10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

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

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	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
800 South Street, Suite 305
Waltham, Massachusetts	02453
(Address of Principal Executive Offices)	(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements during the past 90 days.

Yes x    No o

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

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

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

Yes o    No x

Number of shares of Common Stock issued and outstanding as of November 7, 2006:	Class A	477,952
	Ordinary	7,895,552
	Total	8,373,504

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

PART I.	UNAUDITED FINANCIAL INFORMATION
Item 1.	Consolidated and Condensed Consolidated Financial Statements:
	Consolidated Statements of Operations
	Three months and nine months ended September 30, 2006 and September 30, 2005
	Condensed Consolidated Balance Sheets
	September 30, 2006 and December 31, 2005
	Consolidated Statements of Cash Flows
	Nine months ended September 30, 2006 and September 30, 2005
	Consolidated Statement of Stockholders’ Equity
	Nine months ended September 30, 2006
	Notes to Consolidated and Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 6.	Exhibits
	Signatures

ITEM 1                   CONSOLIDATED AND CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

(In Thousands Except Share and Per Share Amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Net sales	$	90,876		$	95,914		$	278,493		$	277,017
Cost of sales	64,831			68,418			203,307			197,698
Gross profit	26,045			27,496			75,186			79,319
Operating expenses:
Sales and marketing	10,458			10,730			33,191			32,912
Provision for doubtful accounts	172			(143		)	4,734			79
General and administrative	8,143			7,217			24,332			21,152
Amortization of intangible assets	189			280			615			846
Other operating expenses	138			74			253			207
Total operating expenses	19,100			18,158			63,125			55,196
Income from operations	6,945			9,338			12,061			24,123
Other income, net	(395		)	(467		)	(1,841		)	(873		)
Loss on extinguishment of debt	—			—			9,674			—
Interest income	(1,210		)	(674		)	(3,817		)	(2,367		)
Interest expense	3,875			4,236			12,382			12,764
Total non-operating expenses	2,270			3,095			16,398			9,524
Income (loss) before income taxes	4,675			6,243			(4,337		)	14,599
Income tax provision (benefit)	3,707			2,500			(2,602		)	5,840
Net income (loss)	$	968		$	3,743		$	(1,735	)	$	8,759
Earnings (loss) per share:
Basic	$	0.12		$	0.46		$	(0.21	)	$	1.09
Diluted	$	0.11		$	0.45		$	(0.21	)	$	1.06
Weighted average shares:
Basic	8,357,153			8,088,022			8,280,392			8,057,106
Diluted	8,430,306			8,284,461			8,280,392			8,267,581

See notes to consolidated and condensed consolidated financial statements.

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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(In Thousands)

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

See notes to consolidated and condensed consolidated financial statements.

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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(In Thousands)

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

See notes to consolidated and condensed consolidated financial statements.

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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Unaudited

(In Thousands Except Share Data)

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

See notes to consolidated and condensed consolidated financial statements.

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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

Unaudited

(Tabular Amounts In Thousands Except Share, Per Share, Option, and Per Option Data)

(1)           Basis of Presentation

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

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

(2)           Summary of Significant Accounting Policies

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

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

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

Stock-based Compensation - We have an employee stock purchase plan (“Purchase Plan”) and a stock award plan (“Stock Plan”).  Prior to January 1, 2006, we used the intrinsic-value method of accounting for our stock-based employee compensation arrangements. Effective January 1, 2006, we adopted Statement of Financial Accounting Standard (SFAS) No. 123R, “Share-Based Payment” using the modified prospective application method.  Under this transition method, we are required to record compensation cost for all awards

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granted after the date of adoption and for the unvested portion of the previously granted awards that remain outstanding at the date of adoption.  We are not required to restate prior period results.

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

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

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

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

Accumulated Other Comprehensive Income (Loss) - Accumulated other comprehensive income (loss) is comprised of foreign currency translation adjustments, additional minimum pension liabilities, and unrealized gain on available-for-sale (“AFS”) marketable securities.  The components of accumulated other comprehensive loss are as follows:

	Foreign Currency Translation Adjustment			Unrealized Gain on AFS Securities			Tax Impact of Unrealized Gain on AFS Securities			Additional Minimum Pension Liability			Tax Impact of Additional Minimum Pension Liability		Accumulated Other Comprehensive Loss
Balance, January 1, 2006	$	(2,631	)	$	213		$	(85	)	$	(17,424	)	$	6,742	$	(13,185	)
Activity	3,739			(213		)	85			—			—		3,611
Balance, September 30, 2006	$	1,108		$	—		$	—		$	(17,424	)	$	6,742	$	(9,574	)

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

Recent Accounting Pronouncements - In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.” FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after

8

December 15, 2006. We are evaluating the impact that this statement will have on our financial position and results of operations.

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

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

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

(3)           Inventories

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

(4)           Goodwill, Trademarks, and Other Intangible Assets

Intangible assets other than goodwill and indefinite-lived trademarks are amortized on a straight-line basis over their estimated useful lives.  Deferred financing costs are amortized over the repayment periods of the underlying debt.  We test our goodwill and indefinite-lived trademark assets for impairment annually, or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.  At July 31, 2006, we evaluated these assets and determined that the fair value had not decreased below the carrying value and, accordingly, no impairments have been recognized.  The changes in carrying amounts of goodwill and trademarks are as follows:

	Piano Segment		Band Segment		Total
Goodwill:
Balance, January 1, 2006	$	21,533	$	8,555	$	30,088
Foreign currency translation impact	860		—		860
Balance, September 30, 2006	$	22,393	$	8,555	$	30,948
Trademarks:
Balance, January 1, 2006	$	7,409	$	5,824	$	13,233
Foreign currency translation impact	270		—		270
Balance, September 30, 2006	$	7,679	$	5,824	$	13,503

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

	September 30, 2006			December 31, 2005
Gross deferred financing costs	$	5,692		$	8,467
Accumulated amortization	(1,116		)	(4,701		)
Deferred financing costs, net	$	4,576		$	3,766
Gross covenants not to compete	$	500		$	500
Accumulated amortization	(213		)	(138		)
Covenants not to compete, net	$	287		$	362

The change in gross deferred financing costs and related accumulated amortization during the nine months ended September 30, 2006 is primarily attributable to the write-off of the assets associated with our term loan which we repaid, the extinguishment of our 8.75% Senior Notes, and the recording of new deferred financing costs associated with the issuance of our 7.00% Senior Notes and our renegotiated domestic credit facility.  These events are described more fully in Note 6.

The weighted-average amortization period for deferred financing costs is 7 years, and the weighted-average amortization period of covenants not to compete is 5 years.  Total amortization expense, which includes amortization of deferred financing costs, is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Amortization expense	$	189	$	280	$	615	$	846

The following table shows the total estimated amortization expense for 2006 and the next five succeeding fiscal years:

Estimated amortization expense:	Amount
2006	$	811
2007	778
2008	776
2009	734
2010	653
2011	615

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(5)           Other Current Liabilities

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

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

The accrued warranty expense activity for the nine months ended September 30, 2006 and 2005, and the year ended December 31, 2005 is as follows:

	September 30,  2006			September 30,  2005			December 31,  2005
Beginning balance	$	1,857		$	2,139		$	2,139
Additions	605			719			858
Claims and reversals	(642		)	(720		)	(1,045		)
Foreign currency translation impact	46			(89		)	(95		)
Ending balance	$	1,866		$	2,049		$	1,857

(6)           Long-Term Debt

During the nine months ended September 30, 2006, we significantly restructured our long-term debt.  In February 2006 we repaid our larger, higher interest term loan, which had an outstanding balance of $16.0 million at the time of payoff.  We also issued $175.0 million of 7.00% Senior Notes and extended a tender offer to purchase the $166.2 million of our outstanding 8.75% Senior Notes.  We issued our new 7.00% Senior Notes at 99.2435%, and received proceeds of $170.2 million, net of associated fees.  We used the proceeds from this issuance to extinguish $114.6 million of the 8.75% Senior Notes pursuant to our tender offer in the first quarter of 2006.  The remaining proceeds, supplemented by borrowings on our line of credit, were used to exercise our right to call the remaining $51.6 million of 8.75% Senior Notes on April 17, 2006.

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

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following:

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

In conjunction with our debt restructuring activities, we recorded a net loss on extinguishment of debt of $9.7 million in the period ended September 30, 2006, which consists of the following:

	September 30, 2006
Deferred financing costs write-off - term loan	$	977
Deferred financing costs write-off - 8.75% Senior Notes	2,247
Premiums pursuant to the tender offer and call	7,740
Bond premium write-off	(1,290		)
Total net loss on extinguishment of debt	$	9,674

Scheduled payments of long-term debt are as follows:

	September 30, 2006
Remainder of 2006	$	3,811
2007	1,050
2008	—
2009	—
2010	—
Thereafter	188,920
Total	$	193,781

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

Our common stock is comprised of two classes: Class A and Ordinary.  With the exception of disparate voting power, both classes are substantially identical.  Each share of Class A common stock entitles the holder to 98 votes.  Holders of Ordinary common stock are entitled to one vote per share.  Class A common stock shall automatically convert to Ordinary common stock if, at any time, the Class A common stock is not owned by an original Class A holder.  As of September 30, 2006 our Chairman and Chief Executive Officer owned 100% of

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

Employee Stock Purchase Plan - We have an employee stock purchase plan under which substantially all employees may purchase Ordinary common stock through payroll deductions at a purchase price equal to 85% of the lower of the fair market values as of the beginning or end of each twelve-month offering period.  Stock purchases under the Purchase Plan are limited to 5% of an employee’s annual base earnings.  We had reserved 500,000 shares for issuance under this plan and we could grant options to purchase shares up to ten years from the plan’s commencement.  This plan expired on July 31, 2006.  Our stockholders approved a new Purchase Plan effective August 1, 2006 during our annual stockholders meeting.  The characteristics of the plan were not changed.  Our Board of Directors has authorized an aggregate of 400,000 shares of common stock for issuance under this plan.

Stock Plan - The 1996 stock plan, as amended, provided for the granting of up to 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 through July 31, 2006.  Our stock options generally have five-year vesting terms and ten-year option terms.  Upon option exercise, we issue shares of Ordinary common stock, and we will continue to issue shares until we have reached our registered share limitation.  At that time, we will issue shares out of treasury stock.  We have reserved 721,750 treasury stock shares under the 1996 stock plan for this purpose.  Our stockholders approved the new “2006 Stock Plan” effective August 1, 2006 during our annual stockholders meeting.  The characteristics of the plan were not changed.  Our Board of Directors has authorized an aggregate of 1,000,000 shares of common stock for issuance under the 2006 Stock Plan.

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” to account for our stock compensation arrangements, using the modified prospective application transition method.  Accordingly, we did not restate the results of prior periods.  Prior to January 1, 2006, we applied Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and did not recognize any compensation expense associated with employee stock options because the exercise price was equal to the market price at the date of option grant.  SFAS No. 123R requires that stock-based compensation cost be recognized over the period from the date of grant to the date when the award is no longer contingent upon the employee providing additional service.

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

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

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Compensation” (“SFAS 123”), prior to January 1, 2006:

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

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

Key assumptions used to apply this pricing model to the option feature in the Purchase Plan are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Risk-free interest rate		4.3	%		3.3	%		4.1	%		2.5	%
Weighted-average expected life of option feature in the Purchase Plan (in years)		1.0			1.0			1.0			1.0
Expected volatility of underlying stock		23.6	%		23.9	%		23.2	%		25.8	%

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Option feature in Purchase Plan	$	6.82	$	7.27	$	7.02	$	7.31

During the nine months ended September 30, 2005, we granted stock options awards and applied a risk-free interest rate of 4.1%, a weighted-average expected life in years of 7.5, and an expected volatility of 26.1% to the Black-Scholes option-pricing model.  The weighted-average fair value of options granted during the three and nine months ended September 30, 2005 was $10.82.

During the nine months ended September 30, 2006, we granted stock options awards and applied a risk-free interest rate of 5.0%, a weighted-average expected life in years of 7.1, and an expected volatility of 24.4% to the Black-Scholes option-pricing model.  The weighted-average fair value of options granted during the nine months ended September 30, 2006 was $10.95. No stock option awards were granted during the three months ended September 30, 2006.

The following table sets forth information regarding the Purchase Plan:

	Number of Options		Weighted- Average Exercise Price		Remaining Contractual Life (in years)
Outstanding at January 1, 2006	9,476		$	25.42
Shares subscribed	22,672		20.51
Exercised	(26,121	)	20.43
Canceled	(1,312	)	20.44
Outstanding at September 30, 2006	4,715		$	20.80	0.8

The following table sets forth information regarding the Stock Plan:

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

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

As of September 30, 2006, there was $1.7 million 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 2.3 years.

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

(8)           Other Income, Net

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

(9)           Commitments and Contingent Liabilities

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

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

In this regard, we operate certain manufacturing facilities which were previously owned by Philips Electronics North America Corporation (“Philips”).  When we purchased these facilities, Philips agreed to indemnify us for certain environmental matters resulting from activities of Philips occurring prior to December 29, 1988 (the “Environmental Indemnity Agreement”).  To date, Philips has fully performed its obligations

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

In addition, we are continuing an existing environmental remediation plan at a facility we acquired in 2000.  We estimate our costs, which approximate $0.9 million, over a 15-year period.  We have accrued approximately $0.7 million for the estimated remaining cost of this remediation program, which represents the present value total cost using a discount rate of 4.54%.

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

	Environmental Payments
2006	54
2007	95
2008	56
2009	56
2010	56
Thereafter	554
	871

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 at $3.0 million.  Pursuant to the purchase and sale agreement, we have sought indemnification from Grenadilla for anticipated costs above the original estimate in the amount of $2.5 million.  We filed a claim against the escrow and recorded a corresponding receivable for this amount in prepaid expenses and other current assets in the consolidated balance sheet.  However, we cannot be assured that we will be able to recover such costs from Grenadilla.

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

(10)         Retirement Plans

We have defined benefit pension plans covering the majority of our employees, including certain employees in Germany and the U.K.  The components of net periodic pension cost for these plans are as follows:

	Domestic Plans						Foreign Plans
	Three Months Ended						Three Months Ended
	September 30,  2006			September 30,  2005			September 30,  2006			September 30,  2005
Service cost	$	216		$	296		$	220		$	171
Interest cost	737			881			375			329
Expected return on plan assets	(1,084		)	(1,312		)	(79		)	(70		)
Amortization of prior service cost	108			157			—			—
Amortization of net loss	161			74			—			—
Net periodic benefit cost	$	138		$	96		$	516		$	430

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

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

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2006		2005		2006		2005
Service cost	$	12	$	10	$	37	$	30
Interest cost	34		32		102		97
Amortization of transition obligation	9		11		26		34
Amortization of net loss	13		—		38		—
Net postretirement benefit cost	$	68	$	53	$	203	$	161

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

(11)         Segment Information

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

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The following tables present information about our operating segments for the three months and nine months ended September 30, 2006 and 2005:

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

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

Introduction

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

Critical Accounting Policies

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

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

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

Accounts Receivable

We establish reserves for accounts receivable and notes receivable (including recourse reserves when our customers have financed notes receivable with a third party).  We review overall collectibility trends and customer characteristics such as debt leverage, solvency, and outstanding balances in order to develop our reserve estimates.  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 developing our receivable reserve estimates.

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Inventory

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

Workers’ Compensation and Self-Insured Health Claims

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

Warranty

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

Long-lived Assets

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

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

Pensions and Other Postretirement Benefit Costs

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

Income Taxes

Our effective tax rate at an interim period is based upon an estimate of expected foreign source income to U.S. income and our corresponding ability to utilize foreign tax credits effectively.  We consider shifts in sources of income when developing our estimated effective tax rate.

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

Stock-based Compensation

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

Environmental Liabilities

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

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

Forward-Looking Statements

Certain statements contained in this document are “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended.  These forward-looking statements represent our present expectations or beliefs concerning future events.  We caution that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties which could cause actual results to differ materially from those indicated in this report.  These risk factors include, but are not limited to, the following:  changes in general economic conditions; geopolitical events; increased competition; work stoppages and slowdowns; exchange rate fluctuations; variations in the mix of products sold; market acceptance of new product and distribution strategies; ability of suppliers to meet demand; fluctuations in effective tax rates resulting from shifts in sources of income; and the ability to successfully integrate and operate acquired businesses.  Further information on these risk factors is included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005.  We encourage you to read those descriptions carefully.  We caution investors not to place undue reliance on the forward-looking statements contained in this report.  These statements, like all statements contained in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise the statements except as required by law.

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Results of Operations

Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005

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

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

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Net Sales - The decrease in net sales of $5.0 million resulted from an estimated $6.8 million in lower sales caused by the strike at our Elkhart, Indiana brass instrument manufacturing facility.  The strike impact was partially offset by slight improvements in percussion, woodwind, and background brass sales.  Overseas piano sales increased $1.9 million, reflecting improved performances by both our European and Asian divisions.  During the quarter, overseas Steinway grand unit shipments increased 8% and mid-priced grand unit shipments increased 30%, supported largely by the re-launch of our Essex piano line.  These results more than offset the impact of a 10% decrease in domestic Steinway grand shipments, which resulted largely in the $1.5 million decrease in domestic retail sales in the current period.

Gross Profit - Gross profit decreased $1.5 million resulting primarily from lower sales generated by our band division, as well as lower margins at our piano division.  An estimated $3.1 million of lower gross profit resulted from the strike at our Elkhart, Indiana brass instrument manufacturing facility, comprised of $2.2 million in profit on lost sales and $0.9 million in unabsorbed overhead.  The decrease in band division gross profit was somewhat offset by improvements in most student band instrument margins and $0.3 million in lower charges associated with the sell-through of purchased Leblanc inventory, which was written up to fair value upon acquisition.  Despite the revenue increase, piano segment gross profit decreased, as we had fewer domestic retail sales and experienced a shift in mix towards our mid-priced piano lines.

Operating Expenses - Operating expenses increased $0.9 million due to an increase of $0.3 million in bad debt expense, $0.3 million in stock-based compensation, and $0.2 million in recruiting costs.

Non-operating Expenses - Non-operating expenses decreased $0.8 million due to the $0.9 million decrease in interest expense. This improvement resulted from our long-term debt restructuring and repayment of our larger term loan in the first quarter of 2006, as well as lower borrowings on our domestic line of credit.

Income Taxes - Our effective tax rate has increased from the year ago period due to the significant shift in the ratio of foreign source income to worldwide income.  This shift is due largely to the adverse impact of the loss on extinguishment of our 8.75% Senior Notes, the additional inventory and accounts receivable reserve charges taken in the prior quarter, and the estimated loss in income due to the strike at our Elkhart brass facility.  We currently anticipate that virtually all of our consolidated income for the year will be derived from foreign entities and that the vast majority of this income will be subject to both U.S. and foreign tax.  Accordingly, we expect to generate significantly more foreign taxes than we will be able to utilize as credits against U.S. tax liabilities and our higher effective rate reflects this.    Although we continue to investigate acceptable tax planning strategies in an effort to reduce our rate, we currently expect our effective tax rate for 2006 to be 60%.

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Results of Operations

Nine months ended September 30, 2006 Compared to Nine months ended September 30, 2005

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

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

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Net Sales - The increase in net sales of $1.5 million was driven by improved sales at our piano division.  Domestic Steinway grand piano sales at wholesale increased $2.2 million year-to-date, which helped to offset a decrease of $1.0 million in domestic mid-priced product sales to dealers.  Sales incentives offered to dealers as part of the June Essex re-launch contributed largely to the sales improvement.  Total overseas piano sales increased $2.7 million as a 20% increase in total unit shipments was partially offset by an unfavorable foreign currency translation of $1.2 million.  The decrease in band division sales of $2.5 million resulted from the strike at our Elkhart brass instrument manufacturing facility, which commenced April 1st.  We estimate lost sales of $11.7 million mostly due to low availability of professional instruments which are manufactured at this location.  However, the strike’s impact was mitigated by the availability of imported student brass instruments, student woodwind product and the introduction of new percussion products.

Gross Profit - Gross profit decreased by $4.1 million from deterioration in both the band and piano division margins.  Our band division gross margin declined from 21.1% to 19.3% primarily as a result of a $2.3 million charge to inventory reserves during the second quarter and the strike at the Elkhart brass instrument facility during the second and third quarters.  The strike resulted in $2.0 million of unabsorbed overhead and lost profit on the lost sales described above.  However, the deterioration was minimized by $1.4 million in lower charges associated with Leblanc inventory step-up.  Our piano division gross profit decreased $1.1 million despite increased sales, due to three additional weeks of production shutdown at our domestic piano manufacturing facility, which resulted in $1.3 million of unabsorbed overhead.

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

Non-operating Expenses - Non-operating expenses increased $6.9 million due largely to the loss on extinguishment of debt of $9.7 million resulting from the refinancing of our 8.75% Senior Notes and the early repayment of our acquisition term loan.  This net loss was comprised of $7.7 million in premiums paid to bondholders, the write-off of term loan related deferred financing fees of $1.0, and the write-off of bond related deferred financing fees of $2.2 million, which were offset in part by the write-off of bond premium of $1.3 million.

Other income, net increased $1.0 million due to largely to a shift from foreign exchange losses to foreign exchange gains during the period.  Net interest expense decreased $1.8 million due to the reduction in interest rates on our outstanding Senior Notes from 8.75% to 7.00% for a portion of the period and the repayment of our acquisition term loan in the first quarter of 2006.  The remaining decrease was due to interest earned for two months on $51.6 million in residual proceeds from the issuance of our 7.00% Senior Notes.

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

27

investigate acceptable tax planning strategies in an effort to reduce our rate, we currently expect our effective tax rate for 2006 to be 60%.

Liquidity and Capital Resources

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

Our statements of cash flows for the nine months ended September 30, 2006 and 2005 are summarized as follows:

	2006			2005			Change
Net (loss) income:	$	(1,735	)	$	8,759		$	(10,494	)
Changes in operating assets and liabilities	(10,759		)	(14,420		)	3,661
Other adjustments to reconcile net (loss) income to cash from operating activities	13,869			8,139			5,730
Cash flows from operating activities	1,375			2,478			(1,103		)
Cash flows from investing activities	(2,297		)	(2,203		)	(94		)
Cash flows from financing activities	(17,954		)	(4,812		)	(13,142		)

Cash flows generated from operating activities decreased $1.1 million due primarily to changes in working capital accounts.  Cash provided by inventory increased $17.4 million due to increased piano sales combined with reduced production at both our Elkhart brass instrument facility and our domestic piano manufacturing facility.  Cash used by accounts receivable increased $10.3 million due to increased sales and extended payment terms offered as part of the Essex re-launch promotional activities.  An increase in our band division aged receivable balance was also a factor.

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

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

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

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

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borrowings on our line of credit, were used to exercise our right to call the remaining $51.6 million of 8.75% Senior Notes.  This resulted in a loss on extinguishment of $8.7 million, comprised of $7.7 million in premiums paid to existing holders of 8.75% Senior Notes, $1.3 million of bond premium write-off, and $2.3 million in the write-off of associated deferred financing costs. We recorded interest on both the remaining 8.75% Senior Notes and the 7.00% Senior Notes for the February – April timeframe during which both series of notes were outstanding. This double interest expense was partially offset by interest income on the unused debt issuance proceeds during the first quarter, and is not material to our liquidity.  We expect interest payment savings of approximately $2.3 million per year based on the difference in interest rates on the Senior Notes.

