UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010o

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


COMMISSION FILE NUMBER 001-11911

STEINWAY MUSICAL INSTRUMENTS, INC.(Exact name of registrant as specified in its charter)

DELAWARE

35-1910745(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)800 South Street, Suite 305,
Waltham, Massachusetts(Address of Principal Executive Offices)

02453(Zip Code)Registrant's telephone number, including area code (781) 894-9770


Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registeredOrdinary Common Shares, $.001 par value

New York Stock Exchange


Securities
registered pursuant to Section 12(g) of the Act: None

Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes o    No ý

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer o

Accelerated filer     ý

Non-accelerated filer o

Smaller Reporting Company o


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

The aggregate market value of the Common Stock held by non-affiliates of the registrant was $82,946,693 as of June 30, 2010.

Number of shares of Common Stock outstanding as of March 8, 2011:

Class A

477,952Ordinary

11,578,360Total

12,056,312


DOCUMENTS INCORPORATED BY REFERENCE

Part III 
Items 10-14  Definitive Proxy Statement of the Registrant to be filed pursuant to Regulation 14A,
Parts I-IV  Final Prospectus of the Registrant dated August 1, 1996 filed pursuant to Rule 424(b).



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Note Regarding Forward-Looking Statements

Certain statements contained throughout this Annual Report on Form 10-K are "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our present expectations or beliefs concerning future events. We caution
readers that such statements are necessarily based on certain assumptions that are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated in
this report. These risk factors include, but are not limited to, the factors discussed in Item 1A of this report. We encourage investors to read Item 1A carefully. Undue reliance should
not be placed on the forward-looking statements contained in this report. These statements, like all statements contained in this report, speak only as of the date of this report (unless another date
is indicated) and we undertake no obligation to update or revise the statements except as required by law.

Note Regarding Incorporation By Reference

The Securities and Exchange Commission ("SEC") allows us to disclose certain information by referring the reader to other documents we
have filed with the SEC. The information to which we refer is "incorporated by reference" into this Annual Report on Form 10-K. Please read that information.

PART I

Item 1. Business

Company History

Steinway Musical Instruments, Inc., through its wholly owned subsidiaries, is a global leader in the design, manufacture,
marketing and distribution of high quality musical instruments. We are the largest domestic manufacturer of musical instruments. Whenever we refer to the "Company" or to "us," or use the terms "we" or
"our" in this annual report, we are referring to Steinway Musical Instruments, Inc. and its subsidiaries.

Steinway
Musical Instruments, Inc., formerly Selmer Industries, Inc., was incorporated in 1993. We are a Delaware corporation with our principal executive offices located
at 800 South Street, Suite 305, Waltham, Massachusetts 02453, and our telephone number is (781) 894-9770. Through our corporate website,
www.steinwaymusical.com, we provide access free of charge to all of our filings with the SEC, including our Annual Reports on Form 10-K, quarterly
reports on Form 10-Q, and current reports on Form 8-K. These reports are available immediately following filing with the SEC. Information contained on or
connected to our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report or any other filing that we make with
the SEC. Additionally, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers like us that file
electronically with the SEC.

Financial Information by Segment and Geographic Location

Information on business segments and geographic areas in which we operated for the years ended December 31, 2010, 2009 and 2008
is contained in Note 17 to the Consolidated Financial Statements included in this report.

Musical Instrument Industry

We operate two reportable segments within the musical instrument industry: pianos and band & orchestral instruments.

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Pianos  The overall piano market is comprised of two main categories: grand pianos and upright pianos. Steinway & Sons
pianos compete in the high-end segment of the market, whereas our Boston and Essex lines compete in the mid-priced segment of the piano market.

From
2005 to 2009, grand piano sales declined sharply in the United States, the world's largest grand piano market. In 2010, industry sales showed some recovery, but the U.S. grand piano
market remains significantly lower than historical averages. Since Steinway realizes the majority of its profit from high-end grand piano sales, our results are generally more affected by
economic cycles, demographics, and the public's continued interest in music than by industry trends. As a result of the recent economic crisis, our sales in the United States and in most of our
markets overseas continue to be at depressed levels.

Band & Orchestral Instruments  Historically, demand for band & orchestral instruments in the domestic market have been more
significantly impacted by factors such as demographic trends than by macroeconomic cycles. However, the recent financial crisis has impaired the ability of some
dealers to obtain the credit necessary to purchase inventory. In addition, in some areas of the United States, the downturn has led to cuts in state budgets which may negatively impact school music
programs in the short term.

Studies
have emphasized the importance of music education in a child's development and many school band directors promote band programs as social organizations rather than the first step
of intensive music study. We expect this emphasis on music education and steady demographic trends to contribute to a relatively stable domestic market in the long term.

Imports
into the domestic market from offshore low-cost producers have created a highly price sensitive domestic market where manufacturers have implemented aggressive
pricing programs in an attempt to maintain market share positions. Imported instruments have also allowed dealers to source their own proprietary lines in an attempt to improve their margins. To
remain competitive in this market, we import some student woodwind and brass instruments, primarily entry-level, made to our specifications. The impact of lower priced imported instruments has also
led to consolidation within the industry, leaving Conn-Selmer, Yamaha and Jupiter as the top three remaining full line competitors.

Business and Products

Piano Segment

TheFamily of Steinway-Designed Pianosis a comprehensive offering of the world's
finest pianos at three distinct price points to suit every buyer looking to purchase a fine quality piano. The family is comprised of our three brands: Steinway & Sons, Boston and Essex.

Steinway & Sons
grand pianos, handcrafted in New York and Germany, are considered to be the highest quality pianos in the world and have one of the most widely recognized
and prestigious brand names. We also offer Steinway & Sons upright pianos as well as two mid-priced lines of pianos under the Boston and Essex brand names.

Steinway & Sons Pianos  Steinway & Sons pianos differ from all others in design specifications, materials
used and the assembly process. We offer two premium-priced product lines under the Steinway & Sons brand: grand pianos and upright pianos. Grand pianos historically have accounted for
the majority of our production. We offer seven sizes of the grand piano ranging from the 5'1" baby grand to the largest 9' concert grand. The smaller grands are sold to both individual and
institutional customers, while the concert grands are sold primarily to institutions. Steinway & Sons grand pianos are premium pianos in terms of quality and price, with retail prices
for ebony pianos generally ranging from $51,400 to $130,800 in the United States. Limited edition pianos and pianos with special veneers sell for retail prices of up to $200,000.
Steinway & Sons also offers art case pianos designed by either Steinway master craftsmen or renowned artisans. These unique creations often feature exteriors of

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elaborate
marquetry and intricate hand-painting. Many of these pianos are created to commemorate special events and anniversaries.

In
2010, we sold 1,836 grand pianos, of which 1,032 units were shipped from our New York facility to dealers in the Americas. The remaining 804 units were shipped from our German
facility primarily to Europe and Asia.

Our
upright pianos are intended to satisfy the needs of institutions and other customers who are constrained by space limitations. We also provide services such as repair, replacement
part sales, tuning and regulation of pianos, and restoration. Restoration services range from repairs of minor damage to complete restorations of vintage pianos.

Boston and Essex Pianos  Our Boston and Essex lines allow us to compete in the mid-priced category. In 2009, we significantly
enhanced the Boston piano with the introduction of the Boston Performance Edition. The improvements in materials, specifications and performance put Boston at the top of the mid-priced
range, just below Steinway & Sons.

With
certain limited exceptions, we allow only Steinway & Sons dealers to carry Boston and Essex pianos, thereby ensuring that these pianos will be marketed as
complementary product lines to the Steinway & Sons line. These pianos, which were designed by us and are produced for us in Asia, provide our dealers with an opportunity to realize
better margins in this price range while capturing sales that would have otherwise gone to a competitor. Also, since our research indicates that the vast majority of Steinway customers have previously
owned another piano, Boston and Essex pianos provide future Steinway piano customers with the opportunity to join the Steinway family of owners sooner. TheFamily of
Steinway-Designed Pianosincreases our business with our dealers, making us their primary supplier in many instances. Retail prices for Boston upright and grand pianos
generally range from
$7,100 to $49,100 in the United States. Retail prices for Essex pianos range from $4,600 to $18,500 in the United States. Sales of Boston and Essex pianos accounted for 25% of our piano division
revenue and 76% of piano unit sales in 2010.

Band Segment

We are the largest domestic producer of band & orchestral instruments and offer a complete line of brass, woodwind, percussion
and string instruments with well-known brand names. We have complemented our domestic manufacturing strategy with a sourcing strategy from Asia to remain competitive in the marketplace. We
have established relationships with several overseas manufacturers to produce entry-level student instruments to our design specifications. To ensure that our imported instruments meet our
expectations, we have our own quality assurance staff in China to monitor and evaluate our instrument suppliers.

In
2010, sales of sourced products accounted for approximately 40% of our band division revenue. In addition to entry-level student woodwind and brass instruments from Asia, which
comprise approximately 10% of our total band sales, we also import other products such as saxophones, outfit drums and accessories from sources worldwide.

Woodwind and Brass Instruments  We manufacture piccolos, flutes, clarinets, oboes, bassoons, trumpets, French horns, tubas, and trombones
in our manufacturing facilities in Indiana and Ohio. We sell student level instruments in three distinct product groupings: "good" entry-level imported instruments, "better" mid-priced
instruments, which are either imported or manufactured by us, and "best" instruments, which are primarily manufactured by us. In addition, we also manufacture intermediate and professional level
woodwind and brass instruments. Sales of woodwind and brass instruments accounted for 63% of our band division revenue in 2010.

We
sell our woodwind and brass products under the brand namesBach,Selmer, Selmer Paris, C.G. Conn,Leblanc,King,Armstrong,Holton,Yanagisawa, Vito,Emerson,Avanti, Noblet,Artley, andBenge.

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Suggested
retail prices generally range from $300 to $2,500 for student instruments and from $1,100 to $14,000 for intermediate and professional instruments. We often customize the products that we
sell to professional musicians so that the product meets requested design specifications or has certain sound characteristics. We believe that specialization of products helps maintain a competitive
edge in quality and product design. Our specialized woodwind and brass instruments sell for up to $34,000.

We
are the exclusive U.S. distributor forYanagisawasaxophones andSelmer Parissaxophones and clarinets. TheSelmer Parissaxophone is one of the best selling professional saxophones in the world.Selmer
Paris, in turn, has exclusive distribution rights to some of our brass instruments in France.

Percussion Instruments  We manufacture, source, and distribute acoustical and tuned percussion instruments, including outfit drums,
marching drums, concert drums, marimbas, xylophones, vibraphones, orchestra bells, and chimes. We manufacture percussion products in North Carolina and Illinois under the LudwigandMusserbrand names.Ludwigis considered a
leading brand name in acoustical drums and timpani andMusserhas a strong market position in tuned percussion products. Suggested retail prices range
from $500 to $5,600 for acoustical drum outfits and from $1,000 to $17,700 for tuned percussion instruments, with specialized tuned instruments purchased by symphonies and orchestras selling for up to
$23,000. Sales of percussion instruments accounted for 16% of our band division revenue in 2010.

String Instruments  We distribute violins, violas, cellos, and basses. Products are sold under the brand names Glaesel,Scherl & Roth, andWilliam Lewis &
Son. Suggested retail prices generally range from $400 to $3,000 for student instruments and from $1,400 to $5,300 for intermediate and advanced instruments, with specialized
instruments selling for up to $16,000. Components are primarily imported from Europe and Asia and adjusted at our factory in Ohio. Sales of string instruments accounted for 2% of our band division
revenue in 2010.

Accessories  We manufacture mouthpieces and distribute accessories such as music stands, batons, mallets, straps, mutes, reeds, pads,
chin rests, strings, bows, cases and instrument care products. Sales of accessories accounted for 19% of our band division revenue in 2010.

Customers

Piano Segment

Most of our piano sales are to individuals, both professional artists and amateur pianists. A majority of our Boston and Essex
customers are between 40 and 50 years old and have an intermediate level of musical skill. They hold graduate degrees and report annual household income over $100,000. A majority of our
Steinway & Sons customers are over 50 years old, and have a more advanced level of musical skill. They also hold graduate degrees and report income over $300,000.

The
institutional segment of the piano market is less sensitive to economic cycles than the consumer segment. Over the past several years, we have increased our marketing and sales focus
on the institutional market, particularly in the United States. We sell pianos to institutions such as concert halls, universities, music schools, houses of worship, hotels, and retirement homes.
Approximately 17% of pianos sold in 2010 were to institutional customers. The All-Steinway School program targets music schools, conservatories and universities and encourages them to
obtain the All-Steinway designation in order to attract the best music students to their programs. This prestigious list grew 9% in 2010, to 123 institutions worldwide.

Market
size and volume trends are difficult to quantify for international piano markets, as there is no single source for worldwide sales data. Outside the United States, our strongest
market shares are in Germany, Austria, Switzerland, the United Kingdom, and France. We believe that we hold an average grand piano market share of approximately 18% in these countries.

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China is currently the second largest grand piano market in the world and our unit sales in China grew nearly 50% in 2010. With our three piano lines, we believe our market share of
grand piano units is currently 6% in China. In recent years, we also began penetrating former Eastern Bloc countries and our unit sales in this region grew 34% in 2010. Similarly, we will be expanding
our presence in Brazil in 2011 as our marketing research indicates a strong interest in music in general and pianos in particular. We expect a large portion of our long-term growth to come
from these regions.

In
2010, our piano sales had the following geographic breakdown based on customer location: approximately 35% in the United States, 34% in Europe, 11% in China, 10% in Japan, and the
remaining 10% primarily in other Asian countries. Our largest piano dealer accounted for approximately 3% of piano sales in 2010, while the top 15 accounts represented 25% of piano sales.

Band Segment

Band & orchestral instruments are sold to students, amateur and professional musicians, and institutions. The majority of our
instruments are purchased or rented from dealers by students enrolled in music education programs in the United States. Traditionally, students join school bands or orchestras at age 10 or 11 and
learn on beginner level instruments, progressing to intermediate or professional level instruments in high school or college. We estimate that approximately 80% of our domestic band sales are
generated through educational programs. The remaining domestic band sales are to amateur or professional musicians or performing groups, including orchestras and symphonies. Student level instruments
accounted for approximately 58% of band & orchestral unit sales and approximately 33% of instrument revenues in 2010, with intermediate and professional instruments representing the balance.

Historically,
over 80% of our band sales have been in the United States. In recent years, Asian and European markets have presented significant opportunities for growth due to the
quality of our instruments and the strength of our brand names. Through collaborative efforts with our overseas distributors, we expect these markets to be a source of revenue growth in the coming
years.

In
2010, approximately 75% of band sales were in the United States, 10% in Europe and the remaining 15% primarily in Japan and Canada. Our largest group of band dealers under common
control accounted for approximately 11% of band sales in 2010, while the top 15 accounts represented approximately 39% of band sales.

Sales and Marketing

Piano Segment

We distribute our pianos worldwide through nearly 200 independent dealers who operate approximately 300 showrooms. We also have company
operated selection centers in Tokyo and Shanghai which serve our dealers in Japan and China. In addition, we sell our pianos through eleven company operated retail showrooms: six in the United States
and five in Europe. Sales to dealers accounted for approximately 75% of piano segment revenue in 2010. The remaining 25% was generated from sales made directly by us at one of our company operated
retail showrooms.

We
continually refine our sales and marketing programs for the consumer and institutional markets and, over recent years, have devoted significant resources to web-based
marketing and sales lead generation. We employ district sales managers whose responsibilities include developing close working relationships with piano dealers. These highly experienced professionals
provide dealers with sales training and technical support, and develop sales and marketing programs for the consumer and institutional markets. These sales managers are also responsible for promoting
the Steinway Artist Program.

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Steinway Artist Program  Steinway Artists are world-class pianists who voluntarily endorse Steinway & Sons by selecting the
Steinway piano. Our Steinway Artist program is unique in that we do not pay artists to endorse our instruments. To become a Steinway Artist, a pianist must not only meet certain performance and
professional criteria, he or she must also own a Steinway piano. We use these renowned artists in our marketing programs to help reinforce recognition of the Steinway brand name and its association
with quality. The Steinway Artist Program currently includes over 1,600 of the world's finest pianists who perform on Steinway pianos.

Young Steinway Artist Program  Often a formal affiliation with Steinway & Sons has not been possible for an emerging artist
since all Steinway Artists must personally own a Steinway piano. The financial realities of developing a career can often make that requirement difficult for many otherwise deserving young musicians.
In an effort to reach out to young pianists at an early point in their burgeoning careers, we recently developed the Young Steinway Artist Program. This program allows us to consider pianists between
16 and 35 years of age who own either a Boston or an Essex piano. The select group of talented musicians chosen for the Young Steinway Artist Program has the distinction of an affiliation with
the Steinway Artist family as well as access to the worldwide resources of Steinway & Sons.

Concert and Artist Piano Bank  To ensure that all pianists, especially Steinway Artists, have a broad selection of instruments to meet
their individual touch and tonal preferences, we maintain the Concert and Artist Piano Bank. The Piano Bank includes approximately 435 instruments worldwide. Of these instruments, approximately 300
are located in the United States. In New York City alone, the Piano Bank includes approximately 115 instruments. Approximately 50% of these pianos are housed at local concert venues and the remaining
instruments are at our flagship showroom in New York City where they are made available for various occasions. The remaining domestic-based pianos are leased to dealers around the country who actively
support the Steinway Artist program. The Piano Bank promotes our instruments in the music industry and provides management with continual feedback on the quality and performance of recently produced
instruments from our most critical customer, the professional pianist. The Piano Bank instruments are generally sold after four to five years and replaced with new pianos.

Band Segment

Our band & orchestral, string and percussion instruments and related accessories are distributed worldwide through nearly 1,500
independent musical instrument dealers and distributors.

In
North America, we market our products through district sales managers and telemarketing representatives who are responsible for sales within assigned geographic territories. Each
district sales manager is also responsible for developing relationships with band & orchestral directors. These directors represent all levels of music educators, from those who teach
elementary school children through those involved at the college and professional levels. These individuals are the primary influencers in the choice of an instrument brand as they will generally
refer students to designated dealers for the purchase of instruments.

We
believe that our well-established, long-standing relationships with influential music educators are an important component of our distribution strategy. As
part of our band director outreach and support, we recently launched a Division of Education to provide an educational forum that supports the day-to-day realities of music
classroom management. Led by our Vice President of Education, our educational clinicians travel extensively throughout the United States, lecturing and motivating students, educators and parents on
the value of music in a child's development. Within our Education Division, we continue to operate Conn-Selmer Institute ("CSI"), a program which assists graduating music education majors
transition into teaching careers. CSI also offers refresher courses to experienced music educators, further enhancing our relationships with these key influencers.

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To
reach international markets, we primarily sell our instruments through distributors. Our international sales staff includes regional sales directors who have direct contact with our
customers in Europe, Latin America and Asia.

We
support our dealers and distributors through advertising and promotional activities. We reach our customers through trade shows, educator conferences, print media, direct mail,
telemarketing, the Internet and personal sales calls. We also actively advertise in educator and trade publications and provide educational materials, catalogs and product specifications to students,
educators, dealers and distributors.

Competition

Piano Segment

Steinway & Sons Pianos  The level of competition our pianos face depends on the market definition.
Steinway & Sons pianos hold a unique position at the top of the grand piano market, both in terms of quality and price. While there are many makers of pianos, only a few compete directly
with our Steinway brand. Other manufacturers of primarily higher priced pianos include Bösendorfer and Fazioli.

Because
Steinway pianos are built to last for generations, a relatively large market exists for used Steinways. It is difficult to estimate the significance of used piano sales because
most are conducted in the private aftermarket. However, we believe that used Steinway pianos provide the most significant competition in the high end piano market.

Boston and Essex Pianos  Our mid-priced pianos compete with brands such as Bechstein, Schimmel, Kawai, and Yamaha. By working
with manufacturers in Asia, we have been able to enjoy labor costs and manufacturing efficiencies similar to those of some of our primary competitors while offering consumers the added benefit of
pianos designed by Steinway & Sons.

Band Segment

We are the largest domestic producer of band & orchestral instruments and we have leading market shares with many of our
professional level instruments. Yamaha, a Japanese corporation, is our largest competitor. New entrants into the domestic market generally experience difficulty competing due to the need for both
brand recognition and an effective distribution system.

Due
to the growth of offshore manufacturers and the ease of international trade, competition for sales of student level instruments in the United States has intensified in recent years.
These producers benefit from low labor costs, enabling them to offer instruments at highly competitive prices. Imported instruments have also allowed dealers to source their own proprietary lines in
an attempt to improve
their margins. It is difficult to quantify the impact of imported musical instruments since the majority of offshore manufacturers do not report data through industry channels.

Patents and Trademarks

Steinway & Sons pioneered the development of the modern piano with over 150 patents granted since our founding. While we
have several patents effective and pending in the United States and in several foreign countries, we do not believe our business is materially dependent upon any single patent.

We
also have some of the most well-known brand names in the music industry. Our piano trademarks includeSteinway, Steinway & Sons, the Lyre
design,Boston,Heirloom
Collection,Crown Jewel CollectionandEssex. Our band & orchestral
trademarks includeBach,Selmer,C.G. Conn, Leblanc,King,Armstrong, Ludwig,Musser,Holton, Vito,Glaesel,Scherl & Roth, Emerson, William

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Lewis & Son, andBenge. We consider our trademarks to be important and valuable assets. It is possible that the
termination, expiration or infringement of one or more of our trademarks may have an adverse effect on our business, depending on the trademark and the jurisdiction. Accordingly, we maintain trademark
registrations in appropriate jurisdictions on an ongoing basis and vigorously pursue any infringement by competitors or other third parties.

Raw Materials, Component Parts, and Sourced Products

Our raw materials consist primarily of metals and woods. The majority of these materials is sourced from the Americas, with the balance
coming from Europe, Asia and Africa. We manufacture our own piano plates and keys to ensure quality and availability of these component parts. Component parts for string and percussion instruments are
imported from Europe and Asia. We have had adequate supplies of raw materials and component parts in the past and do not expect any disruption to the supply of these items during 2011 or in the
future.

Our
Boston piano line and our Essex piano line are each sole sourced from Asia. Our Selmer Paris instruments, certain component parts and some of our entry-level band instruments are
also sourced from single manufacturers. We continually scrutinize these suppliers and the quality of products that
they manufacture for us and we believe that we have a sufficient number of qualified band instrument suppliers to ensure availability of all offered products in the upcoming year.

Labor

As of December 31, 2010, we employed 1,680 people, consisting of 1,121 hourly production workers and 559 salaried
employees. Of the 1,680 employees, 1,212 were employed in the United States and the remaining 468 were employed primarily in Europe.

Approximately
46% of our workforce in the United States is represented by labor unions. In February 2011, employees at our mallet instrument manufacturing facility in LaGrange, Illinois,
who are represented by the Local 1027 of the United Brotherhood of Carpenters and Joiners of America, informed the Company that they would not present a proposal that may have allowed us to keep the
facility in operation. We plan to transfer production to our percussion facility in Monroe, North Carolina by the end of 2011. Members of Local 1027 are not included in our workforce statistics below.

On
February 15, 2011, our labor contract with employees at our brass instrument manufacturing facility in Eastlake, Ohio expired. While we continue to negotiate with the union's
representatives, we cannot predict when we will be able to reach an agreement.

The
following table indicates the union representation and the current status of our collective bargaining agreements in the United States:

Location

Union affiliation

Type of
manufacturing

Number of
employees

Agreement
expirationEastlake, OH

United Auto Workers

Band instruments


245

February 15, 2011Elkhart, IN

United Auto Workers

Band instrument warehouse


7

March 31, 2012New York, NY

United Furniture Workers

Pianos


271

December 31, 2012Springfield, OH

Glass, Molders, Pottery, Plastics & Allied Workers

Piano Plates


16

September 30, 2013


In
Germany, the workers' council represents all employees other than management. Nevertheless, most employment contract conditions are settled in collective bargaining agreements made
between various trade unions and the employer organizations to which we belong. Our agreement with employees at our piano facility in Hamburg, Germany expires on January 31, 2012. We believe
that relations with our employees and these unions are generally good.

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Item 1A. Risk Factors

An investment in our Company involves risk. In addition to the other information in this report, prospective investors should carefully
consider the following risks before making an investment. The risks described below are not the only risks we face. There may be additional risks and uncertainties that we do not presently know of or
that we currently consider immaterial. All of these risks could adversely affect our business, financial condition, or results of operations.

We operate in competitive markets

Our success depends upon our ability to maintain our share of the musical instrument market by providing the best instruments at prices
equal to or below our competitors providing instruments of comparable quality. Increased competition could lead to price reductions, fewer large sales to institutions, reduced operating margins and
loss of market share.

Our
Steinway pianos currently compete with brands sold by Bösendorfer and Fazioli, which primarily produce and market pianos at the high end of the market. Because of the
potential savings associated with buying a used instrument, as well as the durability of the Steinway piano, a relatively large market exists for used Steinway pianos. It is difficult to estimate the
significance of used piano sales, because most are conducted in the private aftermarket. However, we believe that used Steinway pianos provide the most significant competition in the high end piano
market.

Our
mid-priced pianos compete with brands such as Bechstein, Schimmel, Kawai, and Yamaha. By working with manufacturers in Asia, we have been able to enjoy labor costs and
manufacturing efficiencies similar to those of our primary competitors. Also, with certain limited exceptions, we allow only Steinway dealers to carry the Boston and Essex piano lines, thereby
ensuring that these pianos will be marketed as complementary product lines to the Steinway line.

Our
band & orchestral division competes with a number of domestic and Asian manufacturers of musical instruments, including Jupiter and Yamaha. Any of our competitors may
concentrate their resources upon efforts to compete in our markets. In addition, Asian musical instrument manufacturers have made significant strides in recent years to improve their product quality.
They now offer a broad range of quality products at highly competitive prices and represent a significant competitive challenge for us. Our failure to compete effectively could have a negative impact
on our results of operations.

Economic downturns and changes in consumer preferences could adversely affect our business

Our business is subject to a number of general economic factors, many of which are out of our control, that may, among other things,
result in a decrease in sales and net income. Sales of musical instruments are dependent in part upon discretionary consumer spending, which may be affected by general economic conditions. For
example, Steinway, which represents more than half of our net sales, sells a relatively small number of Steinway & Sons grand pianos each year (1,836 in 2010). Given the small number of pianos
we sell, even a slight decrease in sales could adversely affect our profitability. Band & orchestral sales are also dependent upon the continued interest of school-aged children in
playing musical instruments. Any decrease in consumer spending, reduction in school budgets or decrease in school-aged children's interest in music could result in decreased sales, which
could adversely affect our business and operating results.

We generate most of our sales through independent dealers and distributors

We depend on a network of independent dealers and distributors to distribute all of our band instruments and a majority of our pianos.
If our dealers are unsuccessful, they will reduce their purchases from us. This would negatively impact our sales and production rates. In addition, a significant number of our U.S. dealers finance
their inventory purchases through third parties. One of

9

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the
largest firms closed its financing operation in 2009. With the reduced number of financing options available to our dealers, a prolonged worldwide financial crisis could also result in decreased
purchases, which would adversely affect our business and operating results.

We could be subject to work stoppages or other business interruptions as a result of our unionized work force

A significant portion of our hourly employees are represented by various union locals and covered by collective bargaining agreements.
These agreements contain various expiration dates and must be renegotiated upon expiration. If we are unable to negotiate any of our collective bargaining agreements on satisfactory terms prior to
expiration, we could experience disruptions in our operations which could have a material adverse effect on our operations.

Any significant disruption in our supply from key suppliers could delay production and adversely affect our sales

Our Boston piano line and our Essex piano line are each sole sourced from Asia. Our Selmer Paris instruments, certain component parts
and some of our entry-level band instruments are also sourced from single manufacturers. We are highly dependent on the availability of essential materials and purchased components from our suppliers,
some of which may be available only from limited resources. Moreover, we are dependent upon the availability of our suppliers to provide material that meets specifications, quality standards and
delivery schedules. Our suppliers' failure to provide expected raw materials or component parts would adversely affect production schedules and profitability.

Although
we have had adequate supplies of raw materials and component parts in the past, there is no assurance that we may not experience serious interruptions in the future. Our
continued supply of materials is subject to a number of risks including: 1) the destruction of our suppliers' facilities or their distribution infrastructure; 2) work stoppages or
strikes by our suppliers' employees; 3) the failure of our suppliers to provide materials of the requisite quality; 4) the failure of essential equipment at our suppliers' plants;
5) the failure or shortage of supply of raw materials to our suppliers; and 6) contractual amendments and disputes with our suppliers.

We
cannot assure investors that our suppliers will continue to provide products to us at attractive prices or at all, or that we will be able to obtain such products in the future from
these or other providers on the scale and within the time periods we require. Furthermore, we cannot assure investors that substitute raw materials or component parts will meet the strict
specification and quality standards we impose. If we are not able to obtain key materials, supplies, components or sourced instruments on a timely basis and at affordable costs, or we experience
significant delays or interruptions of their supply, it could have a material adverse effect on our business, financial condition and results of operations.

We experience inherent concentration of credit risk in our accounts receivable

Historically, a large portion of our sales have been generated by our top 15 customers. As a result, we experience some inherent
concentration of credit risk in our accounts receivable due to its composition and the relative proportion of large customer receivables to the total. This is especially true at our band division,
which characteristically has the majority of our consolidated accounts receivable balance. We consider the credit health and solvency of our customers when extending credit and when we develop our
receivable allowance estimates. If our customers fail to pay a significant portion of outstanding receivable balances, it would have a negative impact on our results of operations.

10

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We may be unable to successfully integrate acquisitions of related companies into our business

We have historically acquired other businesses whose operations or product lines complement our existing business. We continually
explore new opportunities to enter into business combinations with other companies in order to maintain and grow our revenues and market presence. These potential transactions with other companies
create risks such as difficulty in assimilating the personnel, customers, technology, products and operations with our personnel, customers, technology, products and operations; disruption of our
ongoing business, including loss of
management focus on existing businesses; and impairment of relationships with existing executives, employees, customers and business partners. In addition, we may not be able to identify suitable
candidates for these transactions or obtain financing or otherwise make these transactions on acceptable terms. Furthermore, the benefits that we anticipate from these potential transactions may not
develop as expected and we cannot be sure that we will recover our investment in any such strategic transaction.

Shifts in our product mix may result in declines in our gross margins and profit levels

Our gross margins vary among our product groups and have fluctuated from quarter to quarter as a result of shifts in product mix (that
is, how much of each product type we sell in any particular quarter). The introduction of new band instruments, decreases in average selling prices, and shifts in the proportion of student level
instruments to professional level instruments may cause variances in our gross margins. We also experience variances in our gross margins as a result of shifts in the proportion of our piano retail
sales to wholesale sales, as well as changes in amounts of piano sales to territories where we realize more favorable pricing.

Failure of our new products to gain market acceptance may adversely affect our operating results

New products may not achieve significant market acceptance or generate sufficient sales to permit us to recover development,
manufacturing and marketing costs associated with these products. Achieving market acceptance for new products may also require substantial marketing efforts and expenditures to expand consumer
demand. These requirements could strain our management, financial and operational resources. Furthermore, failure of our new products to achieve market acceptance could prevent us from maintaining our
existing customer base, gaining new customers or expanding our markets and could have a material adverse effect on our business, financial condition and results of operations.

Since we have a limited number of facilities, any loss of use of any of our facilities could adversely affect our operations

Our operations with respect to specific products are concentrated in a limited number of manufacturing facilities. Because we are
heavily dependent on each of these facilities, our operations may be adversely affected if we experience a disruption in business at any particular facility for a prolonged period of time because we
may not have adequate substitute facilities available to us.

We may face difficulties or delays renewing leases or re-leasing space in our office building

We derive rental income from our building on West 57th Street in New York City. The master lease that was in
effect for ten years expired at the end of 2008; therefore, we no longer have guaranteed rental income. Changes in local market conditions, such as an oversupply of properties, including space
available by sublease, may make it more difficult for us to lease space at attractive rental rates or at all. If we are unable to lease a significant amount of space in our building on economically
favorable lease terms, including the cost of required renovations or concessions to tenants, our cash flow would decrease which would adversely affect our business and operating results.

11

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Our operations may subject us to liabilities for environmental matters, the costs of which could be material

Our manufacturing operations involve the use, handling, storage, treatment and disposal of materials and waste products that may be
toxic or hazardous. Consequently, we are subject to numerous federal, state and local environmental laws and regulations, specifically those relating to discharges to air, water and land, the handling
and disposal of solid and hazardous waste, and the cleanup of properties contaminated by hazardous substances. Many environmental laws impose strict, retroactive, joint and several liability broadly
upon owners and operators of properties, including with respect to environmental matters that occurred prior to the time the party became an owner or operator. In addition, we may have liability with
respect to third-party sites to which we sent wastes for disposal in the past. Our potential liability at any of these sites is affected by many factors including, but not limited to, the method of
remediation, our portion of the hazardous substances at the site relative to that of other responsible parties, the number of responsible parties, the financial capabilities of other parties, and
contractual rights and obligations.

We
have obligations and liabilities with respect to the remediation of current and former properties and third-party waste disposal sites. The liabilities and obligations in some cases
are covered by an indemnification agreement and we have accrued liabilities for sites where the liability is probable and can be estimated. We cannot guarantee the indemnitor will continue to fund the
cleanup liability or that the actual costs of cleanup will not exceed our present accruals. Furthermore, we may be required to fund additional remedial programs in connection with other current,
former or future facilities.

Future
events, such as the discovery of additional contamination or other information concerning past releases of hazardous substances at our manufacturing sites (or at sites to which we
sent wastes for disposal), changes in existing environmental laws or their interpretation, and more rigorous efforts by regulatory authorities, may require additional expenditures by us to modify
operations, install pollution control equipment, clean contaminated sites or curtail our operations. These expenditures could have a material negative impact on our operations.

In
addition, we could be affected by future laws or regulations imposed in response to climate change concerns. Because it is uncertain what laws will be enacted, we cannot predict
whether or not these laws or regulations could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to protect our proprietary information

We rely in part on patent, trade secret, unfair competition, trade dress and trademark laws to protect our rights to aspects of our
business and products, including product designs, proprietary manufacturing processes and technologies. The laws of many foreign countries do not protect proprietary rights to the same extent as laws
in the United States. In addition, although we may have rights to a particular trademark in a given country, we may not have similar rights to that trademark in other countries.

Changes in our effective tax rates could affect future results

As an international company, we are subject to taxation in the United States and various other foreign jurisdictions in which we do
business. One of these foreign jurisdictions has higher statutory rates than those in the United States, and certain of our international earnings are also taxable in the United States. Accordingly,
our effective tax rates will vary depending on the relative proportion of foreign to U.S. income and absorption of foreign tax credits, changes in the valuation of our deferred tax assets and
liabilities, and changes in tax laws. In addition, we are subject to examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We regularly assess

12

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the
likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our income tax reserves and expense. Should actual events or results differ from our current
expectations, charges or credits to our income tax expense reserves and income tax expense may become necessary. Any such adjustments could have a significant impact on our results of operations.

Our foreign operations are exposed to risks associated with foreign regulations, exchange rate fluctuations, trade restrictions and political, economic and social
instability

We manufacture, market and distribute our products worldwide. As a result, we are subject to the risks normally associated with foreign
operations. For example, foreign regulations may limit our ability to produce and sell some of our products or repatriate profits to the United States. In addition, a foreign government may impose
trade or foreign exchange restrictions or increased tariffs, which could adversely affect our operations. Our operations may also be negatively impacted by political, economic and social instability
in foreign countries in which we operate. We are also exposed to risks associated with foreign currency fluctuations. A change in the exchange rates of the U.S. dollar, the Japanese yen, the British
pound, the Chinese yuan and renminbi or the euro relative to each other or other foreign currencies could have a negative impact on us. Although we sometimes engage in transactions to protect against
risks associated with foreign currency fluctuations, we cannot be sure that these fluctuations will not have an adverse effect on us. Sales outside the United States accounted for 49% of our net sales
in 2010.

The requirements of complying with various federal regulations may strain our resources

As a public company, we are subject to various federal regulations, including the reporting requirements of the Sarbanes-Oxley Act.
Sarbanes-Oxley requires that we maintain effective disclosure controls and procedures, corporate governance standards, and internal controls over financial reporting. Although we devote significant
time and resources to ensure ongoing compliance with the reporting requirements of Sarbanes-Oxley, we can give no assurance that we will continue to meet these requirements in the future or that
reportable conditions or material weakness in our internal controls and procedures may not arise despite our best efforts to prevent them. While we have taken and continue to take all steps necessary
to comply with Sarbanes-Oxley, including maintaining effective internal controls, our failure to meet the requirements of Sarbanes-Oxley or other federal regulations could negatively impact our
business, financial condition and results of operations.

Further issuances of equity securities may be dilutive to current shareholders

Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing and equity financing. The
interests of our existing shareholders could be diluted if additional equity securities are issued to finance future developments, acquisitions, or repay indebtedness.

Messrs. Kirkland and Messina exercise significant control over us, which could adversely affect investors

Mr. Kyle R. Kirkland, Chairman of the Board, and Mr. Dana D. Messina, Chief Executive Officer, hold in the aggregate 100%
of our Class A common stock, representing approximately 80% of the voting power of our Company's capital stock. So long as Messrs. Kirkland and Messina continue to hold a majority of the
voting power, they will be able, acting together, to exercise a controlling influence over our Company, including with respect to the composition of our board of directors and, through it, the
direction and policies of the Company. We cannot assure that Messrs. Kirkland and Messina will not pursue other business interests that will conflict with investors' interests.

Item 1B. Unresolved Staff Comments

None.

13

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Item 2. Properties

We own most of our manufacturing and warehousing facilities, as well as the building that includes Steinway Hall in New York City. The
remaining Steinway retail stores are leased. Substantially all of the domestic real estate has been pledged to secure our debt. The following table lists our significant owned and leased facilities:

Location

Owned/
Leased

Approximate
Floor Space
(Square Feet)

Type of Facility and Activity PerformedLong Island City, NY

Owned


450,000

Piano manufacturing and restoration; administrative offices; trainingNew York, NY

Owned


217,000

Piano retail store/showroom; office rental propertyMelville, NY

Leased


9,200

Piano retail store/showroomWestport, CT

Leased


11,000

Piano retail store/showroomCoral Gables, FL

Leased


6,000

Piano retail store/showroomParamus, NJ

Leased


4,000

Piano retail store/showroomWest Hollywood, CA

Leased


3,800

Piano retail store/showroomSpringfield, OH

Owned


110,000

Piano plate manufacturingHamburg, Germany

Owned


221,000

Piano manufacturing; executive offices; trainingLeased


6,000

Piano retail store/showroomMunich, Germany

Leased


15,000

Piano retail store/showroomDüsseldorf, Germany

Leased


6,200

Piano retail store/showroomBerlin, Germany

Leased


7,000

Piano retail store/showroom/service workshopRemscheid, Germany

Leased


25,000

Piano key manufacturingWilkow, Poland

Owned


10,000

Piano key manufacturingShanghai, China

Leased


22,000

Piano warehouse/showroom/workshopLondon, England

Leased


10,000

Piano retail store/showroomTokyo, Japan

Leased


9,000

Piano selection center; warehouseLeased


2,000

Administrative officesEastlake, OH

Owned


160,000

Brass instrument manufacturingElkhart, IN

Owned


150,000

Brass instrument manufacturingOwned


88,000

Woodwind manufacturing; warehouse; officeOwned


81,000

WarehouseOwned


25,000

Administrative officesElkhorn, WI

Owned


58,000

Former brass instrument manufacturing; held for saleKenosha, WI

Owned


95,000

Former woodwind manufacturing and warehouse; held for saleLaGrange, IL

Owned


35,000

Percussion instrument manufacturingMonroe, NC

Leased


114,000

Percussion instrument manufacturing; warehouseCleveland, OH

Leased


35,000

String instrument manufacturingLondon, England

Leased


8,000

Band instrument office; warehouse


We
spent $3.7 million for capital improvements in 2010 consisting primarily of tooling, machinery, software and system upgrades, and plant and facility improvements. We expect
capital spending in 2011 to be in the range of $4.0 to $6.0 million, relating to similar items, along with $1.0 to $2.0 million for improvements and renovations at our building in New
York City.

14

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Item 3. Legal Proceedings

General

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

Environmental Matters

We are required to comply with various federal, state, local and foreign environmental laws, including those relating to discharges to
air, water and land, the handling and disposal of solid and hazardous waste and the cleanup of properties contaminated by hazardous substances, including chlorinated solvents. Our operations are
subject to environmental laws and regulations that require us to obtain and maintain permits from regulatory authorities. Non-compliance with environmental laws and regulations or the
permits we have been issued could give rise to significant fines, penalties and other costs. We currently do not expect to incur material expenditures relating to environmental compliance in 2011.

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

We
are continuing an existing environmental remediation plan at a facility we acquired in 2000. We expect to pay these costs, which approximate $0.6 million, over a
10-year period. We have accrued approximately $0.5 million for the estimated remaining cost of this remediation program, which represents the present value total cost using a
discount rate of 4.54%.

A
summary of expected payments associated with this project is as follows:

Environmental
Payments2011

$
772012


612013


612014


612015


61Thereafter


302Total

$
623


In
2004, we acquired two manufacturing facilities from G. Leblanc Corporation, now Grenadilla, Inc. ("Grenadilla"), for which environmental remediation plans had already been
established. In connection with the acquisition, we assumed the existing accrued liability of approximately $0.8 million for the cost of these remediation activities. Based on a review of past
and

15

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ongoing
investigatory and remedial work by our environmental consultants, and discussions with state regulatory officials, as well as recent sampling, we estimate the remaining costs of such remedial
plans to be $2.4 million. Pursuant to the purchase and sale agreement, we have sought indemnification from Grenadilla for anticipated costs above the original estimate. We filed a claim against
the escrow and recorded a corresponding receivable for this amount in other assets in our consolidated balance sheet. Based on the current estimated costs of remediation, this receivable totaled
$2.1 million as of December 31, 2010 and 2009. We reached an agreement with Grenadilla whereby current environmental costs are paid directly out of the escrow. Currently, the escrow
balance exceeds our receivable balance. Accordingly, Grenadilla has recently expressed an interest in engaging in non-binding mediation in order to close out the escrow arrangement so that
the cash can be distributed to the respective parties in accordance with the purchase agreement. Due to the nature of mediation, the impact, if any, on our financial condition or results of operations
cannot be determined at this time.

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

Item 4. Removed and Reserved

16

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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our Ordinary common stock is traded on the New York Stock Exchange ("NYSE") under the "LVB" symbol. On May 27, 2010, we
submitted an unqualified certification to the NYSE regarding our compliance with NYSE corporate governance listing standards as of the date of certification. The following table sets forth, for the
periods indicated, the high and low share prices of our Ordinary common stock as reported on the NYSE.

Year Ended December 31, 2010

High

LowFirst Quarter

$
20.48

$
15.10Second Quarter


20.76


16.37Third Quarter


19.86


14.31Fourth Quarter


20.00


16.25




Year Ended December 31, 2009

High

LowFirst Quarter

$
18.46

$
6.83Second Quarter


14.40


10.11Third Quarter


12.83


9.81Fourth Quarter


16.09


11.16


We
have two classes of common stock: Class A and Ordinary. With the exception of disparate voting power, both classes are substantially identical. Each share of Class A
common stock entitles the holder to 98 votes. Holders of Ordinary common stock are entitled to one vote per share. Class A common stock shall automatically convert to Ordinary common stock if,
at any time, the Class A common stock is not owned by an original Class A holder.

Holders of Record  As of March 1, 2011, there were 2,891 beneficial shareholders of our Ordinary common stock and two holders of
record of the Class A common stock.

Dividends  Under our domestic credit facility agreement and the indenture for our senior note debt, we are permitted, within certain
limitations, to pay cash dividends on our common stock. Although the limits under our indenture agreement increase as we accumulate earnings over time, we do not anticipate paying additional cash
dividends on our common stock in the foreseeable future.

The
payment of any future dividends will be determined by the Board of Directors in light of conditions then existing, including our results of operations, financial condition, cash
requirements, limitations or restrictions in debt agreements, tax treatment of dividends, business conditions and other factors.

Performance Graph  The following line graph compares the yearly percentage change in our cumulative total shareholder return on our
Ordinary common stock for the period from December 31, 2005 to December 31, 2010 to the cumulative total return for the Russell 2000 Stock Index ("Russell 2000") and the cumulative total
return for a peer group consisting of La-Z-Boy, Inc., Harley-Davidson, Inc., Callaway Golf Company, and Marine Products Corp ("Peer Group").

The
Peer Group was selected by management based on the status of each as a manufacturer and/or distributor of consumer goods in the luxury, leisure, or furniture categories. The
performance graph assumes a $100 investment on December 31, 2005 in each of our Ordinary common stock, the Russell 2000, and the common stock of the Peer Group. Steinway Musical
Instruments, Inc. is included in the Russell 2000. Total shareholder return for Steinway Musical Instruments, Inc., as well as the Russell 2000 and the Peer Group, is based on the
cumulative amount of dividends for a period

17

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(assuming
dividend reinvestment) and the difference between the share price at the beginning and at the end of the period.

Cumulative Total Returns

CHART

December 31,2005

2006

2007

2008

2009

2010Steinway Musical Instruments, Inc.

$
100.00

$
121.72

$
111.08

$
70.55

$
64.10

$
79.97Russell 2000


100.00


117.00


113.79


74.19


92.90


116.40Peer Group


100.00


110.54


86.33


43.32


56.91


66.08


Purchases of Equity Securities by the Issuer

Period

(a) Total
Number of
Shares (or
Units)
Purchased

(b) Average
Price Paid
per Share (or
Unit)

(c) Total
Number of
Shares (or
Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs

(d) Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units) that
May Yet Be
Purchased Under the
Plans or ProgramsAugust 1  August 31, 2010


1,627

$
15.59


1,627

$
22,843,680September 1  September 30, 2010


20,200


16.03


20,200


22,519,840Total


21,827

$
16.00


21,827

$
22,519,840


In May 2008 we announced a share repurchase program, which permits us to make discretionary purchases of up to $25.0 million of our
Ordinary common stock. To date, we have purchased 102,127 shares under this program.

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Equity Compensation Plans

The following table sets forth the equity compensation plan information for our Employee Stock Purchase Plan and our Stock Plans, which
are described in Note 12:

Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights

Weighted-
average exercise
price of
outstanding
options, warrants
and rights

Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))Plan Category

(a)

(b)

(c)Equity compensation plans approved by security holders:1996 Stock Plan


337,876

$
20.95


2006 Stock Plan


749,010


20.45


249,7402006 Purchase Plan


15,709


16.58


209,330Total


1,102,595

$
20.55


459,070


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Item 6. Selected Financial Data

The following table sets forth our selected consolidated financial data as of and for each of the five years in the period ended
December 31, 2010, as derived from our audited financial statements. The table should be read in conjunction with our Consolidated Financial Statements, including the footnotes, and
"Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report, as well as previously filed Annual Reports on Form 10-K.

(In thousands except share and per share data)

Years Ended December 31,

2010

2009(1)

2008(2)

2007

2006(3)Statement of operations data:Net sales

$
318,121

$
306,436

$
387,413

$
406,314

$
384,620Gross profit


95,950


84,913


115,290


123,486


107,407Income from operations


22,813


13,271


21,193


35,202


18,378Net income (loss)


7,900


5,336


8,186


15,410


(668
)Earnings (loss) per shareBasic

$
0.68

$
0.60

$
0.96

$
1.81

$
(0.08
)Diluted

$
0.68

$
0.60

$
0.95

$
1.78

$
(0.08
)Weighted average shares:Basic


11,640,955


8,855,138


8,557,761


8,521,700


8,303,770Diluted


11,695,086


8,859,554


8,629,647


8,647,300


8,303,770Balance sheet data (at December 31):Cash

$
119,811

$
65,873

$
44,380

$
37,304

$
30,409Current assets


328,628


293,906


297,267


285,729


282,678Total assets


485,094


449,790


453,318


457,678


447,175Current liabilities


53,784


46,696


62,554


66,986


66,048Total debt


154,510


158,240


186,750


176,266


178,411Stockholders' equity


228,624


196,496


157,081


163,779


158,001Other financial data:Capital expenditures

$
3,732

$
4,552

$
5,338

$
4,967

$
5,549Cash dividends declared per common share

$


$


$


$
3.00

$
Margins:Gross profit


30.2%


27.7%


29.8%


30.4%


27.9%Operating


7.2%


4.3%


5.5%


8.7%


4.8%


(1)In
2009, our results were beneficially impacted by a gain on extinguishment of debt of $3.4 million. This was partially offset by the
$1.0 million impairment of trademarks associated with our online music business. Earnings per share was diluted by the issuance of 1,700,000 shares of our Ordinary common stock in November
2009. These items are described more fully in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."(2)In
2008, our results were adversely impacted by the impairment of our band division goodwill of $8.6 million and facility
rationalization charges, including property impairment and severance costs totaling $1.3 million. This was partially offset by a gain on extinguishment of debt of $0.6 million. These
items are described more fully in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."(3)In
2006, our results were adversely affected by a significant increase in our provision for doubtful accounts, which resulted from the
bankruptcy filings of two large band division customers; the loss on extinguishment of debt of $9.7 million; and the strike at our Elkhart, Indiana brass instrument manufacturing facility.
These items are described more fully in our Annual Report on Form 10-K for the period ended December 31, 2006.


20

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands)

Introduction

The following discussion provides an assessment of the results of our operations and liquidity and capital resources together with a
brief description of certain accounting policies. Accordingly, the following discussion should be read in conjunction with our Consolidated Financial Statements and the Notes to Consolidated Financial
Statements included within this report.

Overview

Through our operating subsidiaries, we are one of the world's leading manufacturers of musical instruments. Our strategy is to
capitalize on our strong brand names, leading market positions, strong distribution networks, and quality products.

Piano Segment  Sales of our pianos are influenced by general economic conditions, demographic trends and general interest in music and
the arts. The operating results of our piano segment are primarily affected by Steinway & Sons grand piano sales. Given the total number of these pianos that we sell in any year (1,836 sold in
2010), a slight change in units sold can have a material impact on our business and operating results. Our results are also influenced by sales of Boston and Essex pianos, which together represented
76% of total piano units sold but only 25% of total piano
division revenues in 2010. Our Boston piano line and our Essex piano line are each sole sourced from Asia. The ability of these manufacturers to produce and ship products to us could impact our
business and operating results. A breakdown of sales by our divisions and their geographic location can be found in Note 17 to the financial statements. In 2010, our piano sales had the
following geographic breakdown based on customer location: approximately 35% in the United States, 34% in Europe, 11% in China, 10% in Japan, and the remaining 10% primarily in other Asian countries.
For the year ended December 31, 2010, our piano segment sales were $190.5 million, representing 60% of our total revenues.

Piano Outlook for 2011  We expect a challenging year for our overseas piano division with respect to sales and gross profit due to
lingering economic problems in many of the markets to which that division sells. However, our domestic dealers are experiencing fewer credit restrictions, so we anticipate the improvement shown in the
domestic piano results to continue during 2011. We will continue to manage production levels to minimize factory inefficiency and not build excess inventory and we have sufficient manufacturing
capacity to meet anticipated or increased demand.

Band Segment  Our student band instrument sales are influenced by trends in school enrollment, general attitudes toward music and the
arts, and our ability to provide competitively priced products to our dealer network. Management estimates that 80% of our domestic band sales are generated through educational programs; the remainder
is to amateur or professional musicians or performing groups, including symphonies and orchestras.

Our
offerings of sourced products include quality, competitively priced instruments that have our brand names and are built to our specifications. Our product offerings are tailored to
the needs of traditional school music dealers who provide full-service rental programs to beginning band students, as well as music retailers and e-commerce dealers selling
directly to end consumers from their stores or through the Internet. We believe our product offerings have helped us remain competitive at various price points and will continue to do so in the
future.

In
2010, student level instruments accounted for approximately 58% of band & orchestral unit shipments and approximately 33% of band instrument revenues, with intermediate and
professional instruments representing the balance. In 2010, approximately 75% of band sales were in the United

21

---



States,
10% in Europe and the remaining 15% primarily in Japan and Canada. For the year ended December 31, 2010, our band sales were $127.6 million, representing 40% of our total
revenues.

Band Outlook for 2011  Instrument orders to date are higher than in 2010, so we expect sales to improve and margins to remain consistent
in 2011. We will continue to manage production so as to minimize factory inefficiencies. We currently have sufficient manufacturing capacity to meet anticipated or increased demand.

Inflation and Foreign Currency Impact  Although we cannot accurately predict the precise effect of inflation on our operations, we do not
believe that inflation has had a material effect on sales or results of operations in recent years.

Sales
to customers outside the United States represented 49% of consolidated sales in 2010. We record sales in euro, Japanese yen, British pounds, and Chinese renminbi. In 2010, we
generated 79% of our international sales through our piano segment. Foreign exchange rate changes reduced reported sales by approximately $2.1 million in the current year. Although currency
fluctuations affect international sales, they also affect cost of sales and related operating expenses. Consequently, they generally have not had a material impact on operating income. We use
financial instruments such as forward exchange contracts and currency options to reduce the impact of exchange rate fluctuations on firm and anticipated cash flow exposures and certain assets and
liabilities denominated in currencies other than the functional currency of the affected division. We do not purchase currency-related financial instruments for purposes other than exchange rate risk
management.

Taxes  We are subject to U.S. income taxes as well as tax in several foreign jurisdictions in which we do business. Some of these foreign
jurisdictions have higher statutory rates than the United States. In addition, certain of our operations are subject to both U.S. and foreign taxes. However, in such cases we receive a credit against
our U.S. taxes for foreign taxes paid equal to the percentage that such foreign income (as adjusted for reallocated interest) represents of the total income subject to U.S. tax. Accordingly, our
effective tax rates will vary depending on the relative proportion of foreign to U.S. income and the absorption of foreign tax credits in the United States.

In
2010, we utilized 100% of the foreign tax credits generated during the year, as well as $2.9 million of credits previously generated. However, due to our current expectation
for prospective foreign tax credit utilization, we increased our valuation allowances for foreign tax credits generated during 2006 to 2008 for a comparable amount. Accordingly, the net impact on our
overall effective tax rate was nominal. Since there was a minimal net impact of discrete items such as uncertain tax positions, our overall effective tax rate of 39.0% relates primarily to current
period operations.

In
2009, we were able to use over 80% of the foreign tax credits generated during the year. We recognized a benefit of $0.6 million for the excess foreign tax credits generated.
Our overall effective tax
rate for 2009 was 37.3%, which was comprised of 35.8% relating to current period operations and 1.5% relating to discrete items such as uncertain tax positions and settlements with taxing authorities.

In
2008, we were able to use approximately 60% of the foreign tax credits generated during the year. We recognized a benefit of $0.9 million for the excess foreign tax credits
generated, net of reserves, which were recorded based on our historical foreign tax credit usage trends and anticipated ratios of foreign source income to domestic income in the future. Our rate was
beneficially impacted by $1.1 million in reduction of taxes, interest, and penalties associated with uncertain tax positions that were settled during the year. Accordingly, our overall
effective tax rate was 37.7% in 2008.

22

---



Results of OperationsFiscal Year 2010 Compared to Fiscal Year 2009

For the years ended December 31,



Change2010



2009



$

%Net salesBand

$
127,625




$
126,437





1,188


0.9Piano


190,496





179,999





10,497


5.8Total sales


318,121





306,436





11,685


3.8Cost of salesBand


95,569





98,058





(2,489
)

(2.5
)Piano


126,602





123,465





3,137


2.5Total cost of sales


222,171





221,523





648


0.3Gross profitBand


32,056


25.1%


28,379


22.4%


3,677


13.0Piano


63,894


33.5%


56,534


31.4%


7,360


13.0Total gross profit


95,950





84,913





11,037


13.030.2%





27.7%Operating expenses


73,137





70,666





2,471


3.5Facility rationalization and
impairment charges








976





(976
)

(100.0
)Total operating expenses


73,137





71,642





1,495


2.1Income from operations


22,813





13,271





9,542


71.9Other expense (income), net


370





(1,847
)




2,217


(120.0
)Gain on extinguishment of debt


(104
)




(3,434
)




3,330


(97.0
)Net interest expense


9,586





10,045





(459
)

(4.6
)Non-operating expenses


9,852





4,764





5,088


106.8Income before income taxes


12,961





8,507





4,454


52.4Income tax provision


5,061


39.0%


3,171


37.3%


1,890


59.6Net income

$
7,900




$
5,336





2,564


48.1


Overview  Although economic conditions continued to impact our results in 2010, we
experienced improvements in both the band and piano divisions, especially during the latter half of the year. Piano division revenue increased due to increased demand and better access to available
financing by our dealers. Piano margins also improved due to higher production volume at both of our manufacturing facilities. Band division sales were slightly higher than 2009, but margins improved
to a greater extent due to more consistent production schedules, which resulted in better factory efficiency.

Net Sales  Net sales increased $11.7 million primarily due to the $9.0 million improvement in U.S. piano division revenue.
Domestically, Steinway grand unit shipments were 13% higher and mid-priced piano line shipments were consistent with the year-ago period. Despite an unfavorable exchange rate
impact of $2.1 million, overseas piano division revenue improved $1.5 million. This was largely attributable to a 36% improvement in mid-priced piano line shipments which
more than offset a 4% decrease in overseas Steinway grand unit sales.

23

---



Band
division sales increased $1.2 million on an overall unit volume increase of 7%. The unit volume improvement outpaced the revenue improvement due to more cash and promotional
discounts issued in 2010.

Gross Profit  Gross profit improved $11.0 million due to higher sales and gross margins at the piano division and a better gross
margin at the band division. Gross margin for the band division increased from 22.4% to 25.1% due to more consistent production and greater factory efficiencies at most plants, which contributed
$3.3 million to gross profit. Lower pension expenses also helped improve gross profit in 2010.

Piano
segment gross profit increased $7.4 million during the period. Domestically, piano margins shifted upward from 26.4% to 30.4% due to a more consistent production schedule.
Although the number of units produced was similar to the prior year, production days increased 38%. This resulted in lower unabsorbed overhead and fewer factory inefficiencies, which benefited the
gross margin. Production days overseas increased 18%, which caused a similar margin improvement from 35.4% to 36.3%. Nevertheless, a shift in mix toward mid-priced piano lines from higher
margin Steinway grand pianos somewhat offset the impact of greater factory efficiencies on gross profit compared to 2009.

Operating Expenses  Operating expenses were $2.5 million higher than in the year-ago period. A $2.9 million
increase in sales and marketing expenses due to higher salaries, commissions, bonuses, marketing, and advertising costs was partially offset by $1.5 millon shift from bad debt expense to bad debt
recovery. Increased headcount, wages, and bonuses caused a $0.6 million increase in general and administrative costs, and other operating expenses increased $0.5 million due to
additional environmental reserves recorded for facilities acquired in 2004.

Facility Rationalization and Impairment Charges  Facility rationalization and impairment charges decreased $1.0 million. We wrote
down $1.0 million of trademarks associated with our online music business in the year-ago period, whereas in the current period, we had no impairment charges.

Non-operating Expenses  Non-operating expenses were $5.1 million higher than the year-ago
period due to several factors. We experienced a shift from net income to net expense of $3.5 million from our West 57th Street building. We expect to incur a temporary loss
on this facility until we have leased more of the remaining available space to new tenants. There was also a $3.3 million reduction in net gains on extinguishment of debt, which resulted from
repurchasing less debt ($5.8 million in 2010 vs. $10.9 million in 2009) at higher rates. However, net interest expense was $0.5 million lower as a result of these repurchases and
not utilizing our domestic line of credit in 2010. We also benefited from a shift from foreign exchange losses to foreign exchange gains of $1.6 million during the period.

24

---



Results of Operations

Fiscal
Year 2009 Compared to Fiscal Year 2008

For the years ended December 31,



Change2009



2008



$

%Net salesBand

$
126,437




$
159,047





(32,610
)

(20.5
)Piano


179,999





228,366





(48,367
)

(21.2
)Total sales


306,436





387,413





(80,977
)

(20.9
)Cost of salesBand


98,058





124,752





(26,694
)

(21.4
)Piano


123,465





147,371





(23,906
)

(16.2
)Total cost of sales


221,523





272,123





(50,600
)

(18.6
)Gross profitBand


28,379


22.4%


34,295


21.6%


(5,916
)

(17.3
)Piano


56,534


31.4%


80,995


35.5%


(24,461
)

(30.2
)Total gross profit


84,913





115,290





(30,377
)

(26.3
)27.7%





29.8%Operating expenses


70,666





84,220





(13,554
)

(16.1
)Facility rationalization and impairment charges


976





9,877





(8,901
)

(90.1
)Total operating expenses


71,642





94,097





(22,455
)

(23.9
)Income from operations


13,271





21,193





(7,922
)

(37.4
)Other income, net


(1,847
)




(536
)




(1,311
)

244.6Gain on extinguishment of debt


(3,434
)




(636
)




(2,798
)

439.9Net interest expense


10,045





9,218





827


9.0Non-operating expenses


4,764





8,046





(3,282
)

(40.8
)Income before income taxes


8,507





13,147





(4,640
)

(35.3
)Income tax provision


3,171


37.3%


4,961


37.7%


(1,790
)

(36.1
)Net income

$
5,336




$
8,186





(2,850
)

(34.8
)


Overview  Adverse economic conditions negatively impacted both the piano and band divisions' revenue throughout 2009. Piano division
revenue was adversely affected by the economic crisis as well as our dealers' access to available financing. Piano margins continued to be negatively impacted by lower production volume at both of our
manufacturing facilities. Band division sales decreased as a result of reduced demand, similar credit restrictions, and dealers' tendency to only order products that could be resold quickly. However,
band margins improved due largely to lower cash discounts and sales program costs. In an effort to mitigate the impact of lower gross profit, management reduced headcount,
lowered salaries, suspended or reduced benefits, and took other cost saving measures throughout the Company.

Piano
division results include the operations of our online music business, which recognized an impairment charge of $1.0 million on its trademark assets due to a decline in
estimated forecasted discounted cash flows as a result of the economic downturn. No charge was taken against any other intangible assets and no other events or circumstances occurred subsequent to our
annual testing in July 2009 which would have indicated impairment.

Net Sales  Net sales decreased $81.0 million due to decreases in both the band and piano division revenues of 21%. Band division
revenues decreased $32.6 million on a 32% decrease in unit shipments.

25

---



This
was mitigated by a shift from beginner level instruments towards higher priced intermediate and professional level instruments. Piano revenues, which included $8.4 million of online music
retail sales, deteriorated $48.4 million in 2009.

Domestically,
Steinway grand unit shipments dropped 39%, while mid-priced piano unit shipments decreased 22%, resulting in $27.6 million lower revenues. Overseas
Steinway grand unit shipments decreased 23% and mid-priced piano line shipments decreased 10%, causing the $20.8 million deterioration in sales. This includes a $2.6 million
reduction in revenues attributable to foreign exchange. We experienced reduced demand at both the wholesale and retail levels worldwide, although our mid-priced piano lines were less
affected by the economic downturn.

Gross Profit  Gross profit fell $30.4 million due to lower sales at both divisions and lower margins at the piano division. The
band division's gross margin increased slightly, from 21.6% to 22.4% during the period. Pension costs increased $3.3 million due primarily to pension asset portfolio deterioration. This was
more than offset by reduced cash discounts and sales program costs, which were $3.7 million higher in 2008. The absence of severance costs associated with our facility rationalization project,
which were $0.9 million in the year-ago period, and the shift in mix to certain higher margin accessories and brass instruments mitigated the unabsorbed overhead resulting from
lower production.

Piano
segment gross profit dropped $24.5 million during the period. Domestically, piano gross margins decreased from 28.9% to 26.4% as the factory produced 37% fewer Steinway
grand pianos than in the year-ago period in order to manage inventory levels. This resulted in higher unabsorbed
overhead and product costs, which adversely impacted the margin. Overseas margins went from 41.3% to 35.4% as our factory in Germany also reduced production of Steinway grands by 35% compared to 2008.

Operating Expenses  Operating expenses were $13.6 million lower due to several factors. Sales and marketing expenses decreased
$9.1 million due to lower salaries, commissions, and bonuses, as well as decreased spending for trade shows and advertising. Due to reductions in headcount, wages, benefits, and outside
services, general and administrative costs were $4.6 million less than in 2008.

Facility Rationalization and Impairment Charges  Facility rationalization and impairment charges decreased $8.9 million. We wrote
off $8.6 million of band division goodwill in 2008, whereas 2009 impairment charges were limited to the $1.0 million write down of trademarks associated with our online music business.

Non-operating Expenses  Non-operating expenses decreased $3.3 million due to the extinguishment of
$10.9 million of our Senior Notes, which resulted in a $3.4 million net gain, as compared to the $0.6 million gain in 2008. Other income, net increased $1.3 million over
2008. Foreign exchange losses were $0.9 million more than in 2008. However, these expenses were more than offset by the shift from losses to gains on our Supplemental Executive Retirement Plan
("SERP") assets and increased net income from our Steinway Hall property. Net interest expense was $0.8 million higher due to lower interest income on band division financed receivables.

Liquidity and Capital Resources

We have relied primarily upon cash provided by operations, supplemented as necessary by seasonal borrowings under our working capital
lines, to finance our operations, repay or repurchase long-term indebtedness, finance acquisitions, and fund our capital expenditures. Our overseas divisions, particularly those in Asia,
are normally in a borrowing position on their lines. These borrowings are likely to be less than $5.0 million at any given time. In 2008, our domestic line went virtually unused until the
fourth quarter, when we borrowed $30.0 million to ensure short-term liquidity. We paid down $15.0 million of that balance prior to December 31, 2008. In 2009, we
utilized our domestic line of credit most of the year, and our borrowings reached a high of $34.9 million, largely to ensure short-term liquidity by

26

---



maintaining
a substantial cash balance. However, we paid down our domestic borrowings in November and December 2009 and had nothing outstanding as of December 31, 2010.

Cash Flows  Our statements of cash flows are summarized as follows:

For the years ended December 31,

2010

2009

2008Net income:

$
7,900

$
5,336

$
8,186Changes in operating assets and liabilities


17,544


10,206


(21,988
)Other adjustments to reconcile net income to cash flows from operating activities


10,224


8,374


20,773Cash flows from operating activities


35,668


23,916


6,971Cash flows from investing activities


(3,962
)

(5,347
)

(7,655
)Cash flows from financing activities


23,900


2,858


9,084


In
2010, cash flows from operating activities increased $11.8 million. Although the sales increase caused a decrease in source of cash from accounts receivable of
$13.3 million, we also generated $3.6 million more cash from inventory since the sales improvement helped reduce our finished goods levels. We experienced a shift from use to source of
cash of $18.1 million related to accounts payable and accrued expenses during the period. In 2009, we had implemented cost cutting measures to conserve cash and reduce expenditures. In 2010,
spending has returned to normal levels.

In
2009, cash flows from operating activities increased $16.9 million. Reduced production and purchasing resulted in an improvement of cash provided by inventory of
$25.9 million while cash used for liabilities decreased $1.9 million due to fewer purchases and controlled spending. The beneficial impact of these items more than offset the decrease in
net income.

In
2008, cash flows from operating activities decreased $27.1 million. Cash used for inventory increased $24.5 million due to the band division, which experienced an
unexpected inventory buildup due to a $12.1 million reduction in sales, virtually all of which occurred in the fourth quarter. Also, cash used for liability related items increased
$17.7 million due to large pension contributions, tax related payments, and reductions in employee benefit and deferred income accruals. These items exceeded the positive impact of cash
provided by accounts receivable, which increased $14.1 million largely due to more stringent credit criteria at the band division.

In
2010, cash used for investing activities decreased $1.4 million, $0.8 million of which was due to reduced capital expenditures. The remaining reduction is largely
attributable to lower payments for acquisitions. In 2009 we purchased a retail store in Dusseldorf, Germany. In 2010, acquisitions were limited to a small music education business purchased by our
band division.

In
2009, cash used for investing activities decreased $2.3 million. In 2008, we acquired Arkiv and Clickpoint and paid out $3.2 million related to acquisitions. In 2009,
acquisition activity was limited to the purchase of a retail store in Düsseldorf, Germany for $0.8 million. Although capital expenditures were $0.8 million lower than the
year-ago period, proceeds from sales of property were lower by the same amount. In 2008, cash used for investing activities increased $2.9 million due to our acquisitions of Arkiv
and Clickpoint.

In
2010, cash provided by financing activities increased $21.0 million, which was derived from $28.2 million in proceeds received from issuance of our stock and
$1.7 million generated from borrowing on our overseas lines of credit. These were offset by $5.6 million used to repurchase $5.8 million in principal of our Senior Notes and
$0.3 million used to purchase treasury stock. In 2009, cash provided by financing activities decreased $6.2 million. Although we received $27.8 million in proceeds from sales of
our stock, we utilized $15.0 million to pay off our domestic line of credit, $2.7 million to pay down our foreign borrowings, and $7.3 million to repurchase $10.9 million
in principal of our Senior Notes. In

27

---



2008,
cash provided by financing activities shifted $32.3 million largely due to the $15.0 million outstanding borrowing on our domestic line of credit.

Capital Expenditures  Our capital expenditures consist primarily of tooling, machinery, software and system upgrades, and plant and
facility improvements. We expect capital spending in 2011
to be in the range of $4.0 to $6.0 million, relating to similar items, with an additional $1.0 to $2.0 million for improvements and renovations at our building in New York City.

Seasonality  Consistent with industry practice, we sell band instruments almost entirely on credit utilizing the two financing programs
described below. Due to these programs, we have large working capital requirements during certain times of the year when band instrument receivable balances reach highs of approximately $35.0 to
$40.0 million in August and September, and lesser requirements when they are at lows of approximately $25.0 to $30.0 million in January and February. The financing options, intended to
assist dealers with the seasonality inherent in the industry and facilitate the rent-to-own programs offered to students by many retailers, also allow us to match our
production and delivery schedules. The following forms of financing are offered to qualified band instrument dealers.

Other Financing Arrangements  We established a program in 2009 to provide financing to certain domestic piano dealers. As of
December 31, 2010, the total financing available to these dealers was less than $1.0 million. Beyond this program, we generally do not provide extended financing arrangements to our
piano dealers. Typically, if financing is required by a dealer, we will facilitate arrangements through a third-party provider. We generally provide no guarantees with respect to these arrangements.

Off-balance Sheet Arrangements  We currently do not have any off-balance sheet arrangements that have, or are
reasonably likely to have a current or
future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to
investors.

Pensions and Other Postretirement Benefits  When determining the amounts to be recognized in the consolidated financial statements
related to our domestic pension plan, we used a long-term rate of return on plan assets of 9%, which was developed with input from our investment committee, and is consistent with that of
prior years. We believe that 9% is consistent with the historical long-term return trends on our domestic pension assets and our expectations for future returns. The discount rate utilized
for determining future pension and other postretirement benefit obligations for our domestic plans is based on a long-term bond yield curve which matches the expected benefit payment
period under the plan. The bonds used have been rated Aa or AA or better by recognized rating agencies, are non-callable, and have at least $250.0 million par outstanding to ensure
they are sufficiently marketable. The weighted-average discount rates used for December 31, 2010 and 2009 were 5.26% and 5.95%, respectively, for our domestic pension plan and 5.12% and 5.83%
for our postretirement benefit obligation plan.

The
weighted-average discount rates (5.40% and 5.69% as of December 31, 2010 and 2009, respectively) and rates of return (5.30% and 6.00% as of December 31, 2010 and 2009,
respectively) on

28

---



plan
assets for our foreign pension and other postretirement benefit plans were similarly developed utilizing long-term rates of return and discount rates reasonably expected to occur in
the applicable jurisdiction.

Borrowing Activities and Availability  On October 5, 2010, we entered into a new domestic credit facility with a syndicate of
lenders (the "Credit Facility"). The Credit Facility provides us with a potential borrowing capacity of $100.0 million in revolving credit loans and expires on October 5, 2015. It also
provides for borrowings at either London Interbank Offering Rate ("LIBOR") plus a range from 1.75% to 2.25% or as-needed borrowings at an alternate base rate, plus a range from 0.75% to
1.25%; both ranges depend upon availability at the time of borrowing. Borrowings are collateralized by our domestic accounts receivable, inventory and certain fixed assets.

Our
non-domestic credit facilities provide for borrowings equivalent to $27.9 million as of December 31, 2010. There have been no material changes to our
borrowing abilities overseas, and we typically are in a borrowing position of less than $5.0 million at any given time. Our non-domestic credit facilities are discussed more fully
in Note 11 to the consolidated financial statements.

At
December 31, 2010, our total outstanding indebtedness amounted to $155.0 million, consisting of $152.5 million of Senior Notes due March 1, 2014 and
$2.5 million of notes payable to foreign banks. We had nothing outstanding on our domestic line of credit as of December 31, 2010. During 2010 we repurchased $5.8 million of our
Senior Notes. We may consider additional repurchases or restructuring of our Senior Note debt in the future, contingent upon cash availability, interest rates, and the trading and call prices on our
Senior Notes. Cash interest paid was $12.3 million in 2010, $13.6 million in 2009, and $12.4 million in 2008.

All
of our debt agreements contain covenants that place certain restrictions on us, limiting our ability to incur additional indebtedness, to make investments in other entities, and to
make cash dividend payments. We were in compliance with all such covenants as of December 31, 2010 and do not anticipate any compliance issues in 2011. Our domestic debt agreements contain
limitations on the amount of discretionary repurchases we may make of our Ordinary common stock. Our intent and ability to repurchase additional Ordinary common stock either directly from shareholders
or on the open market is directly affected by this limitation. In May 2008 we announced a share repurchase program which permits us to make discretionary purchases of up to $25.0 million of our
Ordinary common stock. To date, we have repurchased 102,127 shares and approximately $22.5 million remains authorized for repurchases under this program.

We
experience long production and inventory turnover cycles, which we constantly monitor since fluctuations in demand can have a significant impact on these cycles. In normal economic
conditions, we are able to effectively utilize cash flow from operations to fund our debt and capital requirements and pay off our seasonal borrowings on our domestic line of credit.

We
intend to manage accounts receivable and credit risk and control inventory levels via reduced purchases and production schedules. Our intention is to manage cash outflow,
maintain sufficient operating cash on hand to meet short-term requirements, and minimize credit facility borrowings.

We
do not have any current plans or intentions that will have a material adverse impact on our liquidity in 2011, although we may consider acquisitions or debt restructurings that may
require funding from operations or from our credit facilities. Other than those described, we are not aware of any trends, demands, commitments, or costs of resources that are expected to materially
impact our liquidity or capital resources. Accordingly, we believe that cash on hand, together with cash flows anticipated from operations and available borrowings under the Credit Facility and
non-domestic credit facilities, will be adequate to meet our debt service requirements, fund continuing capital requirements and satisfy our working capital and general corporate needs
through 2011.

29

---



Contractual Obligations  The following table provides a summary of our contractual obligations at December 31, 2010.

Payments due by periodContractual Obligations

Total

Less than 1 year

1 - 3 years

3 - 5 years

More than
5 yearsLong-term debt(1)

$
188,799

$
13,163

$
21,351

$
154,285

$
Capital leases


8


8








Operating leases(2)


256,516


6,011


9,761


8,148


232,596Purchase obligations(3)


31,065


30,581


484





Other non-current liabilities(4)


44,541


5,584


4,096


3,899


30,962Total

$
520,929

$
55,347

$
35,692

$
166,332

$
263,558


Notes to Contractual Obligations:

Critical Accounting Policies and Estimates

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

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

30

---





The significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements included herein. Not all of these significant accounting policies
require management to make difficult, subjective or complex judgments or estimates. However, management considers the following to be critical accounting policies based on the definition above.



31

---





32

---





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

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board ("FASB") issued guidance regarding when to perform certain impairment
testing on reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. We do
not currently have any reporting units with zero or negative carrying values.

In
January 2010, the FASB issued guidance which amends the existing fair value measurements and disclosure guidance. These amendments require a greater level of disaggregated information
as well as more disclosure around valuation techniques and inputs to fair value measurements. The amendments also provide guidance on employers' disclosures about pension and postretirement benefit
plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. We were required to comply with this new standard as of January 1, 2010. Its
adoption did not have a material impact on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

We are subject to market risk associated with changes in foreign currency exchange rates and interest rates. We mitigate some of our
cash flow exposure to foreign currency fluctuations by holding forward foreign currency contracts. These contracts are not designated as hedges for accounting purposes. The contracts relate primarily
to intercompany transactions and are not used for trading or speculative purposes. The fair value of these contracts is sensitive to changes in foreign currency exchange rates. As of
December 31, 2010, a 10% negative change in foreign currency exchange rates from market rates would decrease the fair value of the contracts by $0.8 million. Gains
and losses on the foreign currency exchange contracts are defined as the difference between the contract rate at its inception date and the current forward rate. However, we would offset any such
gains and losses by corresponding losses and gains, respectively, on the related asset or liability.

Interest Risk

Our interest rate exposure is limited primarily to interest rate changes on our variable rate debt. Our revolving loans bear interest
at rates that fluctuate with changes in PRIME, LIBOR, TIBOR, and EURIBOR and are therefore sensitive to changes in market interest rates. Since we had limited variable rate borrowings for the year
ended December 31, 2010, a hypothetical 10% increase in interest rates would have increased our interest expense by a nominal amount.

Our
long-term debt includes $152.5 million of Senior Notes with a fixed interest rate. Accordingly, there would be no immediate impact on our interest expense
associated with these Senior Notes due to fluctuations in market interest rates. However, based on a hypothetical 10% immediate decrease in market interest rates, the fair value of our Senior Notes,
which would be sensitive to such interest rate changes, would be increased by less than $0.1 million as of December 31, 2010.

33

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Item 8. Financial Statements And Supplementary Data



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


35REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


37CONSOLIDATED FINANCIAL STATEMENTS:Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009, and 2008


38Consolidated Balance Sheets as of December 31, 2010 and 2009


39Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009, and 2008


40Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2010, 2009, and 2008


41Notes to Consolidated Financial Statements


42


34

---







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders
Steinway Musical Instruments, Inc.:

We
have audited the accompanying consolidated balance sheet of Steinway Musical Instruments, Inc. and subsidiaries (the Company) as of December 31, 2010, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then ended. We also have audited the Company's internal control over financial reporting as of December 31, 2010,
based on criteria established inInternal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.
Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

35

---



In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Steinway Musical Instruments, Inc. and subsidiaries
as of December 31, 2010, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion,
Steinway Musical Instruments, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control 
Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/
KPMG LLP

Boston,
Massachusetts
March 14, 2011

36

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders
Steinway Musical Instruments, Inc.

We
have audited the accompanying consolidated balance sheet of Steinway Musical Instruments, Inc. and subsidiaries (the "Company") as of December 31, 2009, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2009. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2009, and
the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in
the United States of America.

/s/
UHY LLP

Boston,
Massachusetts
March 10, 2010

37

---





Steinway
Musical Instruments, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS(In Thousands Except Share and Per Share Data)

For the years ended December 31,

2010

2009

2008Net sales

$
318,121

$
306,436

$
387,413Cost of sales


222,171


221,523


272,123Gross profit


95,950


84,913


115,290Operating expenses:Sales and marketing


41,634


38,742


47,804(Recovery of) provision for doubtful accounts


(294
)

1,161


714General and administrative


29,688


29,083


33,693Amortization


1,226


1,306


1,131Other operating expenses


883


374


878Facility rationalization and impairment charges





976


9,877Total operating expenses


73,137


71,642


94,097Income from operations


22,813


13,271


21,193Other expense (income), net


370


(1,847
)

(536
)Gain on extinguishment of debt


(104
)

(3,434
)

(636
)Interest income


(1,431
)

(1,830
)

(3,049
)Interest expense


11,017


11,875


12,267Total non-operating expenses


9,852


4,764


8,046Income before income taxes


12,961


8,507


13,147Income tax provision


5,061


3,171


4,961Net income

$
7,900

$
5,336

$
8,186Earnings per share  basic

$
0.68

$
0.60

$
0.96Earnings per share  diluted

$
0.68

$
0.60

$
0.95Weighted average shares:Basic


11,640,955


8,855,138


8,557,761Diluted


11,695,086


8,859,554


8,629,647


See
notes to consolidated financial statements.

38

---





Steinway
Musical Instruments, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS(In Thousands Except Share and Per Share Data)

December 31,

2010

2009AssetsCurrent assets:Cash

$
119,811

$
65,873Accounts, notes and other receivables, net


42,385


45,073Inventories, net


144,500


158,030Prepaid expenses and other current assets


10,513


13,499Deferred tax assets


11,419


11,431Total current assets


328,628


293,906Property, plant and equipment, net


86,404


89,538Trademarks


14,981


15,284Goodwill


26,023


24,063Other intangibles, net


4,028


4,183Other assets


16,144


12,663Long-term deferred tax assets


8,886


10,153Total assets

$
485,094

$
449,790Liabilities and stockholders' equityCurrent liabilities:Debt

$
2,462

$
537Accounts payable


12,141


9,764Other current liabilities


39,181


36,395Total current liabilities


53,784


46,696Long-term debt


152,048


157,703Deferred tax liabilities


3,761


7,124Pension and other postretirement benefit liabilities


38,366


35,766Other non-current liabilities


8,511


6,005Total liabilities


256,470


253,294Commitments and contingent liabilitiesStockholders' equity:Class A common stock, $.001 par value, 5,000,000 shares authorized, 477,952 shares issued and outstanding





Ordinary common stock, $.001 par value, 90,000,000 shares authorized, 13,626,363 and 11,844,592 shares issued in 2010 and 2009, respectively, and
11,577,760 and 9,817,816 shares outstanding in 2010 and 2009, respectively


14


12Additional paid-in capital


154,404


125,192Retained earnings


134,209


126,415Accumulated other comprehensive loss


(12,935
)

(7,851
)Treasury stock, at cost (2,024,903 and 2,026,776 shares of Ordinary common stock in 2010 and 2009, respectively)


(47,068
)

(47,272
)Total stockholders' equity


228,624


196,496Total liabilities and stockholders' equity

$
485,094

$
449,790


See notes to consolidated financial statements.

39

---





Steinway
Musical Instruments, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands)

For the years ended December 31,

2010

2009

2008Cash flows from operating activities:Net income

$
7,900

$
5,336

$
8,186Adjustments to reconcile net income to cash flows from operating activities:Depreciation and amortization


9,550


10,370


10,928Gain on extinguishment of debt


(104
)

(3,434
)

(636
)Facility rationalization charges








1,322Goodwill and trademark impairment





976


8,555Stock-based compensation expense


1,447


1,207


1,115Tax deficiency (excess benefit) from stock-based awards


63





(4
)Tax benefit from stock option exercises


5





5Deferred tax benefit


(458
)

(1,679
)

(2,035
)(Recovery of) provision for doubtful accounts


(294
)

1,161


714Other


15


(227
)

809Changes in operating assets and liabilities, net of effects of business acquired:Accounts, notes and other receivables


2,031


15,363


13,642Inventories


9,867


6,310


(19,584
)Prepaid expenses and other assets


(933
)

47


(2,620
)Accounts payable


2,575


(7,235
)

4,257Other current and non-current liabilities


4,004


(4,279
)

(17,683
)Cash flows from operating activities


35,668


23,916


6,971Cash flows from investing activities:Capital expenditures


(3,732
)

(4,552
)

(5,338
)Proceeds from sales of property, plant and equipment


20


25


854Other


103





Acquisition of businesses, net of cash acquired


(353
)

(820
)

(3,181
)Cash flows from investing activities


(3,962
)

(5,347
)

(7,665
)Cash flows from financing activities:Borrowings under lines of credit


2,136


277,245


36,092Repayments under lines of credit


(400
)

(294,913
)

(20,717
)Repayments of long-term debt, net of discount


(5,633
)

(7,280
)

(4,981
)Proceeds from issuance of common stock


28,209


27,806


817Purchase of treasury stock


(349
)




(2,131
)Tax deficiency (excess benefit) from stock-based awards


(63
)




4Cash flows from financing activities


23,900


2,858


9,084Effects of foreign exchange rate changes on cash


(1,668
)

66


(1,314
)Increase in cash


53,938


21,493


7,076Cash, beginning of year


65,873


44,380


37,304Cash, end of year

$
119,811

$
65,873

$
44,380Supplemental cash flow information:Interest paid

$
12,279

$
13,646

$
12,444Income taxes paid

$
7,429

$
5,744

$
14,150


See notes to consolidated financial statements.

40

---





Steinway
Musical Instruments, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(In Thousands Except Share Data)

Common Stock

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total
Stockholders'
EquityBalance, January 1, 2008

$
11

$
94,370

$
112,917

$
1,773

$
(45,292
)
$
163,779Comprehensive loss:Net income








8,186








8,186Foreign currency translation adjustment











(3,991
)




(3,991
)Changes in pension and other postretirement benefits, net











(10,699
)




(10,699
)Total comprehensive loss

















(6,504
)Exercise of 6,500 options for shares of common stock








(24
)




151


127Stock-based compensation





1,115











1,115Tax benefit of options exercised





5











5Issuance of 29,379 shares of common stock





690











690Purchase of 80,300 shares of treasury stock














(2,131
)

(2,131
)Balance, December 31, 2008


11


96,180


121,079


(12,917
)

(47,272
)

157,081Comprehensive income:Net income








5,336








5,336Foreign currency translation adjustment











2,230





2,230Changes in pension and other postretirement benefits, net











2,836





2,836Total comprehensive income

















10,402Stock-based compensation





1,207











1,207Issuance of 1,762,509 shares of common stock


1


27,805











27,806Balance, December 31, 2009


12


125,192


126,415


(7,851
)

(47,272
)

196,496Comprehensive income:Net income








7,900








7,900Foreign currency translation adjustment











(3,540
)




(3,540
)Changes in pension and other postretirement benefits, net











(1,544
)




(1,544
)Total comprehensive income

















2,816Exercise of 24,950 options for shares of common stock





14


(106
)




553


461Tax benefit of options exercised





5











5Stock-based compensation





1,447











1,447Issuance of 1,756,821 shares of common stock


2


27,746











27,748Purchase of 21,827 shares of treasury stock














(349
)

(349
)Balance, December 31, 2010

$
14

$
154,404

$
134,209

$
(12,935
)
$
(47,068
)
$
228,624


See notes to consolidated financial statements.

41

---





Steinway
Musical Instruments, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYears Ended December 31, 2010, 2009, and 2008
(Tabular Amounts in Thousands Except Share and Per Share Data)

1.     Nature of Business

Steinway Musical Instruments, Inc. and subsidiaries (the "Company") is one of the world's leading manufacturers of musical instruments. The Company,
through its piano ("Steinway") and band ("Conn-Selmer") divisions, manufactures and distributes products within the musical instrument industry. Steinway produces the highest quality piano
in the world and has one of the most widely recognized and prestigious brand names. Conn-Selmer is the leading domestic manufacturer of band & orchestral instruments and related
accessories, including complete lines of brass, woodwind, percussion and string instruments. Selmer Paris saxophones, Bach Stradivarius trumpets, C.G. Conn French horns, Leblanc clarinets, King
trombones and Ludwig snare drums are considered by many to be the finest such instruments in the world.

Throughout
these financial statements "we," "us," and "our" refer to Steinway Musical Instruments, Inc. and subsidiaries taken as a whole.

2.     Significant Accounting Policies

Principles of Consolidation  Our consolidated financial statements include the accounts of all direct and indirect subsidiaries, all of
which are wholly owned. All intercompany balances have been eliminated in consolidation.

Use of Estimates  The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of assets and contingent liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates in the consolidated
financial statements include accounts receivable allowances, inventory reserves, workers' compensation and self-insured health claims, impairment of long-lived assets, pension
and other post retirement benefit cost assumptions, deferred income tax valuation allowances, uncertain tax positions, and environmental liabilities.

Revenue Recognition  Generally, revenue for wholesale transactions is recognized upon shipment following receipt of a valid dealer order.
Retail revenue is generally recognized upon delivery to the customer in accordance with the customer's purchase agreement, and restoration revenue is recognized based on the completed contract method.
Revenue from restoration services and rentals is not material to the consolidated financial statements and is included within net sales. Shipping and handling fees billed to customers are not material
and are included within net sales and the related costs are reported within cost of sales. We provide for the estimated costs of warranties, discounts and returns at the time of revenue recognition.

Inventories  Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market.

Depreciation and Amortization  Property, plant and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the

42

---



improvements
or the remaining term of the respective lease, whichever is shorter. Estimated useful lives are as follows:

Buildings and improvements

15  40 yearsLeasehold improvements

5  15 yearsMachinery, equipment and tooling

3  10 yearsOffice furniture and fixtures

3  10 yearsConcert and Artist and rental pianos

15 years


When
impairment indicators are present, we evaluate the recoverability of our long-lived assets by comparing the estimated future cash flows expected to be generated by those
assets to their carrying value. Should the assessment indicate an impairment, the affected assets are written down to fair value. Assets held-for-sale are included in prepaid
expenses and other current assets and are recorded at the lower of cost or net realizable value. We had $1.3 million of such assets, which are comprised of two facilities no longer in use, as
of December 31, 2010 and 2009.

Goodwill, Trademarks, and Other Intangible Assets  Intangible assets other than goodwill and indefinite-lived trademarks are amortized on
a straight-line basis over their estimated useful lives. Deferred financing costs are amortized over the repayment periods of the underlying debt using the effective interest rate method.
We test our goodwill and trademarks for impairment annually, or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.

We
performed our annual goodwill and intangible asset impairment test as of July 31, 2010. Our fall budgeting and planning process provides multi-year cash flows which
we use to conduct our annual impairment testing of intangible assets. Our 2010 analysis did not indicate an impairment of any goodwill or trademarks at either the piano or band division; therefore, no
charge was taken against those assets or any other intangible assets attributable to those divisions. No events or circumstances occurred subsequent to our annual impairment test which would have
indicated that these assets may be impaired.

In
2009, our annual impairment testing indicated a decline in the estimated forecasted discounted cash flows for our online music business component of the piano division. Accordingly,
we wrote down $1.0 million in trademarks attributable to that division. In 2008, our annual impairment testing indicated a decline in the estimated forecasted discounted cash flows for the band
division. Accordingly, we wrote off all of the $8.6 million in goodwill attributable to that division.

Advertising  Advertising costs are expensed as incurred. Advertising expense was $5.2 million for the year ended
December 31, 2010, $5.1 million for the year ended December 31, 2009, and $7.1 million for the year ended December 31, 2008.

Accounts, Notes and Other Receivables, Net  Accounts, notes and other receivables are recorded net of allowances for bad debts, discounts
and returns. Generally, we reserve all receivables that are in

43

---



excess
of one year past due. We write off receivables in the event of customer bankruptcy, or at management's discretion when collectibility is no longer reasonably possible.

December 31,

2010

2009Accounts receivable

$
41,236

$
43,346Notes and other receivables


13,414


15,370Accounts, notes and other receivables, gross


54,650


58,716Allowance for doubtful accounts


(10,316
)

(11,088
)Allowance for discounts and returns


(1,949
)

(2,555
)Accounts, notes and other receivables, net

$
42,385

$
45,073


A
summary of the activity in the allowance for doubtful accounts is as follows:

For the years ended December 31,

2010

2009

2008Beginning balance

$
11,088

$
12,546

$
13,570Additions (recoveries)


(294
)

1,161


714Foreign currency translation adjustments


(10
)

29


(76
)Deductions and other


(468
)

(2,648
)

(1,662
)Ending balance

$
10,316

$
11,088

$
12,546


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

We
report income tax-related interest and penalties as a component of income tax expense. We file income tax returns at the U.S. federal, state, and local levels, as well as
in several foreign jurisdictions. With few exceptions, our returns are no longer subject to examinations for years before 2007.

Foreign Currency Translation and Remeasurement  We translate assets and liabilities of non-U.S. operations into U.S. dollars
at year end rates, and revenues and expenses at average rates of exchange prevailing during the year. We report the resulting translation adjustments as a separate component of accumulated other
comprehensive income or loss. We recognize foreign currency transaction gains and losses in the consolidated statements of operations as incurred.

Foreign Currency Exchange Contracts  We enter into foreign currency exchange contracts to mitigate the risks from foreign currency
fluctuations on certain intercompany transactions. These contracts are not designated as hedging instruments for accounting purposes, and are not used for trading or speculative purposes. Gains and
losses arising from fluctuations in exchange rates are recognized in the statement of operations. Such gains and losses offset the foreign currency exchange gains or losses associated with the
corresponding receivable, payable, or forecasted transaction. We have credit risk to the extent the counterparties are unable to fulfill their obligations on the foreign currency exchange contracts.
However, we enter into these contracts with reputable financial institutions and believe we have no significant credit risk.

Stock-Based Compensation  We have an employee stock purchase plan ("Purchase Plan") and stock award plans ("Stock Plans"), which are
described in Note 12.

44

---



We
measure the grant date fair value of equity awards given to employees in exchange for services and recognize that cost over the period that such services are performed. The cost of
share-based awards is recognized on a straight-line basis over each award's requisite service period. We estimate the fair value of our stock option awards and employee stock purchase plan
rights on the date of grant using the Black-Scholes option valuation model. See Note 12 for additional information regarding our stockholders' equity and stock arrangements.

Earnings per Common Share  Basic earnings per common share is computed using the weighted-average number of common shares outstanding
during each year. Diluted earnings per common share reflects the dilutive impact of shares subscribed under the Purchase Plan and effect of
our outstanding options using the treasury stock method, except when such options would be antidilutive.

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

For the years ended December 31,

2010

2009

2008Weighted-average shares for basic earnings per share


11,640,955


8,855,138


8,557,761Dilutive effect of stock-based compensation plans


54,131


4,416


71,886Weighted-average shares for diluted earnings per share


11,695,086


8,859,554


8,629,647


Antidilutive
options not included in our diluted earnings per common share calculation totaled 739,336 as of December 31, 2010, 1,129,276 as of December 31, 2009, and
454,840 as of December 31, 2008.

Environmental Matters  Potential environmental liabilities are recorded when it is probable that a loss has been incurred and its amount
can reasonably be estimated. (See Note 13.)

Segment Reporting  We have two reportable segments: the piano segment and the band & orchestral instrument segment. We consider
these two segments reportable as they are managed separately and the operating results of each segment are separately reviewed and evaluated by our senior management on a regular basis. The Company's
chief operating decision maker is the Chief Executive Officer.

Retirement Plans  We have defined benefit pension plans covering a majority of our
employees, including certain employees in foreign countries. Certain domestic hourly employees are covered by multi-employer defined benefit pension plans to which we make contributions. We also
provide postretirement life insurance benefits to certain eligible hourly retirees and their dependents.

Benefits
under the pension and other postretirement benefit plans are generally based on age at retirement and years of service and, for some pension plans, benefits are also based on
the employee's annual earnings. The net cost of our pension and other postretirement plans is determined using the projected unit credit method and several actuarial assumptions, the most significant
of which are the discount rate, the long-term rate of asset return, and current rate trends. A portion of these costs is not recognized in net earnings in the year incurred because it is
allocated to product costs and reflected in inventory at the end of a reporting period.

Accumulated Other Comprehensive Income (Loss)  Comprehensive income (loss) is comprised of net income, foreign currency translation
adjustments, and certain changes in pension and other postretirement benefit liabilities, and is reported in the consolidated statements of stockholders' equity

45

---



for
all periods presented. The components of accumulated other comprehensive income (loss) are as follows:

Foreign Currency
Translation
Adjustment

Pension & Other
Post-Retirement
Benefits

Tax Impact of
Pension & Other
Post-Retirement
Benefits

Accumulated
Other
Comprehensive
Income (Loss)Balance, January 1, 2008


9,041


(11,616
)

4,348


1,773Activity


(3,991
)

(18,369
)

7,670


(14,690
)Balance, December 31, 2008


5,050


(29,985
)

12,018


(12,917
)Activity


2,230


5,095


(2,259
)

5,066Balance, December 31, 2009


7,280


(24,890
)

9,759


(7,851
)Activity


(3,540
)

(2,600
)

1,056


(5,084
)Balance, December 31, 2010

$
3,740

$
(27,490
)
$
10,815

$
(12,935
)


Recent Accounting Pronouncements  In December 2010, the Financial Accounting Standards Board ("FASB") issued guidance regarding when to
perform certain impairment testing on reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2010. We do not currently have any reporting units with zero or negative carrying values.

In
January 2010, the FASB issued guidance which amends the existing fair value measurements and disclosure guidance. These amendments require a greater level of disaggregated information
as well as more disclosure around valuation techniques and inputs to fair value measurements. The amendments also provide guidance on employers' disclosures about pension and postretirement benefit
plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. We were required to comply with this new standard as of January 1, 2010. Its
adoption did not have a material impact on our consolidated financial statements.

3.     Acquisitions

In May 2008 we acquired 100% of the membership interest in ArkivMusic, LLC, an online retailer of classical music. We have included the operating results
and net assets of Arkiv in our financial statements since the date of acquisition.

We
acquired Arkiv because its product and customer base are complementary to ours, and we are therefore able to cross-market our products. Under terms of the membership purchase
agreement, we disbursed $3.0 million for the purchase price, and owe additional installment payments of $0.5 million in each of the subsequent three years. We disbursed
$0.5 million in 2009 and 2010 in accordance with this section of the agreement.

We
are also obligated to pay 5% of the 2010 net operating profits of Arkiv, as defined in the membership purchase agreement. This amount, which is not material, is included in our other
current liabilities as of December 31, 2010.

The
final purchase price was dependent upon a calculation derived from the 2010 net operating profits. This calculation resulted in an additional purchase price of $2.7 million,
which was allocated to goodwill and has been included in our other current liabilities as of December 31, 2010. The final purchase price, which includes costs associated with the acquisition
and the net operating profits

46

---



calculation
above, amounts to $7.5 million. These costs have been allocated to acquired assets and assumed liabilities as of May 16, 2008 as follows:

Current assets

$
351Property, plant, and equipment


33Trademarks


2,231Non-compete agreements


250Customer relationships


425Website and developed technology


1,987Goodwill


2,727Accounts payable


(499
)Other current liabilities


(25
)Total

$
7,480


In
2009, we recorded an impairment charge of $1.0 million associated with the trademarks acquired in this transaction. These trademarks have a remaining value of
$1.3 million as of December 31, 2010.

In
February 2009 we acquired a retail store in Düsseldorf, Germany ("Düsseldorf") for $0.8 million. Footnotes providing details of our significant
balance sheet accounts include the impact of the Düsseldorf acquisition as of December 31, 2009.

In
August 2010 our band division purchased a music education business for $0.4 million. Footnotes providing details of our significant balance sheet accounts include the impact of
this acquisition as of December 31, 2010.

4.     Inventories, net

December 31,

2010

2009Raw materials

$
18,091

$
18,413Work-in-process


34,493


42,121Finished goods


91,916


97,496$
144,500

$
158,030


A
summary of the activity in the inventory reserves is as follows:

For the years ended December 31,

2010

2009

2008Beginning balance

$
12,186

$
12,558

$
10,554Additions charged to costs and expenses


3,007


2,194


3,457Foreign currency translation adjustments


(57
)

21


(98
)Deductions and reclassifications


(2,082
)

(2,587
)

(1,355
)Ending balance

$
13,054

$
12,186

$
12,558


47

---



5.     Property, Plant and Equipment, Net

December 31,

2010

2009Land

$
19,208

$
19,686Buildings and improvements


72,552


70,646Leasehold improvements


5,479


5,290Machinery, equipment and tooling


61,535


61,223Office furniture and fixtures


11,804


11,794Concert and Artist and rental pianos


25,622


24,603Construction-in-progress


1,187


2,040197,387


195,282Less accumulated depreciation


(110,983
)

(105,744
)$
86,404

$
89,538


Depreciation
expense was $8.3 million in 2010, $9.1 million in 2009, and $9.8 million in 2008.

6.     Goodwill, Trademarks, and Other Intangible Assets

December 31,

2010

2009Non-amortizing intangible assets:Goodwill

$
26,023

$
24,063Trademarks

$
14,981

$
15,284Amortizing intangible assets:Gross deferred financing costs

$
6,170

$
5,333Accumulated amortization


(3,542
)

(3,135
)Deferred financing costs, net

$
2,628

$
2,198Gross non-compete agreements

$
250

$
250Accumulated amortization


(131
)

(81
)Non-compete agreements, net

$
119

$
169Gross customer relationships

$
524

$
506Accumulated amortization


(283
)

(166
)Customer relationships, net

$
241

$
340Gross website and developed technology

$
2,176

$
2,176Accumulated amortization


(1,136
)

(700
)Website and developed technology, net

$
1,040

$
1,476Total other intangibles

$
9,120

$
8,265Accumulated amortization


(5,092
)

(4,082
)Other intangibles, net

$
4,028

$
4,183


48

---



The
changes in the carrying amounts of goodwill and trademarks are as follows:

Piano
Segment

Band
Segment

TotalGoodwill:Balance, January 1, 2009

$
23,708

$


$
23,708Foreign currency translation impact


355





355Balance, December 31, 2009


24,063





24,063Acquisitions and purchase price adjustments


2,727


200


2,927Foreign currency translation impact


(967
)




(967
)Balance, December 31, 2010

$
25,823

$
200

$
26,023




Piano
Segment

Band
Segment

TotalTrademarks:Balance, January 1, 2009

$
10,324

$
5,824

$
16,148Impairment charge


(976
)




(976
)Foreign currency translation impact


112





112Balance, December 31, 2009


9,460


5,824


15,284Foreign currency translation impact


(303
)




(303
)Balance, December 31, 2010

$
9,157

$
5,824

$
14,981


We
have previously recorded cumulative impairment losses of $8.6 million associated with band division goodwill and $1.0 million associated with online music business
trademarks.

Deferred
financing costs increased $1.1 million due to debt restructuring activities; primarily the renegotiation of our domestic credit agreement, which we entered into on
October 5, 2010. Deferred financing costs were also impacted by our repurchases of $5.8 million and $10.9 million of our Senior Notes in 2010 and 2009, respectively. These
repurchases are described more fully in Note 11. Once our amortizing assets are fully amortized, these assets are removed from both the gross and accumulated amortization balances. The
weighted-average amortization period for deferred financing costs is seven years, and the weighted-average amortization period of all other amortizable intangible assets is five years. The following
table summarizes amortization expense, which includes amortization of deferred financing costs:

For the years ended December 31,

2010

2009

2008Total amortization expense

$
1,226

$
1,306

$
1,131


The
following table shows the estimated amortization expense for intangible assets for each of the five succeeding fiscal years:

For the years ended December 31,

Amount2011

$
1,2542012


1,2542013


9032014


3072015


182Thereafter


128Total

$
4,028


49

---



7.     Other Assets

December 31,

2010

2009Notes receivable

$
3,005

$
2,338Marketable securities


1,688


1,563Deposits


6,140


6,100Environmental escrow receivable


2,073


Other assets


3,238


2,662Total

$
16,144

$
12,663


Deposits
include $3.5 million set aside for potential workers' compensation liabilities, $2.1 million for environmental remediation, and $0.4 million for collateral
as of December 31, 2010 and 2009. The use of these funds is therefore restricted unless we replace the deposits with a letter of credit of a similar amount. We have reclassified our
environmental escrow receivable from current assets to long term assets in 2010 based on when we currently expect to receive payment.

8.     Other Current Liabilities

December 31,

2010

2009Accrued payroll and related benefits

$
11,428

$
9,326Current portion of pension and other postretirement benefit liabilities


1,306


1,456Accrued warranty expense


1,510


1,553Accrued interest


3,549


3,675Deferred income


9,652


7,210Environmental liabilities


77


2,377Income and other taxes payable


358


3,383Other accrued expenses


11,301


7,415Total

$
39,181

$
36,395


We
have reclassified a portion of our environmental liabilities from current to long term due to our current estimated timeframes for remediation. Accrued warranty expense is recorded at
the time of sale for instruments that have a warranty period ranging from one to ten years. The accrued expense
recorded is generally based on historical warranty costs as a percentage of sales and is adjusted periodically following an analysis of warranty activity.

A
summary of the activity in accrued warranty expense is as follows:

For the years ended December 31,

2010

2009

2008Accrued warranty expense:Beginning balance

$
1,553

$
1,451

$
1,541Additions


894


945


1,044Claims and reversals


(896
)

(865
)

(1,075
)Foreign currency translation


(41
)

22


(59
)Ending balance

$
1,510

$
1,553

$
1,451


50

---



9.     Other Expense (Income), Net

For the years ended December 31,

2010

2009

2008West 57th Street building income

$
(4,930
)
$
(6,234
)
$
(4,653
)West 57th Street building expense


6,786


4,553


3,363Foreign exchange (gain) loss, net


(878
)

758


(169
)Miscellaneous, net


(608
)

(924
)

923Total

$
370

$
(1,847
)
$
(536
)


Prior
to January 1, 2009, our building on West 57th Street in New York City was under a master lease agreement whereby all of our interest in the building was
leased back to the owner of the land. Rental expense on the land and rental income associated with the master lease were included, along with other real estate costs, in Other Expense (Income), Net.
The master lease agreement expired on December 31, 2008 and we engaged an outside company to manage this property. West 57th Street building income includes all rent and
other income attributable to the property; West 57th Street building expense includes the land lease, real estate taxes, depreciation, and other building costs. Since we
retain a portion of the leasable space for our own retail store use, we have allocated a ratable portion of the building cost to sales and marketing expenses.

10.   Income Taxes

The
components of the income tax provision are as follows:

For the years ended December 31,

2010

2009

2008U.S. federal:Current

$
392

$


$
33Deferred


(11
)

(1,333
)

(1,557
)U.S. state and local:Current


353


293


(1,308
)Deferred


(320
)

(247
)

356Foreign:Current


4,774


4,557


8,271Deferred


(127
)

(99
)

(834
)Total

$
5,061

$
3,171

$
4,961


The
components of income before income taxes are as follows:

For the years ended December 31,

2010

2009

2008U.S. operations

$
(1,549
)
$
(5,466
)
$
(11,920
)Non-U.S. operations


14,510


13,973


25,067Total

$
12,961

$
8,507

$
13,147


51

---



Our income tax provision differed from that using the statutory U.S. federal rate as follows:

For the years ended December 31,

2010

2009

2008Statutory federal rate applied to income before income taxes

$
4,536

$
2,977

$
4,599Increase (decrease) in income taxes resulting from:Foreign income taxes (net of federal benefit)(1)


(98
)

451


1,554State income taxes (net of federal benefit)


140


34


14Permanent items


410


375


751Benefit of excess foreign tax credits(2)


(25
)

(612
)

(931
)Benefit of state net operating losses(3)


(219
)

(146
)

(216
)Uncertain tax positions


(34
)

(75
)

(1,089
)Other


351


167


279Income tax provision

$
5,061

$
3,171

$
4,961


At
December 31, 2010, accumulated retained earnings of non-U.S. subsidiaries totaled $17.7 million. We provided $3.3 and $0.7 million in 2010 and 2009,
respectively, for U.S. income taxes for non-U.S. subsidiary earnings that were distributed to the U.S. parent company. No additional provision has been made for undistributed earnings of
non-U.S. subsidiaries because our current intention is to reinvest the remaining earnings for the foreseeable future.

52

---



The
components of net deferred taxes are as follows:

December 31,

2010

2009Deferred tax assets:Uniform capitalization and reserve adjustments to inventory

$
6,915

$
5,223Allowance for doubtful accounts


2,602


3,100Accrued expenses and other current assets and liabilities


8,238


6,411Pension and postretirement benefits within accumulated other comprehensive income (loss)


10,815


9,759Net operating losses


3,049


2,021Foreign tax credits


17,921


20,110Other


444


1,075Total deferred tax assets


49,984


47,699Deferred tax liabilities:Pension contributions


(2,723
)

(3,221
)Property, plant and equipment


(14,530
)

(15,219
)Intangibles


(4,524
)

(4,928
)Total deferred tax liabilities


(21,777
)

(23,368
)Net deferred tax assets before valuation allowances


28,207


24,331Valuation allowances


(11,663
)

(9,871
)Net deferred tax assets

$
16,544

$
14,460


The
valuation allowances generally take into consideration limitations imposed upon the use of the tax attributes and reduce the value of such items to the likely net realizable amount.
The valuation allowances relate to foreign tax credits and state net operating loss carryforwards generated in excess of amounts we expect will more likely than not be utilized. Gross state tax net
operating loss carryforwards totaled $66.1 million as of December 31, 2010 and expire in varying amounts from 2011 through 2030. Our foreign tax credit carryforwards expire in varying
amounts from 2011 through 2018.

A
summary of the activity in the foreign tax credit and net operating loss valuation allowances is as follows:

For the years ended December 31,

2010

2009

2008Beginning balance

$
9,871

$
11,561

$
9,786Additions


3,985


392


2,732Usage, expiration, and reversals


(1,995
)

(2,072
)

(754
)Foreign currency translation


(198
)

(10
)

(203
)Ending balance

$
11,663

$
9,871

$
11,561


Valuation
allowances relating to the acquisition of Steinway totaled $2.3 million as of December 31, 2010 and $2.5 million as of December 31, 2009. The
difference results primarily from exchange rate fluctuations.

53

---



Amounts
recorded in other current liabilities and other non-current liabilities in the accompanying consolidated balance sheet relating to uncertain tax positions as of December 31,
2010 and 2009 are as follows:

December 31,

2010

2009Other current liabilities

$
4

$
10Other non-current liabilities


310


365Total

$
314

$
375


The
liability for uncertain tax positions decreased less than $0.1 million in 2010 primarily as a result of the expiration of statutes of limitations. Although we believe our tax
estimates are appropriate, the expiration of any statutes of limitations, the final determination of any tax audits, or related litigation could result in changes to our estimates.

A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

2010

2009Balance, January 1,

$
1,980

$
2,663Gross increase  tax positions taken in a prior year


3


4Gross decrease  tax positions taken in a prior year


(25
)

(59
)Gross increase  tax positions taken in the current year


7


3Payments





(48
)Lapse of statutes of limitations


(626
)

(583
)Balance, December 31,

$
1,339

$
1,980


With
respect to uncertain tax positions, we have $0.1 million accrued for the payment of interest as of December 31, 2010 and 2009. For the year ended December 31,
2010, the net de-recognition of both interest expense and penalties related to uncertain tax positions were nominal. For the year ended December 31, 2009, we recorded a net
de-recognition of $0.8 million in interest expense and less than $0.1 million in penalties related to uncertain tax positions.

Currently,
we do not believe that our tax reserves will decrease significantly during 2011. The total amount of unrecognized tax benefits which would affect our effective tax rate, if
recognized, was $0.1 million as of December 31, 2010 and $0.4 million as of December 31, 2009.

We
file income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, our returns are no longer subject to examinations
for years before 2007.

11.   Long-Term Debt

Our Senior Notes bear interest at 7.00% and mature on March 1, 2014. During the second quarter of 2010 we repurchased $5.8 million of our Senior
Notes at prices ranging from 95.00% to 98.00% of face value plus accrued interest. In March 2009 we repurchased $10.9 million of our Senior Notes at

54

---



prices
ranging from 65.50% to 68.00% of face value plus accrued interest. As a result, we recorded net gains on extinguishment of debt, summaries of which are as follows:

2010

2009Principal repurchased

$
5,820

$
10,924Less:Cash paid


(5,633
)

(7,280
)Write-off of deferred financing costs


(64
)

(160
)Write-off of bond discount


(19
)

(50
)Net gain on extinguishment of debt

$
104

$
3,434


Our
long-term debt consists of the following:

December 31,

2010

2009Senior Notes

$
152,506

$
158,326Unamortized bond discount


(458
)

(623
)Overseas lines of credit


2,462


537Total


154,510


158,240Less current portion


2,462


537Long-term debt

$
152,048

$
157,703


Scheduled
payments as of December 31, 2010 are as follows:

Amount2011

$
2,4622012


2013


2014


152,506Total

$
154,968


On
October 5, 2010, we entered into a new domestic credit facility with a syndicate of lenders (the "Credit Facility"). The Credit Facility provides us with a potential borrowing
capacity of $100.0 million in revolving credit loans and expires on October 5, 2015. It also provides for borrowings at either London Interbank Offering Rate ("LIBOR") plus a range from
1.75% to 2.25% or as-needed borrowings at an alternate base rate, plus a range from 0.75% to 1.25%; both ranges depend upon availability at the time of borrowing. Borrowings are
collateralized by our domestic accounts receivable, inventory and certain fixed assets. We had nothing outstanding on this Credit facility as of December 31, 2010 and $93.7 million of
availability net of borrowing restrictions.

Our
non-domestic credit facilities originating from two German banks provide for borrowings by foreign subsidiaries of up to €16.3 million
($21.7 million at the December 31, 2010 exchange rate), net of borrowing restrictions of €1.8 million ($2.4 million at the December 31, 2010 exchange
rate) and are payable in April 2012. These borrowings are collateralized by most of the assets of the borrowing subsidiaries. A portion of the loans can be converted into a maximum of
£0.9 million ($1.4 million at the December 31, 2010 exchange rate) for use by our U.K. branch and ¥300 million ($3.7 million at the
December 31, 2010 exchange rate) for use by our Japanese subsidiary. Our Chinese subsidiary also has the ability to convert the equivalent of up to €2.5 million into U.S.
dollars or Chinese yuan ($3.3 million at the December 31, 2010 exchange rate). Euro loans bear interest at rates of Euro Interbank Offered Rate ("EURIBOR") plus a margin determined at
the time of borrowing. Margins

55

---



fluctuate
based on the loan amount and the borrower's bank rating. The remaining demand borrowings bear interest at rates of LIBOR plus 0.8% for British pound loans, LIBOR plus 1.0% for U.S. dollar
loans of our Chinese subsidiary, and Tokyo Interbank Offered Rate ("TIBOR") plus 1.4% for Japanese yen loans. We had nothing outstanding as of December 31, 2010 on these credit facilities.

Our
Japanese subsidiary also maintains a separate revolving loan agreement that provides additional borrowing capacity of up to ¥500 million ($6.2 million at
the December 31, 2010 exchange rate) based on eligible inventory balances. The revolving loan agreement bears interest at an average 30-day TIBOR rate plus 0.9% (outstanding
borrowings at 1.1% at December 31, 2010) and expires on December 21, 2011. As of December 31, 2010, we had $2.5 million outstanding on this revolving loan agreement.

All
of our debt agreements contain covenants that place certain restrictions on us, including our ability to incur additional indebtedness, to make investments in other entities, and to
pay cash dividends. We were in compliance with all such covenants as of December 31, 2010.

12.   Stockholders' Equity and Stock Arrangements

Our common stock is comprised of two classes: Class A and Ordinary. With the exception of disparate voting power, both classes are substantially identical.
Each share of Class A common stock entitles the holder to 98 votes. Holders of Ordinary common stock are entitled to one vote per share. Class A common stock shall automatically convert
to Ordinary common stock if, at any time, the Class A common stock is not owned by an original Class A holder. As of December 31, 2010 our Chairman and our Chief Executive Officer
collectively owned 100% of the Class A common shares, representing approximately 80% of the combined voting power of the Class A common stock and Ordinary common stock.

Employee Stock Purchase Plan  Under our 2006 Employee Stock Purchase Plan (the "Purchase Plan") substantially all employees may purchase
Ordinary common stock through payroll deductions at a purchase price equal to 85% of the lower of the fair market values as of the beginning or end of each twelve-month offering period. Stock
purchases under the Purchase Plan are limited to 5% of an employee's annual base earnings. We reserved 400,000 shares for issuance under this plan and may grant options to purchase shares up to ten
years from the plan's commencement on August 1, 2006. In 2007, we registered 400,000 shares for potential issuance under this plan. Shares issued under the Purchase Plan were 56,821 and 62,509
during 2010 and 2009, respectively.

Stock Plans  The 2006 Stock Plan provides for the granting of 1,000,000 stock options (including incentive stock options and
non-qualified stock options), stock appreciation rights, restricted stock, and other stock awards to certain key employees, consultants and advisors. Our stock options generally have
five-year vesting terms and ten-year option terms. In 2007, we registered 1,000,000 shares for potential issuance under this plan. As of December 31, 2010, 1,250 shares
have been issued under this plan and 749,010 stock options are outstanding.

The
1996 Stock Plan, as amended, provided for the granting of 1,500,000 stock options (including incentive stock options and non-qualified stock options), stock appreciation
rights and other stock awards to certain key employees, consultants and advisors. This plan expired as of July 31, 2006 and 261,200 shares have gone unused as of December 31, 2010.
However, this plan still has vested and unvested options outstanding. We reserved 721,750 treasury stock shares to issue under this plan. We reached our registered share limitation in early 2007, and
have since issued 122,674 shares of treasury stock to cover options exercised, with 337,876 remaining options outstanding. Since in most instances the average cost of the treasury stock exceeded the
price of the options exercised, the difference between the proceeds received and the average cost of the treasury stock issued resulted in a reduction of retained earnings of $0.1 million
during the twelve months ended December 31, 2010. No options were exercised during the twelve months ended December 31, 2009.

56

---



The
compensation cost and the income tax benefit recognized for the Stock Plans and Purchase Plan are as follows:

For the years ended December 31,

2010

2009

2008Compensation cost included in:Basic and diluted income per share

$
0.10

$
0.11

$
0.11Stock-based compensation expense


1,447


1,207


1,115Income tax benefit


265


203


187


We
measure the fair value of options on their grant date, including the valuation of the option feature implicit in our Purchase Plan, using the Black-Scholes option-pricing model. The
risk-free interest rate is based on the weighted-average of U.S. Treasury rates over the expected life of the stock option or the contractual life of the option feature in the Purchase
Plan. The expected life of a stock option is based on historical data of similar option holders. We segregate our employees into two groups based on historical exercise and termination behavior. The
expected life of the option feature in the Purchase Plan is the same as its contractual life. Expected volatility is based on historical volatility of our stock over the expected life of the option,
as our options are not readily tradable.

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

For the years ended December 31,

2010

2009

2008Risk free interest rate


2.31%


3.10%


3.42%Weighted average expected life (in years)


7.2


7.4


7.2Expected volatility of underlying stock


33.8%


32.6%


25.9%Expected dividends


n/a


n/a


n/a


The
weighted-average fair values of options granted under the Stock Plans are as follows:

For the years ended December 31,

2010

2009

2008Stock Plan

$
7.93

$
4.70

$
9.94


The
following table sets forth information regarding the Stock Plans:

Number of
Options

Weighted-
Average
Exercise
Price

Remaining
Contractual
Life
(in years)

Aggregate
Intrinsic
ValueOutstanding at January 1, 2010


1,129,276

$
20.61Granted


10,000


19.62Exercised


(24,950
)

18.46Forfeited


(27,440
)

22.36Outstanding at December 31, 2010


1,086,886

$
20.60


6.1

$
3,091Exercisable at December 31, 2010


587,746

$
22.29


4.4

$
736Vested or expected to vest at December 31, 2010


1,000,286

$
20.50


6.0

$
2,808


The
total intrinsic value of the options exercised during each of the twelve months ended December 31, 2010 and 2008 was less than $0.1 million. There were no options
exercised during the twelve months ended December 31, 2009.

57

---



Cash received from option exercises under the Stock Plan for the period ended December 31, 2010 was $0.5 million. No options were exercised during the period ended
December 31, 2009.

As
of December 31, 2010, there was $2.9 million of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan.
This compensation cost is expected to be recognized over a period of approximately three years.

Key
assumptions used to apply the Black-Scholes pricing model to the Purchase Plan are as follows:

For the years ended December 31,

2010

2009

2008Risk-free interest rate


0.40%


1.66%


3.84%Weighted-average expected life of option feature (in years)


1.0


1.0


1.0Expected volatility of underlying stock


28.0%


26.1%


25.6%Expected dividends


n/a


n/a


n/a


The
weighted-average fair value of the option feature in the Purchase Plan is as follows:

For the years ended December 31,

2010

2009

2008Option feature in Purchase Plan

$
3.45

$
5.44

$
7.93


The
following table sets forth information regarding the Purchase Plan:

Number of
Options

Weighted-
Average
Exercise
Price

Remaining
Contractual
Life
(in years)

Aggregate
Intrinsic
ValueOutstanding at January 1, 2010


24,382

$
9.65Shares subscribed


49,553


11.86Exercised


(56,821
)

9.65Canceled, forfeited, or expired


(1,405
)

10.24Outstanding at December 31, 2010


15,709

$
16.58


0.6

$
49


Cash
received from share issuances under the Purchase Plan for the periods ended December 31, 2010 and 2009 was $0.5 million and $0.6 million, respectively.

13.   Commitments and Contingent Liabilities

Lease Commitments  We lease various facilities and equipment under non-cancelable operating lease arrangements. These leases
expire at various times through 2022. Rent expense was $3.7 million for the years ended December 31, 2010 and 2009 and $6.2 million for the year ended December 31, 2008.

In
March 1999, we acquired the building on West 57th Street in New York City that includes the Steinway Hall retail store for approximately $30.8 million. We
entered into a ninety-nine year land lease as part of the transaction. Annual rent payable under the land lease is $2.8 million through 2018 and will be adjusted every twenty years
thereafter to the greater of the existing rent or 4% of the fair market value of the land and building combined. Rent expense is being recognized on a straight-line basis over the initial
twenty-year fixed rent period.

58

---



Future
minimum lease payments for our non-cancelable operating leases, excluding the land lease discussed above, and future rental income associated with our building on West
57th street, are as follows:

For the years ending December 31,

Lease
Payments

Lease
Income2011

$
3,221

$
2,1472012


2,433


2,0782013


1,749


2,0782014


1,492


1,5492015


1,076


1,521Thereafter


3,118


4,617Total

$
13,089

$
13,990


We
also lease pianos to institutions in the U.K. operating lease income associated with this lease program is as follows:

For the years ending December 31,

Lease
Income2011

$
3572012


3292013


3282014


3232015


321Thereafter


2,402Total

$
4,060


Employment Agreements and Other Obligations  We maintain employment agreements with certain employees and consultants, including our
Chairman and Chief Executive Officer. Most of these agreements have one-year terms and contain automatic renewal provisions. Our obligation under these agreements at current compensation
levels is approximately $3.5 million per year.

The
Chairman and Chief Executive Officer collectively hold 100% of the Class A common shares, representing 80% of the combined voting power of the Class A common stock and
Ordinary common stock. Further, these individuals have established a limited liability corporation to which we pay reimbursement of certain rent, overhead and travel-related expenses. These expenses
totaled $0.4 million for the year ended December 31, 2010, $0.3 million for the year ended December 31, 2009, and $0.2 million for the year ended December 31,
2008. Nothing was included in accounts payable related to these expenses at December 31, 2010. Included in accounts payable as of December 31, 2009 is $0.1 million related to
these expenses.

Financing Obligations  Consistent with industry practice, we sell band instruments almost entirely on credit utilizing our receivable
dating and notes receivable financing programs, which are offered only to qualified band instrument dealers. We established a program in 2009 to provide financing to certain domestic piano dealers. As
of December 31, 2010 and 2009, the total financing available to these dealers was less than $1.0 million. Beyond this program, we generally do not provide
extended financing arrangements to our piano dealers. Typically, if financing is required by a dealer, we will facilitate arrangements through a third-party provider. We generally provide no
guarantees with respect to these arrangements.

59

---



Legal and Environmental Matters  We are involved in certain legal proceedings regarding environmental matters, which are described below.
Further, in the ordinary course of business, we are party to various legal actions that we believe are routine in nature and incidental to the operation of our business. While the outcome of such
actions cannot be predicted with certainty, we believe that, based on our experience in dealing with these matters, their ultimate resolution will not have a material adverse impact on our business,
financial condition, results of operations or prospects.

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

We
are continuing an existing environmental remediation plan at a facility we acquired in 2000. We expect to pay these costs, which approximate $0.6 million, over a
10-year period. We have accrued approximately $0.5 million for the estimated remaining cost of this remediation program, which represents the present value total cost using a
discount rate of 4.54%.

A
summary of expected payments associated with this project is as follows:

Environmental Payments2011

$
772012


612013


612014


612015


61Thereafter


302Total

$
623


In
2004, we acquired two manufacturing facilities from G. Leblanc Corporation, now Grenadilla, Inc. ("Grenadilla"), for which environmental remediation plans had already been
established. In connection with the acquisition, we assumed the existing accrued liability of approximately $0.8 million for the cost of these remediation activities. Based on a review of past
and ongoing investigatory and remedial work by our environmental consultants, and discussions with state regulatory officials, as well as recent sampling, we estimate the remaining costs of such
remedial plans to be $2.4 million. Pursuant to the purchase and sale agreement, we have sought indemnification from Grenadilla for anticipated costs above the original estimate. We filed a
claim against the escrow and recorded a corresponding receivable for this amount in other assets in our consolidated balance sheet. Based on the current estimated costs of remediation, this receivable
totaled $2.1 million as of December 31, 2010 and 2009. We reached an agreement with Grenadilla whereby current environmental costs are paid directly out of the escrow. Currently, the
escrow balance exceeds our receivable balance. Accordingly, Grenadilla has recently expressed an interest in engaging in non-binding mediation in order to close out the escrow arrangement
so that the cash can be distributed to the respective parties in accordance with the purchase agreement. Due to the nature of mediation, the impact, if any, on our financial condition or results of
operations cannot be determined at this time.

60

---



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

14.   Retirement Plans

We have defined benefit pension plans covering the majority of our employees, including certain employees in foreign countries. Certain domestic hourly employees
are covered by multi-employer defined benefit pension plans to which we make contributions. These contributions totaled $0.8 million in 2010, $0.7 million in 2009, and
$1.0 million in 2008. The corresponding pension plan assets and liabilities belong to third parties and, accordingly, are not reflected in our consolidated financial statements.

One
of these multi-employer plans was deemed to be in critical status and, as a result, the trustees adopted a rehabilitation plan effective March 2009 designed to improve the plan's
funding status over time. This rehabilitation plan ceased all death benefits, lump sum payments and similar disbursements, reduced the benefit accruals to the lowest level allowed by law, and
established two contribution schedules providing for higher contributions from participating employers. As part of our three year collective bargaining agreement ("CBA") with the union whose members
belong to this plan, we adopted the preferred contribution schedule under which we will increase our previous contributions by 5.5% for each of the three years covered by the new CBA. Had we decided
not to participate in the rehabilitation program, we would likely have effected a withdrawal from the plan, which would have given rise to a significant liability associated with underfunded
accumulated benefit obligations for our employee participants. While we currently believe it is unlikely we would choose to withdraw from this plan, should the rehabilitation effort not be successful
or if other participating employers decide to leave the plan, our course of action may change in the future.

During
2009 our CBA with the striking workers of the Elkhart, Indiana brass instrument manufacturing facility was terminated as the result of the union's decertification. The termination
of the agreement triggered a remeasurement of both the benefit obligation and assets of the domestic plan. The benefit obligation and net periodic pension cost were measured using a discount rate of
6.19%, and plan assets were measured using an expected rate of return of 9.00%. As a result, our long term pension liability decreased by $3.3 million and our accumulated other comprehensive
income increased by $2.0 million, net of tax. We also recognized a curtailment loss of $0.2 million, which represented the remaining unrecognized prior service cost for this group.

All
of our domestic pension plans have been combined under a master trust, "The Steinway Musical Pension Plan," to facilitate plan monitoring and plan investment management.

The
funded status of all our pension and other postretirement benefit plans is measured as the difference between each plan's assets at fair value and the projected benefit obligation.
We have
recognized the aggregate of all underfunded plans in our pension and other postretirement benefit liabilities. The portion of the amount by which the actuarial present value of benefits included in
the projected benefit obligation exceeds the fair value of plan assets, payable in the next twelve months, is reflected in other current liabilities. The balance of the liability is included in
pension and other postretirement benefit liabilities. The measurement date for our pension and other postretirement plans is December 31.

61

---



The
following table sets forth the funded status and amounts recognized for our defined benefit pension plans:

Domestic Plan

Foreign PlansDecember 31,

2010

2009

2010

2009Change in benefit obligation:Benefit obligation, beginning of year

$
58,487

$
54,547

$
32,541

$
28,092Service cost


350


352


583


567Interest cost


3,455


3,422


1,698


1,750Plan participants' contributions


8


9


45


50Amendments








(663
)

Actuarial loss


6,233


3,339


1,467


2,269Foreign currency exchange rate changes








(1,857
)

1,274Benefits paid


(3,511
)

(3,182
)

(1,413
)

(1,461
)Settlements


(1,878
)







Benefit obligation, end of year


63,144


58,487


32,401


32,541Change in plan assets:Fair value of plan assets, beginning of year


48,420


40,573


6,219


4,276Actual return on plan assets


6,151


10,867


752


813Employer contributions


66


153


1,985


2,032Employee contributions


8


9


45


50Foreign currency exchange rate changes








(205
)

509Benefits paid


(3,511
)

(3,182
)

(1,413
)

(1,461
)Settlements


(1,878
)







Fair value of plan assets, end of year


49,256


48,420


7,383


6,219Funded status

$
(13,888
)
$
(10,067
)
$
(25,018
)
$
(26,322
)Amounts recognized on the statement of financial position consist of:Pension and other post retirement benefit liabilities

$
(13,888
)
$
(10,067
)
$
(25,018
)
$
(26,322
)Net amount recognized

$
(13,888
)
$
(10,067
)
$
(25,018
)
$
(26,322
)


The
weighted-average assumptions used to determine our benefit obligations are as follows:

Domestic Plan

Foreign PlansDecember 31,

2010

2009

2010

2009Discount rate


5.26%


5.95%


5.40%


5.69%Rate of compensation increase


n/a


n/a


2.77%


2.77%


The
weighted-average assumptions used to determine our net periodic benefit cost are as follows:

Domestic Plan

Foreign PlansFor the years ended December 31,

2010

2009

2008

2010

2009

2008Discount rate


5.95%


6.42%


6.34%


5.63%


6.32%


5.36%Expected return on assets


9.00%


9.00%


9.00%


5.30%


6.00%


6.00%Rate of compensation increase


n/a


n/a


n/a


2.58%


3.22%


3.51%


On
April 1, 2010, we amended our U.K. pension plan prospectively to both limit active participants' annual increases in pensionable salary and reduce the rate at which
participants accrue

62

---



final
benefits. We remeasured the plan's benefit obligation, plan assets and net periodic pension cost as a result of the plan amendment. Assumptions utilized are as follows:

Benefit Obligation

Net Periodic Pension CostApril 1,
2010

January 1,
2010

April 1,
2010

January 1,
2010

Weighted-
AverageDiscount rate


5.50%


5.80%


5.50%


5.80%


5.59%Expected return on assets


n/a


n/a


5.30%


5.30%


5.30%Rate of compensation increase


3.80%


4.80%


3.80%


4.80%


4.11%


The
decrease in our long-term pension benefit obligation was more than offset by an increase in our actuarial loss due to the change in valuation assumptions when the plan
was remeasured. The plan amendment resulted in a gross decrease in our pension benefit obligation of $0.6 million through recognition of a prior service credit, which will be amortized over a
period of 12 years. On a net basis, our long term pension benefit obligation increased by less than $0.1 million and our accumulated other comprehensive loss decreased by
$0.1 million, net of tax.

The
fiscal 2009 weighted-average discount rate of 6.42% for the domestic pension plan represents a rate of 6.54% from January 1 to July 31 and, post plan remeasurement, a
rate of 6.19% from August 1 to December 31.

The
components of net periodic pension expense for the years ended December 31 are as follows:

For the years ended December 31,

2010

2009

2008Domestic Plan:Service cost

$
350

$
352

$
414Interest cost


3,455


3,422


3,410Expected return on plan assets


(4,194
)

(3,613
)

(5,135
)Amortization of prior service cost


113


167


205Recognized actuarial loss


1,956


2,379


48Curtailment loss





241


Net periodic pension cost (benefit)

$
1,680

$
2,948

$
(1,058
)Foreign Plans:Service cost

$
583

$
567

$
812Interest cost


1,698


1,750


1,887Expected return on plan assets


(346
)

(293
)

(370
)Amortization of prior service credit


(41
)




Recognized actuarial loss


175


8


88Net periodic pension cost

$
2,069

$
2,032

$
2,417


Estimated
amounts that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2011 are as follows:

Domestic Plan

Foreign PlansNet actuarial loss

$
2,172

$
112Prior service cost (credit)


113


(51
)


63

---



Amounts recognized in accumulated other comprehensive income (loss) as of December 31, 2010 and 2009 are as follows:

Domestic Plan

Foreign PlansDecember 31,

2010

2009

2010

2009Net actuarial loss

$
25,883

$
23,562

$
2,301

$
1,454Prior service cost (credit)


687


800


(629
)

Income taxes


(10,628
)

(9,745
)

(488
)

(385
)Total

$
15,942

$
14,617

$
1,184

$
1,069


The
projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were as follows:

2010

2009Projected benefit obligation

$
95,545

$
91,028Accumulated benefit obligation


94,902


90,304Fair value of plan assets


56,639


54,639


The
accumulated benefit obligation for our domestic pension plan was $63.1 million as of December 31, 2010 and $58.5 million as of December 31, 2009. The
accumulated benefit obligation for our foreign pension plans was $31.8 million as of December 31, 2010 and 2009.

Our
domestic pension plan assets are held in a master trust and are overseen by our Investment Committee, which is comprised of members of senior executive management and an independent
director with significant investment experience. The Investment Committee is assisted by a registered investment advisory firm.

The
Investment Committee is responsible for setting the policy that provides the framework for management of the plan assets. In accordance with its responsibilities and charter, the
Investment Committee meets on a regular basis to review the performance of the plan assets and compliance with the investment policy. The policy sets forth an investment structure for managing plan
assets, including setting the asset allocation ranges, which are expected to provide an appropriate level of diversification and investment return over the long term while maintaining sufficient
liquidity to pay the benefits of the plan. Asset allocation ranges are set to produce the highest overall return taking into account investment risks that are prudent and reasonable given prevailing
market conditions. In developing the asset allocation ranges, third-party asset allocation studies are periodically performed that consider the current and expected positions of the plan assets and
funded status. Based on these studies and other appropriate information, the Investment Committee establishes asset allocation ranges taking into account acceptable risk targets and associated
returns.

The
investment policy asset allocation ranges for the plan, as set by the Investment Committee, for the years ended December 31, 2010 and December 31 2009, were as follows:

Asset category:

Minimum

MaximumDomestic equity securities


25%


90%International and other equity securities


0%


50%International debt securities


0%


20%Domestic debt securities


10%


50%Other


0%


10%Cash


0%


5%


64

---



The
Investment Committee determines the specific allocation of the plan's investments within various asset classes. The plan utilizes select investment strategies which are executed
through separate account or fund structures with external investment managers who demonstrate experience and expertise in the appropriate asset classes and styles. The selection of investment managers
is done with careful evaluation of all aspects of performance and risk, due diligence of internal operations and controls, reputation, systems evaluation and a review of investment manager's policies
and processes. The plan also utilizes unleveraged exchange traded funds that track indices. Investment performance is monitored frequently against appropriate benchmarks and compared to compliance
guidelines with the assistance of third-party performance evaluation tools and metrics.

Consistent
with the objective of maximizing return while minimizing risk, multiple investment strategies are employed to diversify risk such that no single investment or investment
manager presents a significant exposure to the total investment portfolio. Plan assets are invested in numerous diversified strategies with the intent to minimize correlations. This allows for
diversification of returns. Further, within each strategy, guidelines are established which set forth the list of authorized investments, the typical portfolio characteristics and diversification
required by limiting the amount that can be invested by sector, country and issuer. As a result, the plan is not significantly exposed to any single entity, investment manager, sector or international
location.

The
Investment Committee reviews our domestic benefit obligations no less than annually with the objective of maintaining a 90% funded status for the projected benefit obligation.
Whenever possible, our annual contribution is expected to cover the short-term liquidity requirements of the plan, so as to maintain the plan's assets for long-term investment.
The performance goal set for the plan's assets is to achieve a long-term rate of return no less than 8.5%.

For
the periods ended December 31, 2010, 2009, and 2008 we used an assumed long-term rate of return on domestic plan assets of 9%. This rate is based on the
long-term (20 - 30 years) rates of return for the assets held. Accordingly, we expect that the actual rate of return for any given year will differ from
the assumed rate and, therefore, do not adjust this assumption based on such differences. Because our monitoring criteria creates a bias in favor of funds that out-perform their
benchmarks, we limit the adjustment to our rate of return assumption to changes in the underlying long term rate of return for stocks generally.

The
domestic pension plan assets are stated at fair value. Investments in equity securities are valued at the last reported sales price. Investments in debt securities are generally
valued using methods based upon market transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders.

We
purchased member interests in several limited liability corporations. These investments include floating and fixed rate debt instruments issued primarily in Europe, undervalued
industrial commercial real estate, privately placed mezzanine transactions consisting of subordinated debt with equity features, and fully collateralized debt of energy companies.

Our
investment in European floating and fixed rate debt is valued daily at a net asset value per membership unit by the custodian using primarily quotations supplied by a third-party
loan pricing service or trades made in over the counter secondary markets. This investment can be redeemed at net asset value by providing written notice to the fund manager and is considered a
Level 2 investment.

Our
additional investments in limited liability corporations are estimated at fair market value based on the most recent financial statements of the corporations available as of
September 30 or November 30 and updated for known capital contributions, distributions, and other market observations, if any, to determine the value as of December 31. These
investments are presented at fair value, priced based on unobservable inputs and are considered Level 3 investments in the financial statements. The fair value of underlying investments in
commercial real estate are based on

65

---



independent
appraised values that take into account projected income and expense of the property, as well as recent sales of similar properties. The underlying mezzanine transactions held by the
partnership are measured at fair value using a market approach based on comparable transactions or performance multiples and, to a lesser extent, an income approach using discounted cash flows. The
fair market value of collateralized debt in energy companies is based on the price at which the investment was acquired and adjusted for the nature of the investment, local market conditions, trading
values on public exchanges for comparable securities, current and projected operating performance and financing transactions subsequent to the acquisition of the investment.

Our
insurance contract, which was discontinued on January 31, 2010, was valued based upon our insurance carrier's estimate of fair value based on historic returns and current
market conditions.

As
of December 31, 2010 the domestic pension plan has a $4.1 million unfunded investment commitment to private equity partnerships described above and an additional
$2.0 million unfunded investment commitment to a separate private equity partnership focused on industrial commercial real estate.

The
fair value of our domestic pension plan assets by asset category and by level (as described in Note 16) at December 31, 2010 and 2009 were as follows:

December 31, 2010

Level 1

Level 2

Level 3

TotalCash and cash equivalents

$
2,377







$
2,377Equity securities:U.S. small-cap


1,045








1,045U.S. large-cap


14,429








14,429International large-cap


5,172








5,172Emerging markets


2,729








2,729Global natural resources


8,813








8,813Debt securities:Global bond fund


1,258








1,258Private equity  European debt(1)





2,554





2,554Other types of investments:Balance flex fund(2)


5,046








5,046Global flex fund(3)


1,419








1,419Private equity(4)








4,414


4,414Total

$
42,288

$
2,554

$
4,414

$
49,256


66

---





December 31, 2009

Level 1

Level 2

Level 3

TotalCash and cash equivalents

$
360







$
360Equity securities:U.S. small-cap


837








837U.S. large-cap


9,398








9,398International large-cap


6,590








6,590Emerging markets


1,310








1,310Global natural resources


10,019








10,019Debt securities:Global senior floating rate debt(1)


6,103








6,103U.S. fixed income


3,857








3,857Global bond fund


952








952Other types of investments:Balance flex fund(2)


3,100








3,100Global flex fund(2)


879








879Insurance contract(3)








1,820


1,820Private equity(4)








3,195


3,195Total

$
43,405

$


$
5,015

$
48,420


67

---



The
reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3) is as follows:

Insurance
Contract

Private Equity

TotalBalance, January 1, 2009

$
1,801

$
2,719

$
4,520Actual return on plan assets:Relating to assets still held


41


(63
)

(22
)Related to assets sold during the period





(75
)

(75
)Purchases, sales, and settlements


(22
)

614


592Balance, December 31, 2009


1,820


3,195


5,015Actual return on plan assets:Relating to assets still held





46


46Related to assets sold during the period


8





8Purchases, sales, and settlements


(1,828
)

1,173


(655
)Balance, December 31, 2010

$


$
4,414

$
4,414


Domestic
plan assets include 52,631 shares of the Company's Ordinary common stock, which was valued at $1.0 million as of December 31, 2010 and $0.8 million as of
December 31, 2009. This represents approximately 2% of the total plan assets as of December 31, 2010 and 2009.

We
made contributions of $0.1 and $0.2 million to our domestic pension plan in 2010 and 2009, respectively. Based on federal laws and regulations, we are not required to make a
contribution to our domestic plan in 2011. We are currently evaluating what amount, if any, we intend to contribute to this plan in 2011. The domestic plan had invested a small portion of its assets
in a group annuity contract. On January 31, 2010, we settled the portion of our domestic plan related to retired participants covered under this contract and this contract was terminated. The
assets and benefit obligation associated with this contract are no longer our responsibility. The impact to our financial statements as a result of this settlement was not material.

Our
foreign pension plans in Germany and the U.K. are governed locally in accordance with specific jurisdictional requirements. Our German plans do not hold assets and pay participant
benefits when due. Expected 2011 benefit payments under these plans are $1.2 million.

Assets
held in the U.K. plan are the responsibility of local trustees, which consist of a local management member and participant, a member nominated participant, and an independent
advisor. The U.K. plan invests primarily in foreign corporate bonds and foreign equities that approximate the trustees' target allocation of 45% debt securities and 55% equity securities. Target
allocations have been designed to cover the U.K. plan's future benefit obligation and are reviewed annually. Investment performance is monitored regularly to attain the funding goals.

The
U.K. plan invests in private funds owned by a life insurance company that acts as the plan's third-party administrator. The funds have limited availability but are valued daily at a
unit level based on bid and offer prices. These funds are liquid and bought and sold regularly. A majority of the underlying securities within the funds held by our U.K. plan are traded on a market
exchange.

68

---



The
fair value of our U.K. plan assets by asset category and by level at December 31, 2010 and 2009 were as follows:

December 31, 2010

Level 1

Level 2

Level 3

TotalEquity securities:U.K. equity





3,341





3,341European equity





239





239U.S. equity





159





159Pacific equity





140





140Debt securities:U.K. treasuries





3,504





3,504Total

$


$
7,383

$


$
7,383




December 31, 2009

Level 1

Level 2

Level 3

TotalEquity securities:U.K. equity





2,651





2,651European equity





218





218U.S. equity





125





125Pacific equity





111





111Debt securities:U.K. treasuries





3,114





3,114Total

$


$
6,219

$


$
6,219


For
the period ended December 31, 2010, we used an assumed long-term rate of return on the U.K. plan assets of 5.30%. For the periods ended December 31, 2009
and 2008, we used an assumed long-term rate of return on the U.K. plan assets of 6.00%. Contributions to this plan totaled $0.8 million in 2010 and 2009. We anticipate contributing
approximately $0.8 million to this plan in 2011.

The
domestic and foreign pension plans expect to pay benefits in each year from 2011 through 2020 as follows:

Domestic Plan

Foreign Plans2011

$
3,576

$
1,4462012


3,620


1,5102013


3,719


1,6132014


3,845


1,7392015


3,918


1,8052016 - 2020


21,449


9,797Total

$
40,127

$
17,910


We
provided postretirement health care and life insurance benefits to certain eligible hourly retirees and their dependents. As a result of terminating one of our CBAs in 2009, we had a
limited number of participants receiving health care benefits under this plan during 2010. These participants recently reached age sixty-five and are eligible for Medicare, so no
postretirement health care benefits will be provided under this plan in 2011. We will continue to provide life insurance benefits for eligible retirees.

69

---



On July 30, 2009, we recognized a plan amendment relating to the termination of our CBA and the elimination of medical and life insurance benefits for former employees of the
Elkhart, Indiana brass instrument manufacturing facility. The termination of the CBA triggered a remeasurement of the benefit obligation and postretirement benefit cost, which were measured using a
discount rate of 6.1%. As a result, our long term postretirement benefit obligation decreased by $0.4 million and our accumulated other comprehensive income increased by $0.2 million,
net of tax. We are recognizing the reduction in our postretirement benefit obligation over a period of approximately seven years as a reduction of prior service costs.

During
2010, we made a settlement payment of $0.1 million associated with this plan. This payment had no material impact on the plan.

The
following table sets forth the funded status of our postretirement benefit plan and accrued postretirement benefit cost reflected in our consolidated balance sheets:

December 31,

2010

2009Change in benefit obligation:Benefit obligation, beginning of year

$
833

$
1,110Service cost


11


6Interest cost


41


59Plan participants' contributions


3


3Actuarial loss


65


154Benefits paid


(83
)

(27
)Plan amendment





(472
)Settlement


(104
)Benefit obligation, end of year


766


833Fair value of plan assets





Funded status

$
(766
)
$
(833
)Amounts recognized on the statement of financial position consist of:Other current and long-term pension and other postretirement benefit liabilities

$
(766
)
$
(833
)


The
assumed weighted-average discount rates used to determine our benefit obligations as of December 31, 2010 and 2009 were 5.12% and 5.83%, respectively. The assumed
weighted-average discount rates used to determine our net postretirement benefit cost for the years ended December 31, 2010 and 2009 were as follows:

For the years ended December 31,

May 21
December 31, 2010

January 1
May 20, 2010

Weighted-
Average2010


5.48%


5.83%


5.62%


August 1
December 31, 2009

January 1
July 31, 2009

Weighted-
Average2009


6.07%


6.69%


6.29%


The
assumed weighted-average discount rate used to determine our net postretirement benefit cost was 6.20% for the year ended December 31, 2008.

70

---



Net
postretirement benefit costs are as follows:

For the years ended December 31,

2010

2009

2008Service cost

$
11

$
6

$
5Interest cost


41


59


68Amortization of prior service credit


(115
)

(78
)

(52
)Settlement


6





Net postretirement benefit (benefit) cost

$
(57
)
$
(13
)
$
21


Estimated
amounts to be amortized from accumulated other comprehensive income (loss) into net postretirement benefit cost in 2011 include prior service costs of $0.1 million.

Amounts
recognized in accumulated other comprehensive income (loss) as of December 31, 2010 and 2009 are as follows:

December 31,

2010

2009Net actuarial loss

$
78

$
19Prior service credit


(830
)

(945
)Income taxes


301


371Total

$
(451
)
$
(555
)


As
of December 31, 2010, we had a limited number of participants receiving medical benefits under this plan. As a result, the assumed health care cost trends do not have a
significant effect on the amounts reported. The domestic postretirement health care and life insurance plan expects to pay benefits in each year from 2011 through 2020 as follows:

For the years ended December 31,2011

$
682012


612013


502014


512015


522016 - 2020


266Total

$
548


We
sponsor several 401(k) retirement savings plans for eligible employees. By December 31, 2009 all of these plans, with one exception, were discretionary. Contributions are
determined annually by the Board of Directors. Contributions to these plans were $0.3 million for the year ended December 31, 2010. No contributions were made to these plans for the year
ended December 31, 2009. Contributions to these plans were $0.3 million for the year ended December 31, 2008. Non-discretionary contributions were less than
$0.1 million for the year ended December 31, 2010, $0.1 million for the year ended December 31, 2009 and $0.4 million for the year ended December 31, 2008.

We
have a supplemental executive retirement plan ("SERP") for a select group of our executives who constitute a "top hat" group as defined by ERISA. Discretionary employer contributions
made to this plan, as determined annually by the Board of Directors, are held in a rabbi trust. The SERP assets are included in our financial statements within other assets (see Notes 7 and
16). We made no contribution to the SERP in 2010 or 2009 and do not anticipate making a contribution in 2011.

71

---



15.   Foreign Currency Exchange Contracts

One of our German divisions, whose functional currency is the euro, secures option and forward contracts for Japanese yen, British pounds, and U.S. dollars to
mitigate cash flow exposure to currency fluctuations. Our band division, whose functional currency is the U.S. dollar, began securing options and forwards in 2008 for the same reason. At
December 31, 2010 our divisions held forward contracts to sell £1.5 million, sell ¥606.0 million, and purchase $5.0 million. These instruments have
various maturity dates through December 2012. At December 31, 2009 our divisions held option and forward contracts to sell £0.5 million, sell
¥240.0 million, and purchase $7.7 million. These instruments had various maturity dates through August 2011. At December 31, 2008, our divisions held option and
forward contracts to sell £1.2 million, sell ¥325.4 million, purchase $10.8 million, and purchase €1.8 million. These instruments
had various maturity dates through June 2011. Since we do not designate these instruments as hedges for accounting purposes, we carry these instruments at fair value and recognize the change in fair
value in earnings. Net amounts were not material during the years ended December 31, 2010, 2009, or 2008.

16.   Fair Values of Financial Instruments

Our financial instruments consist primarily of foreign currency contracts (see Note 15), marketable equity securities, and debt. Certain of these items are
required to be recorded in the financial statements at fair value, while others are required to be recorded at historical cost.

The
financial assets and liabilities recorded at fair value are measured on a recurring or non-recurring basis. Financial assets and liabilities measured on a recurring basis
are those that are adjusted to fair value each time financial statements are prepared. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to
fair value when a significant event occurs. In determining fair value of financial assets and liabilities, we use various valuation techniques. The availability of inputs observable in the market
varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the
transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not
require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management's judgment.

We
assess the inputs used to measure fair value using the following three-tier hierarchy, which indicates the extent to which inputs used are observable in the market.

Level 1

Valuation is based upon unadjusted quoted prices for identical instruments traded in active markets.Level 2

Valuation is based upon quoted prices for identical or similar instruments such as interest rates, foreign currency exchange rates, commodity rates and yield curves, and model-based valuation techniques for which all
significant assumptions are observable in the market.Level 3

Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions include management's own judgments about the assumptions
market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. Other than certain investments held in our domestic defined benefit
pension plan, we do not have any assets or liabilities carried at Level 3 fair value.


72

---



We
value our foreign currency contracts using internal models with observable inputs, including currency forward and spot prices. Estimated fair value has been determined as the
difference between the current forward rate and the contract rate, multiplied by the notional amount of the contract.

The
following table presents information about our assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009 and the fair value hierarchy of the
valuation techniques we utilized.

December 31,
2010

December 31,
2009Financial assets:Trading securities  Level 1

$
1,758

$
1,623Foreign currency contracts  Level 2


216


82$
1,974

$
1,705Financial liabilities:Foreign currency contracts  Level 2

$
447

$
3


Our
trading securities pertain to the SERP and are held in a rabbi trust. We record a corresponding liability for the same amount in our financial statements, which represents our
obligation to SERP participants. Our foreign currency contracts pertain to obligations or potential obligations to purchase or sell euros, pounds, U.S. dollars, and yen under various forward
contracts.

Our
marketable equity securities pertain to the SERP and are included as a component of other assets (see Notes 7 and 14). Investments in marketable equity securities are
categorized as trading, available-for-sale, or held-to-maturity. As of December 31, 2010, 2009 and 2008 we held only trading securities. The
portion of trading gains and losses that relates to trading securities still held is as follows:

For the years ended December 31,

2010

2009

2008Gain (loss)

$
206

$
382

$
(746
)


We
base the estimated fair value of our debt on institutional quotes currently available to us. The historical cost net carrying value and estimated fair value are as follows:

December 31, 2010

December 31, 2009Net Carrying
Value

Estimated
Fair Value

Net Carrying
Value

Estimated
Fair ValueFinancial liabilities:Debt

$
154,510

$
156,208

$
158,863

$
144,218


The
carrying values of accounts, notes and other receivables, marketable equity securities, and accounts payable approximate fair value.

17.   Segment Information

As discussed in Note 2, we have identified two reportable segments: the piano segment and the band & orchestral instrument segment. We consider
these two segments reportable as they are managed separately and the operating results of each segment are separately reviewed and evaluated by our senior management on a regular basis. We have
classified the results of our online music division in "U.S. Piano Segment" as we believe its results are not material and its products and customer base are most correlated with piano operations.
Information reported under each geographic heading is based on the location of our facility responsible for generating such activity, regardless of the location of the

73

---



external
customer. This is consistent with how our chief operating decision maker reviews and evaluates performance.

Intercompany
transactions are generally recorded at a small discount from comparable third-party prices. Income from operations for the reportable segments includes intercompany profit,
as well as certain corporate costs allocated to the segments based primarily on revenue. Amounts reported as "Other & Elim" include those corporate costs that were not allocated to the
reportable segments and the remaining intercompany profit elimination. It also includes corporate assets, elimination of intercompany interest, and investments in subsidiaries that do not eliminate
within the segments. The following tables present information about our reportable segments:

Piano Segment

Band & Orchestral SegmentOther &
ElimU.S.

Germany

Other

Total

U.S.

Other

Total

Consolidated2010Revenues from external
customers

$
89,128

$
54,106

$
47,262

$
190,496

$
123,149

$
4,476

$
127,625

$


$
318,121Operating profit (loss)


3,770


9,592


4,391


17,753


8,523


391


8,914


(3,854
)

22,813Interest income


(52
)

(49
)

(85
)

(186
)

(1,206
)




(1,206
)

(39
)

(1,431
)Interest expense


7,419


10


190


7,619


6,590





6,590


(3,192
)

11,017Depreciation and amortization


4,268


1,570


751


6,589


2,343


9


2,352


609


9,550Income tax provision (benefit)


53


4,708


1,292


6,053


(691
)

119


(572
)

(420
)

5,061Net income (loss)


(5,070
)

4,996


3,100


3,026


4,508


295


4,803


71


7,900Capital expenditures


1,366


1,158


111


2,635


1,088





1,088


9


3,732Property, plant and equipment


51,777


15,480


4,445


71,702


14,620


22


14,642


60


86,404Total assets


148,461


91,281


31,962


271,704


236,937


4,529


241,466


(28,076
)

485,0942009Revenues from external
customers

$
80,167

$
56,229

$
43,603

$
179,999

$
121,503

$
4,934

$
126,437

$


$
306,436Operating profit (loss)


(3,240
)

9,792


4,257


10,809


5,538


506


6,044


(3,582
)

13,271Interest income


(40
)

(89
)

(89
)

(218
)

(1,577
)




(1,577
)

(35
)

(1,830
)Interest expense


7,941


29


195


8,165


6,844





6,844


(3,134
)

11,875Depreciation and amortization


4,579


1,839


486


6,904


2,857





2,857


609


10,370Income tax provision (benefit)


989


2,959


1,214


5,162


(407
)

54


(353
)

(1,638
)

3,171Net income (loss)


(9,990
)

6,310


2,974


(706
)

2,022


(988
)

1,034


5,008


5,336Capital expenditures


2,114


1,115


92


3,321


1,159


33


1,192


39


4,552Property, plant and equipment


52,900


16,914


3,996


73,810


15,614


33


15,647


81


89,538Total assets


137,234


99,718


29,953


266,905


225,526


5,450


230,976


(48,091
)

449,7902008Revenues from external
customers

$
107,769

$
72,621

$
47,976

$
228,366

$
151,583

$
7,464

$
159,047

$


$
387,413Operating profit (loss)


3,422


21,371


3,920


28,713


(4,023
)

(1,153
)

(5,176
)

(2,344
)

21,193Interest income


(92
)

(389
)

(178
)

(659
)

(2,222
)




(2,222
)

(168
)

(3,049
)Interest expense


8,284


88


174


8,546


7,058


114


7,172


(3,451
)

12,267Depreciation and amortization


4,386


1,825


462


6,673


3,555


41


3,596


659


10,928Income tax provision (benefit)


(578
)

5,495


1,097


6,014


(1,447
)

(264
)

(1,711
)

658


4,961Net income (loss)


(2,982
)

16,867


2,937


16,822


(8,041
)

(1,065
)

(9,106
)

470


8,186Capital expenditures


2,042


1,405


240


3,687


1,605


21


1,626


25


5,338Property, plant and equipment


52,674


16,144


2,786


71,604


17,009


18


17,027


77


88,708Total assets


145,009


93,347


28,432


266,788


229,458


9,195


238,653


(52,123
)

453,318


74

---



18.   Quarterly Financial Data (Unaudited)

In 2009, results for the first quarter were favorably impacted by a $3.4 million gain on extinguishment of $10.9 million of our bonds. In the third
quarter of 2009, results were unfavorably impacted by $1.0 million in impairment charges taken on the intangible assets associated with our online music business.

The
following is a summary of unaudited results of operations, in thousands except share and per share data. The variance between the $.60 earnings per share reported in the Consolidated Statement of
Operations for 2009 and the sum of the quarterly earnings per share of $.56 reported below is due to the sale of 1,700,000 shares of Ordinary common stock in November 2009 and the resultant impact on
the earnings per share calculations for the fourth quarter.

December 31, 2010For the year ended

First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterNet sales

$
68,543

$
78,248

$
83,261

$
88,069Gross profit


21,324


22,163


23,195


29,268Net income


1,800


1,180


1,565


3,355Basic earnings per share

$
0.17

$
0.10

$
0.13

$
0.28Diluted earnings per share

$
0.17

$
0.10

$
0.13

$
0.28Weighted average shares:Basic


10,433,830


12,019,468


12,055,741


12,054,781Diluted


10,482,704


12,098,725


12,098,871


12,106,742




December 31, 2009For the year ended

First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterNet sales

$
69,991

$
72,113

$
82,634

$
81,698Gross profit


18,609


18,898


23,405


24,001Net income (loss)


1,005


(620
)

637


4,314Basic earnings (loss) per share

$
0.12

$
(0.07
)
$
0.07

$
0.44Diluted earnings (loss) per share

$
0.12

$
(0.07
)
$
0.07

$
0.44Weighted average shares:Basic


8,533,259


8,533,259


8,581,343


9,772,691Diluted


8,535,278


8,533,259


8,583,320


9,778,632


75

---





Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

UHY LLP ("UHY") served as Steinway Musical Instruments, Inc.'s independent registered public accounting firm to audit the
financial statements and internal control over financial reporting of Steinway Musical Instruments, Inc. (the "Company") for the fiscal year ended December 31, 2009. The Board of
Directors selected UHY to serve as the Company's independent registered public accounting firm for fiscal 2010. On April 19, 2010 UHY informed the Company that effective April 16, 2010,
its New England practice had been acquired by Marcum LLP ("Marcum"). As a result of this transaction, UHY declined reappointment as the Company's independent registered public accounting firm
for the fiscal year ending December 31, 2010.

UHY
audited the Company's financial statements for the fiscal years ended December 31, 2009 and 2008. The audit reports of UHY on the Company's financial statements for those
years did not contain an adverse opinion, or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

During
the fiscal years ended December 31, 2009 and 2008 and subsequently to April 19, 2010, there were no disagreements with UHY on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure that, if not resolved to UHY's satisfaction, would have caused them to make reference to the subject matter in connection with
their reports on the Company's consolidated financial statements for such years, and there were no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K.

The
Company provided UHY with a copy of the foregoing disclosures and requested in writing that UHY furnish the Company with a letter addressed to the Securities and Exchange Commission
stating whether or not they agree with such disclosures. UHY provided a letter dated April 21, 2010 stating its agreement with such statements.

As
a result of the UHY transaction, the Audit Committee appointed Marcum LLP as the successor independent registered public accounting firm on April 19, 2010. Prior to such
appointment, the Company had not consulted with Marcum with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion
that might be rendered on the Company's consolidated financial statements, or any other matter or reportable events listed in Items 304(a)(2)(i) and (ii) of
Regulation S-K.

On
June 16, 2010, the Audit Committee of Steinway Musical Instruments, Inc. dismissed Marcum LLP as the Company's independent registered public accounting firm and
approved the engagement of KPMG LLP ("KPMG") to serve as the Company's independent registered public accounting firm for the fiscal year 2010. On June 21, 2010 the Company issued a press
release announcing the change in its independent registered public accounting firm.

Marcum
served as the Company's independent registered public accounting firm from April 20, 2010 to June 15, 2010. Marcum did not audit the Company's financial statements
as of any date or for any period.

During
the period from April 20, 2010 to June 15, 2010, there were no disagreements with Marcum on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure and there were no reportable events as listed in Item 304(a)(1)(v) of Regulation S-K.

The
Company provided Marcum with a copy of the foregoing disclosures and requested in writing that Marcum furnish the Company with a letter addressed to the Securities and Exchange
Commission stating whether or not they agree with such disclosures. Marcum provided a letter dated June 21, 2010 stating its agreement with such statements.

76

---



During
the years ended December 31, 2008 and 2009 and through the date of the Audit Committee's decision, the Company had not consulted with KPMG with respect to the application
of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's consolidated financial statements, or any other matter or reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.

There
have been no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Our principal executive officer and our principal financial officer, after evaluating together with management the design and operation
of our disclosure controls and procedures have concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were
effective as of December 31, 2010, the end of the period covered by this report.

Internal Control Over Financial Reporting

There were no changes in our Company's internal control over financial reporting that occurred during the fourth quarter of 2010 that
have materially affected, or are likely to materially affect, our Company's internal control over financial reporting.

77

---





MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The
management of Steinway Musical Instruments, Inc. and its subsidiaries (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is a process designed by, or
under the supervision of, the Company's principal executive and principal financial officers, and effected by the Company's board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that:



Internal
Control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The
Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2010. In making this assessment, the Company's management used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control  Integrated
Framework. Management reviewed the results of its assessment with the Audit Committee of its Board of Directors.

Based
on its assessment, management determined that, as of December 31, 2010, the Company's internal control over financial reporting is effective.

78

---



KPMG LLP,
the independent registered public accounting firm that audited the financial statements included in this annual report, audited the Company's internal control over financial reporting
as stated in their report, which appears elsewhere in this report.

By:

/s/ Dana D. Messina Dana D. Messina
Chief Executive Officer
March 14, 2011By:

/s/ Dennis M. Hanson Dennis M. Hanson
Chief Financial Officer
March 14, 2011


79

---





Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information called for by this item is hereby incorporated by reference to the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 2010, which Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by
this report.

Item 11. Executive Compensation

The information called for by this item is hereby incorporated by reference to the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 2010, which Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by
this report.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information called for by this item is hereby incorporated by reference to the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 2010, which Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by
this report.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information called for by this item is hereby incorporated by reference to the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 2010, which Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by
this report.

Item 14. Principal Accounting Fees and Services

The information called for by this item is hereby incorporated by reference to the Registrant's definitive Proxy Statement for the
fiscal year ended December 31, 2010,
which Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this report.

80

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PART IV

Item 15. Exhibits, Financial Statement Schedules



1.

Financial Statements

Sequential
Page NumberReport of Independent Registered Public Accounting Firm


35Report of Independent Registered Public Accounting Firm


37Consolidated Statements of Operations
    Years Ended December 31, 2010, 2009, and 2008


38Consolidated Balance Sheets as of December 31, 2010 and 2009


39Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009, and 2008


40Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2010, 2009, and 2008


41Notes to Consolidated Financial Statements


422.

Exhibits:    The Exhibits listed below are filed as part of, or incorporated by reference into, this
report.


Exhibit
No.

Description3.1

Restated Certificate of Incorporation of Registrant(4)3.2

Bylaws of Registrant(2)3.3

Amendment No. 1 to Bylaws of Registrant(3)3.4

Amendment No. 2 to Bylaws of Registrant(10)4.1

Indenture, dated as of February 23, 2006, among Steinway Musical Instruments, Inc., as Issuer; the subsidiary guarantors; and the Bank of New York Trust Company, N.A., as Trustee(7)10.1

Employment Agreement dated as of August 29, 2007 by and between Steinway & Sons and Thomas Kurrer(10)10.2

Employment Agreement dated as of August 29, 2007 by and between Steinway, Inc. and Ronald Losby(10)10.3

Employment Agreement dated August 29, 2007 by and between Steinway Musical Instruments, Inc. and Dennis Hanson(10)10.4

Employment Agreement dated August 29, 2007 by and between Steinway Musical Instruments, Inc. and Dana Messina(10)10.5

Employment Agreement dated August 29, 2007 by and between Steinway Musical Instruments, Inc. and Kyle Kirkland(10)10.6

Distribution Agreement, dated November 1, 1952, by and between H. & A. Selmer, Inc. and Henri Selmer & Cie(1)10.7

Employment Agreement dated October 17, 2002 between Conn-Selmer, Inc. and John M. Stoner, Jr.(5)10.8

Loan and Security Agreement dated as of October 5, 2010, among Conn-Selmer, Inc. and Steinway, Inc. as borrowers; the several lenders from time to time parties thereto; and Bank of America, N.A., as
Administrative Agent.(16)10.9

Agreement between Conn-Selmer, Inc. and U.A.W. Local 2359(12)


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10.10

Labor Contract Agreement between Musser Division and Carpenter Local 1027 Mill-Cabinet-Industrial Division affiliate of Chicago Regional Council of Carpenters of the United Brotherhood of Carpenters and Jointers of
America(11)10.11

Summary Description of Compensation for Non-Employee Directors(8)10.12

Steinway Musical Instruments, Inc. 2006 Stock Compensation Plan(9)10.13

Steinway Musical Instruments, Inc. 2006 Employee Stock Purchase Plan(9)10.14

Subscription Agreement dated as of November 5, 2009, by and among Samick Musical Instruments Co, Ltd., and Steinway Musical Instruments, Inc.(13)14.0

Code of Ethics and Professional Conduct(6)16.1

Letter Regarding the Change in Certifying Accountant  UHYLLP(14)16.2

Letter Regarding the Change in Certifying Accountant  Marcum LLP(15)21.1

List of Subsidiaries of the Registrant23.1

Consent of Independent Registered Public Accounting Firm  KPMG LLP23.2

Consent of Independent Registered Public Accounting Firm  UHY LLP31.1

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

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 200232.2

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 the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

Steinway Musical Instruments, Inc.By:

/s/ Dana D. Messina Dana D. Messina

March 14, 2011 (Date)


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities listed below on
March 14, 2011:

Signature

Title/s/ Dana D. Messina Dana D. Messina

Director and Chief Executive Officer (Principal Executive Officer)/s/ Dennis M. Hanson Dennis M. Hanson

Chief Financial Officer (Principal Financial and Accounting Officer)/s/ Kyle R. Kirkland Kyle R. Kirkland

Director and Chairman of the Board/s/ John M. Stoner, Jr. John M. Stoner, Jr.

Director/s/ Thomas Kurrer Thomas Kurrer

Director/s/ Peter McMillan Peter McMillan

Director/s/ A. Clinton Allen A. Clinton Allen

Director/s/ Rudolph K. Kluiber Rudolph K. Kluiber

Director/s/ David Lockwood David Lockwood

DirectorJong Sup Kim

Director


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