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 September 30, 2009 Compared to Three Months Ended
September 30, 2008



                           Three Months Ended September 30,                       Change
                            2009                       2008                    $          %

Net sales
Band                    $      37,701                $  44,782                (7,081 )    (15.8 )
Piano                          44,933                   55,706               (10,773 )    (19.3 )
Total sales                    82,634                  100,488               (17,854 )    (17.8 )

Cost of sales
Band                           28,284                   34,405                (6,121 )    (17.8 )
Piano                          30,945                   36,154                (5,209 )    (14.4 )
Total cost of sales            59,229                   70,559               (11,330 )    (16.1 )

Gross profit
Band                            9,417    25.0%          10,377   23.2%          (960 )     (9.3 )
Piano                          13,988    31.1%          19,552   35.1%        (5,564 )    (28.5 )
Total gross profit             23,405                   29,929                (6,524 )    (21.8 )
                                28.3%                    29.8%

Operating expenses             17,274                   20,787                (3,513 )    (16.9 )
Facility
rationalization and
impairment charges                976                    8,555                (7,579 )    (88.6 )
Income from
operations                      5,155                      587                 4,568      778.2

Other income, net                (223 )                   (405 )                 182      (44.9 )
Net interest expense            2,634                    2,378                   256       10.8
Non-operating
expenses                        2,411                    1,973                   438       22.2

Income (loss) before
income taxes                    2,744                   (1,386 )               4,130     (298.0 )

Income tax provision
(benefit)                       2,107    76.8%          (1,126 ) 81.2%         3,233     (287.1 )

Net income (loss)       $         637                $    (260 )                 897     (345.0 )

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 reduced consumer demand, similar credit restrictions, and dealers' tendency to only order products that can be resold quickly. However, band margins improved due to lower cash discounts and sales program costs.

Piano division results include the operations of our online music division, which recorded an impairment charge of $1.0 million on its trademark assets during the period.

Net Sales - Net sales deteriorated 18% 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. As a result, orders and shipments decreased at both the piano and band divisions.

Domestically, piano division revenues dropped $7.9 million. Domestic Steinway grand unit shipments decreased 39% while overall unit shipments decreased 30%, as our mid-priced piano lines fared better during the period. While domestic wholesale sales deteriorated, retail sales increased $0.5 million, supported by an improvement in institutional sales. Although sales by our Asian divisions increased $1.9 million, overseas piano division revenues decreased $2.9 million for the period. Overseas Steinway grand unit shipments decreased 10%, while mid-priced piano line shipments decreased only 3%, due to improved availability of certain Essex models.

Band division revenues decreased $7.1 million as a result of the 27% reduction in unit shipments. Sales of intermediate and professional level instruments deteriorated less than student instruments. Although we had sufficient inventory to supply our dealers for the back to school season, dealers did not order instruments at the levels anticipated going into the fall season. Also, orders to restock after the selling season were weaker than in prior periods.

Gross Profit - Gross profit declined due to lower sales, coupled with lower gross margins at the piano division. Domestically, piano margins dropped from 27.6% to 26.2% due to reduced production, which was implemented in an effort to control inventory levels. Overseas margins dropped from 43.2% to 35.5% largely due to the reduction in production at our factory in Germany. Severance costs of $0.5 million, which were incurred due to layoffs, were also a factor in the overseas piano margin decrease.

The band division's gross margin improved from 23.2% to 25.0% during the period. Although pension costs increased $1.0 million, these were more than offset by reduced cash discounts and sales program costs, which were $1.5 million higher in the year-ago period. Production was lower, resulting in unabsorbed overhead, but overall factory variances were comparable to the prior period.

Operating Expenses - Operating expenses decreased $3.5 million due to several factors. Sales and marketing expenses decreased $2.0 million due to lower salaries, commissions, and bonuses, as well as decreased spending for trade shows and advertising. General and administrative costs were lowered $1.5 million through reductions in headcount, wages, benefits, and outside services.

Facility Rationalization and Impairment Charges - Facility rationalization and impairment charges decreased $7.6 million. We wrote off $8.6 million of band division goodwill in the year-ago period, whereas in the current period, impairment charges were limited to the $1.0 million write down of piano division trademarks associated with our online music business.

Non-operating Expenses - Non-operating expenses were $0.4 million higher than in the prior period. Higher net interest expense, which resulted from lower interest income on band division financed receivables, as well as a shift from foreign exchange gains to foreign exchange losses, resulted in the increase.

