10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

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

COMMISSION FILE NUMBER 001-11911

STEINWAY MUSICAL INSTRUMENTS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	35-1910745
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
800 South Street, Suite 305
Waltham, Massachusetts	02453
(Address of Principal Executive Offices)	(Zip Code)

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

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

Yes x    No o

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

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

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

Yes o    No x

Number of shares of Common Stock issued and outstanding as of August 3, 2007:	Class A	477,952
	Ordinary	8,094,928
	Total	8,572,880

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

PART I.	UNAUDITED FINANCIAL INFORMATION
Item 1.	Consolidated and Condensed Consolidated Financial Statements:
	Consolidated Statements of Operations Three and six months ended June 30, 2007 and June 30, 2006	3
	Condensed Consolidated Balance Sheets June 30, 2007 and December 31, 2006	4
	Consolidated Statements of Cash Flows Six months ended June 30, 2007 and June 30, 2006	5
	Consolidated Statement of Stockholders’ Equity Six months ended June 30, 2007	6
	Notes to Consolidated and Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders	31
Item 6.	Exhibits	31
	Signatures	32

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ITEM 1                   CONSOLIDATED AND CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

(In Thousands Except Share and Per Share Amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Net sales	$	92,257		$	92,423		$	185,689		$	187,617
Cost of sales	63,692			69,274			129,884			138,476
Gross profit	28,565			23,149			55,805			49,141
Operating expenses:
Sales and marketing	11,429			11,063			24,093			22,733
Provision for doubtful accounts	592			4,505			718			4,562
General and administrative	8,141			7,811			17,151			16,189
Amortization of intangible assets	196			197			392			426
Other operating expenses	158			(32		)	1,035			115
Total operating expenses	20,516			23,544			43,389			44,025
Income (loss) from operations	8,049			(395		)	12,416			5,116
Other income, net	(21		)	(695		)	(191		)	(1,446		)
Loss on extinguishment of debt	—			3,063			—			9,674
Interest income	(906		)	(880		)	(2,002		)	(2,607		)
Interest expense	3,429			4,032			6,677			8,507
Total non-operating expenses	2,502			5,520			4,484			14,128
Income (loss) before income taxes	5,547			(5,915		)	7,932			(9,012		)
Income tax provision (benefit)	2,394			(5,054		)	3,349			(6,309		)
Net income (loss)	$	3,153		$	(861	)	$	4,583		$	(2,703	)
Earnings (loss) per share:
Basic	$	0.37		$	(0.10	)	$	0.54		$	(0.33	)
Diluted	$	0.36		$	(0.10	)	$	0.53		$	(0.33	)
Weighted average shares:
Basic	8,520,949			8,331,652			8,470,049			8,242,011
Diluted	8,662,405			8,331,652			8,621,823			8,242,011

See notes to consolidated and condensed consolidated financial statements.

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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(In Thousands)

	June 30, 2007			December 31, 2006
Assets
Current assets:
Cash	$	9,701		$	30,409
Accounts, notes and other receivables, net of allowances of $15,741 and $21,640 in 2007 and 2006, respectively	77,284			75,161
Inventories, net	177,144			154,623
Prepaid expenses and other current assets	12,529			12,711
Deferred tax assets	12,377			9,774
Total current assets	289,035			282,678
Property, plant and equipment, net of accumulated depreciation of $88,991 and $84,386 in 2007 and 2006, respectively	94,714			95,598
Trademarks	13,778			13,671
Goodwill	31,823			31,481
Other intangibles, net	4,329			4,725
Other assets	12,912			12,988
Long-term deferred tax assets	7,483			6,034
Total assets	$	454,074		$	447,175
Liabilities and stockholders’ equity
Current liabilities:
Debt	$	2,889		$	4,595
Accounts payable	15,941			16,805
Other current liabilities	44,661			44,648
Total current liabilities	63,491			66,048
Long-term debt	194,749			173,816
Deferred tax liabilities	11,763			11,754
Pension and other postretirement benefit liabilities	34,156			32,847
Other non-current liabilities	9,395			4,709
Total liabilities	313,554			289,174
Commitments and contingent liabilities
Stockholders’ equity:
Common stock	11			10
Additional paid-in capital	93,358			90,266
Retained earnings	102,111			125,711
Accumulated other comprehensive loss	(9,534		)	(10,550		)
Treasury stock, at cost	(45,426		)	(47,436		)
Total stockholders’ equity	140,520			158,001
Total liabilities and stockholders’ equity	$	454,074		$	447,175

See notes to consolidated and condensed consolidated financial statements.

4

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(In Thousands)

	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net income (loss)	$	4,583		$	(2,703	)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
Depreciation and amortization	5,213			5,439
Amortization of bond discount	83			57
Amortization of bond premium	—			(42		)
Loss on extinguishment of debt	—			9,674
Stock-based compensation expense	643			566
Excess tax benefits from stock-based awards	(402		)	(417		)
Tax benefit from stock option exercises	726			917
Deferred tax benefit	(1,907		)	(10,227		)
Provision for doubtful accounts	718			4,562
Other	(340		)	(85		)
Changes in operating assets and liabilities:
Accounts, notes and other receivables	(2,261		)	(11,582		)
Inventories	(22,778		)	6,020
Prepaid expenses and other assets	63			(423		)
Accounts payable	(953		)	1,014
Other liabilities	73			1,619
Cash flows from operating activities	(16,539		)	4,389
Cash flows from investing activities:
Capital expenditures	(2,394		)	(2,565		)
Proceeds from disposals of property, plant and equipment	90			331
Cash flows from investing activities	(2,304		)	(2,234		)
Cash flows from financing activities:
Borrowings under lines of credit	81,656			37,401
Repayments under lines of credit	(62,532		)	(37,779		)
Debt issuance costs	—			(4,145		)
Proceeds from issuance of debt	—			173,676
Repayments of long-term debt	—			(183,331		)
Premium paid on extinguishment of debt	—			(7,740		)
Proceeds from issuance of common stock	3,495			4,259
Dividends paid	(25,187		)	—
Excess tax benefits from stock-based awards	402			417
Cash flows from financing activities	(2,166		)	(17,242		)
Effect of foreign exchange rate changes on cash	301			1,253
Decrease in cash	(20,708		)	(13,834		)
Cash, beginning of period	30,409			34,952
Cash, end of period	$	9,701		$	21,118
Supplemental Cash Flow Information
Interest paid	$	6,680		$	7,163
Taxes paid	$	6,086		$	3,249

See notes to consolidated and condensed consolidated financial statements.

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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Unaudited

(In Thousands Except Share Data)

	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Stockholders’ Equity
Balance, January 1, 2007	$	10	$	90,266	$	125,711		$	(10,550	)	$	(47,436	)	$	158,001
Comprehensive income:
Net income					4,583									4,583
Foreign currency translation adjustments								1,016						1,016
Total comprehensive income														5,599
FIN 48 adjustment					(2,757		)							(2,757		)
Dividends paid					(25,187		)							(25,187		)
Exercise of 169,624 options for shares of common stock	1		1,723		(239		)				2,010			3,495
Stock-based compensation			643											643
Tax benefit of options exercised			726											726
Balance, June 30, 2007	$	11	$	93,358	$	102,111		$	(9,534	)	$	(45,426	)	$	140,520

See notes to consolidated and condensed consolidated financial statements.

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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

JUNE 30, 2007

Unaudited

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

(1)           Basis of Presentation

The accompanying consolidated and condensed consolidated financial statements of Steinway Musical Instruments, Inc. and subsidiaries (the “Company”) for the three and six months ended June 30, 2007 and 2006 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, 2006, and include all adjustments which are of a normal and recurring nature, necessary for the fair presentation of financial position, results of operations and cash flows for the interim periods. We encourage you to read the consolidated and condensed consolidated financial statements in conjunction with the risk factors, consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2007 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”) and band (“Conn-Selmer”) divisions. 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.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”) which clarifies the accounting and disclosure for uncertain tax positions. This interpretation is effective for fiscal years beginning after December 15, 2006 and we have implemented this interpretation as of January 1, 2007. Previously, we had accounted for uncertain tax positions in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 5, “Accounting for Contingencies” and recorded reserves for uncertain tax

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positions that may have become payable in future years as a result of anticipated or ongoing examinations by tax authorities.

FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. At the adoption date, we made a comprehensive review of our uncertain tax positions. We believe appropriate provisions for outstanding issues have been made.

The cumulative effects of applying this interpretation have been recorded as a decrease of $2.8 million to retained earnings, an increase of $1.6 million to net deferred income tax assets, a net increase of $0.3 million to other current liabilities, and an increase of $4.1 million to other non-current liabilities as of January 1, 2007. In conjunction with the adoption of FIN 48 we began reporting income tax-related interest and penalties as a component of income tax expense. In prior periods such interest was reported in interest expense. As of January 1, 2007, we have accrued $1.3 million for the payment of interest and $0.6 million for the payment of penalties.

As of the date of adoption, the total amount of unrecognized tax benefits was $7.4 million, of which $1.9 million would affect our effective tax rate, if recognized.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, our returns are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2003.

As of June 30, 2007, there have been no material changes to the liability for uncertain tax positions.

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 June 30,		Six Months Ended June 30,
	2007	2006	2007	2006
Weighted-average shares:
For basic earnings (loss) per share	8,520,949	8,331,652	8,470,049	8,242,011
Dilutive effect of stock options	141,456	—	151,774	—
For diluted earnings (loss) per share	8,662,405	8,331,652	8,621,823	8,242,011

All outstanding options to purchase shares of common stock were included in the computation of diluted earnings per common share for the three months ended June 30, 2007 because the exercise prices of the outstanding options were less than the average market price of our common shares. We did not include 20,000 options to purchase shares of common stock in the computation of diluted earnings per share for the six months ended June 30, 2007 because their impact would have been antidilutive. We did not include any of the 628,200

8

outstanding options to purchase shares of common stock in the computation of diluted loss per common share for the three and six months ended June 30, 2006 because their impact would have been antidilutive.

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

	Foreign Currency Translation Adjustments		Pension & Other Post-Retirement Benefits			Tax Impact of Pension & Other Post-Retirement Benefits		Accumulated Other Comprehensive Loss
Balance January 1, 2007	$	3,809	$	(23,235	)	$	8,876	$	(10,550	)
Activity	1,016		—			—		1,016
Balance June 30, 2007	$	4,825	$	(23,235	)	$	8,876	$	(9,534	)

Recent Accounting Pronouncements - On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the impact, if any, its adoption will have on our consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 provides entities with an option to report selected financial assets and liabilities at fair value, with the objective to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. We will be required to adopt SFAS No. 159 in the first quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS No. 159 and have not yet determined the impact, if any, its adoption will have on our consolidated financial position and results of operations.

(3)           Inventories

	June 30, 2007		December 31, 2006
Raw materials	$	18,504	$	20,989
Work-in-process	50,121		49,316
Finished goods	108,519		84,318
	$	177,144	$	154,623

(4)           Goodwill, Trademarks, and Other Intangible Assets

Intangible assets other than goodwill and indefinite-lived trademarks are amortized on a straight-line basis over their estimated useful lives. Deferred financing costs are amortized over the repayment periods of the underlying debt. We test our goodwill and indefinite-lived trademark assets for impairment annually, or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. The changes in carrying amounts of goodwill and trademarks are as follows:

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	Piano Segment		Band Segment		Total
Goodwill:
Balance, January 1, 2007	$	22,926	$	8,555	$	31,481
Foreign currency translation impact	342		—		342
Balance, June 30, 2007	$	23,268	$	8,555	$	31,823
Trademarks:
Balance, January 1, 2007	$	7,847	$	5,824	$	13,671
Foreign currency translation impact	107		—		107
Balance, June 30, 2007	$	7,954	$	5,824	$	13,778

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:

	June 30, 2007			December 31, 2006
Gross deferred financing costs:	$	5,747		$	5,750
Accumulated amortization	(1,630		)	(1,287		)
Deferred financing costs, net	$	4,117		$	4,463
Gross covenants not to compete:	$	500		$	500
Accumulated amortization	(288		)	(238		)
Covenants not to compete, net	$	212		$	262

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Amortization expense	$	196	$	197	$	392	$	426

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The following table shows the total estimated amortization expense for the remainder of 2007 and beyond:

	Amount
Estimated amortization expense:
2007	$	394
2008	788
2009	745
2010	665
2011	626
2012 and thereafter	1,111
Total	$	4,329

(5)Other Current Liabilities

	June 30, 2007		December 31, 2006
Accrued payroll and related benefits	$	18,071	$	16,397
Current portion of pension and other postretirement benefit liabilities	1,202		1,461
Accrued warranty expense	1,601		1,888
Accrued interest	4,082		4,178
Deferred income	5,991		6,348
Environmental liabilities	3,157		3,232
Income and other taxes payable	2,309		3,012
Other accrued expenses	8,248		8,132
Total	$	44,661	$	44,648

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

The accrued warranty expense activity for the six months ended June 30, 2007 and 2006, and the year ended December 31, 2006 is as follows:

	June 30, 2007			June 30, 2006			December 31, 2006
Beginning balance	$	1,888		$	1,857		$	1,857
Additions	272			534			806
Claims and reversals	(580		)	(550		)	(849		)
Foreign currency translation impact	21			53			74
Ending balance	$	1,601		$	1,894		$	1,888

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(6)           Long-Term Debt

Our long-term debt consists of the following:

	June 30, 2007			December 31,  2006
7.00% Senior Notes	$	175,000		$	175,000
Unamortized bond discount	(1,101		)	(1,184		)
Domestic line of credit	20,850			—
Open account loans, payable on demand	2,889			4,595
Total	197,638			178,411
Less: current portion	(2,889		)	(4,595		)
Long-term debt	$	194,749		$	173,816

Scheduled payments of debt are as follows:

	June 30, 2007
Remainder of 2007	$	2,889
2008	—
2009	—
2010	—
2011	20,850
Thereafter	175,000
Total	$	198,739

In conjunction with our debt restructuring activities, we recorded a net loss on extinguishment of debt of $9.7 million for the year ended December 31, 2006, which consists of the following:

For the year ended December 31,	2006
Deferred financing costs write-off - term loan	$	977
Deferred financing costs write-off - 8.75% Senior Notes	2,247
Premiums pursuant to the tender offer and call	7,740
Bond premium write-off	(1,290		)
Total net loss on extinguishment of debt	$	9,674

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

Our common stock is comprised of two classes: Class A and Ordinary. With the exception of disparate voting power, both classes are substantially identical. Each share of Class A common stock entitles the holder to 98 votes. Holders of Ordinary common stock are entitled to one vote per share. Class A common stock shall automatically convert to Ordinary common stock if, at any time, the Class A common stock is not owned by an original Class A holder. As of June 30, 2007 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 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 Plan - 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.

Prior to 2007, we had reserved 721,750 treasury stock shares to issue under our 1996 Stock Plan, once we reached our registered share limitation. This plan has expired but still has vested and unvested options outstanding. In early 2007 we reached our registered share limitation and have since issued 86,674 shares of treasury stock to cover options exercised. 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 of $0.2 million during the six months ended June 30, 2007.

We account for stock-based compensation arrangements in accordance with SFAS No. 123R, “Share-Based Payment,” which we adopted on January 1, 2006 using the modified prospective transition method. The compensation cost and the income tax benefit recognized for these plans is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Compensation cost included in
basic and diluted income (loss) per share	$	0.04	$	0.03	$	0.06	$	0.06
Stock-based compensation expense	379		295		643		566
Income tax benefit	58		43		100		84

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

13

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 Stock Plan are as follows:

	Three Months  Ended June 30,		Six Months  Ended June 30,
	2007	2006	2007	2006
Risk free interest rate	4.6%	5.0%	4.6%	5.0%
Weighted average expected life (in years)	7.2	7.1	8.1	7.1
Expected volatility of underlying stock	24.7%	24.4%	25.2%	24.4%
Expected dividends	n/a	n/a	n/a	n/a
Weighted average fair value	$13.10	$10.95	$13.65	$10.95

The following table sets forth information regarding the Stock Plan:

	Number of Options		Weighted- Average Exercise Price		Remaining Contractual Life (in years)	Aggregate Intrinsic Value (not in 000s)
Outstanding at January 1, 2007	594,500		$	20.98
Granted	137,100		32.45
Exercised	(169,624	)	20.61
Forfeited	(1,100	)	20.22
Outstanding at June 30, 2007	560,876		$	23.89	6.8	$	6,159,976
Exercisable at June 30, 2007	222,976		$	19.96	5.3	$	3,326,168

The total intrinsic value of the options exercised during the six months ended June 30, 2007 and 2006 was $2.3 million and $2.6 million, respectively.

As of June 30, 2007, there was $2.5 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 3.5 years.

The following tables set forth information regarding the Purchase Plan:

	Three Months Ended June 30,		Six Months Ended June 30,
	2007	2006	2007	2006
Risk-free interest rate	5.1%	3.8%	5.1%	3.8%
Weighted-average expected life of option feature (in years)	1.0	1.0	1.0	1.0
Expected volatility of underlying stock	24.7%	22.8%	24.7%	22.8%
Expected dividends	n/a	n/a	n/a	n/a
Weighted-average fair value of option feature	$6.22	$7.25	$6.22	$7.25

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	Number of Options		Weighted- Average Exercise Price		Remaining Contractual Life	Aggregate Intrinsic Value
					(in years)	(not in 000s)
Outstanding at January 1, 2007	11,281		$	20.80
Shares subscribed	13,837		20.80
Exercised	—		—
Canceled, forfeited, or expired	(665	)	20.80
Outstanding at June 30, 2007	24,453		$	20.80	0.1	$	344,298

As reported in the consolidated statements of cash flows, cash received from option exercises under the Stock Plan for the periods ended June 30, 2007 and 2006 was $3.5 million and $4.3 million, respectively. SFAS No. 123R requires that cash flows from tax benefits resulting from tax deductions in excess of the compensation cost recognized for stock-based awards under a fair value basis (excess tax benefits) be classified as a cash flow from financing activities. Accordingly, for the periods ended June 30, 2007 and 2006, $0.4 million of excess tax benefits has been classified as an outflow from operating activities and an inflow from financing activities in the statement of cash flows. For the periods ended June 30, 2007 and 2006, $0.7 million and $0.9 million, respectively, of tax benefit from stock option exercises is presented as a cash inflow from operating activities.

(8)           Other Income, Net

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
West 57th building income	$	(1,164	)	$	(1,163	)	$	(2,327	)	$	(2,327	)
West 57th building expenses	827			820			1,638			1,638
Foreign exchange losses (gains), net	218			(322		)	453			(672		)
Miscellaneous	98			(30		)	45			(85		)
Other income, net	$	(21	)	$	(695	)	$	(191	)	$	(1,446	)

(9)           Commitments and Contingent Liabilities

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

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

15

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 recently 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. We estimate our costs, which approximate $0.8 million, over a 14-year period. We have 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 associated with this project is as follows:

	Environmental Payments
Remainder of 2007	$	25
2008	61
2009	61
2010	61
2011	61
Thereafter	545
Total	$	814

In 2004, we acquired two manufacturing facilities from G. Leblanc Corporation, now Grenadilla, Inc. (“Grenadilla”), for which environmental remediation plans had already been established. In connection with the acquisition, we assumed the existing accrued liability of approximately $0.8 million for the cost of these remediation activities. Based on a review of past and ongoing investigatory and remedial work by our environmental consultants, and discussions with state regulatory officials, as well as recent sampling, we estimate the remaining costs of such remedial plans to be $2.5 million. Pursuant to the purchase and sale agreement, we have sought indemnification from Grenadilla for anticipated costs above the original estimate in the amount of $2.5 million. We filed a claim against the escrow and recorded a corresponding receivable for

16

this amount in prepaid expenses and other current assets in our consolidated balance sheet. We have reached an agreement with Grenadilla whereby future environmental costs will be paid directly out of the escrow. Should the escrow be reduced to zero, we would seek reimbursement 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.

(10)         Retirement Plans

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

	Domestic Plans						Foreign Plans
	Three Months Ended June 30,						Three Months Ended June 30,
	2007			2006			2007			2006
Service cost	$	246		$	190		$	201		$	215
Interest cost	801			690			404			366
Expected return on plan assets	(1,234		)	(1,018		)	(92		)	(77		)
Amortization of prior service cost	108			105			—			—
Recognized loss	148			146			82			—
Net periodic benefit cost	$	69		$	113		$	595		$	504

	Domestic Plans						Foreign Plans
	Six Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Service cost	$	471		$	433		$	399		$	422
Interest cost	1,615			1,475			798			717
Expected return on plan assets	(2,484		)	(2,169		)	(182		)	(151		)
Amortization of prior service cost	216			215			—			—
Recognized loss	276			322			152			—
Net periodic benefit cost	$	94		$	276		$	1,167		$	988

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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:

	Three Months Ended June 30,					Six Months Ended June 30,
	2007			2006		2007			2006
Service cost	$	11		$	13	$	21		$	25
Interest cost	35			34		69			68
Amortization of transition obligation	9			8		18			17
Recognized (gain) loss	(42		)	12		(83		)	25
Net postretirement benefit cost	$	13		$	67	$	25		$	135

We have not made any contributions to our domestic pension plan this year, but anticipate contributing approximately $2.0 million to this plan during 2007. Our anticipated contributions to the pension plan of our U.K. subsidiary approximate $0.2 million for the current year. As of June 30, 2007, we have made contributions of $0.1 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 2007 benefit payments under these plans are $1.2 million. For the six months ended June 30, 2007, we have made benefit payments of $0.6 million under these plans.

 (11)        Segment Information

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

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The following tables present information about our operating segments for the three and six months ended June 30, 2007 and 2006:

	Piano Segment								Band Segment						Other			Consol
Three months ended 2007	U.S.		Germany		Other		Total		U.S.		Europe		Total		& Elim			Total
Net sales to external customers	$	24,804	$	15,761	$	13,817	$	54,382	$	36,173	$	1,702	$	37,875	$	—		$	92,257
Income (loss) from operations	926		4,962		1,639		7,527		1,068		171		1,239		(717		)	8,049

	Piano Segment								Band Segment								Other			Consol
Three months ended 2006	U.S.		Germany		Other		Total		U.S.			Europe		Total			& Elim			Total
Net sales to external customers	$	29,912	$	14,436	$	7,316	$	51,664	$	38,958		$	1,801	$	40,759		$	—		$	92,423
Income (loss) from operations	2,246		3,528		284		6,058		(5,933		)	46		(5,887		)	(566		)	(395		)

	Piano Segment								Band Segment						Other			Consol
Six months ended 2007	U.S.		Germany		Other		Total		U.S.		Europe		Total		& Elim			Total
Net sales to external customers	$	54,432	$	29,271	$	23,604	$	107,307	$	74,952	$	3,430	$	78,382	$	—		$	185,689
Income (loss) from operations	2,868		8,563		2,432		13,863		169		224		393		(1,840		)	12,416

	Piano Segment								Band Segment									Other			Consol
Six months ended 2006	U.S.		Germany		Other		Total		U.S.			Europe			Total			& Elim			Total
Net sales to external customers	$	54,567	$	24,124	$	15,101	$	93,792	$	90,216		$	3,609		$	93,825		$	—		$	187,617
Income (loss) from operations	2,669		5,107		733		8,509		(1,653		)	(40		)	(1,693		)	(1,700		)	5,116

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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.

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 2006 Annual Report on Form 10-K. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management considers the following to be critical accounting policies based on the definition above.

Accounts Receivable

We establish reserves for accounts receivable and notes receivable (including recourse reserves when our customers have financed notes receivable with a third party). We review overall collectibility trends and customer characteristics such as debt leverage, solvency, and outstanding balances in order to develop our reserve estimates. Historically, a large portion of our sales at both our piano and band divisions have been generated by our top 15 customers. As a result, we experience some inherent concentration of credit risk in our accounts receivable due to its composition and the relative proportion of large customer receivables to the total. This is especially true at our band division, which typically has the majority of our consolidated accounts receivable balance. We consider the credit health and solvency of our customers when developing our receivable reserve estimates.

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Inventory

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

Workers’ Compensation and Self-Insured Health Claims

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

Warranty

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

Long-lived Assets

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

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

Pensions and Other Postretirement Benefit Costs

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

Income Taxes

A valuation allowance has been recorded for certain deferred tax assets related to foreign tax credit carryforwards and state net operating loss carryforwards. When assessing the realizability of deferred tax assets, we consider whether it is more likely than not that the deferred tax assets will be fully realized. The ultimate realization of these assets is dependent upon many factors, including the ratio of foreign source

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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 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; geopolitical events; increased competition; work stoppages and slowdowns; impact of dealer consolidations on orders; ability of new workers to meet desired production levels; 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 integrate and operate acquired businesses. Further information on these risk factors is included in Item 1A of

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our Annual Report on Form 10-K for the year ended December 31, 2006. 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, 2007 Compared to Three Months Ended June 30, 2006

	Three Months Ended June 30,								Change
	2007				2006				$		%
Net sales
Band	$	37,875			$	40,759			(2,884	)	(7.1	)
Piano	54,382				51,664				2,718		5.3
Total sales	92,257				92,423				(166	)	(0.2	)
Cost of sales
Band	29,274				35,324				(6,050	)	(17.1	)
Piano	34,418				33,950				468		1.4
Total cost of sales	63,692				69,274				(5,582	)	(8.1	)
Gross profit
Band	8,601			22.7%	5,435			13.3%	3,166		58.3
Piano	19,964			36.7%	17,714			34.3%	2,250		12.7
Total gross profit	28,565				23,149				5,416		23.4
	31.0%				25.0%
Operating expenses	20,516				23,544				(3,028	)	(12.9	)
Income from operations	8,049				(395		)		8,444		(2,137.7	)
Other income, net	(21		)		(695		)		674		(97.0	)
Loss on extinguishment of debt	—				3,063				(3,063	)	(100.0	)
Net interest expense	2,523				3,152				(629	)	(20.0	)
Non-operating expenses	2,502				5,520				(3,018	)	(54.7	)
Income (loss) before income taxes	5,547				(5,915		)		11,462		(193.8	)
Income tax provision (benefit)	2,394			43.2%	(5,054		)	85.4%	7,448		(147.4	)
Net income (loss)	$	3,153			$	(861	)		4,014		(466.2	)

Overview - Sales at our piano division increased over the prior year period due primarily to a large institutional sale of 55 Steinway grand units by our European division.  Sales of mid-priced piano lines also improved as a result of increased demand for Essex models.  Piano margins also improved, largely as a result of higher margin sales overseas. Band division revenues were adversely impacted by reduced order volume caused

23

by previous dealer bankruptcies, the resultant dealer consolidations, and inventory level management by our dealers. However, band division margins improved considerably due in part to improved production at our Elkhart, Indiana brass instrument manufacturing facility, which is now achieving desired production levels on most professional brass instruments, and has exceeded pre-strike levels in these instrument categories.

Net Sales – Net sales remained relatively stable, as the decrease in band division revenues was offset by improved piano division revenues. Management estimates that band division revenues decreased $5.5 million as a result of the aforementioned dealer consolidations.  This affected all instrument categories, contributing to a 13% decrease in brass and woodwind unit shipments and a 27% decrease in total unit shipments for the period.  The revenue decrease was partially mitigated by improved professional level trumpet and trombone sales, which were made possible by improved production levels at our Elkhart, Indiana brass instrument manufacturing facility. Piano division revenues improved $2.7 million, due to improved wholesale shipments of Essex pianos and a large institutional sale made by our European division, which caused a 23% increase in Steinway grand unit shipments overseas. $1.6 million attributable to changes in foreign currency exchange rates also contributed to the revenue increase. Domestically, revenues suffered as a result of a 41% decrease in Steinway grand unit shipments and a 28% decrease in domestic Boston unit shipments. However, sales from the year-ago period were exceptionally high due to the special promotion offered to dealers in conjunction with the Essex model re-launch.

Gross Profit - Gross profit improved $5.4 million due to higher margins at our band division and higher sales and margins at our piano division. Band division margins increased largely due to lower inventory reserve charges, which were $2.3 million higher in the year-ago period. A higher mix of professional brass instruments, improved margins on imported student brass instruments, and a $0.3 million reduction in the unabsorbed overhead at the Elkhart brass instrument manufacturing facility also contributed to the margin improvement. The increase in piano margins is attributable to the European division, which had a large increase in Steinway grand sales and lower production variances. Domestically, margins improved despite the shift in mix toward lower margin mid-priced models, as the prior period included the adverse impact of a factory shutdown, which was taken to control inventory levels.

Operating Expenses - Operating expenses decreased $3.0 million due to $3.9 million lower bad debt expense.  Bad debt expenses were atypically high in the year-ago period due to the bankruptcy filing of one of our large dealers. Increased promotional and bonus expenses at our European piano division accounted for the remainder of the change in operating expenses.

Non-operating Expenses - Non-operating expenses decreased $3.0 million due to the absence of $3.1 million in debt extinguishment costs, which occurred as a result of the call of our remaining $51.6 million of 8.75% Senior Notes in April 2006. The $0.6 million decrease in net interest expense, which resulted largely from our debt refinancing activities, was offset by a shift from foreign exchange gains to foreign exchange losses of a comparable amount.

Income Taxes - Our effective tax rate of 43.2% is significantly lower than the year-ago period due to the forecasted ratio of domestic income to foreign source income. In the prior year, domestic income was abnormally low due to the loss on extinguishment of debt associated with the bond refinancing, the adverse impact of the lost income resulting from the strike at our Elkhart brass instrument manufacturing facility, and additional reserve charges taken in the prior period. The impact of changes in uncertain tax position liabilities, which we recorded in the income tax provision per FIN 48, was not material to the effective tax rate.

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Results of Operations

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

	Period Ended June 30,								Change
	2007				2006				$		%
Net sales
Band	$	78,382			$	93,825			(15,443	)	(16.5	)
Piano	107,307				93,792				13,515		14.4
Total sales	185,689				187,617				(1,928	)	(1.0	)
Cost of sales
Band	61,579				76,329				(14,750	)	(19.3	)
Piano	68,305				62,147				6,158		9.9
Total cost of sales	129,884				138,476				(8,592	)	(6.2	)
Gross profit
Band	16,803			21.4%	17,496			18.6%	(693	)	(4.0	)
Piano	39,002			36.3%	31,645			33.7%	7,357		23.2
Total gross profit	55,805				49,141				6,664		13.6
	30.1%				26.2%
Operating expenses	43,389				44,025				(636	)	(1.4	)
Income from operations	12,416				5,116				7,300		142.7
Other income, net	(191		)		(1,446		)		1,255		(86.8	)
Loss on extinguishment of debt	—				9,674				(9,674	)	100.0
Net interest expense	4,675				5,900				(1,225	)	(20.8	)
Non-operating expenses	4,484				14,128				(9,644	)	(68.3	)
Income (loss) before income taxes	7,932				(9,012		)		16,944		(188.0	)
Income tax provision (benefit)	3,349			42.2%	(6,309		)	70.0%	9,658		(153.1	)
Net income (loss)	$	4,583			$	(2,703	)		7,286		(269.6	)

Overview - Sales at our piano division significantly surpassed the prior year period due to improved demand overseas for Steinways and the re-launched Essex line of pianos. Piano margins also improved, due largely to higher margin sales at our European division. During the first half of 2007, band division revenues from professional brass instrument sales were negatively impacted by approximately $4.7 million ($7.2 million decrease in the first quarter, offset by the $2.4 million improvement in the second quarter) caused by the strike at our Elkhart, Indiana brass instrument manufacturing facility, which began on April 1, 2006. Although we

25

continue negotiations with the union, we currently have a sufficient number of replacement workers to meet our operational needs. We are currently producing most professional instruments at desired production levels, and have exceeded pre-strike levels on many instruments.

Net Sales - The decrease in net sales of $1.9 million occurred despite the 14% increase in piano revenues, due largely to reduced order volume at the band division. Dealer bankruptcies, the resultant dealer consolidations, and inventory level management by our dealers caused a decrease in revenue of $7.5 million. Percussion and certain large brass instrument sales also lagged behind the year-ago period. Lastly, the strike at our Elkhart, Indiana brass instrument plant adversely impacted revenues by $4.7 million. These factors caused a decrease in unit shipments of 22% over the year-ago period. Domestic piano sales were on par with the prior year period as the impact of a decrease in Steinway grand unit shipments of 19% was offset by mid-priced piano line shipment improvement of 57%. Overseas, revenues increased $13.7 million, of which $3.1 million is attributable to foreign currency exchange rates. Increased demand at the wholesale level, resulting in part from a large institutional sale and shipments of our Essex pianos, caused the remaining improvement. Overseas Steinway grand unit shipments rose 20%, and mid-priced piano line shipments rose 179%.

Gross Profit - Gross profit improved $6.7 million due to higher sales and margins at our piano division. Although band division margins were significantly better (21.4% as opposed to 18.6%) due to improved margins on many student instruments and certain brass instruments, most notably trumpets and trombones, this was not enough to offset the impact of the band revenue decline for the period. Piano division margins improved both domestically and overseas.  Our overseas divisions benefited from strong sales of higher-margin units, as well as favorable production variances at our German manufacturing facility. Domestic margin improved due to the absence of the negative impact of three weeks of plant shutdowns, which were taken in the year ago period to reduce inventory levels.

Operating Expenses - Operating expenses decreased $0.6 million, largely due to the $3.8 million decrease in bad debt expense.  Offsetting this was an increase in sales and marketing expense of $1.4 million, which resulted from the introduction of a limited edition piano by our domestic division, as well as promotional expenses at our European division.  We reserved $0.5 million against the $2.0 million escrowed deposit relating to a terminated asset purchase agreement, which caused most of the $0.9 million increase in other operating expenses. The remaining increase in operating expenses is attributable to legal fees and salaries due to increased headcount at the band division, as well as $0.6 million in foreign currency exchange rate impact.

Non-operating Expenses - Non-operating expenses decreased $9.6 million due to the absence of $9.7 million in debt extinguishment costs, which occurred as a result of our Senior Note refinancing in February 2006. The $1.2 million decrease in net interest expense, which resulted largely from our debt refinancing activities, was offset by a shift from foreign exchange gains to foreign exchange losses of a comparable amount.

Income Taxes - Our effective tax rate is significantly lower than the year-ago period due to changes in the mix of domestic income, which was atypically low in the prior period, to foreign source income. Currently, we expect our rate to be more reflective of applicable federal and state statutory tax rates. The impact of changes in uncertain tax position liabilities, which are recorded in the income tax provision per FIN 48, was not material to the effective tax rate.

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.

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Our statements of cash flows for the six months ended June 30, 2007 and 2006 are summarized as follows:

	2007			2006			Change
Net income (loss):	$	4,583		$	(2,703	)	$	7,286
Changes in operating assets and liabilities	(25,856		)	(3,352		)	(22,504		)
Other adjustments to reconcile net income (loss) to cash from operating activities	4,734			10,444			(5,710		)
Cash flows from operating activities	(16,539		)	4,389			(20,928		)
Cash flows from investing activities	(2,304		)	(2,234		)	(70		)
Cash flows from financing activities	(2,166		)	(17,242		)	15,076

Cash flows generated from operating activities decreased $20.9 million due primarily to the $28.8 million increase in cash used for inventory.  The increase in inventory is comprised mostly of mid-priced pianos, certain brass and woodwind instruments, and drums. Cash used by accounts receivable decreased $9.3 million despite the cyclical increase in accounts receivable at our band division due to lower sales, stricter credit policies, and focused cash collections. Adjustments to cash flows from operating activities were atypically high in the prior year due to the $9.7 million adjustment for the loss on extinguishment of debt and provision for doubtful accounts.

The use of cash for investing activities decreased $0.1 million, as the reduction in capital expenditures was offset by lower proceeds from sales of property, plant, and equipment. We continue to expect capital expenditures to be in the range of $5.0 to $7.0 million in 2007.

Cash flows from financing activities increased $15.1 million as compared to the year-ago period.  In 2006, we refinanced our Senior Notes, which generated proceeds of $173.7 million, offset by the repayment of our acquisition term loan of $16.6 million and extinguishment of $166.2 of our 8.75% Senior Note debt. Premiums paid on the debt extinguishment of $7.7 million and costs related to the 7.00% Senior Note offering of $4.1 million also offset our bond refinancing proceeds. In 2007, we used a significant portion of our cash to pay a $25.2 million dividend in March 2007, and have made borrowings of $20.9 million on our domestic revolver.

Borrowing Activities and Availability - We have a domestic credit facility with a syndicate of domestic lenders (the “Credit Facility”). The Credit Facility provides us with a potential borrowing capacity of $110.0 million in revolving credit loans, and expires on September 29, 2011. It also provides for periodic borrowings at either London Interbank Offering Rate (“LIBOR”) plus a range from 1.25% to 1.75%, or as-needed borrowings at an alternate base rate, plus a range from 0.00% to 0.25%; both ranges depend upon borrowing availability at the time of borrowing. The Credit Facility is collateralized by our domestic accounts receivable, inventory, and fixed assets. As of June 30, 2007, there was $20.9 million in revolving credit loans outstanding, as we used borrowings on the Credit Facility to partially fund our dividend payment and the March interest payment on our Senior Notes. As a result, the remaining availability based on eligible accounts receivable and inventory balances was approximately $87.8 million, net of letters of credit.

