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

**FORM10-Q**

| ý | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|----------------------------------------------------------------------------------------------|

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001**

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

**COMMISSION FILE NUMBER 001-11911**

**STEINWAYMUSICAL INSTRUMENTS, INC.****** (Exact name of registrant as specified in itscharter)

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

Registrant’s telephone number includingarea code:  **(781) 894-9770**

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements during the past 90days.    Yes ý    No o

| Number of shares of  Common Stock issued and outstanding as of July 31, 2001: | Class  A | 477,953   |
|-------------------------------------------------------------------------------|----------|-----------|
|                                                                          | Ordinary | 8,483,096 |
|                                                                          |     |           |
|                                                                          | Total    | 8,961,049 |

** **

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**STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESFORM 10QINDEX**PART  I.****FINANCIAL  INFORMATION**  **Item  1.****Condensed  Consolidated Financial Statements:**   Condensed  Consolidated Statements of Income  Three months and six months ended July 1, 2000 and June 30, 2001   Condensed  Consolidated Balance Sheets  December 31, 2000 and June 30, 2001   Condensed  Consolidated Statements of Cash Flows  Six months ended July 1, 2000 and June 30, 2001   Notes  to Condensed Consolidated Financial Statements  **Item  2.****Management’s  Discussion and Analysis of Financial Condition and Results of Operations**  **Item  3.****Quantitative  and Qualitative Disclosures about Market Risk**  **PART II.****OTHER INFORMATION**  **Item  4.****Submission  of Matters to a Vote of Security Holders**  **Item  6.****Exhibits  and Reports on Form 8-K**   **Signatures**
**STEINWAY MUSICAL INSTRUMENTS,INC. AND SUBSIDIARIESCONDENSED CONSOLIDATEDSTATEMENTS OF INCOME(In Thousands Except Share and Per Share Amounts)(Unaudited)**
 Three Months Ended Six Months Ended     July 1,  2000 June 30,  2001 July 1,  2000 June 30,  2001                Net sales$77,824 $83,661 $165,599 $185,242 Cost of sales52,890 56,597 114,061 126,469      Gross profit24,934 27,064 51,538 58,773 Operating expenses:         Sales and marketing8,749 10,426 17,771 22,195  General and administrative4,511 5,140 9,088 10,771  Amortization902 1,044 1,824 2,159  Other operating expense108 353 224 475       Total operating expenses14,270 16,963 28,907 35,600               Income from operations10,664 10,101 22,631 23,173 Interest expense, net3,602 4,529 6,967 9,066 Other income, net(521)(229)(676)(394)     Income before income taxes7,583 5,801 16,340 14,501          Provision for income taxes3,070 2,100 6,620 5,600      Net income before extraordinary loss4,513 3,701 9,720 8,901          Extraordinary loss on early extinguishment of debt (net of tax  benefit of $2,662)- 3,950 - 3,950      Net income (loss)$4,513 $(249)$9,720 $4,951      Earnings per share (basic and diluted):         Before extraordinary loss:$.51 $.41 $1.09 $1.00  Extraordinary loss on early extinguishment of debt- (.44)- (.44)       Net income (loss)$.51 $(.03)$1.09 $.55                Weighted average shares:         Basic8,906,604 8,931,500 8,915,569 8,931,500        Diluted8,906,606 8,931,500 8,915,589 8,931,500       
See notes to condensed consolidatedfinancial statements.

 

**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCESHEETS(In Thousands)(Unaudited)**

 
 **December 31,** **June 30,**  **2000** **2001**** ** **** **** ASSETS    Current assets:     Cash$4,989 $3,629  Accounts, notes and leases receivable, net of allowance for bad  debts of $11,377 and $11,991 in 2000 and 2001, respectively93,042   111,946    Inventories160,296 175,208  Prepaid expenses and other current assets3,005 2,752  Deferred tax assets4,121 3,895     Total current assets265,453 297,430      Property, plant and equipment, net of accumulated depreciation  of $36,760 and $40,650 in 2000 and 2001, respectively106,415   104,059   Other assets, net20,645 21,418 Cost in excess of fair value of net assets acquired, net of  accumulated Amortization of $5,231 and $5,500 in 2000 and 2001, respectively29,303   27,915           TOTAL ASSETS$421,816 $450,822              LIABILITIES AND STOCKHOLDERS' EQUITY    Current liabilities:     Current portion of long-term debt$9,516 $8,670  Accounts payable11,206 6,631  Other current liabilities35,853 31,679     Total current liabilities56,575 46,980      Long-term debt213,894 251,468 Deferred tax liabilities26,316 24,935 Other liabilities11,824 12,163    Total liabilities308,609 335,546      Commitments and contingent liabilities         Stockholders' equity:     Common stock9 9  Additional paid-in capital71,724 71,724  Retained earnings65,392 70,343  Accumulated other comprehensive income(9,966)(12,848) Treasury stock, at cost(13,952)(13,952)    Total stockholders' equity113,207 115,276         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$421,816 $450,822    
Seenotes to condensed consolidated financial statements.
**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(In Thousands)(Unaudited)**

 
 Six Months Ended    July 1,  2000 June 30,  2001         Cash flows from operating activities:    Net income$9,720 $4,951  Adjustments to  reconcile net income to     Cash flows from  operating activities:     Depreciation and amortization5,833 6,966  Early extinguishment of debt  3,950  Deferred tax benefit(781)(660) Other67 293  Changes in operating  assets and liabilities:     Accounts, notes and leases receivable(19,116)(20,037) Inventories(6,277)(18,213) Prepaid expenses and other current assets(787)58  Accounts payable(239)(4,448) Other current liabilities(1,300)(1,531)    Cash flows from operating activities(12,880)(28,671)     Cash flows from investing activities:     Capital expenditures(4,223)(3,012) Proceeds from disposals of fixed assets121 1  Business acquisition, net of cash acquired(2,340)   Changes in other assets196 132     Cash flows from investing activities(6,246)(2,879)     Cash flows from financing activities:     Net borrowings under lines of credit19,583 239  Repayments of long-term debt(689)(115,833) Proceeds from issuance of long-term debt  150,000  Debt issuance costs  (4,335) Proceeds from issuance of stock198    Purchase of treasury stock(483)      Cash flows from financing activities18,609 30,071      Effect of foreign exchange rate changes on cash126 119         Decrease in cash(391)(1,360)Cash, beginning of period4,664 4,989         Cash, end of period$4,273 $3,629              Supplemental Cash Flow Information     Interest paid$7,133 $10,331      Taxes paid$9,805 $7,005     
Seenotes to condensed consolidated financial statements.

 

**STEINWAYMUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESNOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2001(In Thousands Except Share Data)(Unaudited)**
**(1)****Basis  of Presentation**
             Theaccompanying condensed consolidated financial statements of Steinway MusicalInstruments, Inc. and subsidiaries (the “Company”) for the three months and sixmonths ended July 1, 2000 and June 30, 2001 are unaudited.  In the opinion of management, thesestatements have been prepared on the same basis as the audited consolidatedfinancial statements as of and for the year ended December 31, 2000, andinclude all adjustments which are of a normal and recurring nature, necessaryfor the fair presentation of financial position, results of operations and cashflows for the interim period.  Thecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto contained in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,2000 and Reports on Form 8-K filed with the Securities and Exchange Commissionduring 2000.  The results of operationsfor the three months and six months ended June 30, 2001 are not necessarilyindicative of the results that may be expected for the entire year.

             OnSeptember 15, 2000, the Company completed the acquisition of United MusicalInstruments Holdings, Inc. (“UMI”) pursuant to a stock purchase agreement datedas of July 20, 2000.  The acquisition,which had an aggregate purchase price of approximately $84 million, wasaccounted for as a purchase.
**(2)****Summary  of Significant Accounting Policies**
             *Principlesof Consolidation -*The consolidated financial statements of theCompany include the accounts of all of its direct and indirect wholly ownedsubsidiaries, including The Steinway Piano Company, Inc. (“Steinway”), TheSelmer Company, Inc. (“Selmer”), and UMI. Significant intercompany balances have been eliminated in consolidation.

             *Income perCommon Share –*Basic income per share is computed using the weightedaverage number of common shares outstanding during each period.  Diluted income per common share reflects theeffect of the Company’s outstanding options using the treasury stock method,except when such items would be antidilutive. A reconciliation of the weighted average shares used for the basic anddiluted computations for the three month and six month periods ended July 1,2000 and June 30, 2001 is as follows:
 Three  months ended Six  months ended     2000 2001 2000 2001      Weighted average  shares:         For basic income per  share8,906,604 8,931,500 8,915,569 8,931,500  Dilutive effect of  stock options2 - 20 -        For diluted income per  share8,906,606 8,931,500 8,915,589 8,931,500      
             *ComprehensiveIncome –*Other comprehensiveincome (loss) is comprised of foreign currency translation adjustments andadditional minimum pension liabilities. Total comprehensive income (loss) for the three month and six monthperiods ended July 1, 2000 and June 30, 2001 is as follows:
 Three  months ended Six  months ended     2000 2001 2000 2001       Net income$4,513 $(249)$9,720 $4,951  Other comprehensive  loss392 634 1,628 2,882       Total comprehensive  income (loss)$4,121 $(883)$8,092 $2,069      
             *NewAccounting Pronouncements -* On January 1, 2001, the Company adoptedStatement of Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (SFAS 133), which establishes accountingand reporting standards for derivative instruments.  All derivatives, whether designated in hedging relationships ornot, are required to be recorded on the balance sheet at fair value.  If the derivative is designated as a fairvalue hedge, the changes in the fair value of the derivative and of the hedgeditem attributable to the hedged risk are recognized in earnings.  If the derivative is designated as a cashflow hedge, the effective portions of changes in the fair value of the derivativeare recorded in other comprehensive income and are recognized in the incomestatement when the hedged item affects earnings.  Ineffective portions of changes in the fair value of cash flowhedges are recognized in earnings.

             TheCompany uses derivative instruments to manage exposures to foreign exchangerate fluctuations.  The Company’sobjectives for holding derivatives are to minimize the risks using the mosteffective methods to eliminate or reduce the impacts of these exposures.  The Company monitors its foreign currencyexposures daily to maximize the overall effectiveness of its foreign currencyhedge positions.  Principal currencieshedged include the Euro, British pound and Japanese yen.  Options and forwards used to hedge a portionof forecasted international intercompany revenue for up to one year in thefuture are designated as cash flow hedging instruments.  Forwards and options not designated ashedging instruments under SFAS 133 are also used to hedge the impact of thevariability in exchange rates on accounts receivable and payable balances.

             Foroptions designated as cash flow hedges, changes in the time value are excludedfrom the assessment of hedge effectiveness. Hedge ineffectiveness, determined in accordance with SFAS 133, had noimpact on earnings for the three months and six months ended June 30, 2001 asthe Company did not have any qualifying hedged transactions.  For the three months and six months endedJune 30, 2001, other income included a net foreign currency loss of $11 andgain of $13, respectively, for forward contracts not designated as hedginginstruments.

             InJuly 2001, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards No. 141 (“SFAS 141”), “BusinessCombinations.”  SFAS 141 requires thepurchase method of accounting for business combinations initiated after June30, 2001 and eliminates the pooling-of-interests method.  The Company does not believe that theadoption of SFAS 141 will have a significant impact on its financialstatements.

             InJuly 2001 the FASB issued Statement of Financial Accounting Standards No. 142(“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effectiveJanuary 1, 2002.  SFAS 142 requires,among other things, the discontinuance of goodwill amortization.  In addition, the standard includesprovisions for the reclassification of certain existing recognized intangiblesas goodwill, reassessment of the useful lives of existing recognized intangibles,reclassification of certain intangibles out of previously reported goodwill andthe identification of reporting units for purposes of assessing potentialfuture impairments of goodwill.  SFAS142 also requires the Company to complete a transitional goodwill impairmenttest six months from the date of adoption. The Company is currently assessing but has not yet determined the impactof SFAS 142 on its financial position and results of operations.
**(3)****Inventories**
             Inventoriesconsist of the following:
 December  31, June  30,  2000 2001         Raw materials$20,961 $22,576 Work in process53,711 54,486 Finished goods85,624 98,146    Total$160,296 $175,208    
** **
**(4)****Other  (Income) Expense, Net**
             Other(income) expense, net consists of the following:
 Three months ended Six months ended     July 1, June 30, July 1, June 30,  2000 2001 2000 2001               West 57th Building income$(1,164)$(1,164)$(2,327)$(2,327)West 57th Building expenses813 810 1,627 1,624 Foreign exchange loss, net(47)170 248 504 Miscellaneous(123)(45)(224)(195)              Other (income) expense, net$(521)$(229)$(676)$(394)     
** **
**(5)****Commitments  and Contingent Liabilities**
             Certainenvironmental matters are pending against a subsidiary of the Company, whichmight result in monetary damages, the amount of which, if any, cannot bedetermined at the present time.  PhilipsElectronics, a previous owner of a subsidiary of the Company, has agreed tohold the Company harmless from any financial liability arising from theseenvironmental matters which were pending as of December 29, 1988.  Management believes that these matters willnot have a material adverse impact on the Company’s results of operations orfinancial condition.

 
**(6)****Segment  Information**
             TheCompany has identified two distinct and reportable segments: the piano segmentand the band and orchestral instrument segment.  These segments were selected based upon the way in whichmanagement oversees and evaluates the results of each operation.  The following tables present informationabout the Company’s operating segments for the three month and six monthperiods ended July 1, 2000 and June 30, 2001:
**Three months ended 2000**Piano  Segment Band  and Orchestral Segment Other  & Elim Consol  Total    U.S. Germany Other Total U.S. Other Total          Revenues from external  customers$31,064 $8,100  $4,788 $43,952 $32,915 $957 $33,872 $- $77,824Net income (loss)1,103 134 408  1,645 22 (23)(1)2,869 4,513
 
**Three months ended 2001**Piano  Segment Band  and Orchestral Segment Other  & Elim Consol  Total    U.S. Germany Other Total U.S. Other Total          Revenues from external  customers$24,995 $7,945 $5,606 $38,546 $44,164 $951 $45,115 $- $83,661Net income (loss)  before extraordinary loss808 653 (69)1,392 (968)(62)(1,030)3,339 3,701
 
**Six months ended 2000**Piano  Segment Band  and Orchestral Segment Other  & Elim Consol  Total    U.S. Germany Other Total U.S. Other Total          Revenues from external  customers$61,248 $17,547 $9,346 $88,141 $75,417 $2,041 $77,458 $- $165,599Net income (loss)1,861 482 692 3,035 1,032 (32)1,000 5,685 9,720   
 
**Six months ended 2001**Piano  Segment Band  and Orchestral Segment Other  & Elim Consol  Total    U.S. Germany Other Total U.S. Other Total             Revenues from external  customers$54,322 $17,292 $11,828 $83,442 $99,574 $2,226 $101,800 $- $185,242Net income (loss)  before extraordinary loss1,382 1,309 806 3,497 (742)(76)(818)6,222 8,901
** **
**(7)****Summary  of Guarantees**
             OnApril 19, 2001, the Company completed a $150.0 million senior note offering at8.75%.  The proceeds of the offeringwere used to redeem all of the existing 11% Senior Subordinated Notes (the“Notes”), with the balance paying down the revolving credit facility.  The early retirement of the Notes, completedon June 1, 2001 at 102.75% of the principal amount, generated an extraordinarycharge of approximately $4.0 million, net of tax of $2.7 million.

             TheCompany’s payment obligations under the Notes are fully and unconditionallyguaranteed on a joint and several basis by Selmer, Steinway, UMI and certaindirect and indirect wholly-owned subsidiaries of the Company, each a “Guarantor”(the “Guarantor Subsidiaries”).  Thesesubsidiaries represent all of the operations of the Company conducted in theUnited States.  The remainingsubsidiaries, which do not guarantee the Notes, represent foreign operations(the “Non Guarantor Subsidiaries”).

             Thefollowing condensed consolidating supplementary data illustrates thecomposition of the combined Guarantors. Separate complete financial statements of the respective Guarantorswould not provide additional material information which would be useful inassessing the financial composition of the Guarantors.  No single Guarantor has any significantlegal restrictions on the ability of investors or creditors to obtain access toits assets in event of default on the Guarantee other than its subordination tosenior indebtedness.

             Investmentsin subsidiaries are recorded by the parent on the cost method for purposes ofthe supplemental consolidating presentation. Earnings of subsidiaries are therefore not reflected in the parent’sinvestment accounts and earnings.  Theprincipal elimination entries eliminate investments in subsidiaries andintercompany balances and transactions.

** STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENTS OF INCOMESIX MONTHS ENDED JUNE 30, 2001 (In Thousands)(Unaudited)**

 
     Non      Issuer Guarantor Guarantor      of Notes Subsidiaries Subsidiaries Eliminations Consolidated                  Net sales$- $157,548 $33,171 $(5,477)185,242 Cost of sales  111,632 20,401 (5,564)126,469                  Gross profit- 45,916 12,770 87 58,773            Operating expenses:           Sales and marketing  17,407 4,832 (44)22,195  General and administrative2,226 6,593 2,212 (260)10,771  Amortization85 1,534 540   2,159  Other operating (income) expense(1,709)1,386 494 304 475        Total operating expenses602 26,920 8,078 - 35,600                  Income (loss) from operations(602)18,996 4,692 87 23,173            Interest (income) expense, net(1,433)10,308 191 - 9,066 Other (income) expense, net1 (464)69 - (394)                 Income before income taxes830 9,152 4,432 87 14,501            Provision for income taxes405 3,472 1,710 13 5,600                             Net income before extraordinary loss425 5,680 2,722 74 8,901 Extraordinary loss on early extinguishment          of debt (net of tax benefit          of $2,662)742 3,208   - 3,950                  Net income (loss)$(317)$2,472 $2,722 $74 $4,951       
**STEINWAY MUSICAL INSTRUMENTS,INC. AND SUBSIDIARIES****CONDENSEDCONSOLIDATING BALANCE SHEETSJUNE 30, 2001(In Thousands)(Unaudited)**
     Non      Issuer Guarantor Guarantor      Of Notes Subsidiaries Subsidiaries Eliminations Consolidated       ASSETS          Current assets:           Cash$- $863 $2,766 $- $3,629  Accounts, notes and leases receivable, net  103,814 8,132   111,946  Inventories  151,111 25,309 (1,212)175,208  Prepaid expenses and other current assets271 1,924 557   2,752  Deferred tax assets  5,299 3,289 (4,693)3,895       Total current assets271 263,011 40,053 (5,905)297,430            Property, plant and equipment, net244 90,827 12,988   104,059 Investment in subsidiaries71,143 252,042   (323,185)  Other assets, net4,863 13,093 3,462   21,418 Cost in excess of fair value of net assets acquired, net  19,085 8,830   27,915                  TOTAL ASSETS$76,521 $638,058 $65,333 $(329,090)$450,822                             LIABILITIES AND STOCKHOLDERS’ EQUITY          Current liabilities:           Current portion of long-term debt$- $5,784 $2,886   $8,670  Accounts payable2 5,121 1,508   6,631  Other current liabilities(20,058)45,058 11,710 (5,031)31,679       Total current liabilities(20,056)55,963 16,104 (5,031)46,980            Long-term debt150,005 101,463     251,468 Intercompany(109,257)105,134 4,123     Deferred tax liabilities  18,940 5,995   24,935 Other liabilities  1,381 10,782   12,163       Total liabilities20,692 282,881 37,004 (5,031)335,546            Stockholders' equity55,829 355,177 28,329 (324,059)115,276                  TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$76,521 $638,058 $65,333 $(329,090)$450,822       
**STEINWAY MUSICAL INSTRUMENTS,INC. AND SUBSIDIARIES****CONDENSEDCONSOLIDATING STATEMENTS OF CASH FLOWSSIX MONTHS ENDED JUNE 30, 2001(In Thousands)(Unaudited)**

 
     Non      Issuer Guarantor Guarantor      Of Notes Subsidiaries Subsidiaries Eliminations Consolidated       Cash flows from operating activities:           Net income (loss)$(317)$2,472 $2,722 $74 $4,951  Adjustments to reconcile net income (loss) to cash flows from  operating activities:                     Depreciation and amortization109 5,587 1,270   6,966  Early extinguishment of debt742 3,208     3,950  Deferred tax benefit  (323)(337)  (660) Other3 211 79   293  Changes in operating assets and liabilities:           Accounts, notes and leases receivable  (21,450)1,413   (20,037) Inventories  (15,303)(2,823)(87)(18,213) Prepaid expenses and other current assets(54)350 (238)  58  Accounts payable(140)(4,176)(132)  (4,448) Other current liabilities(3,615)332 1,739 13 (1,531)       Cash flows from operating activities(3,272)(29,092)3,693 - (28,671)           Cash flows from investing activities:           Capital expenditures(180)(2,344)(488)  (3,012) Proceeds from disposals of fixed assets  1     1  Changes in other assets  132     132        Cash flows from investing activities(180)(2,211)(488)- (2,879)           Cash flows from financing activities:           Net borrowings (repayments) under lines of credit(180)1,085 (666)  239  Repayments of long-term debt  (115,483)(350)  (115,833) Proceeds from issuance of long-term debt150,000       150,000  Debt issuance costs(4,335)      (4,335) Intercompany dividends  701 (701)     Intercompany transactions(142,033)143,201 (1,168)           Cash flows from financing activities3,452 29,504 (2,885)  30,071            Effect of exchange rate changes on cash    119   119                  Increase (decrease) in cash- (1,799)439   (1,360)Cash, beginning of period  2,662 2,327   4,989                  Cash, end of period$- $863 $2,766 $- $3,629       
**(8)  Extraordinary Loss**

On April 19, 2001, the Company completeda $150.0 million 8.75% senior note offering. The proceeds of this offering were used to redeem $110.0 million ofpreviously outstanding Senior Subordinated Notes, together with accruedinterest, with the balance used to pay down the Credit Facility.  The early retirement of the Notes, whichwere redeemed on June 1, 2001 at 102.75% of the principal amount, generated anextraordinary charge of approximately $4.0 million, net of tax of $2.7million.  The Company’s currentlong-term financing includes the $150.0 million senior notes and $63.3 millionof term loans outstanding under the Credit Facility.  The Company’s debt agreements contain restrictive covenants thatplace certain restrictions on the Company, including restrictions on theCompany’s ability to incur additional indebtedness, to make investments inother entities, or to pay cash dividends.

** **
**ITEM 2****MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** **(Dollars  in thousands)**
**Introduction**

             TheCompany, through its operating subsidiaries, is one of the world’s leadingmanufacturers of musical instruments. Effective September 15, 2000, the Company completed the acquisition ofUnited Musical Instruments Holdings, Inc. (“UMI”) through its wholly ownedsubsidiary, Selmer.  The acquisition ofUMI was accounted for as a purchase for financial reporting purposes.  The aggregate purchase price approximated$84.0 million.  The financial statementsof the Company as of and for the three months and six months ended June 30,2001 include the effects of the acquisition and the results of operations forUMI.

             Certainstatements contained in the following Discussion and Analysis of FinancialCondition and Results of Operations are “forward-looking statements” within themeaning of Section 21E of the Securities and Exchange Act of 1934, asamended.  These forward-lookingstatements represent the Company’s present expectations or beliefs concerningfuture events.  The Company cautionsthat such statements are necessarily based on certain assumptions which aresubject to risks and uncertainties, including, but not limited to, changes ingeneral economic conditions, increased competition, exchange rate fluctuations,and the availability of production capacity and qualified workers which couldcause actual results to differ materially from those indicated herein.  Further information on these risk factors isincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2000 and its Final Prospectus filed in August 1996.

**Results of Operations**

*Three Months Ended June 30, 2001 Compared to Three MonthsEnded July 1, 2000*

             *Net Sales*-Net sales increased $5.8 million (7%) to $83.7 million in the second quarter of2001. This increase was primarily attributable to the addition of UMI, whichresulted in an increase of band and orchestral instrument sales of $11.2million (33%) to $45.1 million on an overall unit sales increase of 38%.  Offsetting this, piano sales decreased $5.4million (12%) due to ongoing economic softness in the United States,particularly in the mid-priced piano market, as well as slower sales at theretail level, and the corresponding decrease in dealers’ demand for replacementinventory. These factors resulted in a decrease of domestic Steinway shipmentsof 27% in the current period.  However,this decrease was mitigated by an 11% increase in Steinway shipments to Europeand Asia.

             *Gros**s Profit*- Gross profit increased by $2.1million (9%) to $27.1 million due to the addition of UMI.  Gross margins improved to 32.3% compared to32.0% in the prior year period. Piano margins improved from 34.6% in 2000 to37.7% in 2001 primarily as a result of the higher proportion of Steinway unitssold.  Band and orchestral instrumentmargins decreased slightly from 28.7% in 2000 to 27.7% in 2001 due to increasedproduction costs and planned expenses for the reengineering of existingmanufacturing systems.
*             *OperatingExpenses*– Overall operating expenses increased by $2.7 million(19%) to $17.0 million in the second quarter. Excluding $2.8 million of UMI operating expense in the current yearperiod, expenses decreased slightly to $14.1 million as compared to $14.3million in the second quarter of 2000 as a result of increased fiscal controlover sales and marketing expenses.

             *OtherExpense, net* -Other expenses, primarily interestexpense, increased by $1.2 million (40%) to $4.3 million.  Higher average outstanding debt balancesresulting from increased inventory levels and the additional debt associatedwith the acquisition of UMI contributed to the increased expense.

             *Income Taxes*– The Company’s effective tax rate decreased from 40.5% in 2000 to 36.2% in2001 primarily as a result of the decrease in the German tax rate. 

*Six Months Ended June 30, 2001 Compared to Six Months EndedJuly 1, 2000*

             *Net Sales*–Netsales increased $19.6 million (12%) to $185.2 million in the first six monthsof 2001 primarily due to the UMI acquisition. Band and orchestral instrumentsales increased $24.3 million (31%) to $101.8 million, and units increased 30%compared to the prior period. As an offset, piano sales decreased $4.7 million(5%) in 2001 on unit decreases of 6% for Steinway pianos and 41% for Bostonpianos, due to ongoing economic softness in the United States, particularly inthe mid-priced piano market, as well as slower sales at the retail level.

             *Gross Profit*–Gross profit increased by $7.2 million (14%) to $58.8 million in thefirst six months of 2001.  Gross marginsimproved to 31.7% from 31.1% when compared to the prior period.  Piano margins improved from 34.5% in 2000 to37% in 2001 primarily as a result of the higher proportion of Steinway unitssold. Gross margins for band instruments remained relatively consistent,increasing slightly from 27.3% in 2000 to 27.4% in 2001.

