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, 2008

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, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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 5, 2008:

Class A	477,952
Ordinary	8,055,307
Total	8,533,259

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

PART I.	UNAUDITED FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Statements of Operations Three and nine months ended September 30, 2008 and 2007	3
	Condensed Consolidated Balance Sheets September 30, 2008 and December 31, 2007	4
	Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2008 and 2007	5
	Condensed Consolidated Statement of Stockholders’ Equity Nine months ended September 30, 2008	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	35
Item 4.	Controls and Procedures	36
PART II.	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.	Exhibits	36
	Signatures	37

2

ITEM 1           CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

(In Thousands Except Share and Per Share Amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Net sales	$	100,488		$	99,293		$	293,195		$	284,982
Cost of sales	70,559			71,202			206,829			201,086
Gross profit	29,929			28,091			86,366			83,896
Operating expenses:
Sales and marketing	11,682			12,037			37,023			36,848
General and administrative	8,701			8,361			26,176			25,512
Amortization of intangible assets	336			196			795			588
Other operating expenses	68			262			537			1,297
Facility rationalization and impairment charges	8,555			—			9,617			—
Total operating expenses	29,342			20,856			74,148			64,245
Income from operations	587			7,235			12,218			19,651
Other (income) expense, net	(405		)	37			(388		)	(154		)
Gain on extinguishment of debt	—			—			(636		)	—
Interest income	(602		)	(613		)	(2,343		)	(2,615		)
Interest expense	2,980			3,518			9,154			10,195
Total non-operating expenses	1,973			2,942			5,787			7,426
Income (loss) before income taxes	(1,386		)	4,293			6,431			12,225
Income tax provision (benefit)	(1,126		)	1,285			1,671			4,634
Net income (loss)	$	(260	)	$	3,008		$	4,760		$	7,591
Earnings (loss) per share
Basic	$	(0.03	)	$	0.35		$	0.56		$	0.89
Diluted	$	(0.03	)	$	0.35		$	0.55		$	0.88
Weighted average shares:
Basic	8,538,264			8,569,253			8,565,928			8,503,117
Diluted	8,538,264			8,683,025			8,652,571			8,641,143

See notes to condensed consolidated financial statements.

3

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(In Thousands)

	September 30, 2008			December 31, 2007
Assets
Current assets:
Cash	$	22,288		$	37,304
Accounts, notes and other receivables, net of allowances of $16,395 and $17,519 in 2008 and 2007, respectively	77,340			73,131
Inventories, net	161,752			152,451
Prepaid expenses and other current assets	13,335			11,272
Deferred tax assets	12,216			11,571
Total current assets	286,931			285,729
Property, plant and equipment, net of accumulated depreciation of $97,679 and $94,221 in 2008 and 2007, respectively	88,014			94,150
Trademarks	16,182			14,119
Goodwill	23,818			32,907
Other intangibles, net	5,899			3,937
Other assets	18,096			18,014
Long-term deferred tax assets	8,415			8,822
Total assets	$	447,355		$	457,678
Liabilities and stockholders’ equity
Current liabilities:
Debt	$	2,983		$	2,285
Accounts payable	17,968			12,381
Other current liabilities	45,456			52,320
Total current liabilities	66,407			66,986
Long-term debt	168,385			173,981
Deferred tax liabilities	11,240			15,003
Pension and other postretirement benefit liabilities	29,124			30,093
Other non-current liabilities	6,592			7,836
Total liabilities	281,748			293,899
Commitments and contingent liabilities
Stockholders’ equity:
Common stock	11			11
Additional paid-in capital	95,876			94,370
Retained earnings	117,653			112,917
Accumulated other comprehensive income (loss)	(811		)	1,773
Treasury stock, at cost	(47,122		)	(45,292		)
Total stockholders’ equity	165,607			163,779
Total liabilities and stockholders’ equity	$	447,355		$	457,678

See notes to condensed consolidated financial statements.

4

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(In Thousands)

	Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities:
Net income	$	4,760		$	7,591
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation and amortization	8,217			7,839
Amortization of bond discount, net	122			124
Gain on extinguishment of debt	(636		)	—
Facility rationalization charges	1,062			—
Goodwill impairment	8,555			—
Stock-based compensation expense	811			853
Excess tax benefits from stock-based awards	(4		)	(410		)
Tax benefit from stock option exercises	5			735
Deferred tax benefit	(3,920		)	(2,038		)
Other	742			1,036
Changes in operating assets and liabilities:
Accounts, notes and other receivables	(3,494		)	(10,705		)
Inventories	(12,544		)	(10,999		)
Prepaid expenses and other assets	(1,582		)	49
Accounts payable	5,185			(3,873		)
Other liabilities	(9,681		)	(1,576		)
Cash flows from operating activities	(2,402		)	(11,374		)
Cash flows from investing activities:
Capital expenditures	(3,834		)	(3,644		)
Proceeds from disposals of property, plant and equipment	817			199
Acquisition of businesses, net of cash acquired	(3,181		)	—
Cash flows from investing activities	(6,198		)	(3,445		)
Cash flows from financing activities:
Borrowings under lines of credit	5,923			148,929
Repayments under lines of credit	(5,395		)	(129,633		)
Repayments of long-term debt, net of discount	(4,981		)	—
Proceeds from issuance of common stock	817			4,137
Purchase of treasury stock	(1,981		)	—
Dividends paid	—			(25,187		)
Excess tax benefits from stock-based awards	4			410
Cash flows from financing activities	(5,613		)	(1,344		)
Effect of foreign exchange rate changes on cash	(803		)	742
Decrease in cash	(15,016		)	(15,421		)
Cash, beginning of period	37,304			30,409
Cash, end of period	$	22,288		$	14,988
Supplemental Cash Flow Information
Interest paid	$	12,398		$	13,269
Taxes paid	$	11,942		$	8,980

See notes to condensed consolidated financial statements.

5

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Unaudited

(In Thousands Except Share Data)

	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
Balance, January 1, 2008	$	11	$	94,370	$	112,917	$	1,773		$	(45,292	)	$	163,779
Comprehensive income:
Net income					4,760								4,760
Foreign currency translation adjustments							(2,584		)				(2,584		)
Total comprehensive income													2,176
Exercise of 6,500 options for shares of common stock	—				(24)					151			127
Stock-based compensation			811										811
Tax benefit of options exercised			5										5
Issuance of 29,379 shares of common stock	—		690										690
Purchase of 74,700 shares of treasury stock										(1,981		)	(1,981		)
Balance, September 30, 2008	$	11	$	95,876	$	117,653	$	(811	)	$	(47,122	)	$	165,607

See notes to condensed consolidated financial statements.

6

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

Unaudited

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

(1)           Basis of Presentation

The accompanying condensed consolidated financial statements of Steinway Musical Instruments, Inc. and subsidiaries (the “Company”) for the three and nine months ended September 30, 2008 and 2007 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, 2007, 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 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, 2007 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and nine months ended September 30, 2008 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 piano (“Steinway”), band (“Conn-Selmer”), and online music (“Arkiv”) divisions. We have included results for Arkiv within the piano segment elsewhere in this report. 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.

We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions and other issues. Prior to 2007, these reserves were recorded when management determined that it was probable that a loss would be incurred related to these matters and the amount of the loss was reasonably determinable. In 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). As a result, reserves recorded subsequent to adoption are based on a determination of whether and how much of a tax benefit taken in our tax filings or positions is more likely than not to be realized, assuming that the matter in question will be raised by the tax authorities. Potential interest and penalties associated with such uncertain tax positions are

7

recorded as a component of income tax expense. At adoption date, we made a comprehensive review of our uncertain tax positions. We believe appropriate provisions for outstanding issues have been made.

In conjunction with the adoption of FIN 48, we began reporting income tax-related interest and penalties as a component of income tax expense. Prior to adoption, such interest was reported in interest expense. We file income tax returns at the U.S. federal, state, and local levels, as well as in several foreign jurisdictions. With few exceptions, our returns are no longer subject to examinations for years before 2004.

The liability for uncertain tax positions decreased $3.8 million in 2008 as a result of settlements with state taxing authorities. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in changes in our estimates.

Stock-based Compensation - We record compensation cost on a straight-line basis over the award’s requisite service period for all share-based awards granted. We estimate the fair value of our stock option awards (less estimated forfeitures) and employee stock purchase plan rights on the date of grant using the Black-Scholes option valuation model.

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,
	2008	2007	2008	2007
Weighted-average shares:
For basic earnings (loss) per share	8,538,264	8,569,253	8,565,928	8,503,117
Dilutive effect of stock options	—	113,772	86,643	138,026
For diluted earnings (loss) per share	8,538,264	8,683,025	8,652,571	8,641,143

We did not include any of the 807,876 outstanding options to purchase shares of common stock in the computation of diluted loss per share for the three months ended September 30, 2008 because the impact would have been antidilutive. We did not include 195,300 outstanding options to purchase shares of common stock in the computation of diluted earnings per common share for the nine months ended September 30, 2008, because their exercise prices were more than the average market price of our common shares, and therefore antidilutive. We did not include 22,500 options to purchase shares of common stock in the computation of diluted earnings per share for the three and nine months ended September 30, 2007, respectively, because their impact would have been antidilutive.

We purchased 48,900 shares of our common stock for $1.3 million during the three months ended September 30, 2008. We purchased 74,700 shares of our common stock for $2.0 million during the nine months ended September 30, 2008 pursuant to our share repurchase program. This program, which was announced in the second quarter of 2008, permits us to make discretionary purchases of up to $25.0 million.

8

Accumulated Other Comprehensive Income (Loss) - Accumulated other comprehensive income (loss) is comprised of foreign currency translation adjustments and pension and other post-retirement benefits. The components of accumulated other comprehensive income (loss) are as follows:

	Foreign Currency Translation Adjustments			Pension & Other Post-Retirement Benefits			Tax Impact of Pension & Other Post-Retirement Benefits		Accumulated Other Comprehensive Income (Loss)
Balance January 1, 2008	$	9,041		$	(11,616	)	$	4,348	$	1,773
Activity	(2,584		)	—			—		(2,584		)
Balance September 30, 2008	$	6,457		$	(11,616	)	$	4,348	$	(811	)

Recent Accounting Pronouncements - On January 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115,” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option) with changes in fair value reported in earnings. We already record marketable securities at fair value in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and derivative contracts and hedging activities at fair value in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The adoption of SFAS 159 had no impact on our consolidated financial position and results of operations as management did not choose to measure any other items at fair value.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. On January 1, 2008, we adopted SFAS 157, which did not have an impact on our consolidated financial statements. In February 2008, the FASB delayed the effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities. We will comply with this component of SFAS 157 January 1, 2009. We are currently evaluating these requirements of SFAS 157 and have not yet determined the impact its adoption will have on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” a revision to SFAS No. 141, “Business Combinations” (“ SFAS 141R”), which provides revised guidance for recognition and measurement of identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree at fair value. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of a business combination. SFAS 141R is required to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will comply with SFAS 141R January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent. Specifically, SFAS 160 requires the presentation of noncontrolling interests as equity in the Consolidated Statement of Financial

9

Position, and separate identification and presentation in the Consolidated Statement of Operations of net income attributable to the entity and the noncontrolling interest. It also establishes accounting and reporting standards regarding deconsolidation and changes in a parent’s ownership interest. We will be required to comply with SFAS 160 January 1, 2009. The provisions of SFAS 160 are generally required to be applied prospectively, except for the presentation and disclosure requirements, which must be applied retrospectively. We are currently evaluating the potential impact, if any, of the adoption of SFAS 160 on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends and expands the disclosure requirements for derivative instruments and hedging activities, with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial statements. We will comply with SFAS 161 January 1, 2009.

(3) Acquisitions

On May 16, 2008 we acquired 100% of the membership interest in ArkivMusic, LLC (“Arkiv”), an online retailer of classical music. We have included the operating results and net assets of Arkiv in our financial statements since the date of acquisition.

We acquired Arkiv because its product and customer base are complementary to ours, and we will be able to cross-market our products. Under terms of the membership purchase agreement, we disbursed $3.0 million for the purchase price, and owe additional installment payments of $0.5 million in each of the next three years. In addition, we are obligated to pay an amount equal to 5% of the net operating profits of Arkiv, if any, for 2008, 2009, and 2010, the sum of which is not to exceed $2.5 million. The final purchase price is dependent upon a calculation derived from the 2010 net operating profits which, when finalized, may result in an additional payment of not more than $11.0 million. In the event that we terminate a particular former owner without cause and do not offer one of the other former owners the vacated position, we are required to make a mandatory final purchase price payment of $8.3 million. We are still accumulating certain information relative to the valuation of intangible assets that may impact the final purchase price allocation. Accordingly, the final purchase price allocation may differ from the amounts presented below. The purchase price is based on the preliminary acquisition cost determination of $4.8 million and has been allocated to acquired assets and assumed liabilities as of May 16, 2008 as follows:

Current assets	$	351
Property, plant, and equipment	33
Trademarks	2,231
Non-compete agreements	250
Customer relationships	425
Website and developed technology	1,987
Accounts payable	(499		)
Other current liabilities	(25		)
Subtotal	4,753
Less: Installment payments	(1,605		)
Cash acquired	(162		)
Total cash paid	$	2,986

10

Subsequent footnotes providing details of our significant balance sheet accounts include the impact of the Arkiv acquisition as of September 30, 2008.

On July 16, 2008, we acquired the stock of 4 Real Investments, Inc., which does business as Clickpoint Software, Inc. (“Clickpoint”). Our Chairman, Kyle Kirkland, and Chief Executive Officer, Dana Messina, were shareholders of Clickpoint as of the date of acquisition. We paid approximately $0.2 million for this acquisition, of which $0.1 million was paid to our Chairperson, $0.1 million to our Chief Executive Officer, and the residual amount of less than $0.1 million to the remaining owners. The purchase price has been allocated primarily to website and developed technology.

(4)Inventories

	September 30, 2008		December 31, 2007
Raw materials	$	20,069	$	18,615
Work-in-process	47,623		51,402
Finished goods	94,060		82,434
	$	161,752	$	152,451

(5)           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. We performed our annual goodwill and intangible asset impairment test as of July 31, 2008. Based on our analysis, it was determined that the goodwill associated with the band division was impaired. This was primarily due to the decline in the estimated forecasted discounted cash flows expected by that division, the reasons for which are discussed in the Managements’ Discussion and Analysis section of this document. Accordingly, we wrote off all of the $8.6 million in goodwill during the period. Our analysis of band division trademarks did not indicate an impairment, therefore no charge was taken against that asset, or any other intangible assets attributable to other divisions. No other events or circumstances have occurred subsequent to our annual impairment date which have indicated that these assets may potentially be impaired.

Intangible assets related to the acquisitions discussed in Note 3 have been included with the piano division.

11

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

	Piano			Band			Total
Goodwill:
Balance, January 1, 2008	$	24,352		$	8,555		$	32,907
Foreign currency translation impact	(534		)	—			(534		)
Impairment charge	—			(8,555		)	(8,555		)
Balance, September 30, 2008	$	23,818		$	—		$	23,818
Trademarks:
Balance, January 1, 2008	$	8,295		$	5,824		$	14,119
Additions based on preliminary purchase
price allocation to acquired assets	2,231			—			2,231
Foreign currency translation impact	(168		)	—			(168		)
Balance, September 30, 2008	$	10,358		$	5,824		$	16,182

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, 2008			December 31, 2007
Gross deferred financing costs:	$	5,624		$	5,755
Accumulated amortization	(2,456		)	(1,980		)
Deferred financing costs, net	$	3,168		$	3,775
Gross non-compete agreements:	$	750		$	500
Accumulated amortization	(432		)	(338		)
Non-compete agreements, net	$	318		$	162
Gross customer relationships:	$	425		$	—
Accumulated amortization	(32		)	—
Customer relationships, net:	$	393		$	—
Gross website and developed technology:	$	2,176		$	—
Accumulated amortization	(156		)	—
Website and developed technology, net	$	2,020		$	—
Total other intangibles	$	8,975		$	6,255
Accumulated amortization	(3,076		)	(2,318		)
Other intangibles, net	$	5,899		$	3,937

12

Deferred financing costs were impacted by our purchase of $5.8 million of our Senior Notes in March 2008. This repurchase is described more fully in Note 7. Trademarks, non-compete agreements, customer relationships, and website and developed technology were impacted by the acquisitions of Arkiv and Clickpoint, which are described more fully in Note 3. The weighted-average amortization period for deferred financing costs is seven years, and the weighted-average amortization period of all other amortizable intangibles is five years. Total amortization expense, which includes amortization of deferred financing costs, is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Amortization expense	$	336	$	196	$	795	$	588

The following table shows the total estimated amortization expense for the remainder of 2008 and beyond:

Remainder of 2008	$	335
2009	1,302
2010	1,218
2011	1,178
2012	1,068
2013 and thereafter	798
Total	$	5,899

(6)           Other Current Liabilities

	September 30, 2008		December 31, 2007
Accrued payroll and related benefits	$	16,294	$	16,721
Current portion of pension and other postretirement benefit liabilities	1,263		1,440
Accrued warranty expense	1,555		1,541
Accrued interest	977		4,049
Deferred income	9,879		10,224
Environmental liabilities	2,514		2,648
Income and other taxes payable	2,320		6,139
Other accrued expenses	10,654		9,558
Total	$	45,456	$	52,320

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.

13

The accrued warranty expense activity for the nine months ended September 30, 2008 and 2007, and the year ended December 31, 2007 is as follows:

	September 30, 2008			September 30, 2007			December 31, 2007
Beginning balance	$	1,541		$	1,888		$	1,888
Additions	788			469			798
Claims and reversals	(742		)	(772		)	(1,200		)
Foreign currency translation impact	(32		)	54			55
Ending balance	$	1,555		$	1,639		$	1,541

(7)           Long-Term Debt

Our long-term debt consists of the following:

	September 30, 2008			December 31, 2007
7.00% Senior Notes	$	169,250		$	175,000
Unamortized bond discount	(865		)	(1,019		)
Open account loans, payable on demand	2,983			2,285
Total	171,368			176,266
Less: current portion	(2,983		)	(2,285		)
Long-term debt	$	168,385		$	173,981

Scheduled payments of debt are as follows:

	September 30, 2008
Remainder of 2008	$	2,983
2009 - 2012	—
Thereafter	169,250
Total	$	172,233

14

In March 2008, we repurchased $5.8 million of our Senior Notes at a price of 86.625% plus interest. As a result, we recorded a net gain on extinguishment of debt of $0.6 million. A summary of the transaction is as follows:

Principal repurchased	$	5,750
Accrued interest	19
Subtotal	5,769
Less:
Cash paid	(5,000		)
Deferred financing costs write-off	(101		)
Bond discount write-off	(32		)
Net gain on extinguishment of debt	$	636

(8)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. Each share of Class A common stock shall automatically convert to Ordinary common stock if, at any time, that share of Class A common stock is not owned by an original Class A holder. As of September 30, 2008 our Chairman and our Chief Executive Officer collectively owned 100% of the Class A common shares, representing approximately 85% 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 (“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 have reserved 400,000 shares of common stock for issuance under this plan.

Stock Plans - The 2006 Stock Plan provides for the granting of 1,000,000 stock options (including incentive stock options and non-qualified stock options), stock appreciation rights and other stock awards to certain key employees, consultants and advisors. Our stock options generally have five-year vesting terms and ten-year option terms.

Our 1996 Stock Plan has expired but still has vested and unvested options outstanding. We reached our registered share limitation in early 2007, and had previously reserved 721,750 treasury stock shares to issue under this plan. We have since issued 98,974 shares of treasury stock to cover options exercised, with 385,776 remaining options outstanding. Since in most instances the average cost of the treasury stock exceeded the price of the options exercised, the difference between the proceeds received and the average cost of the treasury stock issued resulted in a reduction of retained earnings. This reduction was less than $0.1 million for the three and nine months ended September 30, 2008.

15

The compensation cost and the income tax benefit recognized for these plans is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Compensation cost included in basic and diluted income (loss) per share	$	0.03	$	0.02	$	0.08	$	0.08
Stock-based compensation expense	300		210		811		853
Income tax benefit	46		48		131		148

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 the expected life of the option, as our options are not readily tradable.

Key assumptions used to apply this pricing model to the 2006 Stock Plan are as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2008	2007	2008	2007
Risk free interest rate	3.1%	4.7%	3.4%	4.6%
Weighted average expected life (in years)	6.7	7.3	7.2	8.1
Expected volatility of underlying stock	26.0%	24.7%	25.9%	25.1%
Expected dividends	—	—	—	—
Weighted average fair value	$9.92	$12.25	$9.94	$13.61

The following table sets forth information regarding the Stock Plans:

	Number of Options		Weighted- Average Exercise Price		Remaining Contractual Life (in years)	Aggregate Intrinsic Value (not in 000s)
Outstanding at January 1, 2008	544,576		$	23.78
Granted	302,300		27.26
Exercised	(6,500	)	19.49
Forfeited	(32,500	)	28.61
Outstanding at September 30, 2008	807,876		$	24.92	6.9	$	2,960,909
Exercisable at September 30, 2008	361,016		$	21.08	4.4	$	2,556,834

16

The total intrinsic value of the options exercised during the nine months ended September 30, 2008 and 2007 was less than $0.1 million and $2.4 million, respectively.

As of September 30, 2008, there was $3.8 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 4.2 years.

The following tables set forth information regarding the Purchase Plan:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2008	2007	2008	2007
Risk-free interest rate	3.8%	4.9%	4.3%	5.0%
Weighted-average expected life of option feature (in years)	1.0	1.0	1.0	1.0
Expected volatility of underlying stock	25.6%	25.5%	25.7%	25.0%
Expected dividends	—	—	—	—
Weighted-average fair value of option feature	$7.88	$7.98	$8.27	$6.78

	Number of Options		Weighted- Average Exercise Price		Remaining Contractual Life (in years)	Aggregate Intrinsic Value (not in 000s)
Outstanding at January 1, 2008	10,441		$	28.73
Shares subscribed	25,512		23.46
Exercised	(29,379	)	23.49
Canceled	(1,497	)	23.49
Outstanding at September 30, 2008	5,077		$	23.36	0.8	$	22,847

As reported in the consolidated statements of cash flows, cash received from option exercises under the Stock Plans for the periods ended September 30, 2008 and 2007 was $0.8 million and $4.1 million, respectively. 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) are required to be classified as a cash flow from financing activities. Accordingly, for the periods ended September 30, 2008 and 2007, less than $0.1 million and $0.4 million, respectively, 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. For the periods ended September 30, 2008 and 2007, less than $0.1 million and $0.7 million, respectively, of tax benefit from stock option exercises is presented as a cash inflow from operating activities.

(9)Facility Rationalization – Band

As part of our effort to reduce excess manufacturing capacity in our band segment, in December 2007 we announced the pending closure of our Kenosha, Wisconsin woodwind manufacturing facility, which effectively ceased operations in May 2008. We recorded $0.1 million in facility impairment charges as a component of operating expenses and less than $0.1 million in severance costs as a component of cost of goods sold for the year ended December 31, 2007 related to this facility. Production was relocated to our Elkhart, Indiana

17

woodwind manufacturing facility. In September 2008, this facility, which has a remaining book value of $1.2 million, was reclassified from property, plant and equipment to other assets, as it is now being held for sale.

In February 2008, management decided to terminate production of musical instrument cases, which were manufactured in a leased facility in North Carolina. The remaining instrument production and assembly work occurring in that facility was not impacted by this termination, which occurred in April 2008.

We closed our Elkhorn, Wisconsin brass instrument manufacturing facility in August 2008 and relocated its production to our Eastlake, Ohio brass instrument manufacturing facility. In the second quarter, we recorded $0.2 million in associated facility impairment charges as a component of operating expenses. Associated severance costs are shown below. In September 2008, this facility, which has a remaining book value of $0.3 million, was reclassified from property, plant and equipment to other assets, as it is now being held for sale.

In July 2008, we sold our Leblanc clarinet manufacturing facility and operations in France. This facility’s production is being transitioned to our Elkhart, Indiana woodwind manufacturing facility. In the second quarter, we recorded $0.9 million in related facility impairment charges as a component of operating expenses. Since the workers at this facility have been retained by the purchaser, no severance costs have been recorded.

The severance liability and related activity associated with the band segment’s facility rationalization project are as follows:

	Kenosha			Case			Elkhorn			Total
Facility rationalization severance liability:
Balance, January 1, 2008	$	39		$	—		$	—		$	39
Additions charged to cost of sales	438			88			431			957
Payments	(410		)	(77		)	(240		)	(727		)
Reversals	—			(11		)	(70		)	(81		)
Balance, September 30, 2008	$	67		$	—		$	121		$	188

In the first quarter of 2008, we recorded $0.1 million of inventory write-down charges as a component of cost of goods sold related to musical instrument cases.

Currently we do not expect to incur any additional material charges associated with the facility rationalization project.

18

(10)Other (Income) Expense, Net

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
West 57th building income	$	(1,163	)	$	(1,163	)	$	(3,490	)	$	(3,490	)
West 57th building expenses	823			823			2,464			2,461
Foreign exchange (gain) loss, net	(178		)	111			180			564
Miscellaneous	113			266			458			311
Other (income) expense, net	$	(405	)	$	37		$	(388	)	$	(154	)

(11)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 under the Environmental Indemnity Agreement, which terminates on December 29, 2008, however, we cannot assure investors 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, four Conn-Selmer predecessor entities are among the potentially responsible parties (“PRP”) group. The PRP group has entered into a Consent Order with the EPA, the site owners, and the largest contributor. For two of the Conn-Selmer predecessor entities, which were previously owned by Philips, this matter was tendered to Philips pursuant to the Environmental Indemnity Agreement. Philips is a party to the Consent Order and has paid its share of the liability. The four Conn-Selmer predecessor entities paid approximately $0.1 million in 2006 and settled this claim except for the possibility of a contingent remedial action, should any additional environmental issues be discovered. We believe the likelihood of a contingency assessment to be remote and, our share of the liability, if any, would not be material.

In addition, we are continuing an existing environmental remediation plan at a facility we acquired in 2000 and subsequently sold. We estimate our costs, which approximate $0.7 million, over a 13-year period. We have

19

accrued approximately $0.6 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

20

associated with this project is as follows:

	Environmental Payments
Remainder of 2008	$	8
2009	61
2010	61
2011	61
2012	61
Thereafter	484
Total	$	736

We received notification from the Arizona Department of Environmental Quality (“ADEQ”) that, among other things, the required periodic reports related to this environmental remediation effort were not filed timely for 1999-2005 and, therefore, ADEQ proposed a fine of $0.8 million, which was subsequently reduced to $0.2 million. Since the violations are limited to administrative items, and research indicates that fines paid to ADEQ for similar violations (those with no environmental harm) were less than $0.1 million, we believe this matter will be settled for less than $0.2 million and have included this amount in accounts payable.

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 periodic sampling, we estimate the remaining costs of such remedial plans to be $2.0 million. Pursuant to the purchase and sale agreement, we 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 our consolidated balance sheet. In 2007, we reduced this receivable, which is $2.0 million as of September 30, 2008, based on the current estimated costs of remediation. We have reached an agreement with Grenadilla whereby environmental costs are paid directly out of the escrow. Should the escrow be reduced to zero, we would seek further indemnification from Grenadilla for these additional costs. However, we cannot be assured that we will be able to recover such costs.

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.

21

(12)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 (benefit) for these plans are as follows:

	Domestic Plans						Foreign Plans
	Three Months Ended September 30,						Three Months Ended September 30,
	2008			2007			2008			2007
Service cost	$	104		$	236		$	204		$	219
Interest cost	853			807			486			433
Expected return on plan assets	(1,284		)	(1,242		)	(96		)	(94		)
Amortization of prior service cost	51			108			—			—
Amortization of net loss	12			137			23			86
Net periodic pension cost (benefit)	$	(264	)	$	46		$	617		$	644

	Domestic Plans						Foreign Plans
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Service cost	$	311		$	707		$	616		$	618
Interest cost	2,558			2,422			1,465			1,231
Expected return on plan assets	(3,851		)	(3,726		)	(298		)	(276		)
Amortization of prior service cost	153			324			—			—
Amortization of net loss	36			413			71			238
Net periodic pension cost (benefit)	$	(793	)	$	140		$	1,854		$	1,811

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

22

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Service cost	$	—		$	11		$	4		$	32
Interest cost	(1		)	33			51			102
Amortization of transition obligation	—			8			—			26
Amortization of prior service costs	(13		)	—			(39		)	—
Recognized gain	(16		)	(41		)	—			(124		)
Net periodic postretirement cost (benefit)	$	(30	)	$	11		$	16		$	36

We intend to make contributions of $3.0 to $5.0 million to our domestic pension plan this year. Our anticipated contributions to the pension plan of our U.K. subsidiary approximate $0.8 million for the current year. As of September 30, 2008, we have made contributions of $0.5 million to this plan. The pension plans of our German entities do not hold any assets and use operating cash to pay participant benefits as they become due. Expected 2008 benefit payments under these plans are $1.3 million, of which $1.0 million was paid through September 2008.

(13)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. We have reclassified the results of our online music division from “Other & Elim” into “U.S. Piano Segment” as we believe its results are not material and its products and customer base are most correlated with piano operations. 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” corporate costs that were not allocated to the reportable segments, and the remaining intercompany profit elimination.

The following tables present information about our operating segments for the three and nine months ended September 30, 2008 and 2007:

23

Three months ended 2008

	Piano Segment								Band Segment								Other			Consol
	U.S.		Germany		Other		Total		U.S.			Europe		Total			& Elim			Total
Net sales to external customers	$	28,988	$	17,236	$	9,482	$	55,706	$	42,841		$	1,941	$	44,782		$	—		$	100,488
Income (loss) from operations	1,242		4,954		482		6,678		(5,225		)	203		(5,022		)	(1,069		)	587

Three months ended 2007

	Piano Segment								Band Segment						Other			Consol
	U.S.		Germany		Other		Total		U.S.		Europe		Total		& Elim			Total
Net sales to external customers	$	28,087	$	13,673	$	10,225	$	51,985	$	45,150	$	2,158	$	47,308	$	—		$	99,293
Income (loss) from operations	2,669		2,408		718		5,795		1,824		244		2,068		(628		)	7,235

Nine months ended 2008

	Piano Segment								Band Segment									Other			Consol
	U.S.		Germany		Other		Total		U.S.			Europe			Total			& Elim			Total
Net sales to external customers	$	81,515	$	52,292	$	34,088	$	167,895	$	119,484		$	5,816		$	125,300		$	—		$	293,195
Income (loss) from operations	3,093		13,871		2,693		19,657		(3,551		)	(1,312		)	(4,863		)	(2,576		)	12,218

Nine months ended 2007

	Piano Segment								Band Segment						Other			Consol
	U.S.		Germany		Other		Total		U.S.		Europe		Total		& Elim			Total
Net sales to external customers	$	82,519	$	42,944	$	33,829	$	159,292	$	120,102	$	5,588	$	125,690	$	—		$	284,982
Income (loss) from operations	5,537		10,971		3,150		19,658		1,993		468		2,461		(2,468		)	19,651

24

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

Introduction

We are a 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. In May 2008, we acquired ArkivMusic, LLC (“Arkiv”), an online retailer of classical music.

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 2007 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. 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 at both our piano and band divisions has 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 a majority of our consolidated accounts receivable balance. We consider the credit health and solvency of our customers when developing our receivable reserve estimates.

25

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 account for 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. Abnormal costs are recorded in the period in which they occur.

Workers’ Compensation and Self-Insured Health Claims

We establish self-insured workers’ compensation and 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 establish long-lived intangible assets based on estimated fair values, and amortize finite-lived intangibles over their estimated useful lives. 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 a comparison of estimated fair values to our market capitalization and multi-year cash flows.

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

We record valuation allowances 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

26

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.

A liability has been recorded for uncertain tax positions. When analyzing these positions, we consider the probability of various outcomes which could result from examination, negotiation, or settlement with various taxing authorities. The final outcome on these positions could differ significantly from our original estimates due to the following: expiring statues of limitations; availability of detailed historical data; the results of audits or examinations conducted by taxing authorities or agents that vary from management’s anticipated results; identification of new tax contingencies; the release of applicable administrative tax guidance; management’s decision to settle or appeal assessments; or the rendering of court decisions affecting our estimates of tax liabilities; as well as other factors.

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; recent geopolitical events; increased competition; work stoppages and slowdowns; ability to successfully consolidate band manufacturing; impact of dealer consolidations on orders; exchange rate fluctuations; variations in the mix of products sold; market acceptance of new product and distribution strategies; ability of suppliers to meet demand; concentration of credit risk; fluctuations in effective tax rates resulting from shifts in sources of income; and the ability to successfully 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, 2007. We encourage you to read those descriptions carefully. We caution investors not to place undue reliance on the forward-looking statements contained in this

27

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.

Results of Operations

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

	Three Months Ended September 30,							Change
	2008				2007			$		%
Net sales
Band	$	44,782			$	47,308		(2,526	)	(5.3	)
Piano	55,706				51,985			3,721		7.2
Total sales	100,488				99,293			1,195		1.2
Cost of sales
Band	34,405				38,099			(3,694	)	(9.7	)
Piano	36,154				33,103			3,051		9.2
Total cost of sales	70,559				71,202			(643	)	(0.9	)
Gross profit
Band	10,377			23.2%	9,209		19.5%	1,168		12.7
Piano	19,552			35.1%	18,882		36.3%	670		3.5
Total gross profit	29,929				28,091			1,838		6.5
	29.8%				28.3%
Operating expenses	20,787				20,856			(69	)	(0.3	)
Facility rationalization and impairment charges	8,555				—			8,555		100.0
Income from operations	587				7,235			(6,648	)	(91.9	)
Other (income) expense, net	(405		)		37			(442	)	(1,194.6	)
Net interest expense	2,378				2,905			(527	)	(18.1	)
Non-operating expenses	1,973				2,942			(969	)	(32.9	)
Income (loss) before income taxes	(1,386		)		4,293			(5,679	)	(132.3	)
Income tax provision (benefit)	(1,126		)	81.2%	1,285		29.9%	(2,411	)	(187.6	)
Net income (loss)	$	(260	)		$	3,008		(3,268	)	(108.6	)

Overview – Piano division revenue improved, while margins were lower due to a shift in mix towards upright pianos and the absence of limited edition piano sales, which occurred in 2007 and generated higher margins. Band division sales decreased due to fewer unit sales across all product lines. However, gross margins improved due to lower unabsorbed overhead and production variances than in the year ago period. Scheduled plant closures under our facility rationalization project have been completed, and virtually all production has been incorporated into existing facilities.

Our fall budgeting and planning process provides multi-year cash flow projections which we use to conduct our annual impairment testing of intangible assets. Recent decreases in order volume, the adverse impact of

28

unavailable sourced products, delays in producing new product lines, and recent economic events, coupled with other factors, caused us to lower sales expectations. As a result, our future anticipated cash flows at the band division were reduced and our goodwill was determined to be impaired. Accordingly, we recorded an $8.6 million charge during the period to fully write off this asset. Analyses of band division trademarks and other assets indicated no other impairment, so no charges have been taken nor are they anticipated. No impairment indicators were noted during our analysis of the piano division.

Piano division results include the operations of our online music division.

Net Sales – Net sales improved due to higher piano division sales. Domestically, piano division revenues increased $0.9 million due to the incremental $1.8 million of online music sales. This more than offset the impact of the 6% decrease in Steinway grand piano shipments, which occurred primarily at the retail level. Overseas Steinway grand unit shipments decreased 3%. Despite this, overseas piano division sales increased $2.8 million, $1.6 million of which is attributable to foreign currency translation. Improved sales of larger, higher priced models by our German division also contributed to the increase. Although unit shipments decreased 15%, band division revenues were only 5% lower, as sales of intermediate and professional level woodwinds as well as certain higher priced products mitigated the deterioration in shipments.

Gross Profit - Gross profit improved due to higher piano sales and better band margins. Domestically, piano margins were adversely impacted by lower retail sales and a shift in mix towards lower margin upright pianos. This was partially offset by the shift in mix overseas towards larger, higher margin models and favorable manufacturing variances at our factory in Germany. The band division’s gross profit improved, as production inefficiencies and unabsorbed overhead at our manufacturing facilities was reduced by approximately $1.2 million, and we eliminated an accessory sales program which cost $0.9 million in the prior year.

Operating Expenses – Operating expenses were consistent with the year ago period. The $0.8 million reduction in bad debt expense was offset by an increase in other operating expenses of a comparable amount.

Facility rationalization and impairment charges – Facility rationalization and impairment charges of $8.6 million are comprised entirely of $8.6 million associated with the write off of goodwill discussed above.

Non-operating Expenses - Non-operating expenses decreased $1.0 million due to $0.5 million lower net interest expense, as we did not have anything outstanding on our domestic line of credit in the current period. A $0.3 million shift from foreign exchange losses to foreign exchange gains and a decrease in legal costs also contributed to the expense reduction.

Income Taxes - Our effective tax rate is comprised of 39% associated with current year income and a $0.7 million benefit relating primarily to uncertain tax positions which were settled with state taxing authorities. As a result of the pretax loss incurred during the quarter, the combination of these items resulted in an effective rate of 81% for the quarter. The year-to-date rate discussed below is more reflective of our effective rate for the year.

29

Results of Operations

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

	Nine months ended September 30,								Change
	2008				2007				$		%
Net sales
Band	$	125,300			$	125,690			(390	)	(0.3	)
Piano	167,895				159,292				8,603		5.4
Total sales	293,195				284,982				8,213		2.9
Cost of sales
Band	97,445				99,678				(2,233	)	(2.2	)
Piano	109,384				101,408				7,976		7.9
Total cost of sales	206,829				201,086				5,743		2.9
Gross profit
Band	27,855			22.2%	26,012			20.7%	1,843		7.1
Piano	58,511			34.8%	57,884			36.3%	627		1.1
Total gross profit	86,366				83,896				2,470		2.9
	29.5%				29.4%
Operating expenses	64,531				64,245				286		0.4
Facility rationalization and impairment charges	9,617				—				9,617		100.0
Income from operations	12,218				19,651				(7,433	)	(37.8	)
Other income, net	(388		)		(154		)		(234	)	151.9
Loss on extinguishment of debt	(636		)		—				(636	)	100.0
Net interest expense	6,811				7,580				(769	)	(10.1	)
Non-operating expenses	5,787				7,426				(1,639	)	(22.1	)
Income (loss) before income taxes	6,431				12,225				(5,794	)	(47.4	)
Income tax provision (benefit)	1,671			26.0%	4,634			37.9%	(2,963	)	(63.9	)
Net income (loss)	$	4,760			$	7,591			(2,831	)	(37.3	)

30

Overview – Piano division revenue improved, though piano margin deteriorated due to fewer Steinway grand unit sales and the adverse impact of domestic manufacturing facility shutdowns, which were taken in an effort to control inventory. Band division sales deteriorated slightly, despite improved intermediate and professional level saxophone and clarinet sales, due to delivery issues for certain student level sourced instruments and decreased demand. Band division margins improved due to lower production variances and unabsorbed overhead than in the year-ago period.

Our facility rationalization project is nearing completion, as we sold our clarinet manufacturing facility in France, and closed our Elkhorn brass instrument manufacturing facility in August. We are currently in the process of incorporating the production processes from these closed facilities into our remaining factories.

We recorded an impairment charge of $8.6 million relating to the write-off of band division goodwill. Circumstances which led us to conclude that goodwill was impaired are described above.

Net Sales – Net sales increased due to improved piano division revenues. Although overseas Steinway grand unit shipments decreased 4%, overseas revenue improved $9.6 million, of which $8.1million is attributable to foreign currency translation. The remaining increase was generated by improved mid-priced piano line sales. Domestic piano division sales decreased $1.0 million despite the $2.7 million incremental online music sales, largely due to fewer sales at the wholesale level, which resulted in an 8% decrease in domestic Steinway grand piano sales. Band division unit shipments decreased 12% during the period. This was due to sourced instrument supply issues and decrease demand resulting from dealers managing working capital and using existing inventory. However, the shift in mix from lower priced student band instruments to intermediate and professional level instruments mitigated the decrease in unit shipments.

Gross Profit – Gross profit improved due to higher piano division sales and improved band division margins. Although domestic piano margins dropped (29.1% vs. 32.8%) due to fewer production days and the resulting unabsorbed overhead, overseas piano margins remained relatively stable. This coupled with higher overseas piano sales, resulted in a higher gross profit for the period. The band division’s gross profit benefited from less unabsorbed overhead and production inefficiencies than in the year-ago period. This, coupled with the shift in mix towards higher margin intermediate and professional level band instruments in the first half of the year, more than offset the impact of $0.9 million in severance costs associated with plant closures.

Operating Expenses – Operating expenses increased $0.3 million as a $1.5 million decrease in bad debt expense and other reserves was offset by the adverse impact of foreign exchange translation.

Facility rationalization and impairment charges – Charges of $9.6 million are comprised of $8.6 million in write off of our band division goodwill, and $1.1 million in fixed asset impairment charges. We wrote down our Elkhorn, Wisconsin manufacturing facility by $0.2 million in conjunction with the closure of that plant. We also wrote down our clarinet manufacturing facility in France by $0.9 million in conjunction with the sale of that plant in July 2008.

Non-operating Expenses - Non-operating expenses decreased $1.6 million due to the $0.8 million reduction in net interest expense, as our domestic line of credit has gone virtually unused in the current period. The $0.6 million gain on extinguishment of $5.8 million of our Senior Notes also contributed to the improvement.

Income Taxes - Our effective tax rate is comprised of 39% associated with current year income and a benefit of 13% primarily relating to the favorable settlement of several uncertain tax positions with state taxing authorities. In the year-ago period, the impact of these positions was not material to the effective rate.

31

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, 2008 and 2007 are summarized as follows:

	2008			2007			Change
Net income:	$	4,760		$	7,591		$	(2,831	)
Changes in operating assets and liabilities	(22,116		)	(27,104		)	4,988
Other adjustments to reconcile net income to cash from operating activities	14,954			8,139			6,815
Cash flows from operating activities	(2,402		)	(11,374		)	8,972
Cash flows from investing activities	(6,198		)	(3,445		)	(2,753		)
Cash flows from financing activities	(5,613		)	(1,344		)	(4,269		)

Cash flows used by operating activities was $9.0 million less than a year ago. Cash used for accounts receivable decreased $7.2 million due to more stringent credit criteria at our band division. Major non-cash adjustments include facility rationalization and goodwill impairment charges, which are added back in adjustments to reconcile net income to cash flows from operating activities.

Cash flows used for investing activities increased $2.8 million primarily due to our acquisitions of Arkiv and Clickpoint. Cash used for capital expenditures was comparable to the year-ago period. We expect capital expenditures to be in the range of $5.0 to $6.0 million in 2008.

Cash flows used for financing activities increased $4.3 million due to several factors. In 2008, we used operating cash to extinguish $5.8 million of our Senior Notes and purchased $2.0 million of our own stock, while proceeds generated from stock option exercises dropped $3.3 million from a year ago. In the prior period, borrowings on our domestic credit facility of $20.7 million were largely offset by the use of cash to fund the $25.2 million dividend issued in March 2007.

Borrowing Activities and Availability – We have a domestic credit facility with a syndicate of domestic lenders (the “Credit Facility”) with a potential borrowing capacity of $110.0 million in revolving credit loans, which expires on September 29, 2011. It 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 borrowing availability at the time of borrowing. The Credit Facility is collateralized by our domestic accounts receivable, inventory, and fixed assets. As of September 30, 2008, there was nothing outstanding on our Credit Facility, and borrowing availability, net of letters of credit, was approximately $108.8 million.

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 ($24.9 million at the September 30, 2008 exchange rate), net of borrowing restrictions of €1.2 million ($1.7 million at the September 30, 2008 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, 2008

32

exchange rate) for use by our U.K. branch and ¥300 million ($2.8 million at the September 30, 2008 exchange rate) for use by our Japanese subsidiary. Our Chinese subsidiary also has the ability to convert the equivalent of up to €2.5 million into U.S. dollars or Chinese yuan ($3.5 million at the September 30, 2008 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 rates of LIBOR plus 0.8% for British pound loans, LIBOR plus 1.0% for U.S. dollar loans of our Chinese subsidiary, and Tokyo Interbank Offered Rate (“TIBOR”) plus 0.8% for Japanese yen loans. We had outstanding borrowings of $0.2 million at 1.6% as of September 30, 2008 on these credit facilities.

Our Japanese subsidiary also maintains a separate revolving loan agreement that provides additional borrowing capacity of up to ¥460 million ($4.3 million at the September 30, 2008 exchange rate) based on eligible inventory balances. The revolving loan agreement bears interest at an average 30-day TIBOR rate plus 0.9% (outstanding borrowings at 1.6% at September 30, 2008) and expires on January 31, 2010. As of September 30, 2008, we had $2.8 million outstanding on this revolving loan agreement.

At September 30, 2008, our total outstanding indebtedness amounted to $172.2 million, consisting of $169.3 million of 7.00% Senior Notes and $3.0 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 limitations on cash dividend payments. We were in compliance with all such covenants as of September 30, 2008 and do not anticipate any compliance issues in the future. 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. In May 2008 we announced a share repurchase program, which permits us to make discretionary purchases of up to $25.0 million of our Ordinary common stock. We repurchased 74,700 shares for $2.0 million through September 2008.

We experience long production and inventory turnover cycles, which we constantly monitor since fluctuations in demand can have a significant impact on these cycles. We expect to effectively utilize cash flow from operations to fund our debt and capital requirements and pay off our seasonal borrowings on our domestic line of credit. Currently we anticipate all of our divisions will be stable or improve throughout the period. Our intention is to manage accounts receivable and customer credit, reduce inventory levels, and repay credit facility borrowings.

We do not have any current plans or intentions that will have a material adverse impact on our liquidity in 2008, 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 the remainder of 2008.

33

Contractual Obligations - The following table provides a summary of our contractual obligations at September 30, 2008.

	Payments due by period
	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Contractual Obligations
Long-term debt (1)	$	236,456	$	14,880	$	23,695	$	23,695	$	174,186
Capital leases	27		17		10		—		—
Operating leases (2)	263,562		5,228		9,729		7,999		240,606
Purchase obligations (3)	21,514		21,503		11		—		—
Other long-term liabilities (4)	36,878		6,271		6,808		4,715		19,084
Total	$	558,437	$	47,899	$	40,253	$	36,409	$	433,876

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, 2008 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 $249.4 million of our operating lease obligations are attributable to the land lease associated with the purchase of Steinway Hall, which has 89 years remaining. The rest 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 12 in the Notes to Condensed Consolidated Financial Statements included within this filing, liabilities relating to uncertain tax positions which are expected to be settled within one year, and obligations under employee and consultant agreements. We have not included $0.4 million of liabilities relating to uncertain tax positions within this schedule due to the uncertainty of the payment date, if any.

Recent Accounting Pronouncements

On January 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115,” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option) with changes in fair value reported in earnings. We already record marketable securities at fair value in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and derivative contracts and hedging activities at fair value in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The adoption of SFAS 159 had no impact on our consolidated financial position and results of operations as management did not choose to measure any other items at fair value.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. On January 1, 2008, we adopted SFAS 157, which did not have an impact on our consolidated financial statements. In February 2008, the FASB delayed the effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities. We will comply with this component of SFAS 157 January 1, 2009.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” a revision to SFAS No. 141, “Business Combinations” (“ SFAS 141R”), which provides revised guidance for recognition and

34

measurement of identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree at fair value. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of a business combination. SFAS 141R is required to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will comply with SFAS 141R January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent. Specifically, SFAS 160 requires the presentation of noncontrolling interests as equity in the Consolidated Statement of Financial Position, and separate identification and presentation in the Consolidated Statement of Operations of net income attributable to the entity and the noncontrolling interest. It also establishes accounting and reporting standards regarding deconsolidation and changes in a parent’s ownership interest. We will be required to comply with SFAS 160 January 1, 2009. The provisions of SFAS 160 are generally required to be applied prospectively, except for the presentation and disclosure requirements, which must be applied retrospectively. We are currently evaluating the potential impact, if any, of the adoption of SFAS 160 on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends and expands the disclosure requirements for derivative instruments and hedging activities, with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial statements. We will comply with SFAS 161 January 1, 2009.

ITEM 3           QUANTITATIVE 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, 2007.

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, 2007.

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.

35

ITEM 4           CONTROLS AND PROCEDURES

Our principal executive officer and our principal financial officer, after evaluating together with management the design and operation of our disclosure controls and procedures, have concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of September 30, 2008, the end of the period covered by this report. In designing disclosure controls and procedures, 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, internal control over financial reporting.

PART II         OTHER INFORMATION

ITEM 2           UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

					(d) Maximum
				(c) Total Number	Number (or
				of Shares (or	Approximate Dollar
				Units) Purchased	Value) of Shares (or
				as Part of	Units) that May Yet
	(a) Total Number	(b) Average		Publicly	Be Purchased Under
	of Shares (or	Price Paid per		Announced Plans	the Plans or
Period	Units) Purchased	Share (or Unit)		or Programs	Programs
June 18 - September 30, 2008	74,700	$	26.52	74,700	$	25,000,000
Total	74,700	$	26.52	74,700	$	25,000,000

ITEM 6   EXHIBITS

(i)Exhibits

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

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

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

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

36

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 10, 2008

37