We also have certain non-domestic credit facilities originating from two German banks that provide for borrowings by foreign subsidiaries of up to €17.4 million ($23.5 million at the June 30, 2007 exchange rate), net of borrowing restrictions of €0.7 million ($1.0 million at the June 30, 2007 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 ($1.0 million at the June 30, 2007 exchange rate) for use by our U.K. branch and ¥300 million ($2.4 million at the June 30, 2007 exchange rate) for use by our

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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 ($3.4 million at the June 30, 2007 exchange rate). Euro loans bear interest at rates of Euro Interbank Offered Rate (“EURIBOR”) plus a margin determined at the time of borrowing. Margins fluctuate based on the loan amount and the borrower’s bank rating. The remaining demand borrowings bear interest at fixed margins at rates of LIBOR plus 0.8% for British pound loans (no outstanding borrowings at June 30, 2007), LIBOR plus 1.0% for U.S. dollar loans of our Chinese subsidiary (outstanding borrowings at 6.4% at June 30, 2007), and Tokyo Interbank Offered Rate (“TIBOR”) plus 0.9% for Japanese yen loans (borrowings at 1.6% at June 30, 2007). We had $1.3 million outstanding as of June 30, 2007 on these credit facilities.

Our Japanese subsidiary also maintains a separate revolving loan agreement that provides additional borrowing capacity of up to ¥460 million ($3.7 million at the June 30, 2007 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 1.5% at June 30, 2007) and expires on January 31, 2010. As of June 30, 2007, we had $1.6 million outstanding on this revolving loan agreement.

At June 30, 2007, our total outstanding indebtedness amounted to $198.7 million, consisting of $175.0 million of 7.00% Senior Notes, $20.9 million on the Credit Facility, and $2.9 million of notes payable to foreign banks.

All of our debt agreements contain covenants that place certain restrictions on us, including our ability to incur additional indebtedness, to make investments in other entities, and limitations on cash dividend payments. We were in compliance with all such covenants as of June 30, 2007 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.

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 both our piano and band divisions to 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 2007, 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 2007.

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Contractual Obligations - The following table provides a summary of our contractual obligations at June 30, 2007.

	Payments due by period
Contractual Obligations	Total		Less than  1 year		1 - 3 years		3 - 5 years		More than  5 years
Long-term debt (1)	$	286,276	$	16,556	$	27,240	$	47,063	$	195,417
Capital leases	46		15		30		1		—
Operating leases (2)	268,190		5,169		9,132		8,583		245,306
Purchase obligations(3)	22,607		22,581		24		2		—
Other long-term liabilities (4)	39,238		4,848		3,934		3,859		26,597
Total	$	616,357	$	49,169	$	40,360	$	59,508	$	467,320

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 June 30, 2007 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 $252.1 million of our operating lease obligations are attributable to the ninety-nine year land lease associated with the purchase of Steinway Hall; the remainder is attributable to the leasing of other facilities and equipment.

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

(4) Our other long-term liabilities consist primarily of the long-term portion of our pension obligations, which are described in Note 10 in the Notes to Consolidated Financial Statements included within this filing, 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 $4.2 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 September 15, 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the impact, if any, its adoption will have on our consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 provides entities with an option to report selected financial assets and liabilities at fair value, with the objective to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. We will be required to adopt SFAS No. 159 in the first quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS No. 159 and have not yet determined the impact, if any, its adoption will have on our consolidated financial position and results of operations.

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ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

We are exposed to market risk associated with changes in foreign currency exchange rates and interest rates. We mitigate a portion of our foreign currency exchange rate risk by maintaining foreign currency cash balances and holding option and forward foreign currency contracts. They are not designated as hedges for accounting purposes. These contracts relate primarily to intercompany transactions and are not used for trading or speculative purposes. The fair value of the option and forward foreign currency exchange contracts is sensitive to changes in foreign currency exchange rates. The impact of an adverse change in foreign currency exchange rates would not be materially different than that disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.

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, 2006.

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

ITEM 4CONTROLS AND PROCEDURES

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

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

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PART II OTHER INFORMATION

ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Company’s Annual Meeting of Shareholders held on May 11, 2007, the Board of Directors was re-elected in its entirety.  The votes cast for each nominee were as follows:

	For	Withheld
Kyle Kirkland	49,395,738	2,563,764
Dana D. Messina	50,044,334	1,915,168
John M. Stoner, Jr.	49,395,730	2,563,772
Bruce A. Stevens	49,395,782	2,563,720
A. Clinton Allen	51,774,319	185,183
Rudolph K. Kluiber	51,803,419	156,083
Peter McMillan	51,586,014	373,488

The proposal to ratify Deloitte & Touche LLP to serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2007 was approved with 51,605,164 votes cast for, 354,138 against, and 200 abstentions.

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

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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: August 6, 2007

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EX-31.1

EXHIBIT 31.1

I, Dana D. Messina, certify that:

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

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

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

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

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

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date: August 6, 2007

/s/ Dana D. Messina

Dana D. Messina

Director, President and Chief

Executive Officer

EX-31.2

EXHIBIT 31.2

I, Dennis M. Hanson, certify that:

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

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

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

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

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

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date: August 6, 2007	/s/ Dennis M. Hanson
	Dennis M. Hanson
	Senior Executive Vice President and
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

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

In connection with the Quarterly Report on Form 10-Q of Steinway Musical Instruments, Inc. (the “Company”) for the quarter ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dana D. Messina, Chief Executive Officer of the Company, certify that to the best of my knowledge:

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

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

	/s/ Dana D. Messina
	President and Chief Executive Officer
	(Principal Executive Officer)
August 6, 2007

EX-32.2

EXHIBIT 32.2

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

In connection with the Quarterly Report on Form 10-Q of Steinway Musical Instruments, Inc. (the “Company”) for the quarter ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dennis M. Hanson, Senior Executive Vice President and Chief Financial Officer of the Company, certify that to the best of my knowledge:

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

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

	/s/ Dennis M. Hanson
	Senior Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)
August 6, 2007