In September, we amended and restated our domestic credit facility, which we have with a syndicate of domestic lenders (the “Credit Facility”).  The Credit Facility provides us with a potential borrowing capacity of $110.0 million in revolving credit loans, and expires on September 29, 2011. It also provides for periodic borrowings at either London Interbank Offering Rate (“LIBOR”) plus a range from 1.25% to 1.75% or as-needed borrowings at an alternate base rate, plus a range from 0.00% to 0.25%; both ranges depend upon availability at the time of borrowing. The Credit Facility is collateralized by our domestic accounts receivable, inventory, and fixed assets.  As of September 30, 2006, there was $13.9 million in revolving credit loans outstanding, as we used borrowings on the Credit Facility to repay our real estate term loan, which had a balance of $14.6 million at the time of repayment.  As a result, the remaining availability based on eligible accounts receivable and inventory balances was approximately $94.0 million, net of letters of credit.

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

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

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

All of our debt agreements contain covenants that place 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 September 30, 2006 and do not anticipate any compliance issues in 2006.

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Our bond indenture contains limitations, based on net income (among other things), on the amount of discretionary repurchases we may make of our Ordinary common stock.  Our intent and ability to repurchase additional Ordinary common stock either directly from shareholders or on the open market is directly affected by this limitation.

We have reserved 721,750 shares of our existing treasury stock to be utilized for the exercise of outstanding stock options under our Amended and Restated 1996 Stock Plan.  As of September 30, 2006, we estimate 529,550 shares of reserved treasury stock will be utilized.  These options have no impact on our cash flow or the number of shares outstanding unless and until the options are exercised.

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

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

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Contractual Obligations - The following table provides a summary of our contractual obligations at September 30, 2006.

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

Notes to Contractual Obligations:

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

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

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

(4)Our other long-term liabilities consist primarily of the long-term portion of our pension obligations, which are described in Note 10 in the Notes to Consolidated Financial Statements included within this filing, and obligations under employee and consultant agreements.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.” FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are evaluating the impact that this statement will have on our financial position and results of operations.

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

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

ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

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

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Our revolving loans bear interest at rates that fluctuate with changes in PRIME, LIBOR, TIBOR, and EURIBOR.  As such, our interest expense on our revolving loans and the fair value of our fixed long-term debt are sensitive to changes in market interest rates.  The effect of an adverse change in market interest rates on our interest expense would not be materially different than that disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.

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

ITEM 4CONTROLS AND PROCEDURES

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

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

PART IIOTHER INFORMATION

ITEM 6 EXHIBITS

(i)Exhibits

31.1Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

32.2Certification 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

32

SIGNATURES

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

STEINWAY MUSICAL INSTRUMENTS, INC.

/s/ Dana D. Messina

Dana D. Messina

Director, President and Chief Executive Officer

/s/ Dennis M. Hanson

Dennis M. Hanson

Senior Executive Vice President and

Chief Financial Officer

Date: November 9, 2006

33

EX-31.1

EXHIBIT 31.1

I, Dana D. Messina, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Steinway Musical Instruments, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2006

/s/ Dana D. Messina

Dana D. Messina

Director, President and Chief

Executive Officer

EX-31.2

EXHIBIT 31.2

I, Dennis M. Hanson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Steinway Musical Instruments, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2006	/s/ Dennis M. Hanson
	Dennis M. Hanson
	Senior Executive Vice President and
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS REQUIRED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Steinway Musical Instruments, Inc. (the “Company”) for the quarter ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dana D. Messina, Chief Executive Officer of the Company, certify that to the best of my knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Dana D. Messina

President and Chief Executive Officer

(Principal Executive Officer)

November 9, 2006

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS REQUIRED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Steinway Musical Instruments, Inc. (the “Company”) for the quarter ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dennis M. Hanson, Senior Executive Vice President and Chief Financial Officer of the Company, certify that to the best of my knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Dennis M. Hanson

Senior Executive Vice President and

Chief Financial Officer

(Principal Financial Officer)

November 9, 2006