Income Taxes - We recorded an income tax expense of $2.1 million, reflecting our anticipated rate of 48% associated with current year income, as well $0.6 million associated with uncertain tax positions. The combination of these items resulted in an effective tax rate of 77% for the period. The rate of 81% in the year-

ago period reflected 39% associated with 2008 year to date loss and a $0.7 million benefit relating to uncertain tax positions.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

                            Nine Months Ended September 30,                      Change
                             2009                      2008                   $          %

Net sales
Band                     $     100,126               $ 125,300              (25,174 )    (20.1 )
Piano                          124,612                 167,895              (43,283 )    (25.8 )
Total sales                    224,738                 293,195              (68,457 )    (23.3 )

Cost of sales
Band                            77,635                  97,445              (19,810 )    (20.3 )
Piano                           86,191                 109,384              (23,193 )    (21.2 )
Total cost of sales            163,826                 206,829              (43,003 )    (20.8 )

Gross profit
Band                            22,491    22.5%         27,855   22.2%       (5,364 )    (19.3 )
Piano                           38,421    30.8%         58,511   34.8%      (20,090 )    (34.3 )
Total gross profit              60,912                  86,366              (25,454 )    (29.5 )
                                 27.1%                   29.5%

Operating expenses              53,325                  64,531              (11,206 )    (17.4 )
Facility
rationalization and
impairment charges                 976                   9,617               (8,641 )    (89.9 )
Income from operations           6,611                  12,218               (5,607 )    (45.9 )

Other income, net               (1,034 )                  (388 )               (646 )    166.5
Net gain on
extinguishment of debt          (3,434 )                  (636 )             (2,798 )    439.9
Net interest expense             7,672                   6,811                  861       12.6
Non-operating expenses           3,204                   5,787               (2,583 )    (44.6 )

Income before income
taxes                            3,407                   6,431               (3,024 )    (47.0 )

Income tax provision             2,385    70.0%          1,671   26.0%          714       42.7

Net income               $       1,022               $   4,760               (3,738 )    (78.5 )

Overview - The same economic conditions discussed above, which we expect to continue at least through the end of 2009, negatively impacted both the piano and band divisions' revenue through the end of the period. Although the band margin improved slightly overall, lower production volumes at our piano and band instrument manufacturing facilities adversely impacted margins. 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 business, which recognized an impairment charge of $1.0 million on its trademark assets during the period.

Net Sales - Net sales deteriorated 23% in the current period. Although online music sales were $3.2 million higher than the year-ago period, domestic piano division revenues dropped $23.8 million. Domestic Steinway grand unit shipments decreased 43% and overall unit shipments decreased 31%. Overseas, piano division revenues decreased $19.5 million, which includes a $5.1 million reduction attributable to foreign currency translation. Overseas Steinway grand unit shipments decreased 27%, while mid-priced piano line shipments decreased 16%. Overall, our mid-priced piano line shipments have been less affected by the economic downturn.

Band division revenues were $25.2 million lower due primarily 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.

Gross Profit -Gross profit declined $25.5 million due to lower sales at both divisions and lower gross margins at the piano division. Domestically, piano margins dropped from 29.1% to 25.6% as the factory has produced 40% fewer new Steinway grand pianos than in the year-ago period in order to manage inventory levels. This resulted in higher unabsorbed overhead and product costs, which adversely impacted the margin. Overseas margins dropped from 40.3% to 35.3% as our factory in Germany also reduced production of Steinway grands by 40% compared to 2008.

The band division's gross margin increased slightly, from 22.2% to 22.5% during the period. Pension costs increased $2.6 million due primarily to pension asset portfolio deterioration. This was more than offset by reduced cash discounts and sales program costs, which were $3.3 million higher in the year-ago period. The absence of severance costs associated with our facility rationalization project, which were $0.9 million in the year-ago period, and the shift in mix to certain higher margin instruments helped mitigate the unabsorbed overhead resulting from lower production.

Operating Expenses - Operating expenses decreased $11.2 million, or 17%, during the period. Sales and marketing expenses decreased $6.9 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 $4.1 million less than in 2008.

Facility Rationalization and Impairment Charges - Facility rationalization and impairment charges decreased $8.6 million. In 2008, we wrote off $8.6 million of band division goodwill and we incurred $1.1million in fixed asset impairment charges associated with the sales and closures of band division facilities. In the current period, impairment charges were limited to the $1.0 million write down of piano division trademarks associated with our online music business.

Non-operating Expenses - Non-operating expenses improved $2.6 million due to the extinguishment of $10.9 million of our Senior Notes, which resulted in a $3.4 million net gain, as compared to the $0.6 million gain in 2008. Net interest expense was $0.9 million higher due to lower interest income on band division financed receivables. Foreign exchange losses were $0.7 million more than the year ago period. However, these expenses were partially offset by the shift from losses to gains on our SERP assets and increased net income from our Steinway Hall property.

Income Taxes - Our effective tax rate of 70% is comprised of approximately 48% associated with current year income, and 22% relating primarily to activity associated with our uncertain tax positions. Our effective tax rate can be materially impacted by shifts in sources of income, as well as the estimated tax obligation in relative proportion to the pretax income. In addition, the effective tax rate becomes more volatile at lower levels of pretax income as relatively stable permanent differences between book and tax income become a proportionately larger factor. Accordingly, this rate could shift significantly during the remainder of 2009. In

2008, our tax rate was comprised of 39% associated with 2008 income, and a benefit of 13% relating to uncertain tax positions.

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, 2009 and 2008 are summarized as follows: