayments of long-term debt                                                         |       | —                                            |       | (183,331 | ) |
| Premium paid on extinguishment of debt                                               |       | —                                            |       | (7,740 | ) |
| Proceeds from issuance of common stock                                               |       | 3,495                                             |       | 4,259 |   |
| Dividends paid                                                                       |       | (25,187                                           | )          | — |   |
| Excess tax benefits from stock-based awards                                          |       | 402                                               |       | 417 |   |
| Cash flows from  financing activities                                                |       | (2,166                                            | )          | (17,242 | ) |
|                                                                                 |       |                                              |       |   |   |
| Effect of  foreign exchange rate changes on cash                                     |       | 301                                               |       | 1,253 |   |
|                                                                                 |       |                                              |       |   |   |
| Decrease in cash                                                                     |       | (20,708                                           | )          | (13,834 | ) |
| Cash, beginning  of period                                                           |       | 30,409                                            |       | 34,952 |   |
|                                                                                 |       |                                              |       |   |   |
| Cash, end of  period                                                                 |       | $                                                 | 9,701      |   | $ | 21,118 |   |
| Supplemental  Cash Flow Information                                                  |       |                                              |       |   |   |
| Interest paid                                                                        |       | $                                                 | 6,680      |   | $ | 7,163 |   |
| Taxes paid                                                                           |       | $                                                 | 6,086      |   | $ | 3,249 |   |

 

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, 2007                               |       | $                 | 10         |                             | $          | 90,266                 |       | $                                           | 125,711    |                | $          | (10,550                               | )          | $ | (47,436 | ) | $ | 158,001 |   |
| Comprehensive  income:                                  |       |              |       |                             |       |                   |       |                                        |       |                |       |                                  |       |
| Net income                                              |       |              |       |                             |       | 4,583                  |       |                                        |       |                |       | 4,583                                 |       |
| Foreign currency translation adjustments                |       |              |       |                             |       |                   |       | 1,016                                       |       |                |       | 1,016                                 |       |
| Total  comprehensive income                             |       |              |       |                             |       |                   |       |                                        |       |                |       | 5,599                                 |       |
| FIN 48  adjustment                                      |       |              |       |                             |       | (2,757                 | )          |                                        |       |                |       | (2,757                                | )          |
| Dividends paid                                          |       |              |       |                             |       | (25,187                | )          |                                        |       |                |       | (25,187                               | )          |
| Exercise of  169,624 options for shares of common stock |       | 1                 |       | 1,723                            |       | (239                   | )          |                                        |       | 2,010               |       | 3,495                                 |       |
| Stock-based  compensation                               |       |              |       | 643                              |       |                   |       |                                        |       |                |       | 643                                   |       |
| Tax benefit of  options exercised                       |       |              |       | 726                              |       |                   |       |                                        |       |                |       | 726                                   |       |
| Balance, June  30, 2007                                 |       | $                 | 11         |                             | $          | 93,358                 |       | $                                           | 102,111    |                | $          | (9,534                                | )          | $ | (45,426 | ) | $ | 140,520 |   |

 

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**

**JUNE 30, 2007**

**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 and six months ended June 30, 2007 and 2006 are unaudited. In theopinion of management, these statements have been prepared on the same basis asthe audited consolidated financial statements as of and for the year endedDecember 31, 2006, and include all adjustments which are of a normal andrecurring nature, necessary for the fair presentation of financial position,results of operations and cash flows for the interim periods. We encourage youto read the consolidated and condensed consolidated financial statements inconjunction with the risk factors, consolidated financial statements and notes theretocontained in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006 filed with the Securities and Exchange Commission (“SEC”).The results of operations for the three and six months ended June 30, 2007 arenot necessarily indicative of the results that may be expected for the entireyear.

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

**(2)           Summary of Significant AccountingPolicies**

**Principlesof Consolidation** - Our consolidated financial statementsinclude the accounts of all direct and indirect subsidiaries, all of which arewholly owned, including the piano (“Steinway”) and band (“Conn-Selmer”)divisions. Intercompany balances have been eliminated in consolidation.

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

**IncomeTaxes** - We provide for income taxes using an asset andliability approach. We compute deferred income tax assets and liabilities fordifferences between the financial statement and tax bases of assets andliabilities that will result in taxable or deductible amounts in the futurebased on enacted tax laws and rates applicable to the periods in which thedifferences are expected to affect taxable income. We establish valuationallowances when necessary to reduce deferred tax assets to the amount that morelikely than not will be realized.

In July 2006, the FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes -an interpretation of FASB Statement No. 109” (“FIN 48”) which clarifiesthe accounting and disclosure for uncertain tax positions. This interpretationis effective for fiscal years beginning after December 15, 2006 and wehave implemented this interpretation as of January 1, 2007. Previously, wehad accounted for uncertain tax positions in accordance with Statement ofFinancial Accounting Standard (“SFAS”) No. 5, “Accounting for Contingencies” and recorded reserves foruncertain tax 

7

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positions that may havebecome payable in future years as a result of anticipated or ongoing examinationsby tax authorities.

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

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

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

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

As of June 30, 2007, there have been no material changes to theliability for uncertain tax positions.

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

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

A reconciliation of the weighted-averageshares used for the basic and diluted computations is as follows:
| ** **                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted-average  shares:              |       |                                                |       |                                              |       |   |   |   |   |
| For basic  earnings (loss) per share   |       | 8,520,949                                           |       | 8,331,652                                         |       | 8,470,049 |   | 8,242,011 |   |
| Dilutive effect  of stock options      |       | 141,456                                             |       | —                                            |       | 151,774 |   | — |   |
| For diluted  earnings (loss) per share |       | 8,662,405                                           |       | 8,331,652                                         |       | 8,621,823 |   | 8,242,011 |   |

 

All outstanding options to purchase shares of commonstock were included in the computation of diluted earnings per common share forthe three months ended June 30, 2007 because the exercise prices of theoutstanding options were less than the average market price of our commonshares. We did not include 20,000 options to purchase shares of common stock inthe computation of diluted earnings per share for the six months ended June 30,2007 because their impact would have been antidilutive. We did not include anyof the 628,200 

8

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outstandingoptions to purchase shares of common stock in the computation of diluted lossper common share for the three and six months ended June 30, 2006 because theirimpact would have been antidilutive.

**AccumulatedOther Comprehensive Loss** - Accumulated other comprehensive loss is comprised of foreigncurrency translation adjustments and pension and other post-retirementbenefits. The components of accumulated other comprehensive loss are asfollows:
| ** **               | ** ** | **Foreign Currency  Translation  Adjustments** | ** ** | **Pension & Other  Post-Retirement  Benefits** | ** ** | **Tax Impact of  Pension & Other  Post-Retirement  Benefits** | ** ** | **Accumulated Other  Comprehensive Loss** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                     |       |                                                |       |                                                         |       |                                                                                  |       |                                                |       |
| Balance January  1, 2007 |       | $                                                   | 3,809      |                                                         | $          | (23,235                                                                               | )          | $                                                   | 8,876      |   | $ | (10,550 | ) |
| Activity                 |       | 1,016                                               |       | —                                                       |       | —                                                                                |       | 1,016                                               |       |
| Balance June 30, 2007    |       | $                                                   | 4,825      |                                                         | $          | (23,235                                                                               | )          | $                                                   | 8,876      |   | $ | (9,534 | ) |

 

**Recent Accounting Pronouncements****-**On September15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No.157”). SFAS No. 157 defines fair value, establishes a framework for measuringfair value and expands disclosures about fair value measurements. SFAS No. 157is effective for financial statements issued for fiscal years beginning afterNovember 15, 2007. We are currently evaluating the requirements of SFAS No. 157and have not yet determined the impact, if any, its adoption will have on ourconsolidated financial position and results of operations.

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

**(3)           Inventories**
|                 | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
|            |       |                    |       |                        |       |
| Raw materials   |       | $                       | 18,504     |                        | $          | 20,989 |   |
| Work-in-process |       | 50,121                  |       | 49,316                      |       |
| Finished goods  |       | 108,519                 |       | 84,318                      |       |
|            |       | $                       | 177,144    |                        | $          | 154,623 |   |

 

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

Intangible assets other than goodwill and indefinite-lived trademarksare amortized on a straight-line basis over their estimated useful lives.Deferred financing costs are amortized over the repayment periods of theunderlying 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. Thechanges in carrying amounts of goodwill and trademarks are as follows:

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|                                      | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|
| Goodwill:                            |       |                   |       |                  |       |      |       |
| Balance, January  1, 2007            |       | $                      | 22,926     |                  | $          | 8,555     |       | $ | 31,481 |   |
| Foreign currency  translation impact |       | 342                    |       | —                |       | 342       |       |
| Balance, June  30, 2007              |       | $                      | 23,268     |                  | $          | 8,555     |       | $ | 31,823 |   |
|                                 |       |                   |       |                  |       |      |       |
| Trademarks:                          |       |                   |       |                  |       |      |       |
| Balance, January  1, 2007            |       | $                      | 7,847      |                  | $          | 5,824     |       | $ | 13,671 |   |
| Foreign currency  translation impact |       | 107                    |       | —                |       | 107       |       |
| Balance, June  30, 2007              |       | $                      | 7,954      |                  | $          | 5,824     |       | $ | 13,778 |   |

 

We also carry certain intangible assets that are amortized. Once fullyamortized, these assets are removed from both the gross and accumulatedamortization balance. These assets consist of the following:
|                                  | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                             |       |                    |       |                        |       |
| Gross deferred  financing costs: |       | $                       | 5,747      |                        | $          | 5,750 |   |
| Accumulated  amortization        |       | (1,630                  | )          | (1,287                      | )          |
| Deferred  financing costs, net   |       | $                       | 4,117      |                        | $          | 4,463 |   |
|                             |       |                    |       |                        |       |
| Gross covenants  not to compete: |       | $                       | 500        |                        | $          | 500 |   |
| Accumulated  amortization        |       | (288                    | )          | (238                        | )          |
| Covenants not to  compete, net   |       | $                       | 212        |                        | $          | 262 |   |

 

The weighted-average amortization period for deferred financing costsis seven years, and the weighted-average amortization period of covenants notto compete is five years. Total amortization expense, which includesamortization of deferred financing costs, is as follows:
|                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **            | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                  |       |                                                |       |                                              |       |   |   |   |   |
| Amortization  expense |       | $                                                   | 196        |                                              | $          | 197 |   | $ | 392 |   | $ | 426 |   |
|                       |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 

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The following table shows the total estimated amortization expense forthe remainder of 2007 and beyond:
|                                           | ** ** | **Amount** | ** ** |
|-------------------------------------------|------------|------------|------------|
| Estimated amortization expense: |       |       |       |
| 2007                                      |       | $          | 394        |   |
| 2008                                      |       | 788        |       |
| 2009                                      |       | 745        |       |
| 2010                                      |       | 665        |       |
| 2011                                      |       | 626        |       |
| 2012 and  thereafter                      |       | 1,111      |       |
| Total                                     |       | $          | 4,329      |   |

 

**(5)****                                 OtherCurrent Liabilities**
|                                                                          | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Accrued payroll  and related benefits                                    |       | $                       | 18,071     |                        | $          | 16,397 |   |
| Current portion  of pension and other postretirement benefit liabilities |       | 1,202                   |       | 1,461                       |       |
| Accrued warranty  expense                                                |       | 1,601                   |       | 1,888                       |       |
| Accrued interest                                                         |       | 4,082                   |       | 4,178                       |       |
| Deferred income                                                          |       | 5,991                   |       | 6,348                       |       |
| Environmental  liabilities                                               |       | 3,157                   |       | 3,232                       |       |
| Income and other  taxes payable                                          |       | 2,309                   |       | 3,012                       |       |
| Other accrued  expenses                                                  |       | 8,248                   |       | 8,132                       |       |
| Total                                                                    |       | $                       | 44,661     |                        | $          | 44,648 |   |

 

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

The accrued warranty expense activity for the six months ended June 30,2007 and 2006, and the year ended December 31, 2006 is as follows:
|                                      | ** ** | **June 30,  2007** | ** ** | **June 30,  2006** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Beginning  balance                   |       | $                       | 1,888      |                    | $          | 1,857                       |       | $ | 1,857 |   |
| Additions                            |       | 272                     |       | 534                     |       | 806                         |       |
| Claims and  reversals                |       | (580                    | )          | (550                    | )          | (849                        | )          |
| Foreign currency  translation impact |       | 21                      |       | 53                      |       | 74                          |       |
| Ending balance                       |       | $                       | 1,601      |                    | $          | 1,894                       |       | $ | 1,888 |   |

 

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**(6)           Long-Term Debt**

Ourlong-term debt consists of the following:
|                                        | ** ** | **June 30,  2007** | ** ** | **December 31,   2006** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|
| 7.00% Senior  Notes                    |       | $                       | 175,000    |                              | $          | 175,000 |   |
| Unamortized bond  discount             |       | (1,101                  | )          | (1,184                            | )          |
| Domestic line of  credit               |       | 20,850                  |       | —                            |       |
| Open account  loans, payable on demand |       | 2,889                   |       | 4,595                             |       |
| Total                                  |       | 197,638                 |       | 178,411                           |       |
| Less: current  portion                 |       | (2,889                  | )          | (4,595                            | )          |
| Long-term debt                         |       | $                       | 194,749    |                              | $          | 173,816 |   |

 

Scheduled paymentsof debt are as follows:
|                    | ** ** | **June 30,  2007** | ** ** |
|--------------------|------------|-------------------------|------------|
| Remainder of  2007 |       | $                       | 2,889      |   |
| 2008               |       | —                  |       |
| 2009               |       | —                  |       |
| 2010               |       | —                  |       |
| 2011               |       | 20,850                  |       |
| Thereafter         |       | 175,000                 |       |
| Total              |       | $                       | 198,739    |   |

 

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

 

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

Our common stock is comprised of two classes: Class A and Ordinary.With the exception of disparate voting power, both classes are substantiallyidentical. Each share of Class A common stock entitles the holder to 98 votes.Holders of Ordinary common stock are entitled to one vote per share. Class Acommon stock shall automatically convert to Ordinary common stock if, at any time,the Class A common stock is not owned by an original Class A holder. As of June30, 2007 our Chairman and our Chief Executive Officer collectively owned 100%of the Class A common shares, representing approximately 85% of the combinedvoting power of the Class A common stock and Ordinary common stock.

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

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

Prior to 2007, we hadreserved 721,750 treasury stock shares to issue under our 1996 Stock Plan, oncewe reached our registered share limitation. This plan has expired but still hasvested and unvested options outstanding. In early 2007 we reached ourregistered share limitation and have since issued 86,674 shares of treasurystock to cover options exercised. Since in most instances the average cost of thetreasury stock exceeded the price of the options exercised, the differencebetween the proceeds received and the average cost of the treasury stock issuedresulted in a reduction of retained earnings of $0.2 million during the sixmonths ended June 30, 2007.

We account for stock-based compensation arrangements in accordance withSFAS No. 123R, “Share-Based Payment,” which we adopted on January 1, 2006 usingthe modified prospective transition method. The compensation cost and theincome tax benefit recognized for these plans is as follows:
| ** **                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Compensation  cost included in            |       |                                                |       |                                              |       |   |   |   |   |
| basic and diluted income (loss) per share |       | $                                                   | 0.04       |                                              | $          | 0.03 |   | $ | 0.06 |   | $ | 0.06 |   |
| Stock-based  compensation expense         |       | 379                                                 |       | 295                                               |       | 643 |   | 566 |   |
| Income tax benefit                        |       | 58                                                  |       | 43                                                |       | 100 |   | 84 |   |
|                                           |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 

Wemeasured the fair value of options on their grant date, including the valuationof the option feature implicit in our Purchase Plan, using the Black-Scholes option-pricingmodel. The risk-free interest rate is based on the weighted-average of U.S.Treasury rates over the expected life of the stock option or the contractuallife of the option feature in the Purchase Plan. The expected life of a stockoption is based on historical data of similar option holders. We havesegregated our employees into two groups based on historical exercise andtermination behavior. The expected life of the option feature in the PurchasePlan is the same as its contractual 

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life. Expected volatilityis based on historical volatility of our stock over the expected life of theoption, as our options are not readily tradable.

Key assumptionsused to apply this pricing model to the Stock Plan are as follows:
|                                            | ** ** | **Three Months   Ended June 30,** | ** ** | **Six Months   Ended June 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                              | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Risk free  interest rate                   |       | 4.6%                                                  |       | 5.0%                                                |       | 4.6% |   | 5.0% |   |
| Weighted average  expected life (in years) |       | 7.2                                                   |       | 7.1                                                 |       | 8.1 |   | 7.1 |   |
| Expected  volatility of underlying stock   |       | 24.7%                                                 |       | 24.4%                                               |       | 25.2% |   | 24.4% |   |
| Expected  dividends                        |       | n/a                                                   |       | n/a                                                 |       | n/a |   | n/a |   |
| Weighted average fair  value               |       | $13.10                                                |       | $10.95                                              |       | $13.65 |   | $10.95 |   |

 

The followingtable sets forth information regarding the Stock Plan:
| ** **                      | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life  (in years)** | ** ** | **Aggregate  Intrinsic  Value  (not in 000s)** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at  January 1, 2007 |       | 594,500                     |       | $                                       | 20.98      |                                              |       |                                                     |       |   |
| Granted                         |       | 137,100                     |       | 32.45                                   |       |                                              |       |                                                     |       |
| Exercised                       |       | (169,624                    | )          | 20.61                                   |       |                                              |       |                                                     |       |
| Forfeited                       |       | (1,100                      | )          | 20.22                                   |       |                                              |       |                                                     |       |
| Outstanding at  June 30, 2007   |       | 560,876                     |       | $                                       | 23.89      |                                              | 6.8        |                                                     | $          | 6,159,976 |   |
|                            |       |                        |       |                                    |       |                                              |       |                                                     |       |
| Exercisable at  June 30, 2007   |       | 222,976                     |       | $                                       | 19.96      |                                              | 5.3        |                                                     | $          | 3,326,168 |   |

 

The total intrinsic value of the options exercisedduring the six months ended June 30, 2007 and 2006 was $2.3 million and $2.6million, respectively.

As of June 30, 2007, there was $2.5 million ofunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the Stock Plan. This compensation cost is expectedto be recognized over a period of 3.5 years.

The followingtables set forth information regarding the Purchase Plan:
| ** **                                                   | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                   | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Risk-free  interest rate                                     |       | 5.1%                                       |       | 3.8%                                          |       | 5.1% |   | 3.8% |   |
| Weighted-average  expected life of option feature (in years) |       | 1.0                                        |       | 1.0                                           |       | 1.0 |   | 1.0 |   |
| Expected  volatility of underlying stock                     |       | 24.7%                                      |       | 22.8%                                         |       | 24.7% |   | 22.8% |   |
| Expected  dividends                                          |       | n/a                                        |       | n/a                                           |       | n/a |   | n/a |   |
| Weighted-average  fair value of option feature               |       | $6.22                                      |       | $7.25                                         |       | $6.22 |   | $7.25 |   |

 

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|                                  | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | ** **                  | ** ** | ** **                              | ** ** | **(in years)**              | ** ** | **(not in 000s)**     | ** ** |
| Outstanding at  January 1, 2007  |       | 11,281                      |       | $                                       | 20.80      |                             |       |                            |       |   |
| Shares  subscribed               |       | 13,837                      |       | 20.80                                   |       |                             |       |                            |       |
| Exercised                        |       | —                      |       | —                                  |       |                             |       |                            |       |
| Canceled, forfeited,  or expired |       | (665                        | )          | 20.80                                   |       |                             |       |                            |       |
| Outstanding at  June 30, 2007    |       | 24,453                      |       | $                                       | 20.80      |                             | 0.1        |                            | $          | 344,298 |   |
|                                  |            |                             |            |                                         |            |                                  |            |                                 |            |  |  |

 

As reported in the consolidated statements of cashflows, cash received from option exercises under the Stock Plan for the periodsended June 30, 2007 and 2006 was $3.5 million and $4.3 million, respectively.SFAS No. 123R requires that cash flows from tax benefits resulting from taxdeductions in excess of the compensation cost recognized for stock-based awardsunder a fair value basis (excess tax benefits) be classified as a cash flowfrom financing activities. Accordingly, for the periods ended June 30, 2007 and2006, $0.4 million of excess tax benefits has been classified as an outflowfrom operating activities and an inflow from financing activities in thestatement of cash flows. For the periods ended June 30, 2007 and 2006, $0.7million and $0.9 million, respectively, of tax benefit from stock optionexercises is presented as a cash inflow from operating activities.

**(8)           Other Income, Net**
| ** **                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                  |       |                                                |       |                                              |       |   |   |   |   |
| West 57th  building income            |       | $                                                   | (1,164     | )                                                 | $          | (1,163 | ) | $ | (2,327 | ) | $ | (2,327 | ) |
| West 57th  building expenses          |       | 827                                                 |       | 820                                               |       | 1,638 |   | 1,638 |   |
| Foreign exchange  losses (gains), net |       | 218                                                 |       | (322                                              | )          | 453 |   | (672 | ) |
| Miscellaneous                         |       | 98                                                  |       | (30                                               | )          | 45 |   | (85 | ) |
| Other income, net                     |       | $                                                   | (21        | )                                                 | $          | (695 | ) | $ | (191 | ) | $ | (1,446 | ) |

 

**(9)           Commitments and ContingentLiabilities**

We are involved in certain legal proceedingsregarding environmental matters, which are described below. Further, in theordinary 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 be predicted with certainty, we believethat, based on our experience in dealing with these matters, their ultimateresolution will not have a material adverse impact on our business, financialcondition, results of operations or prospects.

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

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thehazardous substances at the site relative to that of other parties, the numberof responsible parties, the financial capabilities of other parties, andcontractual rights and obligations.

In this regard, we operate certain manufacturingfacilities which were previously owned by Philips Electronics North AmericaCorporation (“Philips”). When we purchased these facilities, Philips agreed toindemnify us for certain environmental matters resulting from activities ofPhilips occurring prior to December 29, 1988 (the “Environmental IndemnityAgreement”). To date, Philips has fully performed its obligations under theEnvironmental Indemnity Agreement, which terminates on December 29, 2008,however, we cannot assure investors that it will continue to do so in thefuture. Four matters covered by the Environmental Indemnity Agreement arecurrently pending. Philips has entered into Consent Orders with theEnvironmental Protection Agency (“EPA”) for one site and the North CarolinaDepartment of Environment, Health and Natural Resources for a second site,whereby Philips has agreed to pay required response costs. On October 22, 1998,we were joined as defendant in an action involving a third site formerlyoccupied by a business we acquired in Illinois. Philips has accepted thedefense of this action pursuant to the terms of the Environmental IndemnityAgreement. At the fourth site, which is a third party waste disposal site, fourConn-Selmer predecessor entities are among the potentially responsible parties(“PRP”) group. The PRP group has recently entered into a Consent Order with theEPA, the site owners, and the largest contributor. For two of the Conn-Selmerpredecessor entities, which were previously owned by Philips, this matter wastendered to Philips pursuant to the Environmental Indemnity Agreement. Philipsis a party to the Consent Order and has paid its share of the liability. Thefour Conn-Selmer predecessor entities paid approximately $0.1 million in 2006and settled this claim except for the possibility of a contingent remedialaction, should any additional environmental issues be discovered. We believethe likelihood of a contingency assessment to be remote and, our share of theliability, if any, would not be material.

In addition, we are continuing an existingenvironmental remediation plan at a facility we acquired in 2000. We estimateour costs, which approximate $0.8 million, over a 14-year period. We haveaccrued approximately $0.6 million for the estimated remaining cost of thisremediation program, which represents the present value total cost using adiscount rate of 4.54%. A summary of expected payments associated with thisproject is as follows:
|                    | ** ** | **Environmental  Payments** | ** ** |
|--------------------|------------|-----------------------------|------------|
| Remainder of  2007 |       | $                           | 25         |   |
| 2008               |       | 61                          |       |
| 2009               |       | 61                          |       |
| 2010               |       | 61                          |       |
| 2011               |       | 61                          |       |
| Thereafter         |       | 545                         |       |
| Total              |       | $                           | 814        |   |

 

In 2004, we acquired two manufacturing facilitiesfrom G. Leblanc Corporation, now Grenadilla, Inc. (“Grenadilla”), for whichenvironmental remediation plans had already been established. In connectionwith the acquisition, we assumed the existing accrued liability ofapproximately $0.8 million for the cost of these remediation activities. Basedon a review of past and ongoing investigatory and remedial work by ourenvironmental consultants, and discussions with state regulatory officials, aswell as recent sampling, we estimate the remaining costs of such remedial plansto be $2.5 million. Pursuant to the purchase and sale agreement, we have soughtindemnification from Grenadilla for anticipated costs above the originalestimate in the amount of $2.5 million. We filed a claim against the escrow andrecorded a corresponding receivable for

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thisamount in prepaid expenses and other current assets in our consolidated balancesheet. We have reached an agreement with Grenadilla whereby futureenvironmental costs will be paid directly out of the escrow. Should the escrowbe reduced to zero, we would seek reimbursement from Grenadilla for theseadditional costs. However, we cannot be assured that we will be able to recoversuch costs.

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

**(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 netperiodic pension cost for these plans are as follows:
| ** **                          | ** ** | **Domestic Plans**                        | ** ** | **Foreign Plans**                         | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
| ** **                          | ** ** | **2007**                                       | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                        |       | $                                              | 246        |                                           | $          | 190 |   | $ | 201 |   | $ | 215 |   |
| Interest cost                       |       | 801                                            |       | 690                                            |       | 404 |   | 366 |   |
| Expected return on plan  assets     |       | (1,234                                         | )          | (1,018                                         | )          | (92 | ) | (77 | ) |
| Amortization of prior  service cost |       | 108                                            |       | 105                                            |       | — |   | — |   |
| Recognized loss                     |       | 148                                            |       | 146                                            |       | 82 |   | — |   |
| Net periodic benefit  cost          |       | $                                              | 69         |                                           | $          | 113 |   | $ | 595 |   | $ | 504 |   |

 
| ** **                          | ** ** | **Domestic Plans**                      | ** ** | **Foreign Plans**                       | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                          | ** ** | **Six Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **                          | ** ** | **2007**                                     | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                        |       | $                                            | 471        |                                         | $          | 433 |   | $ | 399 |   | $ | 422 |   |
| Interest cost                       |       | 1,615                                        |       | 1,475                                        |       | 798 |   | 717 |   |
| Expected return on plan  assets     |       | (2,484                                       | )          | (2,169                                       | )          | (182 | ) | (151 | ) |
| Amortization of prior  service cost |       | 216                                          |       | 215                                          |       | — |   | — |   |
| Recognized loss                     |       | 276                                          |       | 322                                          |       | 152 |   | — |   |
| Net periodic benefit cost           |       | $                                            | 94         |                                         | $          | 276 |   | $ | 1,167 |   | $ | 988 |   |

 

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We providepostretirement health care and life insurance benefits to certain eligiblehourly retirees and their dependents. The components of net periodicpostretirement benefit cost for these benefits are as follows:
| ** **                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                       | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                           |       | $                                              | 11         |                                         | $          | 13 |   | $ | 21 |   | $ | 25 |   |
| Interest cost                          |       | 35                                             |       | 34                                           |       | 69 |   | 68 |   |
| Amortization of  transition obligation |       | 9                                              |       | 8                                            |       | 18 |   | 17 |   |
| Recognized  (gain) loss                |       | (42                                            | )          | 12                                           |       | (83 | ) | 25 |   |
| Net  postretirement benefit cost       |       | $                                              | 13         |                                         | $          | 67 |   | $ | 25 |   | $ | 135 |   |

 

Wehave not made any contributions to our domestic pension plan this year, butanticipate contributing approximately $2.0 million to this plan during 2007.Our anticipated contributions to the pension plan of our U.K. subsidiaryapproximate $0.2 million for the current year. As of June 30, 2007, we havemade contributions of $0.1 million to this plan. The pension plans of ourGerman entities do not hold any assets and use operating cash to payparticipant benefits as they become due. Expected 2007 benefit payments underthese plans are $1.2 million. For the six months ended June 30, 2007, we havemade benefit payments of $0.6 million under these plans.

** (11)        SegmentInformation**

We have identified two reportable segments: the piano segment and theband & orchestral instrument segment. We consider these two segmentsreportable as they are managed separately and the operating results of eachsegment are separately reviewed and evaluated by our senior management on aregular basis. Management and the chief operating decision maker use incomefrom operations as a meaningful measurement of profit or loss for the segments.Income from operations for the reportable segments includes certain corporatecosts allocated to the segments based primarily on revenue, as well asintercompany profit. Amounts reported as “Other & Elim” include thosecorporate costs that were not allocated to the reportable segments and the remainingintercompany profit elimination.

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The followingtables present information about our operating segments for the three and sixmonths ended June 30, 2007 and 2006:
| ** **                                 | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|------------|------------|
| **Three months ended 2007** | ** ** | **U.S.**               | ** ** | **Germany**           | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to  external customers           |       | $                      | 24,804     |                  | $          | 15,761    |       | $          | 13,817     |   | $ | 54,382 |   | $ | 36,173 |   | $ | 1,702 |   | $ | 37,875 |   | $ | — |   | $ | 92,257 |   |
| Income (loss)  from operations             |       | 926                    |       | 4,962                 |       | 1,639     |       | 7,527      |       | 1,068 |   | 171 |   | 1,239 |   | (717 | ) | 8,049 |   |
|                                            |            |                        |            |                       |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                 | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|------------|------------|
| **Three months ended 2006** | ** ** | **U.S.**               | ** ** | **Germany**           | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to  external customers           |       | $                      | 29,912     |                  | $          | 14,436    |       | $          | 7,316      |   | $ | 51,664 |   | $ | 38,958 |   | $ | 1,801 |   | $ | 40,759 |   | $ | — |   | $ | 92,423 |   |
| Income (loss)  from operations             |       | 2,246                  |       | 3,528                 |       | 284       |       | 6,058      |       | (5,933 | ) | 46 |   | (5,887 | ) | (566 | ) | (395 | ) |
|                                            |            |                        |            |                       |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                               | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|------------|------------|
| **Six months ended 2007** | ** ** | **U.S.**               | ** ** | **Germany**           | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to  external customers         |       | $                      | 54,432     |                  | $          | 29,271    |       | $          | 23,604     |   | $ | 107,307 |   | $ | 74,952 |   | $ | 3,430 |   | $ | 78,382 |   | $ | — |   | $ | 185,689 |   |
| Income (loss)  from operations           |       | 2,868                  |       | 8,563                 |       | 2,432     |       | 13,863     |       | 169 |   | 224 |   | 393 |   | (1,840 | ) | 12,416 |   |
|                                          |            |                        |            |                       |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                               | ** ** | **Piano Segment** | ** ** | **Band Segment** | ** ** | **Other** | ** ** | **Consol** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|-----------|------------|------------|------------|
| **Six months ended 2006** | ** ** | **U.S.**               | ** ** | **Germany**           | ** ** | **Other** | ** ** | **Total**  | ** ** | **U.S.** | ** ** | **Europe** | ** ** | **Total** | ** ** | **& Elim** | ** ** | **Total** | ** ** |
| Net sales to  external customers         |       | $                      | 54,567     |                  | $          | 24,124    |       | $          | 15,101     |   | $ | 93,792 |   | $ | 90,216 |   | $ | 3,609 |   | $ | 93,825 |   | $ | — |   | $ | 187,617 |   |
| Income (loss) from  operations           |       | 2,669                  |       | 5,107                 |       | 733       |       | 8,509      |       | (1,653 | ) | (40 | ) | (1,693 | ) | (1,700 | ) | 5,116 |   |
|                                          |            |                        |            |                       |            |           |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

**Introduction**

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

**CriticalAccounting Policies**

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

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

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

**Accounts Receivable**

We establish reserves for accounts receivable and notes receivable(including recourse reserves when our customers have financed notes receivablewith a third party). We review overall collectibility trends and customercharacteristics such as debt leverage, solvency, and outstanding balances inorder to develop our reserve estimates. Historically, a large portion of oursales at both our piano and band divisions have been generated by our top 15customers. As a result, we experience some inherent concentration of creditrisk in our accounts receivable due to its composition and the relativeproportion of large customer receivables to the total. This is especially trueat our band division, which typically has the majority of our consolidatedaccounts receivable balance. We consider the credit health and solvency of ourcustomers when developing our receivable reserve estimates.

20

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**Inventory**

We establish inventory reserves for items such aslower-of-cost-or-market and obsolescence. We review inventory levels on adetailed basis, concentrating on the age and amounts of raw materials,work-in-process, and finished goods, as well as recent usage and sales datesand quantities to help develop our estimates. Ongoing changes in our businessstrategy, including a shift from batch processing to single piece productionflow, coupled with increased offshore sourcing, could affect our ability to realizethe current cost of our inventory, and are considered by management whendeveloping our estimates. We also establish reserves for anticipatedbook-to-physical adjustments based upon our historical level of adjustmentsfrom our annual physical inventories. We cost our inventory using standardcosts. Accordingly, variances between actual and standard costs that are notabnormal in nature are capitalized into inventory and released based oncalculated inventory turns.

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

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

**Warranty**

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

**Long-lived Assets**

Wereview long-lived assets, such as property, plant, and equipment, forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. We measure recoverabilityby comparing the carrying amount of the asset to the estimated future cashflows the asset is expected to generate.

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

**Pensions and OtherPostretirement Benefit Costs**

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

**Income Taxes**

A valuation allowance has been recorded for certain deferred tax assetsrelated to foreign tax credit carryforwards and state net operating losscarryforwards. When assessing the realizability of deferred tax assets, weconsider whether it is more likely than not that the deferred tax assets willbe fully realized. The ultimate realization of these assets is dependent upon manyfactors, including the ratio of foreign source 

21

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

A liability has been recorded for uncertain tax positions. Whenanalyzing these positions, we consider the probability of various outcomeswhich could result from examination, negotiation, or settlement with varioustaxing authorities. The final outcome on these positions could differsignificantly from our original estimates due to expiring statues oflimitations, availability of detailed historical data, the results of audits orexaminations conducted by taxing authorities or agents that vary frommanagement’s anticipated results, identification of new tax contingencies, therelease of applicable administrative tax guidance, management’s decision tosettle or appeal assessments, or the rendering of court decisions affecting ourestimates of tax liabilities, as well as other factors.

**Stock-Based Compensation**

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

**Environmental Liabilities**

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

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

**Forward-LookingStatements**

Certain statements contained in this document are “forward-lookingstatements” within the meaning of Section 21E of the Securities and ExchangeAct of 1934, as amended. These forward-looking statements represent our presentexpectations or beliefs concerning future events. We caution that suchstatements are necessarily based on certain assumptions which are subject torisks and uncertainties which could cause actual results to differ materiallyfrom those indicated in this report. These risk factors include, but are notlimited to, the following: changes in general economic conditions; geopoliticalevents; increased competition; work stoppages and slowdowns; impact of dealerconsolidations on orders; ability of new workers to meet desired productionlevels; exchange rate fluctuations; variations in the mix of products sold; marketacceptance of new product and distribution strategies; ability of suppliers tomeet demand; concentration of credit risk; fluctuations in effective tax ratesresulting from shifts in sources of income; and the ability to successfullyintegrate and operate acquired businesses. Further information on these riskfactors is included in Item 1A of 

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our Annual Report on Form 10-K for the year endedDecember 31, 2006. We encourage you to read those descriptions carefully. Wecaution investors not to place undue reliance on the forward-looking statementscontained in this report. These statements, like all statements contained inthis report, speak only as of the date of this report (unless another date isindicated) and we undertake no obligation to update or revise the statementsexcept as required by law.

**Results of Operations**

Three Months EndedJune 30, 2007 Compared to Three Months Ended June 30, 2006
| ** **                         | ** ** | **Three Months Ended June 30,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **2007**                                            | ** ** | ** ** | ** ** | **2006**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
|                               |       |                                                |       |       |       |       |       |   |   |   |   |   |   |
| Net sales                          |       |                                                |       |       |       |       |       |   |   |   |   |   |   |
| Band                               |       | $                                                   | 37,875     |       |       |       | $          | 40,759 |   |   |   | (2,884 | ) | (7.1 | ) |
| Piano                              |       | 54,382                                              |       |       |       | 51,664     |       |   |   | 2,718 |   | 5.3 |   |
| Total sales                        |       | 92,257                                              |       |       |       | 92,423     |       |   |   | (166 | ) | (0.2 | ) |
|                               |       |                                                |       |       |       |       |       |   |   |   |   |   |   |
| Cost of sales                      |       |                                                |       |       |       |       |       |   |   |   |   |   |   |
| Band                               |       | 29,274                                              |       |       |       | 35,324     |       |   |   | (6,050 | ) | (17.1 | ) |
| Piano                              |       | 34,418                                              |       |       |       | 33,950     |       |   |   | 468 |   | 1.4 |   |
| Total cost of  sales               |       | 63,692                                              |       |       |       | 69,274     |       |   |   | (5,582 | ) | (8.1 | ) |
|                               |       |                                                |       |       |       |       |       |   |   |   |   |   |   |
| Gross profit                       |       |                                                |       |       |       |       |       |   |   |   |   |   |   |
| Band                               |       | 8,601                                               |       | 22.7%      |       | 5,435      |       | 13.3% |   | 3,166 |   | 58.3 |   |
| Piano                              |       | 19,964                                              |       | 36.7%      |       | 17,714     |       | 34.3% |   | 2,250 |   | 12.7 |   |
| Total gross  profit                |       | 28,565                                              |       |       |       | 23,149     |       |   |   | 5,416 |   | 23.4 |   |
|                               |       | 31.0%                                               |       |       |       | 25.0%      |       |   |   |   |   |   |   |
|                               |       |                                                |       |       |       |       |       |   |   |   |   |   |   |
| Operating  expenses                |       | 20,516                                              |       |       |       | 23,544     |       |   |   | (3,028 | ) | (12.9 | ) |
|                               |       |                                                |       |       |       |       |       |   |   |   |   |   |   |
| Income from  operations            |       | 8,049                                               |       |       |       | (395       | )          |   |   | 8,444 |   | (2,137.7 | ) |
|                               |       |                                                |       |       |       |       |       |   |   |   |   |   |   |
| Other income,  net                 |       | (21                                                 | )          |       |       | (695       | )          |   |   | 674 |   | (97.0 | ) |
| Loss on  extinguishment of debt    |       | —                                              |       |       |       | 3,063      |       |   |   | (3,063 | ) | (100.0 | ) |
| Net interest  expense              |       | 2,523                                               |       |       |       | 3,152      |       |   |   | (629 | ) | (20.0 | ) |
| Non-operating  expenses            |       | 2,502                                               |       |       |       | 5,520      |       |   |   | (3,018 | ) | (54.7 | ) |
|                               |       |                                                |       |       |       |       |       |   |   |   |   |   |   |
| Income (loss)  before income taxes |       | 5,547                                               |       |       |       | (5,915     | )          |   |   | 11,462 |   | (193.8 | ) |
|                               |       |                                                |       |       |       |       |       |   |   |   |   |   |   |
| Income tax  provision (benefit)    |       | 2,394                                               |       | 43.2%      |       | (5,054     | )          | 85.4% |   | 7,448 |   | (147.4 | ) |
|                               |       |                                                |       |       |       |       |       |   |   |   |   |   |   |
| Net income  (loss)                 |       | $                                                   | 3,153      |       |       |       | $          | (861 | ) |   |   | 4,014 |   | (466.2 | ) |

 

**Overview***-*Salesat our piano division increased over the prior year period due primarily to alarge institutional sale of 55 Steinway grand units by our Europeandivision.  Sales of mid-priced pianolines also improved as a result of increased demand for Essex models.  Piano margins also improved, largely as aresult of higher margin sales overseas. Band division revenues were adverselyimpacted by reduced order volume caused 

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by previous dealerbankruptcies, the resultant dealer consolidations, and inventory levelmanagement by our dealers. However, band division margins improved considerablydue in part to improved production at our Elkhart, Indiana brass instrumentmanufacturing facility, which is now achieving desired production levels onmost professional brass instruments, and has exceeded pre-strike levels inthese instrument categories.

**Net Sales** –**Netsales remained relatively stable, as the decrease in band division revenues wasoffset by improved piano division revenues. Management estimates that banddivision revenues decreased $5.5 million as a result of the aforementioned dealerconsolidations.  This affected allinstrument categories, contributing to a 13% decrease in brass and woodwindunit shipments and a 27% decrease in total unit shipments for the period.  The revenue decrease was partially mitigatedby improved professional level trumpet and trombone sales, which were madepossible by improved production levels at our Elkhart, Indiana brass instrumentmanufacturing facility. Piano division revenues improved $2.7 million, due toimproved wholesale shipments of Essex pianos and a large institutional salemade by our European division, which caused a 23% increase in Steinway grandunit shipments overseas. $1.6 million attributable to changes in foreigncurrency exchange rates also contributed to the revenue increase. Domestically,revenues suffered as a result of a 41% decrease in Steinway grand unitshipments and a 28% decrease in domestic Boston unit shipments. However, salesfrom the year-ago period were exceptionally high due to the special promotionoffered to dealers in conjunction with the Essex model re-launch.

**GrossProfit***-* Gross profitimproved $5.4 million due to higher margins at our band division and highersales and margins at our piano division. Band division margins increasedlargely due to lower inventory reserve charges, which were $2.3 million higherin the year-ago period. A higher mix ofprofessional brass instruments, improved margins on imported student brassinstruments, and a $0.3 million reduction in the unabsorbed overhead at theElkhart brass instrument manufacturing facility also contributed to the marginimprovement. The increase in piano margins is attributable to the Europeandivision, which had a large increase in Steinway grand sales and lowerproduction variances. Domestically, margins improved despite the shift in mixtoward lower margin mid-priced models, as the prior period included the adverseimpact of a factory shutdown, which was taken to control inventory levels.

**Operating Expenses** - Operatingexpenses decreased $3.0 million due to $3.9 million lower bad debtexpense.  Bad debt expenses wereatypically high in the year-ago period due to the bankruptcy filing of one ofour large dealers. Increased promotional and bonus expenses at our Europeanpiano division accounted for the remainder of the change in operating expenses.

**Non-operating Expenses** -Non-operating expenses decreased $3.0 million due to the absence of $3.1million in debt extinguishment costs, which occurred as a result of the call ofour remaining $51.6 million of 8.75% Senior Notes in April 2006. The $0.6million decrease in net interest expense, which resulted largely from our debtrefinancing activities, was offset by a shift from foreign exchange gains toforeign exchange losses of a comparable amount.

**Income Taxes** -**Our effective tax rate of 43.2% is significantly lower thanthe year-ago period due to the forecasted ratio of domestic income to foreignsource income. In the prior year, domestic income was abnormally low due to theloss on extinguishment of debt associated with the bond refinancing, theadverse impact of the lost income resulting from the strike at our Elkhartbrass instrument manufacturing facility, and additional reserve charges takenin the prior period. The impact of changes in uncertain tax positionliabilities, which we recorded in the income tax provision per FIN 48, was notmaterial to the effective tax rate.

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**Resultsof Operations**

Six Months EndedJune 30, 2007 Compared to Six Months Ended June 30, 2006
| ** **                         | ** ** | **Period Ended June 30,** | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **2007**                                 | ** ** | ** ** | ** ** | **2006**   | ** ** | ** ** | ** ** | **$** | ** ** | **%** | ** ** |
|                               |       |                                     |       |       |       |       |       |   |   |   |   |   |   |
| Net sales                          |       |                                     |       |       |       |       |       |   |   |   |   |   |   |
| Band                               |       | $                                        | 78,382     |       |       |       | $          | 93,825 |   |   |   | (15,443 | ) | (16.5 | ) |
| Piano                              |       | 107,307                                  |       |       |       | 93,792     |       |   |   | 13,515 |   | 14.4 |   |
| Total sales                        |       | 185,689                                  |       |       |       | 187,617    |       |   |   | (1,928 | ) | (1.0 | ) |
|                               |       |                                     |       |       |       |       |       |   |   |   |   |   |   |
| Cost of sales                      |       |                                     |       |       |       |       |       |   |   |   |   |   |   |
| Band                               |       | 61,579                                   |       |       |       | 76,329     |       |   |   | (14,750 | ) | (19.3 | ) |
| Piano                              |       | 68,305                                   |       |       |       | 62,147     |       |   |   | 6,158 |   | 9.9 |   |
| Total cost of  sales               |       | 129,884                                  |       |       |       | 138,476    |       |   |   | (8,592 | ) | (6.2 | ) |
|                               |       |                                     |       |       |       |       |       |   |   |   |   |   |   |
| Gross profit                       |       |                                     |       |       |       |       |       |   |   |   |   |   |   |
| Band                               |       | 16,803                                   |       | 21.4%      |       | 17,496     |       | 18.6% |   | (693 | ) | (4.0 | ) |
| Piano                              |       | 39,002                                   |       | 36.3%      |       | 31,645     |       | 33.7% |   | 7,357 |   | 23.2 |   |
| Total gross  profit                |       | 55,805                                   |       |       |       | 49,141     |       |   |   | 6,664 |   | 13.6 |   |
|                               |       | 30.1%                                    |       |       |       | 26.2%      |       |   |   |   |   |   |   |
|                               |       |                                     |       |       |       |       |       |   |   |   |   |   |   |
| Operating  expenses                |       | 43,389                                   |       |       |       | 44,025     |       |   |   | (636 | ) | (1.4 | ) |
|                               |       |                                     |       |       |       |       |       |   |   |   |   |   |   |
| Income from  operations            |       | 12,416                                   |       |       |       | 5,116      |       |   |   | 7,300 |   | 142.7 |   |
|                               |       |                                     |       |       |       |       |       |   |   |   |   |   |   |
| Other income,  net                 |       | (191                                     | )          |       |       | (1,446     | )          |   |   | 1,255 |   | (86.8 | ) |
| Loss on  extinguishment of debt    |       | —                                   |       |       |       | 9,674      |       |   |   | (9,674 | ) | 100.0 |   |
| Net interest  expense              |       | 4,675                                    |       |       |       | 5,900      |       |   |   | (1,225 | ) | (20.8 | ) |
| Non-operating  expenses            |       | 4,484                                    |       |       |       | 14,128     |       |   |   | (9,644 | ) | (68.3 | ) |
|                               |       |                                     |       |       |       |       |       |   |   |   |   |   |   |
| Income (loss)  before income taxes |       | 7,932                                    |       |       |       | (9,012     | )          |   |   | 16,944 |   | (188.0 | ) |
|                               |       |                                     |       |       |       |       |       |   |   |   |   |   |   |
| Income tax  provision (benefit)    |       | 3,349                                    |       | 42.2%      |       | (6,309     | )          | 70.0% |   | 9,658 |   | (153.1 | ) |
|                               |       |                                     |       |       |       |       |       |   |   |   |   |   |   |
| Net income  (loss)                 |       | $                                        | 4,583      |       |       |       | $          | (2,703 | ) |   |   | 7,286 |   | (269.6 | ) |

 

**Overview***-*Salesat our piano division significantly surpassed the prior year period due toimproved demand overseas for Steinways and the re-launched Essex line ofpianos. Piano margins also improved, due largely to higher margin sales at ourEuropean division. During the first half of 2007, band division revenues fromprofessional brass instrument sales were negatively impacted by approximately $4.7million ($7.2 million decrease in the first quarter, offset by the $2.4 millionimprovement in the second quarter) caused by the strike at our Elkhart, Indianabrass instrument manufacturing facility, which began on April 1, 2006. Althoughwe 

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continue negotiationswith the union, we currently have a sufficient number of replacement workers tomeet our operational needs. We are currently producing most professionalinstruments at desired production levels, and have exceeded pre-strike levelson many instruments.

**Net Sales** -**Thedecrease in net sales of $1.9 million occurred despite the 14% increase inpiano revenues, due largely to reduced order volume at the band division.Dealer bankruptcies, the resultant dealer consolidations, and inventory levelmanagement by our dealers caused a decrease in revenue of $7.5 million.Percussion and certain large brass instrument sales also lagged behind theyear-ago period. Lastly, the strike at our Elkhart, Indiana brass instrumentplant adversely impacted revenues by $4.7 million. These factors caused adecrease in unit shipments of 22% over the year-ago period. Domestic pianosales were on par with the prior year period as the impact of a decrease inSteinway grand unit shipments of 19% was offset by mid-priced piano lineshipment improvement of 57%. Overseas, revenues increased $13.7 million, ofwhich $3.1 million is attributable to foreign currency exchange rates.Increased demand at the wholesale level, resulting in part from a largeinstitutional sale and shipments of our Essex pianos, caused the remainingimprovement. Overseas Steinway grand unit shipments rose 20%, and mid-pricedpiano line shipments rose 179%.

**Gross Profit***-*Gross profit improved $6.7 million due to higher sales and margins at our pianodivision. Although band division margins were significantly better (21.4% asopposed to 18.6%) due to improved margins on many student instruments andcertain brass instruments, most notably trumpets and trombones, this was notenough to offset the impact of the band revenue decline for the period. Pianodivision margins improved both domestically and overseas.  Our overseas divisions benefited from strongsales of higher-margin units, as well as favorable production variances at ourGerman manufacturing facility. Domestic margin improved due to the absence of thenegative impact of three weeks of plant shutdowns, which were taken in the yearago period to reduce inventory levels.

**Operating Expenses** - Operatingexpenses decreased $0.6 million, largely due to the $3.8 million decrease inbad debt expense.  Offsetting this was anincrease in sales and marketing expense of $1.4 million, which resulted fromthe introduction of a limited edition piano by our domestic division, as wellas promotional expenses at our European division.  We reserved $0.5 million against the $2.0million escrowed deposit relating to a terminated asset purchase agreement,which caused most of the $0.9 million increase in other operating expenses. Theremaining increase in operating expenses is attributable to legal fees andsalaries due to increased headcount at the band division, as well as $0.6million in foreign currency exchange rate impact.

**Non-operating Expenses** -Non-operating expenses decreased $9.6 million due to the absence of $9.7 millionin debt extinguishment costs, which occurred as a result of our Senior Noterefinancing in February 2006. The $1.2 million decrease in net interestexpense, which resulted largely from our debt refinancing activities, wasoffset by a shift from foreign exchange gains to foreign exchange losses of acomparable amount.

**Income Taxes** -**Our effective tax rate is significantly lower than theyear-ago period due to changes in the mix of domestic income, which wasatypically low in the prior period, to foreign source income. Currently, weexpect our rate to be more reflective of applicable federal and state statutorytax rates. The impact of changes in uncertain tax position liabilities, which arerecorded in the income tax provision per FIN 48, was not material to theeffective tax rate.

**Liquidityand Capital Resources**

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

 

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Our statements ofcash flows for the six months ended June 30, 2007 and 2006 are summarized asfollows:
|                                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net income (loss):                                                                  |       | $        | 4,583      |     | $          | (2,703     | )          | $ | 7,286 |   |
| Changes in  operating assets and liabilities                                        |       | (25,856  | )          | (3,352   | )          | (22,504    | )          |
| Other  adjustments to reconcile net income (loss) to cash from operating activities |       | 4,734    |       | 10,444   |       | (5,710     | )          |
| Cash flows from  operating activities                                               |       | (16,539  | )          | 4,389    |       | (20,928    | )          |
|                                                                                |       |     |       |     |       |       |       |
| Cash flows from  investing activities                                               |       | (2,304   | )          | (2,234   | )          | (70        | )          |
|                                                                                |       |     |       |     |       |       |       |
| Cash flows from  financing activities                                               |       | (2,166   | )          | (17,242  | )          | 15,076     |       |
|                                                                                     |            |          |            |          |            |            |            |  |  |  |

 

Cash flows generated from operating activitiesdecreased $20.9 million due primarily to the $28.8 million increase in cashused for inventory.  The increase ininventory is comprised mostly of mid-priced pianos, certain brass and woodwindinstruments, and drums. Cash used by accounts receivable decreased $9.3 milliondespite the cyclical increase in accounts receivable at our band division dueto lower sales, stricter credit policies, and focused cash collections.Adjustments to cash flows from operating activities were atypically high in theprior year due to the $9.7 million adjustment for the loss on extinguishment ofdebt and provision for doubtful accounts.

The use of cashfor investing activities decreased $0.1 million, as the reduction in capitalexpenditures was offset by lower proceeds from sales of property, plant, andequipment. We continue to expect capital expenditures to be in the range of$5.0 to $7.0 million in 2007.

Cash flows fromfinancing activities increased $15.1 million as compared to the year-agoperiod.  In 2006, we refinanced ourSenior Notes, which generated proceeds of $173.7 million, offset by therepayment of our acquisition term loan of $16.6 million and extinguishment of$166.2 of our 8.75% Senior Note debt. Premiums paid on the debt extinguishmentof $7.7 million and costs related to the 7.00% Senior Note offering of $4.1million also offset our bond refinancing proceeds. In 2007, we used asignificant portion of our cash to pay a $25.2 million dividend in March 2007,and have made borrowings of $20.9 million on our domestic revolver.

**Borrowing Activities and Availability** - We have a domestic creditfacility with a syndicate of domestic lenders (the “Credit Facility”). TheCredit Facility provides us with a potential borrowing capacity of $110.0million in revolving credit loans, and expires on September 29, 2011. It alsoprovides for periodic borrowings at either London Interbank Offering Rate (“LIBOR”)plus a range from 1.25% to 1.75%, or as-needed borrowings at an alternate baserate, plus a range from 0.00% to 0.25%; both ranges depend upon borrowingavailability at the time of borrowing. The Credit Facility is collateralized byour domestic accounts receivable, inventory, and fixed assets. As of June 30,2007, there was $20.9 million in revolving credit loans outstanding, as we usedborrowings on the Credit Facility to partially fund our dividend payment andthe March interest payment on our Senior Notes. As a result, the remainingavailability based on eligible accounts receivable and inventory balances wasapproximately $87.8 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 €17.4 million ($23.5million at the June 30,2007 exchange rate), net of borrowing restrictions of €0.7 million ($1.0million at the June 30, 2007exchange rate) and are payable on demand. These borrowings are collateralizedby most of the assets of the borrowing subsidiaries. A portion of the loans canbe converted into a maximum of £0.5 million ($1.0 million at the June 30, 2007 exchange rate) for useby our U.K. branch and ¥300 million ($2.4 million at the June 30, 2007 exchange rate) for use by our

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Japanese subsidiary. OurChinese subsidiary also has the ability to convert the equivalent of up to €2.5million into U.S. dollars or Chinese yuan ($3.4 million at the June 30, 2007 exchange rate). Euroloans bear interest at rates of Euro Interbank Offered Rate (“EURIBOR”) plus amargin determined at the time of borrowing. Margins fluctuate based on the loanamount and the borrower’s bank rating. The remaining demand borrowings bearinterest at fixed margins at rates of LIBOR plus 0.8% for British pound loans(no outstanding borrowings at June 30,2007), LIBOR plus 1.0% for U.S. dollar loans of our Chinese subsidiary (outstandingborrowings at 6.4% at June 30, 2007),and Tokyo Interbank Offered Rate (“TIBOR”) plus 0.9% for Japanese yen loans(borrowings at 1.6% at June 30, 2007).We had $1.3 million outstanding as of June30, 2007 on these credit facilities.

Our Japanesesubsidiary also maintains a separate revolving loan agreement that providesadditional borrowing capacity of up to ¥460 million ($3.7 million at the June 30, 2007 exchange rate) based oneligible inventory balances. The revolving loan agreement bears interest at anaverage 30-day TIBOR rate plus 0.9% (outstanding borrowings at 1.5% at June 30, 2007) and expires on January31, 2010. As of June 30, 2007,we had $1.6 million outstanding on this revolving loan agreement.

At June 30, 2007,our total outstanding indebtedness amounted to $198.7 million, consisting of$175.0 million of 7.00% Senior Notes, $20.9 million on the Credit Facility, and$2.9 million of notes payable to foreign banks.

All of our debt agreements contain covenantsthat place certain restrictions on us, including our ability to incuradditional indebtedness, to make investments in other entities, and limitationson cash dividend payments. We were in compliance with all such covenants as ofJune 30, 2007 and do not anticipate any compliance issues in the future. Ourbond indenture contains limitations, based on net income (among other things),on the amount of discretionary repurchases we may make of our Ordinary commonstock. Our intent and ability to repurchase additional Ordinary common stockeither directly from shareholders or on the open market is directly affected bythis limitation.

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

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

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**ContractualObligations** - Thefollowing table provides a summary of our contractual obligations at June 30,2007.
|                                  | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                 | ** ** | **Less than   1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **More than   5 years** | ** ** |
|                             |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt  (1)              |       | $                                         | 286,276    |   | $ | 16,556 |   | $ | 27,240 |   | $ | 47,063 |   | $ | 195,417 |   |
| Capital leases                   |       | 46                                        |       | 15 |   | 30 |   | 1 |   | — |   |
| Operating leases  (2)            |       | 268,190                                   |       | 5,169 |   | 9,132 |   | 8,583 |   | 245,306 |   |
| Purchase obligations(3)          |       | 22,607                                    |       | 22,581 |   | 24 |   | 2 |   | — |   |
| Other long-term  liabilities (4) |       | 39,238                                    |       | 4,848 |   | 3,934 |   | 3,859 |   | 26,597 |   |
| Total                            |       | $                                         | 616,357    |   | $ | 49,169 |   | $ | 40,360 |   | $ | 59,508 |   | $ | 467,320 |   |

 

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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 future variable interest obligation using theapplicable June 30, 2007 rates. The nature of our long-term debt obligations,including changes to our long-term debt structure, is described more fully inthe “Borrowing Availability and Activities” section of “Liquidity and CapitalResources.”

(2) Approximately $252.1 million of our operatinglease 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 firm purchasecommitments for raw materials, finished goods, and equipment.

(4) Our other long-term liabilities consist primarily of the long-termportion of our pension obligations, which are described in Note 10 in the Notesto Consolidated Financial Statements included within this filing, liabilitiesrelating to uncertain tax positions which are expected to be settled within oneyear, and obligations under employee and consultant agreements. We have notincluded $4.2 million of liabilities relating to uncertain tax positions withinthis schedule due to the uncertainty of the payment date, if any.

**Recent Accounting Pronouncements**

On September 15, 2006, theFASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “FairValue Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements. SFAS No. 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007. We are currentlyevaluating the requirements of SFAS No. 157 and have not yet determined theimpact, if any, its adoption will have on our consolidated financial positionand results of operations.

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

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**ITEM 3****                   QUANTITATIVEAND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

**We are exposed to market risk associated with changes inforeign currency exchange rates and interest rates. We mitigate a portion ofour foreign currency exchange rate risk by maintaining foreign currency cashbalances and holding option and forward foreign currency contracts. They are notdesignated as hedges for accounting purposes. These contracts relate primarilyto intercompany transactions and are not used for trading or speculativepurposes. The fair value of the option and forward foreign currency exchangecontracts is sensitive to changes in foreign currency exchange rates. Theimpact of an adverse change in foreign currency exchange rates would not bematerially different than that disclosed in our Annual Report on Form 10-K forthe year ended December 31, 2006.**

**Our revolving loans bear interest at rates that fluctuatewith changes in Prime, LIBOR, TIBOR, and EURIBOR. As such, our interest expenseon our revolving loans and the fair value of our fixed long-term debt aresensitive to changes in market interest rates. The effect of an adverse changein market interest rates on our interest expense would not be materiallydifferent than that disclosed in our Annual Report on Form 10-K for the yearended December 31, 2006.**

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

**ITEM 4****                   CONTROLS ANDPROCEDURES**

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’s disclosure controls and procedures, theCompany’s management recognizes that any controls, no matter how well designedand operated, can only provide reasonable, not absolute, assurance of achievingthe desired control objectives.

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

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

**ITEM 4****                  ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

At the Company’s Annual Meeting of Shareholders heldon May 11, 2007, the Board of Directors was re-elected in its entirety.  The votes cast for each nominee were asfollows:
|                      | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------------|------------|------------|------------|--------------|------------|
|                 |       |       |       |         |       |
| Kyle Kirkland        |       | 49,395,738 |       | 2,563,764    |       |
| Dana D. Messina      |       | 50,044,334 |       | 1,915,168    |       |
| John M. Stoner,  Jr. |       | 49,395,730 |       | 2,563,772    |       |
| Bruce A. Stevens     |       | 49,395,782 |       | 2,563,720    |       |
| A. Clinton Allen     |       | 51,774,319 |       | 185,183      |       |
| Rudolph K.  Kluiber  |       | 51,803,419 |       | 156,083      |       |
| Peter McMillan       |       | 51,586,014 |       | 373,488      |       |

 

Theproposal to ratify Deloitte & Touche LLP to serve as the Company’sindependent registered public accounting firm for the fiscal year endingDecember 31, 2007 was approved with 51,605,164 votes cast for, 354,138 against,and 200 abstentions.

**ITEM 6****                 ****EXHIBITS**
| (i)    | Exhibits |                                                                                                                                                        |   |
|--------|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |     |                                                                                                                                                        |   |
|   | 31.1     | Certification of the Principal Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                 |
|   |     |                                                                                                                                                        |
|   | 31.2     | Certification of the Principal Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                 |
|   |     |                                                                                                                                                        |
|   | 32.1     | Certification of the Principal Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|   |     |                                                                                                                                                        |
|   | 32.2     | Certification of the Principal Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|        |          |                                                                                                                                                             |        |  |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on their behalf by the undersigned, thereuntoduly authorized.
|        | STEINWAY MUSICAL  INSTRUMENTS, INC.              |
|--------|--------------------------------------------------|
|   |                                             |
|   |                                             |
|   |  /s/ Dana D. Messina                        |   |
|   | Dana D. Messina                                  |
|   | Director,  President and Chief Executive Officer |
|   |                                             |
|   |                                             |
|   |  /s/ Dennis M. Hanson                       |   |
|   | Dennis M. Hanson                                 |
|   | Senior Executive  Vice President and             |
|   | Chief Financial  Officer                         |

 

Date: August 6, 2007

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