             *OperatingExpenses*–Operating expenses increased by $6.7million to $ 35.6 million in the current year period, primarily due to theacquisition of UMI, which reported operating expenses of $6.1 million in thecurrent period.

             *OtherExpense, Net*–Other expenses increased by $2.4 million(38%) to $8.7 million in the current year period. Higher average outstandingdebt balances due to increased inventory levels and the additional debtassociated with the acquisition of UMI generated an increase in net interest expenseof $2.1 million.  A slight increase inforeign currency exchange loss of $0.3 million also contributed to the increasein other expenses in the current period.

             *Income Taxes*–The Company’s effective tax rate decreased from 40.5% to 38.6% in2001.  This decrease was primarily dueto the decrease in the German tax rate.

**Liquidity and Capital Resources**

             TheCompany has relied primarily upon cash provided by operations, supplemented asnecessary by seasonal borrowings under its working capital line, to finance itsoperations, repay long-term indebtedness and fund capital expenditures.

             Cashused in operations in the first six months of 2001 was $28.7 million, comparedto cash used in operations of $12.9 million in 2000. This change is dueprimarily to the acquisition of UMI, payments made on accounts payable, and anincrease in inventory balances in the current period.  A decline in Boston piano shipments and certain band products hasled to a buildup in inventories in the current period.

             Capitalexpenditures of $4.2 million and $3.0 million in the first six months of 2000and 2001, respectively, were used primarily for the purchase of new machinery,building improvements and certain EPA compliance projects.  The Company expects to maintain this levelof capital spending in the future as it continues to modernize its equipmentand renovate its facilities in order to improve its production efficiency.

             TheCompany’s domestic seasonal borrowing requirements are accommodated through acommitted, revolving credit facility with a domestic lender (the “CreditFacility”).  The Credit Facility, whichwas amended and restated to accommodate both the acquisition of UMI and the$150.0 million bond offering completed in the current period, provides theCompany with a potential borrowing capacity, on a revolving basis, of up to$85.0 million, based on eligible accounts receivable and inventorybalances.  The Credit Facility bearsinterest at average 30-day LIBOR plus 1.75% and expires on September 14,2008.  As of June 30, 2001, revolvingcredit loans outstanding were $44.0 million and additional availability wasapproximately $41.0 million.  Openaccount loans with foreign banks also provide for borrowings by Steinway’sforeign subsidiaries of up to 39 million Deutsche marks ($17.0 million at theJune 30, 2001 exchange rate).

             OnApril 19, 2001, the Company completed a $150.0 million 8.75% senior noteoffering.  The proceeds of this offeringwere used to redeem $110.0 million of previously outstanding SeniorSubordinated Notes, with the balance used to pay down the Credit Facility.  The early retirement of the Notes, whichwere redeemed on June 1, 2001 at 102.75% of the principal amount, generated anextraordinary charge of approximately $4.0 million, net of tax of $2.7 million.  The Company’s current long-term financingincludes the $150.0 million senior notes and $63.3 million of term loansoutstanding under the Credit Facility. The Company’s debt agreements contain restrictive covenants that placecertain restrictions on the Company, including restrictions on the Company’sability to incur additional indebtedness, to make investments in otherentities, or to pay cash dividends.

             Managementbelieves that cash on hand, together with cash flows anticipated fromoperations and available borrowings under the Credit Facility, will be adequateto meet existing debt service requirements, fund continuing capitalrequirements and satisfy working capital and general corporate needs through2001.

**New Accounting Pronouncements**

             OnJanuary 1, 2001, the Company adopted Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and HedgingActivities” (SFAS 133), which establishes accounting and reporting standardsfor derivative instruments.  All derivatives,whether designated in hedging relationships or not, are required to be recordedon the balance sheet at fair value.  Ifthe derivative is designated as a fair value hedge, the changes in the fairvalue of the derivative and of the hedged item attributable to the hedged riskare recognized in earnings.  If thederivative is designated as a cash flow hedge, the effective portions ofchanges in the fair value of the derivative are recorded in other comprehensiveincome and are recognized in the income statement when the hedged item affectsearnings.  Ineffective portions ofchanges in the fair value of cash flow hedges are recognized in earnings.

             TheCompany uses derivative instruments to manage exposures to foreign exchangerate fluctuations.  The Company’sobjectives for holding derivatives are to minimize the risks using the mosteffective methods to eliminate or reduce the impacts of these exposures.  The Company monitors its foreign currencyexposures daily to maximize the overall effectiveness of its foreign currencyhedge positions.  Principal currencieshedged include the Euro, British pound and Japanese yen.  Options and forwards used to hedge a portionof forecasted international intercompany revenue for up to one year in thefuture are designated as cash flow hedging instruments.  Forwards and options not designated ashedging instruments under SFAS 133 are also used to hedge the impact of thevariability in exchange rates on accounts receivable and payable balances.

             Foroptions designated as cash flow hedges, changes in the time value are excludedfrom the assessment of hedge effectiveness. Hedge ineffectiveness, determined in accordance with SFAS 133, had noimpact on earnings for the three months and six months ended June 30, 2001 asthe Company did not have any qualifying hedged transactions.  For the three months and six months endedJune 30, 2001, other income included a net foreign currency loss of $11 andgain of $13, respectively, for forward contracts not designated as hedginginstruments.

             InJuly 2001, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards No. 141 (“SFAS 141”), “BusinessCombinations.”  SFAS 141 requires thepurchase method of accounting for business combinations initiated after June30, 2001 and eliminates the pooling-of-interests method.  The Company does not believe that theadoption of SFAS 141 will have a significant impact on its financialstatements.

             InJuly 2001 the FASB issued Statement of Financial Accounting Standards No. 142(“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effectiveJanuary 1, 2002.  SFAS 142 requires,among other things, the discontinuance of goodwill amortization.  In addition, the standard includesprovisions for the reclassification of certain existing recognized intangiblesas goodwill, reassessment of the useful lives of existing recognizedintangibles, reclassification of certain intangibles out of previously reportedgoodwill and the identification of reporting units for purposes of assessingpotential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwillimpairment test six months from the date of adoption.  The Company is currently assessing but has not yet determined theimpact of SFAS 142 on its financial position and results of operations.

 
**ITEM 3****QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK**
             TheCompany is subject to market risk associated with changes in foreign currencyexchange rates and interest rates.  TheCompany mitigates its foreign currency exchange rate risk by maintainingforeign currency cash balances and holding forward foreign currencycontracts.  These contracts are used asa hedge against intercompany transactions and are not used for trading orspeculative purposes.  The fair value ofthe forward foreign currency exchange contracts is sensitive to changes inforeign currency exchange rates.  Theimpact of an adverse change in foreign currency exchange rates would not bematerially different than that disclosed in the Company’s Annual Report on Form10-K for the year ended December 31, 2000.

             TheCompany’s revolving loans and term loans bear interest at rates that fluctuatewith changes in the Libor rate. Substantially all of the Company’s long-term debt, except the term loansreferred to above, is at fixed interest rates. Accordingly, the Company’s interest expense on its revolving loans andterm loans and the fair value of its fixed long-term debt is sensitive tochanges in market interest rates.  Theeffect of an adverse change in market interest rates on the Company’s interestexpense and the fair value of its long-term debt would not be materiallydifferent than that disclosed in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2000.

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

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

             Atthe Company’s Annual Meeting of Shareholders held on May 4, 2001, the Board ofDirectors was re-elected in its entirety. The votes cast for each nominee were as follows:
 For Against Kyle Kirkland51,693,788 295,999 Dana D. Messina51,693,788 295,999 Thomas T. Burzycki51,857,583 132,204 Bruce A. Stevens51,857,770 132,017 A. Clinton Allen51,905,843 83,944 Peter McMillan51,905,843 83,944 
             Theproposal to ratify Deloitte & Touche LLP to serve as the Company’sindependent auditors for the fiscal year ending December 31, 2001 was approvedwith 51,925,887 votes cast for, 38,350 votes against, and 25,550 abstentions.

**ITEM 6**            **EXHIBITS AND REPORTS ON FORM 8-K**
(a)Exhibits  4.1        Second Amendment to the Second Amended  and Restated Credit Agreement dated as of April 19, 2001 among Selmer  Company, Inc., Steinway, Inc. and United Musical Instruments USA, Inc., as  borrowers; certain wholly owned subsidiaries of the borrowers (as may be  amended from time to time), as guarantors; the several lenders from time to  time parties thereto; and GMAC Commercial Credit LLC, as Administrative Agent    (b)Reports  on Form 8-K   The  Company did not file any reports on Form 8-K during the quarter ended June  30, 2001.
SIGNATURES

             Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrantshave duly caused this report to be signed on their behalf by the undersigned,thereunto duly authorized.
 STEINWAY  MUSICAL INSTRUMENTS, INC. /s/   Dana D. Messina  Dana  D. Messina Director,  President and Chief Executive Officer /s/   Dennis M. Hanson  Dennis  M. Hanson Senior  Executive Vice President and Chief  Financial Officer
Date:  August 14, 2001***