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 condensed 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 employee stock purchase plan ("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 June 30, 2009 Compared to Three Months Ended June 30, 2008



                            Three Months Ended June 30,                       Change
                            2009                    2008                   $          %

Net sales
Band                     $    29,713              $  41,018              (11,305 )    (27.6 )
Piano                         42,400                 57,503              (15,103 )    (26.3 )
Total sales                   72,113                 98,521              (26,408 )    (26.8 )

Cost of sales
Band                          23,484                 32,065               (8,581 )    (26.8 )
Piano                         29,731                 37,411               (7,680 )    (20.5 )
Total cost of sales           53,215                 69,476              (16,261 )    (23.4 )

Gross profit
Band                           6,229    21.0%         8,953   21.8%       (2,724 )    (30.4 )
Piano                         12,669    29.9%        20,092   34.9%       (7,423 )    (36.9 )
Total gross profit            18,898                 29,045              (10,147 )    (34.9 )
                               26.2%                  29.5%

Operating expenses            17,391                 21,156               (3,765 )    (17.8 )
Facility
rationalization
charges                            -                  1,062               (1,062 )   (100.0 )
Total operating
expenses                      17,391                 22,218               (4,827 )    (21.7 )

Income from operations         1,507                  6,827               (5,320 )    (77.9 )

Other (income)
expense, net                    (253 )                   54                 (307 )   (568.5 )
Net interest expense           2,516                  2,276                  240       10.5
Non-operating expenses         2,263                  2,330                  (67 )     (2.9 )

(Loss) income before
income taxes                    (756 )                4,497               (5,253 )   (116.8 )

Income tax (benefit)
provision                       (136 )  18.0%         1,452   32.3%       (1,588 )   (109.4 )

Net (loss) income        $      (620 )            $   3,045               (3,665 )   (120.4 )

Overview - Piano division revenue was adversely affected by the current economic crisis as well as our dealers' access to available financing. Piano margins continued to be negatively impacted by lower production volume at both of our manufacturing facilities. Band division sales decreased as a result of 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 27% in the current period. Many of our piano dealers continue to experience difficulty obtaining financing and, consequently, are utilizing cash to pay down existing credit lines rather than replenishing inventories. Band dealers are prolonging the usefulness of existing inventory by refurbishing and reutilizing rental pool instruments instead of purchasing new ones, which enables them to generate and preserve cash. This has resulted in decreased orders and shipments at both the piano and band divisions.

Domestically, $1.0 million in incremental online music sales helped offset lower piano division revenues, which dropped $7.5 million. Domestic Steinway grand unit shipments decreased 46% while overall unit shipments decreased 27%, as our mid-priced piano lines fared better during the period. Both domestic wholesale and retail sales deteriorated, although the retail sales decline was mitigated by an improvement in institutional sales. Overseas, piano division revenues decreased $7.6 million, of which $2.5 million is attributable to foreign currency translation. Overseas Steinway grand unit shipments decreased 29%, while mid-priced piano line shipments decreased only 4%, due to improved availability of various Essex models as well as institutional sales.

Band division revenues were $11.3 million lower, correlating to the 37% decrease in unit shipments. Sales of intermediate and professional level instruments deteriorated less than student instruments. Unlike prior years, dealers are not stocking instruments in advance of the back to school season, but instead are ordering only those products 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 27.8%% to 25.0% largely due to the reduced production, which was implemented in an effort to control inventory levels. Overseas margins dropped from 40.5% to 33.4% as production was also reduced at our factory in Germany. The shift in mix, mostly towards the mid-priced piano lines, was also a factor in the margin decrease.

The band division's gross margin fell from 21.8% to 21.0% during the period. Pension costs increased $0.9 million but were partially offset by the absence of severance costs associated with our facility rationalization project, which were $0.6 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 brass instruments.

Operating Expenses - Operating expenses decreased $4.8 million, or 22%, due to several factors. Sales and marketing expenses decreased $2.1 million due to lower salaries, commissions, and bonuses, as well as decreased spending for trade shows and advertising. General and administrative costs were lowered $1.6 million through reductions in headcount, wages, benefits, and outside services. Lastly, there were no fixed asset impairment charges associated with our facility rationalization project, whereas these charges totaled $1.1 million a year ago.

Non-operating Expenses - On a net basis, non-operating expenses were consistent with the prior period. Higher net interest expense, which resulted from lower interest income on band division financed receivables, was partially offset by an increase in income from our West 57th Street property of $0.2 million. The increase in foreign exchange losses of $0.2 million was offset by gains on our Supplemental Executive Retirement Plan ("SERP") assets.

Income Taxes - Due to the current period loss, we recorded an income tax benefit of $0.2 million, reflecting our anticipated rate of 22% associated with current year income, which is discussed further below. Offsetting this are expenses of $0.1 million relating primarily to assessments from taxing authorities and uncertain tax positions. The combination of these items resulted in an effective tax rate of 18% for the period.

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008



                             Six Months Ended June 30,                        Change
                            2009                    2008                   $          %

Net sales
Band                     $    62,425              $  80,518              (18,093 )    (22.5 )
Piano                         79,679                112,189              (32,510 )    (29.0 )
Total sales                  142,104                192,707              (50,603 )    (26.3 )

Cost of sales
Band                          49,351                 63,040              (13,689 )    (21.7 )
Piano                         55,246                 73,230              (17,984 )    (24.6 )
Total cost of sales          104,597                136,270              (31,673 )    (23.2 )

Gross profit
Band                          13,074    20.9%        17,478   21.7%       (4,404 )    (25.2 )
Piano                         24,433    30.7%        38,959   34.7%      (14,526 )    (37.3 )
Total gross profit            37,507                 56,437              (18,930 )    (33.5 )
                               26.4%                  29.3%

Operating expenses            36,051                 43,744               (7,693 )    (17.6 )
Facility
rationalization
charges                            -                  1,062               (1,062 )   (100.0 )
Total operating
expenses                      36,051                 44,806               (8,755 )    (19.5 )

Income from operations         1,456                 11,631              (10,175 )    (87.5 )

Other (income)
expense, net                    (811 )                   17                 (828 ) (4,870.6 )
Net gain on
extinguishment of debt        (3,434 )                 (636 )             (2,798 )    439.9
Net interest expense           5,038                  4,433                  605       13.6
Non-operating expenses           793                  3,814               (3,021 )    (79.2 )

Income before income
taxes                            663                  7,817               (7,154 )    (91.5 )

Income tax provision             278    41.9%         2,797   35.8%       (2,519 )    (90.1 )

Net income               $       385              $   5,020               (4,635 )    (92.3 )

Overview - The same economic conditions discussed above, which we expect to continue through the end of 2009, negatively impacted both the piano and band divisions' revenue through the first half of the year. Likewise, lower production volumes at our piano and band instrument manufacturing facilities adversely impacted margins. However, management has reduced headcount, lowered salaries, suspended or reduced benefits, and taken other cost saving measures throughout the Company to help offset these factors.

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

Net Sales - Net sales deteriorated 26.3% in the current period. Although online music sales were $3.1 million higher than the year-ago period, domestic piano division revenues dropped $15.9 million. Domestic Steinway grand unit shipments decreased 44% and overall unit shipments decreased 32%. Overseas, piano

division revenues decreased $16.6 million, which includes a $4.6 million reduction attributable to foreign currency translation. Overseas Steinway grand unit shipments decreased 33%, while mid-priced piano line shipments decreased 22%. Overall, our mid-priced piano line shipments have been less affected by the economic downturn.

Band division revenues were $18.1 million lower, correlating to the 28% decrease in unit shipments. Sales of intermediate and professional level instruments deteriorated less than student instruments. Dealers are ordering only those instruments for which there is an immediate need instead of stocking instruments in anticipation of the back to school season.

Gross Profit - Gross profit declined due to lower sales and gross margins at both divisions. Domestically, piano margins dropped from 29.9% to 25.3% as the factory has produced 38% fewer Steinway grands than in the year-ago period in order to manage inventory levels. This resulted in higher unabsorbed overhead and product costs, which adversely impacted the margin. Overseas margins dropped from 38.9% to 35.2% as our factory in Germany also reduced production of Steinway grands by 40% compared to 2008.

The band division's gross margin fell from 21.7% to 20.9% during the period. Pension costs increased $1.7 million due primarily to pension asset portfolio deterioration. This was partially offset by the absence of severance costs associated with our facility rationalization project, which were $1.0 million in the year-ago period. Production was lower, resulting in unabsorbed overhead, but this was mitigated by a shift in mix to certain higher margin student and brass instruments.

Operating Expenses - Operating expenses decreased $8.8 million, or 20%, during the period. Sales and marketing expenses decreased $4.9 million due to lower salaries, commissions, and bonuses, as well as decreased spending for trade shows and advertising. Due to reductions in headcount, wages, benefits, and outside services, general and administrative costs were $2.8 million less than in 2008. Lastly, there were no fixed asset impairment charges associated with our facility rationalization project, whereas these charges totaled $1.1 million in the year-ago period.

Non-operating Expenses - Non-operating 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 of $0.6 million, which resulted from lower interest income on band division financed receivables, was partially offset by the shift from losses to gains on our SERP assets.

Income Taxes - Our effective tax rate of 41.9% is comprised of approximately 22% associated with current year income, and 19.9% relating primarily to assessments from taxing authorities and uncertain tax positions. 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 32% on income taxed overseas, has resulted in an abnormally low estimated tax rate of 22% 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 six months ended June 30, 2009 and 2008 are summarized as follows: