(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 an online retailer of classical music. Through our band division, we are 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 2008 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.

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 expensed 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 net book value to estimated fair values, 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

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 statutes of limitations; availability of detailed historical data; results of audits or examinations conducted by taxing authorities or agents that vary from management's anticipated results; identification of new tax contingencies; 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; reductions in school budgets; increased competition; work stoppages and slowdowns; ability to successfully consolidate band manufacturing; impact of dealer consolidations on orders; ability of dealers to obtain financing; exchange rate fluctuations; variations in the mix of products sold; market acceptance of new products, 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, 2008. 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.

Results of Operations



Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008



                           Three Months Ended March 31,                        Change
                          2009                      2008                    $          %

Net sales
Band                   $    32,712                $  39,500                (6,788 )    (17.2 )
Piano                       37,279                   54,686               (17,407 )    (31.8 )
Total sales                 69,991                   94,186               (24,195 )    (25.7 )

Cost of sales
Band                        25,867                   30,975                (5,108 )    (16.5 )
Piano                       25,515                   35,819               (10,304 )    (28.8 )
Total cost of sales         51,382                   66,794               (15,412 )    (23.1 )

Gross profit
Band                         6,845    20.9%           8,525   21.6%        (1,680 )    (19.7 )
Piano                       11,764    31.6%          18,867   34.5%        (7,103 )    (37.6 )
Total gross profit          18,609                   27,392                (8,783 )    (32.1 )
                             26.6%                    29.1%

Operating expenses          18,660                   22,588                (3,928 )    (17.4 )
(Loss) income from
operations                     (51 )                  4,804                (4,855 )   (101.1 )

Other income, net             (558 )                    (37 )                (521 )  1,408.1
Net gain on
extinguishment of
debt                        (3,434 )                   (636 )              (2,798 )    439.9
Net interest expense         2,522                    2,157                   365       16.9
Non-operating
(income) expenses           (1,470 )                  1,484                (2,954 )   (199.1 )

Income before income
taxes                        1,419                    3,320                (1,901 )    (57.3 )

Income tax provision           414    29.2%           1,345   40.5%          (931 )    (69.2 )

Net income             $     1,005                $   1,975                  (970 )    (49.1 )

Overview - Piano division revenue was adversely affected by the current economic crisis as well as dealer credit restrictions. Piano margins were negatively impacted by lower production volume at both of our manufacturing facilities. Band division sales decreased as a result of similar credit restrictions and dealers' tendency to only order products that can be resold quickly. Band margins were adversely impacted by increased pension and postretirement benefit costs, which largely resulted from pension asset portfolio deterioration.

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

Net Sales - Net sales deteriorated 25.7% in the current period. Currently, many of our piano dealers are experiencing difficulty obtaining financing and, consequently, are utilizing cash to pay down existing credit lines rather than replenishing inventories. Band dealers are refurbishing and reutilizing rental pool instruments instead of purchasing new ones in order to generate and preserve cash. This has resulted in decreased orders and shipments at both the piano and band divisions.

Domestically, piano division revenues dropped $8.5 million despite $2.1 million in incremental online music sales. Domestic Steinway grand unit shipments decreased 43% while total unit shipments decreased 36%, reflecting fewer shipments at both the wholesale and retail level. However, retail sales were atypically high in the prior period due to large institutional sales. Overseas, piano division revenues decreased $9.0 million, which includes a $2.0 million reduction attributable to foreign currency translation. Overseas Steinway grand unit shipments decreased 38% and total unit shipments decreased 36%, though retail shipments improved over the year-ago period.

Band division revenues were $6.8 million lower, correlating to the 19% decrease in unit shipments. Sales of accessories and student instruments deteriorated less than intermediate and professional level instruments. Dealers continue to purchase conservatively, only buying items for which there is an immediate need.

Gross Profit - Gross profit declined due to lower sales and gross margins at both divisions. Domestically, piano margins dropped from 31.9% to 25.6% largely due to the reduction in production, which was implemented in an effort to control inventory levels. The decrease was caused by a lower daily production rate, coupled with $0.3 million in unabsorbed overhead resulting from one week of unplanned factory shutdown. Although production was also reduced at our factory in Germany, the resultant adverse impact was offset by improved retail sales in that country. Accordingly, overseas margins remained stable.

The band division's gross margin fell from 21.6% to 20.9% during the period. Pension costs increased $0.8 million but were partially offset by the absence of facility rationalization costs, which were $0.4 million in the year-ago period. Production was lower, resulting in unabsorbed overhead, but this was mitigated by a shift in mix to higher margin accessories and certain student instruments.

Operating Expenses - Operating expenses decreased $3.9 million, or 17%, largely due to the $2.8 million savings in sales and marketing expenses. These savings resulted in part from lower commissions and bonuses, which are correlated to sales, as well as decreased spending for trade shows and advertising. General and administrative costs were lowered by $1.0 million through reductions in headcount, wages, benefits, and outside services.

Non-operating (Income) Expenses- Non-operating (income) expenses improved $3.0 million due to the extinguishment of $10.9 million of our Senior Notes, which resulted in a $3.4 million net gain. Higher net interest expense, which resulted from lower interest income on band division financed receivables, was partially offset by an increase in foreign exchange gains of $0.2 million.

Income Taxes - Our effective tax rate of 29.2% is comprised of approximately 8% relating primarily to assessments from taxing authorities and uncertain tax positions and 21% associated with current year income. As a result of the ratio of income generated overseas to domestic income, we currently anticipate no U.S. federal tax liability. This, coupled with nominal anticipated state taxes and an average effective rate of 33% on income taxed overseas, has resulted in an abnormally low estimated tax rate of 21% on current period earnings. This rate could be materially impacted by shifts in sources of income during the remainder of 2009.

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 three months ended March 31, 2009 and 2008 are summarized as follows: