**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**Form  10-KSB**

**ANNUALREPORT PURSUANT TO****Section 13Or 15(d) Of The Securities Exchange Act Of 1934**

**Forthe fiscal year ended June 30, 2006**

**Commissionfile number:  0-31955**

**QRS Music Technologies, Inc.**

(Nameof small business issuer in its charter)

 

| **Delaware**                                                    |   | **36-3683315**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **2011  Seward Avenue, Naples, Florida**                        |   | **34109**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |

 

Issuer’s telephonenumber  **(239) 597 -5888**

 

Securitiesregistered under Section 12(b) of the Exchange Act:

 

**None**

 

Securitiesregistered under Section 12(g) of the Exchange Act:

 
|        | Common, $0.01  par value |   |
|--------|--------------------------|--------|
|   | (Title of class)         |   |

 

Check whether theissuer (1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. xYes o No

Check if there isno disclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB. x

Indicate by checkmark whether the registrant is a shell company        Yeso         No x

The issuer’srevenues for its most recent fiscal year were $18,084,539.

The aggregatemarket value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the  average ofthe closing  bid  ($1.55) and closing asked ($1.70) price ofsuch common equity, as of October 10, 2006 was $6,406,996.

The number ofshares outstanding of the issuer’s common stock as of June 30, 2006 was9,658,956.

Transitional SmallBusiness Disclosure Format (Check one): Yes o;No x

 

----

**PARTI**

**Item1. Description of Business.**

**GENERAL**

QRSMusic Technologies, Inc. (“Company”) is a Delaware Corporation which was formedin January, 1990.  During fiscal yearended June 30, 2006, Company’s primary lines of business were manufacture andsale of Pianomation® Music Instrument Digital Interface (“MIDI”), dealerpreparation and sale of Story & Clark and Gulbransen pianos, sale of MIDICDs and floppy disks, distribution of piano supply parts, manufacture anddistribution of the Gulbransen Digital Hymnal, and manufacture and sale ofmusic rolls for player pianos.  Allfinancial statements presented are consolidated statements. The Company’sfiscal year ends each June 30, and the fiscal years ended June 30, 2005, andJune 30, 2006 are referred to as “fiscal 2005” and “fiscal 2006”, respectively. The Company maintains its corporate offices anda showroom in Naples, Florida.  TheCompany has a warehouse, teaching facility, Pianomation® development facilityand showroom in Las Vegas, Nevada, piano preparation and Pianomation® assemblyand installation center and showroom facilities in Seneca, Pennsylvania, and apiano roll manufacturing and warehouse facility and software developmentfacility in Buffalo, New York.  DuringFiscal 2005 the Company leased space in Hong Kong to help with procurement andsales to the Chinese and surrounding markets. During Fiscal 2004, the Company began utilizing space in Sydney,Australia in a building at the time owned by an affiliated company.   The Company used the space to inventorypianos and pianomation units that will be sold in the Australian market.   During Fiscal 2005 the affiliated companywas sold to a non-affiliated party, and subsequently the Company moved itssales offices to another location. (Please refer to Item 12 for additional information.)  See “ConsolidatedFinancial Statements” for financial information.

 **PIANOMATION®**

The Pianomation® MIDI System isa Musical Instrument Digital Interface equipped playback system for acousticand digital pianos.  Pianomation®, whichis the Company’s flagship product, automates the Company’s own line of Story& Clark pianos, and can be retrofitted by independent installers intovirtually any brand of piano. Several major piano manufacturers, have selectedPianomation® for factory installation in new instruments.

The Pianomation® productconsists of an electronic processor and a mechanical assembly which drivessolenoid actuators. The processor receives MIDI signals from a MIDI mastercontroller such as a CD player, disk drive or personal computer. The signalsreceived from the master controller are processed by the Pianomation® processorwhich in turn causes the mechanical solenoid actuators to “play” the piano’skeys. The MIDI signal contains, and the Pianomation® processor transmits, theinformation necessary to control the duration of each note and the level ofexpression and foot pedal operation. The Pianomation® system is unique as it isthe only system currently available which not only controls the mechanicaloperation of a piano but synchronizes the MIDI signal with a separate trackcontaining an audio music signal and stores both tracks in analog format on aCD. This allows the Pianomation® system to enhance the piano performance with avocalist, symphony orchestra or other recorded music.

The ease of installation andminimal service requirements of the Pianomation® system and the software whichallows the conversion of a digital signal into analog format are principalfeatures.  A unique low profile solenoidrail actuates the keys, and can be easily regulated to the touch of the hostpiano to a high degree of sensitivity. In fact, Pianomation® can actually play at volume levels below thecapabilities of the human pianist for the ultimate in background music.  The sustain pedal is operated by a speciallydesigned solenoid, or can be simulated by the system’s exclusive “Magic Pedal”feature.

Pianomation’s®flexibility and open-ended architecture allow a wide range of use andflexibility for all current and future playback formats.  With QRS CDs, Pianomation® can playunobtrusively with solo piano music or with concert-quality performances thatinclude audio accompaniment; with QRS videos, Pianomation® can be used forgroup sing-alongs or karaoke; with  QRSfloppies, Pianomation® can drive a general MIDI system for the MIDI enthusiast;and, with various computer programs, it can serve the working musician as aMIDI slave, interacting on a sophisticated level with all manner of MIDIequipment.  The Transcription Series andSyncAlong CDs continue to be popular items in the Pianomation CD series, andthe libraries of available CDs are expanded every year.   The SyncAlong Series CDs leverage thePianomation system advantages to allow the end-user to experience the trueaudio recordings of major recording artists. The Company in fiscal 2004 introduced a download service called “NetPiano.”   This subscription service allows theconsumer to log into a specified internet site and download music to play ontheir Pianomation system.  The Companyalso sells the Playola System of portable piano automation. Unlike thePianomation® System which requires installation by a trained technician, thePlayola system consists of only two components which can be easily placed onand removed from a piano by a user. Playola is also MIDI compatible.

2

----

Pianomation® Manufacturer

Thecomponents of the Pianomation® MIDI System and Playola system are manufacturedfor the Company by a number of different suppliers. With the exception of anumber of small pieces, the Company has located more than one supplier for eachcomponent. It maintains an inventory of components which it believes would besufficient to continue its business if the single source vendor of small piecesshould cease to adequately supply ordered parts. The Company assembles some ofthe Pianomation® System and Playola components in its Pennsylvania facility.The Company also has installations centers in its Pennsylvania, Florida andNevada locations, enabling music stores and dealers to send their pianos forfactory installations of a Pianomation system. In large part, the Pianomation® System is shipped in kit form forinstallation by a technician into an acoustic piano. The Company believes thereto be ample sources and quantities of raw materials for the manufacture of allcomponents.  As technology advances, theCompany continues to develop and introduce new user-interface devices (“frontends”) that can be utilized to play the Pianomation system.   In Fiscal 2005 the Company debuted theAncho, Petine and Q-Touch interfaces as the music industry’s annual trade showin January in Anaheim, CA.   Each frontend has unique properties that leverage the advantages of current technology toenhance and benefit the Pianomation player system.   The introduction of new front ends, anddiscontinuation of older models also enables the Company to address conditionsof supply of electronic components.

Pianomation® Distribution

The Company distributes thePianomation® system as an option on its Story & Clark pianos, throughapproximately 500 independent piano retailers and independent piano technicianswho install the system on virtually any piano initially sold by the retailer oras a retrofit on pianos owned by customers. The Company also distributesthrough OEM sales to piano manufacturers and other distributors who privatelabel the system. Playola is distributed though the same network of independentpiano retailers.

**STORY & CLARK PIANOS**

The Company imports and sells pianos under the Story& Clark trademark, and manufactures a select number of specialty pianosbearing the Story & Clark trademark. The Story & Clark line includes reproducing player pianos, grandpianos, console and studio pianos, nickelodeons, custom leaded glass panelpianos, roll players, and various piano accessories such as piano benches andlamps. The term player piano is used to describe any acoustic piano that hasbeen modified to play itself.    Anickelodeon is a piano that plays itself, and has additional instruments (suchas drums, xylophone, castanets, etc.) that are mounted on or near the piano andare also played by the same solenoid system.

AllStory & Clark pianos, including imported pianos, at the option of thedealer, are thoroughly serviced and prepared by factory piano technicians priorto sale. All Story & Clark pianos are pre-slotted to allow for easy laterinstallation of the Pianomation® system.

The Company purchased theGulbransen name and the Digital Hymnal in 2003.   As a requirement ofthat purchase, the company is obligated to supply audited statements of theproduct sold.  Currently the Company isinvolved in discussions as to the format of that audit.  The Gulbransen name is an established name inthe piano industry. In September 2004 the Company introduced a new commercialline of pianos marketed under the Gulbransen brand name.  The Gulbransenbrand of pianos is offered through different sales channels as well as severaltraditional dealer accounts.  The primary focus of the Gulbransen line isdirect sales through the Internet as well as catalog sales.   The Gulbransen line increases exposure toQRS’s unique line of products from venue specific Grand Pianos to Nickelodeonsand Violins.  QRS Music’s Pianomation®technology is  available on theGulbransen line of pianos

PianoManufacture

A majority of the Company’s lineof pianos are imported from the Peoples Republic of China.  Specialty pianos and all piano prep servicesare performed at the Company’s 46,000 square foot facility in Seneca,Pennsylvania. The Company believes that there is an adequate supply of allmaterials used to build its specialty pianos in Pennsylvania. The Company alsobelieves there are other sources of imported pianos if current supply wereinterrupted.

The name Story & Clark is used on pianos importedfrom various piano manufacturers located in the People’s Republic ofChina.  For Fiscal 2006 and Fiscal 2005combined imported piano sales represented 39.90% and 38.41% of overall salesrespectively.

Piano Distribution

The Company distributes its pianos and technology products through anetwork of approximately 240 independent 

3

----

piano stores around the country. The Company also retails its pianosthrough its own showrooms in Las Vegas and Seneca, and during various specialpromotions and sales.

The Company may enter into anagreement with a financing company when the dealer (purchaser) desires tofinance his purchases.  For the yearended June 30, 2006, approximately 24.08% of the Company sales were subject to thesefinancing agreements. Under these agreements, the entire sale is financed.There were no material costs incurred by the Company due to repurchasing ofrepossessed merchandise for the year ended June 30, 2006.

**PLAYER PIANO ROLLS**

The Company is the only majormanufacturer in the world of paper player piano rolls.  The Company has master recording data forover 5,000 music titles for player piano rolls and maintains an inventory ofover 45,000 music rolls at its Buffalo facility. The Company contracts withcopyright owners for nonexclusive rights to produce various musical selectionsand then with artists who actually perform the musical selection. The Companyhas master rolls representing the only player piano performance of Liberace andone of only a few of the performances of Scott Joplin, Fats Waller, GeorgeGershwin and other famous pianists. Celebrity performances are recorded on a specially equipped piano calleda marking piano.  Each key on the markingpiano is connected pneumatically to a metal stylus on unit sitting next to thepiano.   There is a blank roll of pianoroll paper that passes over a drum equipped with a piece of carbon paper.   As a key is depressed on the piano, themetal stylus descends against the piano roll paper, and a carbon mark is madeon the underside of the paper.   As longas the key is depressed, the stylus stays down.   Once the key is released, the stylus raises.Once the performance is complete, the roll with the carbon marks is taken out,and the carbon lines are cut out with an exacto knife.   This becomes the pattern for the piano rollsthat will be mass-produced.  Celebrityperformances are recorded on the marking piano because it requires no knowledgeof player piano roll arranging by the performer.  The artist is only required to sit at thepiano and play as they normally would. Upon completion of the performance there is a pattern of the exactperformance that can then be reproduced in the form of a perforated pianoroll.   When the completed roll is playedon a customer’s piano, the original artist’s performance will be duplicatedexactly.  For fiscal year ended June 30,2006 and 2005 player piano roll and related items sales represented 1.90% and3.38% of total overall sales respectively. Non-celebrity performances are doneon a digital keyboard or computer.  Allraw materials for the rolls are readily available from multiple sources. TheCompany also sells player piano accessories.

Roll Distribution.

Playerpiano rolls and player piano accessories are primarily sold though mail ordercatalog.  The Company maintains aprospect list of over 89,000 qualified buyers. The Company also sells player piano rolls and accessories on itsinternet web site and through a few independent dealers.

**MIDI CDS, FLOPPY DISKS and NETPIANO**

The Company has an inventory of over 2,000 musicaldata files in MIDI format which it sells in CD, DVD and floppy disk format andas downloads on its internet web site. The CDs are primarily used forelectronic player devices such as Pianomation®. The web downloads are part of a new online service called NetPiano.Total music sales for Pianomation (including CD, floppy and downloadableformat) for fiscal year ended June 30, 2006 and 2005 were 5.32% and 4.86% oftotal overall sales respectively.

**COMPETITION**

Pianomation® has two major competitors,Yamaha Music and PianoDisc.  DuringFiscal 2006, one new company exhibited a player system at the Industry NAMMShow in January.   It is too soon to knowthe level of competition that company will exhibit. The Yamaha Disklaviersystem is only available as a factory installed option on Yamaha pianos. ThePianoDisc system, and the new system introduced in January areretrofitable.  Principal competitivefactors are reliability, features, system flexibility and ease of installation.The Company believes it competes well as a result of the reliability of itssystem, ease of installation, and its strong library of live recordedbackground music including vocals as well as piano signal on one CD.

4

----

The quality of the softwareoffered for use on the Pianomation System continues to be one of the strongestselling points of the system.   The SyncAlong Series of CDs, available exclusively in the QRS Library, is a decidingfactor in many consumers choice of player systems.

Story & Clarkcompetes with very large (Steinway Pianos, Samick Pianos, Young Chang Pianos,and Kawai Music) and several other offshore piano manufacturers and has a verysmall portion of the market. Principal competitive factors are distributionchannels, trademark and value added features. While it is one of only a handfulof domestic piano distributors and manufacturers, the Company competes byfilling niche markets including player pianos and nickelodeons rather thancompeting in the mass distribution market for standard home-use and commercial-usepianos.

Currently no other company sellsnew player piano rolls.  Although severalsmall companies do specialty recuts and small runs of unique rolls. Used playerpiano rolls are sold by numerous individuals.

**PIANOMATION AND OTHER PIANO SALES**

For Fiscal 2005 and Fiscal 2006,perforated paper roll players represented less than one percent of pianosales.  Total piano sales for fiscal yearended June 30, 2006 and 2005 represented 39.90% and 38.72% of total overallsales respectively.   Sales of technologyrelated products for fiscal year ended June 30, 2006 and 2005 represented50.81% and 50.72% of overall sales respectively. Approximately 52.21% of Story& Clark pianos sold were retrofitted with the Pianomation® system in fiscalyear 2006 and approximately 61.7% in fiscal year 2005.

**EMPLOYEES**

The Company employs 60 full-time employees, oneseasonal worker and one part-time worker.

**RESEARCH AND DEVELOPMENT**

The Company is involved in several research anddevelopment projects both in the area of Pianomation products and pianos.  The expenditures for fiscal year 2006 were$769,000 and for fiscal 2005 they were $684,000. All research and developmentexpenses were borne directly by the Company. Other than new products discussedelsewhere herein, all other publicly announced new products are in the researchand development stage. The Company is undertaking several large projects as itworks to maintain its leading edge in technology for the music industry.   As these projects progress in theirdevelopment cycle more funds are required to bring them to fruition.  Development for the Petine and Ancho userinterfaces for the Pianomation player system were completed in fiscal 2006, andthese interfaces were introduced and are now a part of the QRS product line oftechnology devices.

**PATENTS TRADEMARKS AND LICENSES**

TheCompany has 10 United States Trademark registrations: Registration No. 658,518(QRS logo), Registration No. 2,190,286 (QRS), Registration No. 2,562,052(Hobart M. Cable), Registration No. 2,490,762 (Story & Clark), RegistrationNo. 2,227,035 (Pianomation), Registration No 744,841 (Gulbransen), RegistrationNo. 830,313 (PNOBar), Registration No. 830,340 (PNOScan), Registration No830,442 (PNO) and Registration No. 830,751 (PNOVision).

TheCompany also holds and or has rights (some exclusive) to ten patents related toboth existing product offerings, such as NetPiano, and the Gulbransen DigitalHymnal and several other products currently under development.

QRS obtains rights to use the music for both thePianomation library and music roll library from the appropriate copyrightholders.   In some cases those rights areadministered by an agency, and sometimes by the copyright holder themselves.

5

----

**Item 2. Description of Property.**

The Company owns a 24,000 square foot building inBuffalo, New York which is used for piano roll manufacture and warehouse, a46,000 square foot building in Seneca, Pennsylvania which is used for specialtypiano manufacturing, Pianomation® System assembly and warehouse facility, and a17,000 square foot building in Seneca, Pennsylvania which is used for awarehouse. The Company leases from its Chairman and largest shareholder, 4,000square feet of office and warehouse space in Naples, Florida.  The Naples location is the Company’s principalcorporate office. The Company leases from its Chairman and largest shareholderapproximately 8,000 square feet of showroom and warehouse space in Las Vegas,Nevada. The terms of the office space arrangements for Las Vegas and Naples arecomparable to similar spaces available on the open market.  In Fiscal 2004, the Company utilized, withoutcharge, warehouse space in New South Wales, Australia provided by AlltechInternational Holdings, Inc., an affiliate of the Company’s Chairman.   In Fiscal 2005, the Company’s Chairman wasno longer an affiliate of Alltech International Holdings, Inc and the Companylater moved it’s showroom and warehouse space to a location in Balmain,Australia which it leases from an independent third party.

The principle provisions of those leases are asfollows:
| Description and Location | ** ** | **Base Rent Per Month** | ** ** | **Date of Lease** | ** ** | **Expiration** | ** **     |
|------------------------------------|------------|----------------------------------------|------------|-----------------------------|------------|----------------|----------------|
| Offices and Warehouse              |       | $                                      | 2,000      |                        | 01/01/1993 |           | 12/31/2012     |   |
| Naples, Florida                    |       |                                   |       |                        |       |           |           |
| Showroom and  Warehouse            |       | $                                      | 6,250      |                        | 04/01/2000 |           | Month-to-month |   |
| Las Vegas, Nevada                  |       |                                   |       |                        |       |           |           |
| Showroom and Warehouse             |       | $                                      | 3,464      | *                           | 05/06/2006 |           | 05/05/2007     |   |
| Balmain, Australia                 |       |                                   |       |                        |       |           |           |
| Office and  Warehouse              |       | $                                      | 3,906      | *                           | 12/15/2004 |           | 12/15/2006     |   |
| Hong Kong                          |       |                                   |       |                        |       |           |           |

 

 

----

*convertedto US $ from native currency as of 06/30/06.

**Item 3. Legal Proceedings.**

A lawsuit filed in Clark County Nevada District Court in October 2000by Family Music against the Company , Richard Dolan and a former employee ofthe Company was settled on February 3, 2005 . The lawsuit was settled withoutany payment to the plaintiff or any other consideration by the Company.

On August 20, 2003 a default judgment in the amount ofapproximately $478,000 was entered against the Company in the United StatesBankruptcy Court, Southern District of Ohio, Western Division. The defaultjudgment was granted to Dwight’s Piano Co (formerly known as Baldwin Piano& Organ Company and subsidiaries, a former customer of the Company) and wasbased upon claims that preferential transfers were made to the Company duringthe 90 day period prior to Baldwin’s bankruptcy filing on May 31, 2001. Becausea judgment was entered against the Company by the Court, the entire amount ofthe judgment was accrued as of June 30, 2003. The Company filed a motionseeking vacation of the judgment and raised several defenses available to itunder the Bankruptcy Code.  On January 3,2005 the United States Bankruptcy Court, Southern District of Ohio, WesternDivision, approved a negotiated settlement agreement between the Company andDwight’s Piano Co.  The negotiatedsettlement agreement reduced the Company’s preference liability to$61,395.  Upon the consummation of thesettlement, the United States Bankruptcy Court immediately entered anOrder vacating the default judgment entered, and subsequently dismissedthe litigation initiated by Dwight’s Piano Co. against the Company, withprejudice.  As a result of the negotiatedsettlement, for the year ended June 30, 2005 the Company recognized income of$416,206, reflected as a reduction of selling, general and administrativeexpenses.

**Item 4. Submission of Matters to a Vote of Security Holders.**

Nomatters were submitted to shareholders.

6

----

**PART II**

**Item 5. Market for Common Equity  Related Stockholder Matters  and Small Business Issuer Purchases of EquitySecurities**

On August 6, 2001 the Company’scommon stock began quotation on the OTCBB under the symbol QRSM. Prior to thattime, the Company’s common stock was quoted on the Electronic Pink Sheets. Thehigh and low bids of the Company’s common stock for each quarter during fiscalyears ended June 30, 2006 and 2004 are as follows:

| Fiscal Year Ended June 30, 2006 | ** ** | **High Bid Price** | ** ** | **Low Bid Price** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| First Quarter                                            |       | $                            | 2.20       |                        | $          | 1.41 |   |
| Second Quarter                                           |       | 1.78                         |       | 1.45                        |       |
| Third Quarter                                            |       | 1.75                         |       | 1.50                        |       |
| Fourth Quarter                                           |       | 1.61                         |       | 1.25                        |       |
|                                                          |            |                              |            |                             |            |  |  |

 

| Fiscal Year Ended June 30, 2005 | ** ** | **High Bid Price** | ** ** | **Low Bid Price** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| First Quarter                                            |       | $                            | 2.50       |                        | $          | 1.45 |   |
| Second Quarter                                           |       | 2.25                         |       | 1.40                        |       |
| Third Quarter                                            |       | 3.84                         |       | 1.98                        |       |
| Fourth Quarter                                           |       | 2.20                         |       | 1.60                        |       |
|                                                          |            |                              |            |                             |            |  |  |

 

 

Trading information is as reported by the NationalAssociation of Securities Dealers Composite feed or other qualified interdealerquotation medium and as compiled by Pink Sheets, LLC.  Such over-the-counter quotations reflectinter-dealer prices, without retail markup, markdown or commission, and may notnecessarily represent actual transactions.

The records of AmericanRegistrar and Transfer Co., the Company’s transfer agent, indicate that thereare 124 registered owners of the Company’s common stock as of June 30, 2006.

The Company has not paid anydividends on common stock in the past five fiscal years.  The Company has no intention of payingdividends on common stock in the foreseeable future. The Company did notdeclare or pay preferred stock dividends in fiscal year 2006 or fiscal year2005.  All shares of preferred stock areowned by the Company’s Chairman.

In February 2005, the Company issued 200,000 shares ofits common stock at a cash purchase price of $1.00 per share to oneindividual  These shares were issued as aresult of the individual exercising options he held. The shares were issued ina private transaction pursuant to Section 4(2) of the Securities Act of 1933.

**Item 6. Management’s Discussion and Analysis or Plan ofOperation.**

**GENERAL.**

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.

Certain statements in this Form 10-KSB constitute “forward-looking”statements within the meaning of the Private Securities Litigation Reform Actof 1995.  Such forward-looking statementsinvolve known and unknown risks, uncertainties and other factors which maycause the actual results, performance or achievements of the Company to bematerially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements.  Such factors include, among others, thefollowing: the effects of the changes in Homeland Security policies,specifically relating to the effects on international and domestic transportationof goods, the state of the economy, the financial condition of major OEM’s ,competition, seasonality, success of operating initiatives, new productdevelopment and introduction schedules, acceptance of new product offerings,advertising and promotional efforts, adverse publicity,; changes in businessstrategy or development plans, availability and terms of capital, labor andemployee benefit costs, changes in government regulations, uncertaintyregarding economic recovery of the United States and international economies ingeneral and consumer spending in particular, and other factors particular tothe Company.

The Company is a DelawareCorporation and is a manufacturer and distributor of pianos, pianomation units,and music for electronic player systems (in a variety of forms) and music rollsfor use in player pianos. The Company has three wholly owned subsidiaries, onein Hong Kong one in Australia, and the third was formed in the US for purposesof the Gulbransen asset acquistion. The third subsidiary was merged into theCompany during fiscal 2006. All statements made encompass the main company andthe two subsidiaries.   The Company sellsits products to dealers and end-users, predominately in the United States andhas offices in New York, Pennsylvania, Florida and Nevada recently startedleasing space in Balmain, Australia and Hong Kong.

7

----

**Critical Accounting Policies andEstimates**

SUMMARY

The consolidated financial statements include theaccounts and transactions of QRS Music Technologies Inc. and its wholly-ownedsubsidiaries.  All significantinter-company transactions and balances are eliminated in consolidation.  The preparation of consolidated financialstatements requires the Company to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent liabilities. On an on-going basis, the Companyevaluates its estimates, including those related to revenue recognition,product returns and allowances, bad debts, inventory valuation, goodwill andintangible assets, income taxes, warranty provisions, contingencies andlitigation. The Company bases its estimates on historical experience and onvarious other assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual amounts may differ from these estimates under differentassumptions or conditions. The Company believes the following criticalaccounting policies affect its more significant judgments and estimates used inthe preparation of its consolidated financial statements.

REVENUE RECOGNITION

Sales of products are generally recognized by the Companyupon shipment to its customers.  Statedterms of each sale are generally FOB shipping point and title for the productstransfers to the customer upon shipment. The Company may, at times, arrange financing of customers’ purchasesthrough commercial financing companies. These arrangements generally require the Company to repurchase pianosfinanced and repossessed by the commercial financing companies.  The purchase price is typically the totalunpaid balance owed to the finance companies plus reasonable expenses.  Shipping and handling costs are included inselling expenses net of amounts invoiced to the customer per the order. TheCompany’s products generally carry a warranty. These costs are accrued at thepoint of shipment and, at June 30, 2006, the Company had a reserve for returnsof $71,000.

ALLOWANCE FOR DOUBTFULACCOUNTS

No single customer of the Company has representedgreater than 10% of revenues or accounts receivable in fiscal 2006 or fiscal2005.  The Company maintains allowancesfor doubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments.  Ifthe financial condition of the Company’s customers were to deteriorate,resulting in an impairment of their ability to make payments, additional allowancesmay be required. The Company does not request collateral from its customers butcollectibility is enhanced through the use of credit card payments. The Companyassesses collectibility based on a number of factors including, but not limitedto, past transaction history with the customer, the credit-worthiness of thecustomer, independent credit reports, industry trends and the macro-economicenvironment. The Company’s experience with the bankruptcy of Baldwin Piano haslead it to re-address terms it offers to larger customers and OEMaccounts.  As of June 30, 2006 and 2005the Company maintained an allowance for doubtful accounts of approximately$475,000 and $214,000, respectively.

INVENTORIES

Inventoriesare valued at the lower of cost or market using the first-in, first-out (FIFO)method.  On a regular basis the Companyreviews its inventories for slow-moving and obsolete items and adjusts thevalue of such inventory to its estimated net realizable value.  For both fiscal year ending June 30, 2006 and2005, the Company reflected a reserve for slow-moving and obsolete inventory ofapproximately $770,000.

The Company believes that the mix of inventoryreflects the current customer demand for products. The Company maintainsseveral hundred suppliers for both manufactured and distributed components andproducts.  The Company feels that thereare many sources for component suppliers, and maintains a listing ofalternative source for many critical parts. No assurances can be given as to maintaining a supply from any onedistributor.  Currently, the Companydoesn’t have any knowledge from any distributor as to a reduction ordiscontinuation of products currently being purchased.   The Company has no information indicatingthat any distributor intends to reduce or discontinue products currently beingpurchased.

LONG-LIVED ASSETS,INTANGIBLE ASSETS AND GOODWILL

TheCompany adopted SFAS No. 141, “Business Combinations,” and SFAS 142, “Goodwilland Other Intangible Assets,” effective July 1, 2002.  Under these standards, all acquisitionssubsequent to June 30, 2001 must be accounted for under the purchase method ofaccounting, and purchased goodwill is no longer subject to amortization.  Rather, it is subject to periodic 

8

----

impairment testsbased on its fair value.  Goodwillrepresents the excess cost over the fair value of tangible net assets of theCompany and is recorded on the consolidated balance sheet in other assets.  The Company reviews the carrying value of thegoodwill annually and at other times when facts or circumstances indicate thatthe recorded amount of goodwill may be impaired.  If this review indicates that goodwill is notrecoverable, the Company’s carrying value of the goodwill is reduced by theestimated shortfall.  As of June 30,2006, no impairment has been recorded.

INCOME TAXES

As part of the process of preparing the consolidatedfinancial statements, the Company is required to estimate its income taxes ineach of the jurisdictions in which it operates. This process involves theCompany estimating its actual current tax exposure together with assessingtemporary differences resulting from differing treatment of items, such asdepreciation, amortization, and inventory reserves, for tax and accountingpurposes. These differences result in deferred tax assets and liabilities,which are included within the consolidated balance sheets. The Company mustthen assess the likelihood that its deferred tax assets will be recovered fromfuture taxable income and, to the extent it believes that recovery is notlikely, the Company must establish a valuation allowance. In the event thatactual results differ from these estimates, or the Company adjusts theseestimates in future periods, the Company may need to establish an additionalvaluation allowance which could materially impact its financial position andresults of operations.

The Company has substantial deferred tax assetsassociated with inventory adjustments, allowance for doubtful accounts andother accruals which will reduce taxable income in the future.  The Company believes that it is more likelythan not that the deferred tax assets will be utilized.

**FISCAL 2006 COMPARED TO FISCAL 2005.**

SALES

Total sales decreased 10.7% from$20.25 million in fiscal 2005 to $18.10 million in fiscal 2006.  The Company experienced a delay in therelease of a new controller for the Pianomation system, which affected sales ofboth technology and pianos in the first and second quarters.  Once it was released, it was well received bythe marketplace, but during the third and fourth quarters, the overall domesticpiano market substantially softened . The decline appears to be related to a hesitant buying public.   As a result of the lower than average retailsales of pianos, dealers in turn decreased both their inventory levels andspeed of reordering.

COSTS AND EXPENSES

Total cost of sales decreased13.1% from $14.06 million in fiscal 2005 to $12.22 million in fiscal 2006.  As a percentage of sales, cost of salesdecreased two percentage points from 69.5% in fiscal 2005 to 67.6% in fiscal2006.  While lower sales accounted for alower total cost of sales, the Company has experienced decreases in its cost ofsales during Fiscal 2006.   These decreasesare a result of efforts by the Company to reduce component costs.

Selling, general andadministrative expenses increased 23.8% from $3.79 million in fiscal 2005 to$4.70 million in fiscal 2006.  Theincrease is a result of an increase in marketing and promotional expenses, anincrease in delivery expenses, an increase in Board of Director expenses, sincethe Board was expanded to six members, offset by a decrease in commissions andrelated sales expenses, as a result of lower sales.  Further in fiscal 2005 there was a reversalof a previous charge associated with the Baldwin preference action.  During Fiscal 2003, Baldwin Piano and Organ,a large OEM account of the Company’s, declared bankruptcy and as a result theCompany was party to a preference action brought by the estate of Baldwin Pianoand Organ.   The Company recognized theentire expense as bad debt during fiscal 2003.  During fiscal 2005 the suit was settled for a lesser amount, and theCompany reversed the difference to its current bad debt expense.   This reduction in selling, general andadministrative expenses was reflected in the third quarter financials forfiscal 2005

Research and developmentexpenses increased 12.4% from $684,000 in fiscal 2005 to $769,000 in fiscal2006 due to the varying development times of products in development.  The Company is undertaking severallarge projects as it works to maintain its leading edge in technology for themusic industry.   As these projectsprogress in their development cycle more funds are required to bring them tofruition.  Development for the Petine andAncho user interfaces for the Pianomation player system were completed infiscal 2006, and these interfaces were introduced and are now a part of the QRSproduct line of technology devices. Several other products are nearing completion and the Company plans tointroduce them during fiscal 2007.  There are also several products that are currently in the exploratoryphase of development and no determination has been made as to if and when theywill be completed and brought to the marketplace.

9

----

INTEREST EXPENSE.

Interest expense increased 47.6%from $33,000 in fiscal 2005 to $48,000 in fiscal 2006.  The increase is due to the additionalborrowing undertaken in fiscal 2005 and 2006. The additional borrowing in 2005 was used to finance the acquisition ofinventory for the Gulbransen piano line. The additional borrowing in 2006 was used to finance the acquisition oftechnology and copyrights.

PROVISION FOR INCOME TAXES.

The Company’s effective tax ratefor fiscal 2006 and fiscal 2005 were 54.4% and 34.5%, respectively.

LIQUIDITY AND CAPITAL RESOURCES.

The primary sources of theCompany’s cash are net cash flows from operating activities and short-termvendor financing.  Currently, the Companydoes not have available any established lines of credit with banking facilities.

The Company’s cash amounted to$57,000 and $603,000 at June 30, 2006 and 2005, respectively.  Fiscal 2006 earnings before interest, taxes,depreciation and amortization (“EBITDA”) decreased $1.22 million to $639,000from $1.86 million in fiscal 2005. The Company’s cash and cash equivalentdecreased for year ended June, 30, 2006 as compared to the year ended June 30,2005 as a result of the increase in inventory, and the increase in bothresearch and development and administrative expenses, and the increasedaccounts receivable.   The accountsreceivable for fiscal year ended June 30, 2006 were higher  than fiscal year ended June 30, 2005, due tothe timing of some sales, and the overall increase in customers experiencingpoor cash flow.   During fiscal 2006 theCompany experienced a lower EBITDA largely due to a decrease in sales and anincrease in research and development spending and funding of the Company’sprofit sharing plan.

The Company had a note payableto a lending institution due May 2002 which required a balloon payment ofapproximately $919,000 payable at that time (see Note 5 to the FinancialStatements).  The Company retired thatloan in fiscal 2006.

The Company entered into ademand note payable with its majority shareholder for $500,000 bearing aninterest rate of 6% per annum.  TheCompany has since made a partial payment against the note of $250,000.

The Company entered into a notepayable with an individual in exchange for the purchase of intellectualproperty (technology and copyrights).  That note is payable in quarterly payments of $28,571 plus accruedinterest at 3.8% per quarter, due in full by January 1, 2014 and secured byassets of the Company equal to the remaining balance of the loan.

The Company is considering some short term financingto meet some short-term obligations.  Asthe Company disclosed in its Form 8K filed on February 14, 2006 it is currentlyinvestigating an acquisition of National Educational Music  Company (NEMC).  Should that acquisition occur, the Company anticipatesthat it would be, at least in part, financed through debt.  At this time the Company has not identifiedthe source or possible terms of that debt. There are no other major capital expenditures planned for in theforeseeable future, nor any payments planned for off-balance sheetobligations.  Except as stated above, theCompany’s management is not aware of any known trends or demands, commitments,events, or uncertainties, as they relate to liquidity which could negativelyaffect the Company’s ability to operate and grow as planned.

Futurecontractual obligations of the Company are as follows:

PAYMENTSDUE BY PERIOD
| Contractual      | ** ** | ** ** | ** ** | **Next 12** | ** ** | ** **         | ** ** | **After**        | ** ** |
|------------------|------------|------------|------------|------------------|------------|--------------------|------------|------------------|------------|
| **Obligations**  | ** ** | **Total**  | ** ** | **Months**       | ** ** | **1-3 Years** | ** ** | **4 Years** | ** ** |
| Long Term Debt   |       | $          | 764,089    |             | $          | 86,472             |       | $                | 279,936    |   | $ | 397,681 |   |
| Operating Leases |       | $          | 169,543    |             | $          | 85,543             |       | $                | 72,000     |   | $ | 12,000 |   |

 

10

----

Recent AccountingPronouncements

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-BasedPayment (SFAS No, 123R),” effective for fiscal years beginning after June 15,2005.  SFAS No. 123R requires entities tomeasure and recognize the cost of employee services received in exchange for anaward of equity instruments based on the grant-date fair value of the award(with limited exceptions).  The Companyadopted SFAS No. 123R, effective July 1, 2005. To date, the Company has not granted any equity instruments for employeeservices.

InMay 2005, the FASB issued SFAS No. 154, Accounting Changes and ErrorCorrections, a Replacement of APB No. 20 and FASB Statement No. 3.  SFAS No. 154 changes the accounting andreporting requirements for a change in accounting principle that is either avoluntary change or as required by a newly issued accounting pronouncement whichdoes not include an explicit transition requirement.  In accordance with SFAS No. 154, a change inaccounting principle should be reported through retrospective application toall prior periods.  SFAS No. 154 alsore-defines “restatement” as the revising of previously issued financial statementsto reflect the correction of an error.  Acorrection of an error to previously issued financial statements should bereported as a prior period adjustment by restating the prior periods’ financialstatements.  SFAS No. 154 also providesguidance for determining whether retrospective application is impracticable andfor reporting a change when retrospective application is impracticable, SFASNo. 154 further clarifies the reporting requirement for change indepreciation, amortization, or depletion method for long-lived assets, whichshould be accounted for as a change in accounting estimate in the period ofchange and/or future periods.  SFAS No.154 is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. Early adoption is permitted.  Theadoption of SFAS No. 154 is not expected to have a material impact on theCompany’s financial position or results of operations.

InJuly 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in IncomeTaxes, an interpretation of FASB Statement No. 109.  FIN No. 48 clarifies the accounting andreporting for uncertainties in income tax law.  FIN No. 48 prescribes a comprehensive model for the financial statementrecognition, measurement, presentation, and disclosure of uncertain taxpositions taken or expected to be taken in income tax returns.  FIN No. 48 is effective for fiscal yearsbeginning after December 15, 2006.   TheCompany has not yet determined the impact, if any, that may result from the adoptionof FIN No. 48.

InSeptember 2006, the SEC Staff issued Staff Accounting Bulletin (SAB) No. 108Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements, which addresses how theeffects of prior-year uncorrected misstatements should be considered whenquantifying misstatements in current-year financial statements.  The difference in approaches for quantifyingthe amount of misstatements primarily results from the effects of misstatementsthat were not corrected at the end of the prior year (prior yearmisstatements).  SAB No. 108 will requirecompanies to quantify misstatements using both the balance sheet and incomestatement approaches and to evaluate whether either approach results inquantifying an error that is material in light of relevant quantitative andqualtitative factors.  When the effect ofinitial adoption is determined to be material, SAB No. 108 allows companies torecord that effect as a cumulative effect adjustment to beginning-of-yearretained earnings.   The requirements areeffective for reporting periods ending after November 15, 2006.  The adoption of SAB No. 108 is not expectedto have a material impact on the Company’s financial position and results ofoperations.

InSeptember 2006, the FASB issued SFAS No. 157, Fair Value Measurements whichdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expands disclosures aboutfair value measurements.  Whereapplicable, SFAS No. 157 simplifies and codifies related guidance within GAAPand does not require any new fair value measurements.  SFAS No. 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years. Earlier adoption is encouraged. The adoption of SFAS No. 157 is not expected to have a material impacton the Company’s financial position or results of operations.

**Item 7. Financial Statements.**

11

----

**QRS Music Technologies Inc.**

**Table of Contents**

**June 30, 2006 and 2005**

** **
| **Report of Independent  Registered Public Accounting Firm**     |       |
|------------------------------------------------------------------|------------|
| ** **                                                       |       |
| **Financial Statements**                                         | ** ** |
| ** **                                                       | ** ** |
| Consolidated Balance  Sheets                                     |       |
|                                                             |       |
| Consolidated  Statements of Income                               |       |
|                                                             |       |
| Consolidated  Statements of Changes in Stockholders’ Equity |       |
|                                                             |       |
| Consolidated  Statements of Cash Flows                           |       |
|                                                             |       |
| Notes to the  Consolidated Financial Statements                  |       |

 

12

----

**Report of Independent Registered Public Accounting Firm**

Board of Directors ofQRS Music Technologies Inc.

We have audited the accompanying consolidated balance sheetsof QRS Music Technologies Inc. as of June 30, 2006 and 2005, and the relatedconsolidated statements of income, changes in stockholders’ equity and cashflows for the years then ended.  Theseconsolidated financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

We conducted our audits in accordance with standards of thePublic Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, anaudit of its internal control over financial reporting.   Our audits included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting.  Accordingly,we express no such opinion.   An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.   We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of QRS Music Technologies Inc. as of June 30, 2006 and 2005, and theresults of their operations and their cash flows for the years then ended inconformity with accounting principles generally accepted in the United States.

ALTSCHULER, MELVOIN AND GLASSER LLP

Chicago, IllinoisAugust 18, 2006

13

----

**QRS Music Technologies Inc.**

**Consolidated Balance Sheets**

**June 30, 2006 and 2005**

** **
| ** **                                                                                                                                                                                                                            | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                                                                                                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets                                                                                                                                                                                                                        |       |       |       |       |       |
| Cash                                                                                                                                                                                                                                  |       | $          | 56,466     |       | $          | 603,004 |   |
| Accounts receivable (net of allowance of $475,000  and $214,400 as of June 30, 2006 and 2005, respectively)                                                                                                                           |       | 1,538,860  |       | 906,909    |       |
| Inventories                                                                                                                                                                                                                           |       | 8,272,748  |       | 7,911,851  |       |
| Income taxes refundable                                                                                                                                                                                                               |       | 0          |       | 233,000    |       |
| Deferred income taxes                                                                                                                                                                                                                 |       | 929,000    |       | 620,000    |       |
| Prepaid expenses and other current assets                                                                                                                                                                                             |       | 109,668    |       | 181,570    |       |
|                                                                                                                                                                                                                                  |       | 10906,742  |       | 10,456,334 |       |
|                                                                                                                                                                                                                                  |       |       |       |       |       |
| Property, plant  and equipment                                                                                                                                                                                                        |       | 1,206,569  |       | 1,202,904  |       |
|                                                                                                                                                                                                                                  |       |       |       |       |       |
| Goodwill                                                                                                                                                                                                                              |       | 60,000     |       | 60,000     |       |
|                                                                                                                                                                                                                                  |       |       |       |       |       |
| Other intangible  assets                                                                                                                                                                                                              |       | 844,893    |       | 34,933     |       |
|                                                                                                                                                                                                                                  |       |       |       |       |       |
| Other assets                                                                                                                                                                                                                          |       | 27,549     |       | 28,896     |       |
|                                                                                                                                                                                                                                  |       |       |       |       |       |
|                                                                                                                                                                                                                                  |       | $          | 13,045,753 |       | $          | 11,783,067 |   |
| ** **                                                                                                                                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current  liabilities                                                                                                                                                                                                                  |       |       |       |       |       |
| Current portion of long-term debt                                                                                                                                                                                                     |       | $          | 86,472     |       | $          | 108,834 |   |
| Accounts payable (including $123,296 and $30,737 due  to related parties as of June 30, 2006 and 2005, respectively)                                                                                                                  |       | 1,672,298  |       | 1,462,267  |       |
| Accrued expenses                                                                                                                                                                                                                      |       | 548,753    |       | 536,066    |       |
| Note payable due stockholder                                                                                                                                                                                                          |       | 250,000    |       | 250,000    |       |
| Income taxes payable                                                                                                                                                                                                                  |       | 17,000     |       | 0          |       |
|                                                                                                                                                                                                                                  |       |       |       |       |       |
|                                                                                                                                                                                                                                  |       | 2,574,523  |       | 2,357,167  |       |
|                                                                                                                                                                                                                                  |       |       |       |       |       |
| Long-term debt                                                                                                                                                                                                                        |       | 677,617    |       | 0          |       |
|                                                                                                                                                                                                                                  |       |       |       |       |       |
| Commitments and  contingencies                                                                                                                                                                                                        |       |       |       |       |       |
|                                                                                                                                                                                                                                  |       |       |       |       |       |
| Stockholders’  equity                                                                                                                                                                                                            |       |       |       |       |       |
| Series A preferred stock, voting, $.01 par value,  2,000,000 shares authorized, 534,925 shares issued and outstanding in 2006  and 2005, liquidation value of $2,428,562, and $2,300,180, respectively, as  of June 30, 2006 and 2005 |       | 5,349      |       | 5,349      |       |
| Class A common stock, voting, $.01 par value,  40,000,000 shares authorized, 9,658,956 and 9,458,956 shares issued and  outstanding in 2006 and 2005, respectively                                                                    |       | 96,590     |       | 94,590     |       |
| Additional paid-in capital                                                                                                                                                                                                            |       | 5,358,075  |       | 5,160,075  |       |
| Retained earnings                                                                                                                                                                                                                     |       | 4,333,599  |       | 4,165,886  |       |
|                                                                                                                                                                                                                                  |       | 9,777,613  |       | 9,425,900  |       |
|                                                                                                                                                                                                                                  |       | $          | 13,045,753 |       | $          | 11,783,067 |   |

 

See accompanying notes

14

----

**QRS Music Technologies Inc.**

**Consolidated Statements of Income**

**Years Ended June 30, 2006 and2005**

** **
| ** **                                                                                                             | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Net sales                                                                                                              |       | $          | 18,084,539 |       | $          | 20,247,169 |   |
|                                                                                                                   |       |       |       |       |       |
| Cost of sales  (including $49,500 to related parties in each of 2006 and 2005)                                         |       | 12,223,527 |       | 14,064,682 |       |
|                                                                                                                   |       |       |       |       |       |
| **Gross  profit**                                                                                                      |       | 5,861,012  |       | 6,182,487  |       |
| ** **                                                                                                             |       |       |       |       |       |
| Operating  expenses                                                                                                    |       |       |       |       |       |
| Selling, general and administrative (including  $49,500 and $77,384 to related parties in 2006 and 2005, respectively) |       | 4,691,953  |       | 3,790,904  |       |
| Research and development                                                                                               |       | 768,786    |       | 684,217    |       |
|                                                                                                                   |       | 5,460,739  |       | 4,475,121  |       |
|                                                                                                                   |       |       |       |       |       |
| **Income  from operations**                                                                                            |       | 400,273    |       | 1,707,366  |       |
| ** **                                                                                                             |       |       |       |       |       |
| Other (income)  expense                                                                                                |       |       |       |       |       |
|                                                                                                                   |       |       |       |       |       |
| Interest income                                                                                                        |       | (16,003    | )          | 0          |       |
|                                                                                                                   |       |       |       |       |       |
| Interest expense  (including $15,000 and $20,548 to related parties in 2006 and 2005,  respectively)                   |       | 48,063     |       | 32,552     |       |
|                                                                                                                   |       |       |       |       |       |
|                                                                                                                   |       | 32,060     |       | 32,552     |       |
|                                                                                                                   |       |       |       |       |       |
| **Income  before income taxes**                                                                                        |       | 368,213    |       | 1,674,814  |       |
| ** **                                                                                                             |       |       |       |       |       |
| Income tax  expense (benefit)                                                                                          |       |       |       |       |       |
| Federal                                                                                                                |       | 427,000    |       | 503,000    |       |
| State                                                                                                                  |       | 82,500     |       | 74,000     |       |
| Deferred                                                                                                               |       | (309,000   | )          | 0          |       |
|                                                                                                                   |       | 200,500    |       | 577,000    |       |
| **Net  income**                                                                                                        |       | 167,713    |       | 1,097,814  |       |
| ** **                                                                                                             |       |       |       |       |       |
| Less current  year preferred stock dividends in arrears                                                                |       | (128,382   | )          | (128,382   | )          |
|                                                                                                                   |       |       |       |       |       |
| **Income available  to common stockholders**                                                                           |       | $          | 39,331     |       | $          | 969,432 |   |
| ** **                                                                                                             |       |       |       |       |       |
| **Net  income per common share**                                                                                       |       |       |       |       |       |
| Basic                                                                                                                  |       | $          | .00        |       | $          | 0.10 |   |
| Assuming dilution                                                                                                      |       | $          | .00        |       | $          | 0.10 |   |
|                                                                                                                   |       |       |       |       |       |
| **Shares  used in computing per share amounts**                                                                        |       |       |       |       |       |
| Basic, weighted average                                                                                                |       | 9,532,381  |       | 9,458,956  |       |
| Assuming  dilution, weighted average                                                                                   |       | 9,584,277  |       | 9,570,956  |       |

 

See accompanying notes

15

----

**QRS Music Technologies Inc.**

**Consolidated Statements of Changes in Stockholders’ Equity**

**Years Ended June 30, 2006 and2005**

** **
| ** **                 | ** ** | **Series A Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional**     | ** ** | ** ** | ** ** | **Total**   | ** ** |
|----------------------------|------------|---------------------------------------------|------------|-----------------------|------------|--------------------|------------|------------|------------|-------------|------------|
| ** **                 | ** ** | **Number of**                          | ** ** | ** **            | ** ** | **Number of** | ** ** | ** ** | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Stockholders’** | ** ** |
| ** **                 | ** ** | **Shares**                                  | ** ** | **Amount**            | ** ** | **Shares**         | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Equity** | ** ** |
| ** **                 | ** ** | ** **                                  | ** ** | ** **            | ** ** | ** **         | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance, June 30,  2005    |       | 534,925                                     |       | $                     | 5,349      |               | 9,458,956  |       | $          | 94,590      |       | $ | 5,160.075 |   | $ | 3,068,072 |   | $ | 8,328,086 |   |
|                       |       |                                        |       |                  |       |               |       |       |       |        |       |   |   |   |   |
| Net income                 |       |                                        |       |                  |       |               |       |       |       |        |       | 1,097,814 |   | 1,097,814 |   |
|                       |       |                                        |       |                  |       |               |       |       |       |        |       |   |   |   |   |
| Balance, June 30,  2006    |       | 534,925                                     |       | 5,349                 |       | 9,458,956          |       | 94,590     |       | 5,160,075   |       | 4,165,886 |   | 9,425,900 |   |
|                       |       |                                        |       |                  |       |               |       |       |       |        |       |   |   |   |   |
| Net income                 |       |                                        |       |                  |       |               |       |       |       |        |       | 167,713 |   | 167,713 |   |
|                       |       |                                        |       |                  |       |               |       |       |       |        |       |   |   |   |   |
| Issuance of  common stock  |       |                                        |       |                  |       | 200,000            |       | 2,000      |       | 198,000     |       |   |   | 200,000 |   |
|                       |       |                                        |       |                  |       |               |       |       |       |        |       |   |   |   |   |
| **Balance, June 30, 2006** |       | 534,925                                     |       | $                     | 5,349      |               | 9,658,956  |       | $          | 96,590      |       | $ | 5,358,075 |   | $ | 4,333,599 |   | $ | 9,793,613 |   |

 

See accompanying notes

16

----

**QRS Music Technologies Inc.**

**Consolidated Statements of Cash Flows**

**Years Ended June 30, 2006 and2005**

** **
| ** **                                               | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                               |       |       |       |       |       |
| **Operating  activities**                                |       |       |       |       |       |
| Net income                                               |       | $          | 167,713    |       | $          | 1,097,814 |   |
| Depreciation and amortization                            |       | 238,696    |       | 148,554    |       |
| Loss on disposition of assets                            |       | 3,828      |       | 29,760     |       |
| Provision for bad debts                                  |       | 299,458    |       | (308,499   | )          |
| Deferred tax (benefit)                                   |       | (309,000   | )          | 0          |       |
| Changes in                                               |       |       |       |       |       |
| Accounts receivable                                      |       | (931,409   | )          | (272,102   | )          |
| Inventories                                              |       | (360,897   | )          | (2,259,268 | )          |
| Incomes taxes refundable                                 |       | 233,000    |       | (154,000   | )          |
| Prepaid expenses and other current assets                |       | 71,902     |       | (92,704    | )          |
| Other assets                                             |       | (53,623    | )          | (14,049    | )          |
| Accounts payable                                         |       | 210,031    |       | 945,644    |       |
| Accrued expenses                                         |       | 12,688     |       | 122,073    |       |
| Income taxes payable                                     |       | 17,000     |       | 0          |       |
| **Net cash used in operating activities**                |       | (400,613   | )          | (756,777   | )          |
| ** **                                               |       |       |       |       |       |
| **Investing  activities**                                |       |       |       |       |       |
| Acquisitions of property and equipment                   |       | (145,776   | )          | (330,972   | )          |
| Repayments of advances due from stockholder              |       | 0          |       | 18,000     |       |
| **Net cash used in investing activities**                |       | (145,776   | )          | (312,972   | )          |
| ** **                                               |       |       |       |       |       |
| **Financing  activities**                                |       |       |       |       |       |
| Repayments of long-term debt                             |       | (200,149   | )          | (179,818   | )          |
| Proceeds from note payable – stockholder            |       | 0          |       | 500,000    |       |
| Repayments on note payable – stockholder            |       |       |       | (250,000   | )          |
| Proceeds from exercise of stock options                  |       | 200,000    |       | 0          |       |
| **Net cash provided by (used in) financing  activities** |       | (149       | )          | 70,182     |       |
| ** **                                               |       |       |       |       |       |
| **Decrease in cash**                                     |       | (546,538   | )          | (999,567   | )          |
| ** **                                               |       |       |       |       |       |
| **Cash**                                                 |       |       |       |       |       |
| Beginning of year                                        |       | 603,004    |       | 1,602,571  |       |
|                                                     |       |       |       |       |       |
| **End of year**                                          |       | $          | 56,466     |       | $          | 603,004 |   |
| ** **                                               |       |       |       |       |       |
| **Supplemental  disclosures of cash flow information**   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest paid                                            |       | $          | 40,804     |       | $          | 32,552 |   |
| Income taxes  paid                                       |       | $          | 259,500    |       | $          | 731,000 |   |

**Supplemental schedule ofnoncash investing and financing activities**

Duringthe year ended June 30, 2006, the Company acquired software and intellectualassets from an unrelated party for $855,403 evidenced by a promissory note.

See accompanying notes

17

----

**QRSMusic Technologies Inc.**

**Notesto the Consolidated Financial Statements**

**Years Ended June 30, 2006 and 2005**

**Note 1              Natureof Operations and Significant Accounting Policies**

**Nature of Operations**—QRS Music Technologies, Inc. (the “Company”)is a manufacturer and distributor of pianos, pianomation units, compact discs,and music rolls for use in player pianos. The Company sells its products to dealers and end-users, predominantlyin the United States.

ChurchServices, Inc., a wholly owned subsidiary, was established during the yearended June 30, 2003 to acquire certain assets of Gulbransen, Inc.   During fiscal year 2006 that subsidiary wasmerged into the Company.

TheCompany has divisions in Buffalo, NY; Seneca, PA; Naples, FL; and Las Vegas,NV, and operates a sales office in Sydney, Australia, and a procurement officein Hong Kong.

**Principles of Consolidation**—The consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiaries, QRSMusic Technologies, Australia and QRS Music Technologies HK Limited.  All significant intercompany transactions andbalances have been eliminated in consolidation.

**Use of Estimates**—The preparation of financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes.  Actual resultscould differ from those estimates.

**Revenue Recognition**—The Company recognizes sales when productsare shipped.  The Company may, at times,arrange financing of customers’ purchases through commercial financingcompanies.  These arrangements generallyrequire the Company to repurchase pianos financed and repossessed by thecommercial financing companies.  Thepurchase price is typically the total unpaid balance owed to the financecompanies plus reasonable expenses.

Pianospurchased from the finance companies are recorded into inventory on the samebasis as the Company records purchases of pianos from independent pianosuppliers.

**Segments**—In June 1997, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” which established annual reporting standards for an enterprise’soperating segments and related disclosures about its products, services,geographic areas and major customers. The Company’s operations are within one reportable segment operating inthe United States.

**Concentration**- A majority of theCompany’s line of pianos are imported from the Peoples Republic of China.  The Import and Export Company of DongbeiPianos (Group) Co. supplies the largest percentage of the imported pianos.   The Company also believes there are othersources of imported pianos available at comparable prices if the current supplywere interrupted.

**Cash**—At June 30, 2006 and 2005, the Company had deposits at threeand four commercial banks, respectively. Deposits are insured by the Federal Deposit Insurance Corporation (FDIC)up to $100,000.  Deposits may from timeto time exceed federally insured limits.

**Accounts Receivable**—The Company grants trade credit todomestic and international customers. Receivables are valued at management’s estimate of the amount that willultimately be collected.  The allowancefor doubtful accounts is based on the specific identification of uncollectibleaccounts and the Company’s historical collection experience.

**Inventories**—Inventories are valued at the lower ofcost or market under the first-in, first-out (FIFO) method.

18

----

**Property, Plant and Equipment**—Property, plant and equipment are valuedat cost and depreciated using the straight-line method over the estimateduseful lives of the assets.  Maintenanceand repairs are charged to income as incurred. Expenditures that materially extend the useful lives of assets arecapitalized.

**Goodwill and Other Intangible Assets**—The Company adopted SFAS 141, “BusinessCombinations,” and SFAS 142, “Goodwill and Other Intangible Assets,” effectiveJuly 1, 2002.  Under thesestandards, all acquisitions subsequent to June 30, 2001 must be accounted forunder the purchase method of accounting and purchased goodwill is no longersubject to amortization.  Rather, it issubject to periodic impairment tests based on its fair value.  Goodwill represents the excess cost over thefair value of tangible net assets of the Company and is recorded on theconsolidated balance sheet in other assets. The Company reviews the carrying value of the goodwill annually and atother times when facts or circumstances indicate that the recorded amount ofgoodwill may be impaired.  If this reviewindicates that goodwill is not recoverable, the Company’s carrying value of thegoodwill is reduced by the estimated increases in impairment.  As of June 30, 2006 and 2005, respectively,the Company has $60,000 of goodwill on the consolidated balance sheets and noimpairment has been recorded.  Otherintangible assets consist of trademarks, patent and copyright, which areamortized over their estimated useful lives.

**Advertising**—The Company expenses advertising as the costs areincurred.  Advertising expense wasapproximately $110,000 and $119,000 for the years ended June 30, 2006 and 2005,respectively.

**Research and Development**—The Company expenses research anddevelopment as the costs are incurred.

**Deferred Income Taxes**—Deferred income tax assets and liabilitiesare recognized for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns.  Under this method, deferred income tax assetsand liabilities are determined based on the financial statement and tax basisof assets and liabilities (Note 9).

**Earnings Per Share**—The Company computes earnings per share (“EPS”) underStatement of Financial Accounting Standard (SFAS) No. 128, “Earnings per Share.”  Basic net earnings less preferred dividendsare divided by the weighted average number of common shares outstanding duringthe year to calculate basic net earnings per common share.  Diluted net earnings per common share arecalculated to give effect to the potential dilution that could occur ifconvertible preferred stock, warrants, options or other contracts to issuecommon stock were exercised and resulted in the issuance of additional commonshares.

Thecomputation of basic and diluted EPS was as follows:
|                                                 | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|
| Net income                                      |       | $         | 167,713    |      | $          | 1,097,814 |   |
| Preferred stock dividends                       |       | (128,382  | )          | (128,382  | )          |
| Income available to common stockholders         |       | $         | 39,331     |      | $          | 969,432 |   |
|                                            |       |      |       |      |       |
| Denominator                                     |       |      |       |      |       |
| Basic weighted average shares outstanding       |       | 9,532,381 |       | 9,458,956 |       |
| Weighted average shares outstanding for options |       | 51,896    |       | 112,000   |       |
| Diluted weighted average shares outstanding     |       | 9,584,277 |       | 9,570,956 |       |
|                                            |       |      |       |      |       |
| Basic net income per share                      |       | $         | 0.00       |      | $          | 0.10 |   |
| Diluted net income per share                    |       | $         | 0.00       |      | $          | 0.10 |   |

 

19

----

In 2006 and 2005, 534,925 weighted average commonshares from the conversion of convertible preferred stock were not included inthe computation because they were antidilutive.

**Fair Value of Financial Instruments**—The carrying amounts offinancial instruments including cash, accounts receivable, accounts payable,and short-term debt approximate their fair values because of the relativelyshort maturity of these instruments.  Thecarrying value of long-term debt, including the current portion, approximated**** fair value basedupon market prices for the same or similar instruments.

**Recent Accounting Pronouncements—**In December2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment (SFASNo, 123R),” effective for fiscal years beginning after June 15, 2005.  SFAS No. 123R requires entities to measureand recognize the cost of employee services received in exchange for an awardof equity instruments based on the grant-date fair value of the award (withlimited exceptions).  The Company adoptedSFAS No. 123R, effective July 1, 2005. To date, the Company has not granted any equity instruments for employeeservices.

In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections, a Replacement of APB No. 20 and FASBStatement No. 3.  SFAS No. 154 changesthe accounting and reporting requirements for a change in accounting principlethat is either a voluntary change or as required by a newly issued accountingpronouncement which does not include an explicit transition requirement.  In accordance with SFAS No. 154, a change inaccounting principle should be reported through retrospective application toall prior periods.  SFAS No. 154 alsore-defines “restatement” as the revising of previously issued financialstatements to reflect the correction of an error.  A correction of an error to previously issuedfinancial statements should be reported as a prior period adjustment byrestating the prior periods’ financial statements.  SFAS No. 154 also provides guidance fordetermining whether retrospective application is impracticable and forreporting a change when retrospective application is impracticable. SFASNo. 154 further clarifies the reporting requirement for a change indepreciation, amortization, or depletion method for long-lived assets, whichshould be accounted for as a change in accounting estimate in the period ofchange and/or future periods.  SFAS No.154 is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. Early adoption is permitted.  Theadoption of SFAS No. 154 is not expected to have a material impact on theCompany’s financial position or results of operations.

In July 2006, the FASB issued FIN No. 48, Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement No.109.  FIN No. 48 clarifies the accountingand reporting for uncertainties in income tax law.   FIN No. 48 prescribes a comprehensive modelfor the financial statement recognition, measurement, presentation, anddisclosure of uncertain tax positions taken or expected to be taken in incometax returns.  FIN No. 48 is effective forfiscal years beginning after December 15, 2006.   The Company has not yet determined theimpact, if any, that may result from the adoption of FIN No. 48.

In September 2006, the SEC Staff issued StaffAccounting Bulletin (SAB) No. 108 Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements, which addresses how the effects of prior-year uncorrectedmisstatements should be considered when quantifying misstatements incurrent-year financial statements.  Thedifference in approaches for quantifying the amount of misstatements primarilyresults from the effects of misstatements that were not corrected at the end ofthe prior year (prior year misstatements). SAB No. 108 will require companies to quantify misstatements using boththe balance sheet and income statement approaches and to evaluate whethereither approach results in quantifying an error that is material in light ofrelevant quantitative and qualtitative factors. When the effect of initial adoption is determined to be material, SAB No.108 allows companies to record that effect as a cumulative effect adjustment tobeginning-of-year retained earnings.  The requirements are effective for reporting periods ending afterNovember 15, 2006.  The adoption of SABNo. 108 is not expected to have a material impact on the Company’s financialposition and results of operations.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements which defines fair value, establishes 

20

----

a framework for measuring fair value in generallyaccepted accounting principles (GAAP), and expands disclosures about fair valuemeasurements.  Where applicable, SFAS No.157 simplifies and codifies related guidance within GAAP and does not requireany new fair value measurements.  SFASNo. 157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007, and interim periods within those fiscal years.  Earlier adoption is encouraged.  The adoption of SFAS No. 157 is not expectedto have a material impact on the Company’s financial position or results ofoperations.

**Note 2              Inventories**

Inventoriesat June 30, 2006 and 2005 consist of:

|                   | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-------------------|------------|-----------|------------|-----------|------------|
| Raw materials     |       | $         | 5,138,868  |      | $          | 5,746,815 |   |
| Finished goods    |       | 3,904,261 |       | 2,936,315 |       |
|              |       | 9,043,129 |       | 8,683,130 |       |
| Valuation reserve |       | (770,381  | )          | (771,279  | )          |
|              |       | $         | 8,272,748  |      | $          | 7,911,851 |   |

**Note 3              Property,Plant and Equipment**

Property,plant and equipment at June 30, 2006 and 2005 consist of:

|                                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Lives**                                        | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                                       | ** ** |
| Land and buildings                        |       | $          | 878,303    |       | $          | 878,303                                          |       | 10-39 years |   |
| Leasehold improvements                    |       | 660,450    |       | 613,316    |       | 10-20 years                                      |       |
| Machinery and equipment                   |       | 410,795    |       | 394,402    |       | 5-7    years                 |       |
| Office equipment                          |       | 595,364    |       | 539,762    |       | 5-7    years                 |       |
| Vehicles                                  |       | 52,261     |       | 52,261     |       | 5       years |       |
|                                      |       | 2,597,173  |       | 2,478,044  |       |                                             |       |
| Accumulated depreciation and amortization |       | (1,390,604 | )          | (1,275,140 | )          |                                             |       |
|                                      |       |       |       |       |       |                                             |       |
| Net book value                            |       | $          | 1,206,569  |       | $          | 1,202,904                                        |       |   |   |

Depreciationand amortization expense amounted to $138,283 and $148,554 for the years endedJune 30, 2006 and 2005, respectively.

**Note 4              OtherIntangible Assets**

Otherintangible assets at June 30, 2006 and 2005 consist of amortized identifiableintangible assets with finite lives as follows:

 
|                                    | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Lives**  | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intellectual assets and technology |       | $          | 855,403    |       | $          | 0          |       | 15 years |   |
| Trademarks                         |       | 64,903     |       | 34,933     |       | 10 years   |       |
| Patent                             |       | 25,000     |       | 0          |       | 6 years    |       |
|                               |       | 945,306    |       | 34,933     |       |       |       |
| Accumulated amortization           |       | (100,413   | )          | 0          |       |       |       |
|                               |       | $          | 844,893    |       | $          | 34,933     |       |   |   |

 

21

----

**Total amortization expense for the finite-lived intangible assets was$100,413 and $0, respectively, for the years ended June 30, 2006 and 2005.**

**The annualamortization expense expected for future years is expected to be:**
| 2007       |   | $       | 100,493 |   |
|------------|--------|---------|---------|--------|
| 2008       |   | 91,805  |    |
| 2009       |   | 85,756  |    |
| 2010       |   | 80,257  |    |
| 2011       |   | 75,239  |    |
| Thereafter |   | 411,343 |    |
|       |   | $       | 844,893 |   |

**Note 5              Long-TermDebt**

Long-termdebt at June 30, 2006 and 2005 consists of:

|                                                                                                                                                                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Note payable - lending institution - payable in  monthly installments of $13,751 plus accrued interest at the prime rate (paid  in full during fiscal 2006)                                                   |       | $        |       |     | (108,834   | ) |
|                                                                                                                                                                                                          |       |     |       |     |       |
| Note payable –payable in quarterly installments of  $28,571 including interest at 3.80% per quarter, due January 1, 2014, secured  by assets of the Company equal to the outstanding balance of the loan |       | $        | 764,089    |     | $          | 0 |   |
|                                                                                                                                                                                                          |       |     |       |     |       |
| Current portion                                                                                                                                                                                               |       | (86,472  | )          | (108,834 | )          |
|                                                                                                                                                                                                          |       |     |       |     |       |
|                                                                                                                                                                                                          |       | $        | 677,617    |     | $          | 0 |   |

Maturitiesof long term debt are:
| 2007       |   | $       | 86,472  |   |
|------------|--------|---------|---------|--------|
| 2008       |   | 89,806  |    |
| 2009       |   | 93,267  |    |
| 2010       |   | 96,862  |    |
| 2011       |   | 100,596 |    |
| Thereafter |   | 297,086 |    |
|       |   | $       | 764,089 |   |

**Note 6              Related-Party Transactions**

Duringthe year ended June 30, 2005 the Company was advanced $500,000 from its majorstockholder.   Such advance was evidencedby an unsecured demand note bearing interest at 6% per annum.   During the year ended June 30, 2005 apayment of $250,000 was made, leaving a balance due of $250,000.   Interest in the amount of $15,000 and$20,548 was incurred for the year ended June 30, 2006 and 2005, respectively.

TheCompany leases property from its major stockholder under a 20-year operatinglease which expires December 2012. Annual lease payments are $24,000. On April 1, 2000, the Company entered into an additional rentalagreement with the same stockholder.  Thelease is on a month-to-month basis for $6,250 per month.  Rent expense incurred related to theseagreements amounted to $99,000 for each of the years ended June 30, 2006 and2005.

Beginningin 2004, in New South Wales, Australia, the Company began utilizing space in abuilding owned by Alltech International Holdings, Inc.   At the time the Company’s chairman andmajority stockholder was also chairman and majority stockholder of AlltechInternational Holdings, Inc.   At thetime one of the Company’s directors was also an officer of AlltechInternational Holdings, Inc.   TheCompany used the space to inventory pianos and pianomation units that will besold in the Australian market.   AlltechInternational Holdings, Inc. also provided some managerial and accountingservices for transactions in Australia in exchange for a commission on the 

22

----

productsold.  Alltech International Holdings,Inc was sold during fiscal 2005 and currently has no common officers, directorsor related parties to the Company.  During the fourth quarter of 2005, the Company vacated the space it waspreviously utilizing, and no longer utilizes any managerial or accountingservices from Alltech International Holdings, Inc.  Expenses relating to this arrangementamounted to $27,884 in 2005.

**Note 7              Stockholders’Equity**

Eachshare of the Series A Preferred Stock is convertible into one share of commonstock.  Cumulative dividends (whendeclared) on the Series A Preferred Stock will be paid at a rate of 6 percentper annum of the original liquidation value on June 30 and December 31.  The preferred liquidation amount is $4 pershare.  The holders of the preferredshares are entitled to one vote per share with respect to all matters submittedto a vote of the Company’s stockholders. Dividends in arrears on the Series A Preferred Stock amounted to$288,862 and $160,480 at June 30, 2006 and 2005, respectively.

Duringthe year ended June 30, 2002, in exchange for consulting services, the Companygranted an option to purchase 200,000 shares of stock at $1 per shareexercisable until February 15, 2007. These options were fully exercised in fiscal 2006.

**Note 8              EmployeeBenefit Plan**

TheCompany maintains a profit sharing plan for the benefit of all employees thatmeet certain eligibility requirements.  Company contributions are discretionary and amounted to $246,190 and$215,570 for the years ending June 30, 2006 and 2005, respectively.

**Note 9              IncomeTaxes**

Thecomponents of the net deferred tax assets and liabilities as of June 30, 2006and 2005 are as follows:
|                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                   |       |     |       |     |       |
| Deferred tax assets (liabilities)                                      |       |     |       |     |       |
| Allowance for doubtful accounts                                        |       | $        | 310,000    |     | $          | 164,000 |   |
| Variation in inventories between tax and financial  reporting purposes |       | 362,000  |       | 356,000  |       |
| Other accruals                                                         |       | 257,000  |       | 100,000  |       |
|                                                                   |       |     |       |     |       |
| Net deferred tax asset                                                 |       | $        | 929,000    |     | $          | 620,000 |   |

 

A reconciliation of the provision for income taxes and theamount computed by applying the federal statutory rate to income before incometax expense is as follows:
|                                                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                  |       |     |       |     |       |
| Computed income tax expense at federal statutory  rate                |       | $        | 125,000    |     | $          | 569,000 |   |
| Income tax expense at state rates (net of federal  income tax effect) |       | 55,000   |       | 49,000   |       |
| Other                                                                 |       | 20,500   |       | (41,000  | )          |
|                                                                  |       | $        | 200,500    |     | $          | 577,000 |   |

 

23

----

**Note 10            Commitments and Contingencies**

TheCompany is contingently liable under its third party financing agreements,arranged for its customers, in the amounts of $2,385,000 and $2,224,000 at June30, 2006 and 2005, respectively.  Thetotal pianos repurchased by the Company under these commitments amounted to $0and $58,935 for the years ended June 30, 2006 and 2005, respectively.  A reserve for returns of $71,000 and $91,000at June 30, 2006 and 2005, respectively, is included in accrued expenses in theaccompanying balance sheets.

TheCompany is a party to various other claims, legal actions and complaints arisingin the ordinary course of business.  Inthe opinion of management, all such matters are adequately covered byinsurance, or if not so covered, are without merit or are of such kind orinvolve such amounts that unfavorable disposition would not have a materialeffect on the Company’s financial position, results of operations or liquidity.

TheCompany has entered into various royalty and licensing agreements with thirdparties.  Royalty and licensing expensefor the years ended June 30, 2006 and 2005, respectively, amounted toapproximately $150,000 and $413,000.

On August 20, 2003 a default judgment in the amount ofapproximately $478,000 was entered against the Company in the United StatesBankruptcy Court, Southern District of Ohio, Western Division. The defaultjudgment was granted to Dwight’s Piano Co (formerly known as Baldwin Piano& Organ Company and subsidiaries, a former customer of the Company) and wasbased upon claims that preferential transfers were made to the Company duringthe 90 day period prior to Baldwin’s bankruptcy filing on May 31, 2001. Becausea judgment was entered against the Company by the Court, the entire amount ofthe judgment was accrued as of June 30, 2003. The Company filed a motionseeking vacation of the judgment and raised several defenses available to itunder the Bankruptcy Code.  On January 3,2005 the United States Bankruptcy Court, Southern District of Ohio, WesternDivision, approved a negotiated settlement agreement between the Company andDwight’s Piano Co.  The negotiatedsettlement agreement reduced the Company’s preference liability to$61,395.  Upon the consummation of thesettlement, the United States Bankruptcy Court immediately entered anOrder vacating the default judgment entered, and subsequently dismissed thelitigation initiated by Dwight’s Piano Co. against the Company, withprejudice.  As a result of the negotiatedsettlement, for the year ended June 30, 2005 the Company recognized income of$416,206, reflected as a reduction of selling, general and administrativeexpenses.

**The Company hasentered into a two year lease for office and warehouse space in Hong Kong, atwo year lease for showroom and warehouse space in Balmain, Australia and amonth to lease month lease for warehouse space in Las Vegas, Nevada.     All leases have the option to renew at theend of the commitment period.  Total rentexpense and related costs for all operating leases was $213,000 and $214,000(including $99,000 each year with related parties — Note 6) for the years endedJune 30, 2006 and 2005, respectively.**

**Total minimumlease payments under these operating leases are as follows:**
|       | ** ** | **Related Parties** | ** ** | **Non-related Parties** | ** ** | **Total** | ** ** |
|-------|------------|--------------------------|------------|------------------------------|------------|-----------|------------|
| 2007  |       | $                        | 24,000     |                         | $          | 62,000    |       | $ | 86,000 |   |
| 2008  |       | 24,000                   |       |                         |       | 24,000    |       |
| 2009  |       | 24,000                   |       |                         |       | 24,000    |       |
| 2010  |       | 24,000                   |       |                         |       | 24,000    |       |
| 2011  |       | 12,000                   |       |                         |       | 12,000    |       |
| Total |       | $                        | 108,000    |                         | $          | 62,000    |       | $ | 170,000 |   |

** **

24

----

**Item 8. Changes In and Disagreements with Accountants onAccounting and Financial Disclosure.**

None

**Item 8A. Controls and Procedures.**

Evaluation of Disclosure Controls and Procedures and Changes inInternal Control over Financial Reporting

The Company iscurrently in the process of changing their internal communication and computersystem in order to continue to address ongoing changing regulations and past deficiencies.  With the deployment of the new communicationand computer system new procedures and process flows are also being developedand refined to further insure the accuracy and timeless of all reporting.

In addition tointernal improvements, the company took steps to increase the size and makeupof their Board of Directors.   Suchchanges took effect in fiscal 2006.  TheCompany added three new independent board members, two of whom serve on theAudit Committee.

During the yearend audit process for fiscal year 2006, the Company’s independent auditorsnoted a reportable condition involving our internal controls and operations,primarily relating to the year end close procedure.

The Company hasaddressed this issue and is committed to improving their year end closeprocedure.  They are in the process ofreorganizing the responsibilities in the accounting department to ensure timelyrecording of all entries.

The Company is committed to ongoing periodic reviewsof its controls and their effectiveness. Controls have improved and managementhas no reason to believe that the financial statements included in this reportare not fairly stated in all material respects. Management believes its practices and procedures, although not as matureor as formal as management intends them to be in the future, are adequate underthe circumstances, and that there are no material inaccuracies or omissions inthis Form.

**Item 8B.Other Information**

None

**PART III**

**Item 9. Directors, Executive Officers, Promoters and ControlPersons; Compliance With Section 16(a) of the Exchange Act.**

DIRECTORSAND OFFICERS.  The Directors andExecutive Officers of the Company and the positions held by each of them are asfollows.  All directors serve until theCompany’s next annual meeting of shareholders.
| ** **          | ** ** | ** ** | ** ** | **Serving as**    | ** ** | ** **                                                |
|---------------------|------------|------------|------------|-------------------|------------|-----------------------------------------------------------|
| ** **          | ** ** | ** ** | ** ** | **Director of**   | ** ** | **Position Held  With**                                   |
| **Name**            | ** ** | **Age**    | ** ** | **Company Since** | ** ** | **the Company**                                           |
|                |       |       |       |              |       |                                                      |
| Richard A. Dolan    |       | 70         |       | 1990              |       | Director,  Chairman                                       |
|                |       |       |       |              |       |                                                      |
| Ann A. Jones        |       | 41         |       | 1996              |       | Secretary,  Treasurer, Chief  Financial Officer, Director |
|                |       |       |       |              |       |                                                      |
| Geoffry Matlin      |       | 55         |       | 1998              |       | Director                                                  |
|                |       |       |       |              |       |                                                      |
| Thomas A. Dolan     |       | 47         |       |              |       | President, Chief  Executive Officer                       |
|                |       |       |       |              |       |                                                      |
| Richard Kurtz       |       | 62         |       | 2006              |       | Director                                                  |
|                |       |       |       |              |       |                                                      |
| Thomas O’Grady |       | 50         |       | 2006              |       | Director                                                  |
|                |       |       |       |              |       |                                                      |
| Frank Seta          |       | 50         |       | 2006              |       | Director                                                  |

 

25

----

BIOGRAPHICAL INFORMATION.

Richard A. Dolan

Formore than the past seven years, Mr. Dolan has been majority shareholder, and adirector of Company. He also served as President and Chief Executive officerthrough June, 2002.  He was the founderof and had been the principal owner and Chairman of Alltech InternationalHoldings since 1971, prior to selling in 2005. Prior to 1971 he was Research Director of Simoniz in Europe. Mr. Dolanhas a Bachelor of Science in chemistry from DePaul University, a Master ofScience degree in chemistry from Roosevelt University.

Ann A. Jones

Ms. Jones has been Secretary,Treasurer, Chief Financial Officer and Director of Company since 1996. FromJune 1988 to June 1996 Ms. Jones has served in various capacities with Companyincluding customer service and manager..

Geoffry Matlin

Geoffry Matlin has been a director of the Companysince September 1998. From November 1995 until December 1997 Mr. Matlin was thecorporate controller of Alltech Associates, Inc., a manufacturer anddistributor of chromatography equipment.  From January 1998 until August2004 Mr. Matlin held the positions of Chief Financial Officer, Secretary andTreasurer of Alltech Associates, Inc.  From August 2004 until the presentMr. Matlin is the financial analyst for Alltech Associates, Inc. a wholly ownedsubsidiary of WR Grace.

Thomas A. Dolan

Thomas A. Dolan, son of ChairmanRichard A. Dolan, has been the President and Chief Executive Officer of the theCompany since July 2002.  Employed by the Company since 1994, Mr. Dolan has served in variouscapacities including regional and national sales and manager of research anddevelopment.   Mr. Dolan has a bachelor’sdegree in Industrial Administration and Economics from Iowa State University,and a bachelors degree in Electrical Engineering from the University ofArizona  He has worked for Motorola, Inc.in its component products division and Johnson Controls as a Sales Engineer.

Richard Kurtz

From 1987 to 2004, Mr, Richard R. Kurtz served asDirector, President and Chief Operating Officer of Alltech InternationalHoldings, Inc.  From the acquisition ofAlltech International Holdings by W.R. Grace & Co to his retirement inJanuary 2005, Mr. Kurtz served as Chief Operating Office of the Alltech Divisionof the Seperations-Life Sciences Unit of W.R. Grace & Co.  He served in the United States Air Force,where he also completed two medical technology technical schools.   Mr. Kurtz attended Lycoming College, Temple University and the PennsylvaniaState University before joining Applied Science Laboratories in 1968.  Mr. Kurtz was the Operations and PlantManager of that firm at the time it was acquired by Alltech Associates, Inc in1982.

Thomas O’Grady

Since June 2003, Mr. Thomas O’Grady has been ExecutiveVice President of Commercial Banking at the Mt. Prospect National Bank in MountProspect, IL.   Prior to June 2003, Mr. O’Gradywas a First Vice President, Division Head at Bank One, NA.  He has in total 26 years of commercialbanking experience.   Mr. O’Grady has aBachelor of Science degree in 

26

----

business administration with an emphasis in economicsfrom St. John’s University.   Mr. O’Gradyserves on the Company’s Audit Committee.

Frank Seta

Mr. Frank Seta is currently President of Seta Music inCincinnati, Ohio.   Prior to opening hisstore, he was the Chief Marketing Officer for the Gibson Musical InstrumentCompany and was employed for over 20 years with the Baldwin Piano Company invarious senior management positions, including Vice President of Acoustic andDigital Pianos prior to his resignation in May, 2001.   Mr. Seta has also served on numerousindustry committees.   Mr. Seta serves onthe Company’s Audit Committee.

SECTION16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based solely upon reviewof Forms 3 and 4 and amendments thereto furnished to the Company under Rule16a-3(e) during its most recent fiscal year and written representationsreceived from reporting persons, no person who was a director, officer or 10%beneficial owner failed to timely file reports required by Section 16(a) of theExchange Act.

The Company has not yet adopted a code of ethics. Itis in the process of drafting an appropriate code of ethics. The Companyexpects to adopt a code of ethics within in fiscal 2007.

Currently the Company maintains an audit committee thatis comprised of its two independent board members, Frank Seta and Thomas O’Grady,and Geoff Matlin.    Mr. Matlin isconsidered a financial expert by virtue of both his education and experience.

**Item 10. Executive Compensation.**

Thefollowing table sets forth information concerning compensation for services inall capacities by the Company and its subsidiaries for fiscal years ended June30, 2004, 2005 and 2006 of those persons who were, at June 30, 2006, the ChiefExecutive Officer of the Company and other highly compensated executiveofficers and employees of Company.

SUMMARY COMPENSATION TABLE

 
| ** **                    | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **    | ** ** | ** **         | ** ** | **Long Term Compensation** | ** ** |
|-------------------------------|------------|------------|------------|------------------------------|------------|---------------|------------|--------------------|------------|--------------------------------------|------------|
| ** **                    | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **    | ** ** | ** **         | ** ** | **Awards**                           | ** ** | ** ** | ** ** | **Payouts** | ** ** | ** ** | ** ** |
| **Name and**             | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **    | ** ** | ** **         | ** ** | **Securities**                       | ** ** | ** ** | ** ** | **Underlying** | ** ** | **All** | ** ** |
| **Principal**                 | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Resricted** | ** ** | **Options /** | ** ** | **LTIP**                             | ** ** | **Other** | ** ** |
| **Position**                  | ** ** | **Yr**     | ** ** | **Salary**                   | ** ** | **Bonus**     | ** ** | **Other**          | ** ** | **Stock Awards**                | ** ** | **SARs** | ** ** | **Payouts** | ** ** | **Compensation** | ** ** |
| ** **                    | ** ** | ** ** | ** ** | **$**                        | ** ** | **$**         | ** ** | **$**              | ** ** | **$**                                | ** ** | **#** | ** ** | **$** | ** ** | **$** | ** ** |
| Richard Dolan,  Chairman      |       | 2004       |       | —                       |       | —        |       | —             |       | —                               |       | — |   | — |   | — |   |
|                          |       | 2005       |       | —                       |       | —        |       | —             |       | —                               |       | — |   | — |   | — |   |
|                          |       | 2006       |       | —                       |       | —        |       | —             |       | —                               |       | — |   | — |   | — |   |
| Ann Jones, CFO                |       | 2004       |       | 87,000                       |       | 69,000        |       | —             |       | —                               |       | — |   | — |   | — |   |
|                          |       | 2005       |       | 87,000                       |       | 69,000        |       | —             |       | —                               |       | — |   | — |   | — |   |
|                          |       | 2006       |       | 87,000                       |       | 42,500        |       | —             |       | —                               |       | — |   | — |   | — |   |
| Thomas Dolan,  President, CEO |       | 2004       |       | 85,000                       |       | 85,000        |       | —             |       | —                               |       | — |   | — |   | — |   |
|                          |       | 2005       |       | 87,000                       |       | 85,000        |       | —             |       | —                               |       | — |   | — |   | — |   |
|                          |       | 2006       |       | 85,000                       |       | 42,500        |       | —             |       | —                               |       | — |   | — |   | — |   |

 

27

----

The Company compensates outsidedirectors for attendance at board meetings. Such director compensation iscurrently $2,000 per meeting.

**Item 11. Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters.**

PRINCIPAL SHAREHOLDERS.

Thefollowing table sets forth as of June 30, 2006, the number of Company’s votingsecurities beneficially owned by persons who own five percent or more ofCompany’s voting stock, by each director, and by all officers and directors asa group.  The table presented belowincludes shares issued and outstanding, and warrants to purchase shares andoptions exercisable within 60 days.

 

| Title and Class              | ** ** | **Name and Address  Of Beneficial Owner**            | ** ** | **Type of  Ownership**            | ** ** | **Number of  Shares Owned** | ** ** | **Percent of  Class** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| Common Stock $.01 par  value |       | Richard Dolan   2011 Seward Ave.   Naples, FL 34109  |       | Record and Beneficial             |       | 5,819,274                   | *          | 58                    | %          |
| Common Stock $.01 par  value |       | Ann Jones   2011 Seward Ave.   Naples, FL 34109      |       | Record and Beneficial             |       | 200,063                     | **         | 2                     | %          |
| Common Stock $.01 par  value |       | Geoffry Matlin   2011 Seward Ave.   Naples, FL 34109 |       | Record and Beneficial             |       | 24,250                      | **         |                  | ***        |
| Common Stock $.01 par  value |       | Thomas Dolan   2011 Seward Ave.   Naples, FL 34109   |       | Record and Beneficial             |       | 359,227                     | ****       | 4                     | %          |
| Common Stock $.01 par  value |       | All Officers and Directors As a Group                |       | Record and Beneficial (4 persons) |       | 6,411,814                   |       | 62                    | %          |

 

----

***Includes442,190 shares owned by family members of which Mr. Richard Dolan disclaimsownership.   It also includes 534,925 sharesof Series A preferred stock which is convertible into shares of common stock.**

**** The directorsand officers have sole voting and investment power as the shares beneficiallyowned by them.**

***** Less thanone percent.**

****  Includes143,900 shares owned by family members of Mr. Thomas Dolan .

**Item12. Certain Relationships and Related Transactions.**

The Company leasesfrom Richard A. Dolan 4,000 square feet of warehouse and office space locatedin Naples, Florida.  Richard A. Dolan isthe Company’s, controlling shareholder and a Member of Company’s Board ofDirectors.  The lease was executedJanuary 1, 1993 and has a term of 20 years. Rental is $24,000 per year.

The Company alsoleases from Mr. Dolan 6,000 square feet of showroom space in Las Vegas, Nevada.  That lease is month-to-month with rentalpayments of $75,000 per year.

The Company has no and is notcurrently considering adopting any policy regarding transactions withaffiliates.

In fiscal 2005 in New South Wales,Australia, the Company utilized spaces in a building owned by AlltechInternational Holdings, Inc.   TheCompany’s chairman and majority shareholder was also chairman and majorityshareholder of Alltech International Holdings.  One of the Company’s directors, Geoff Matlin was also an officer ofAlltech International Holdings. During fiscal 2006 the Alltech InternationalHoldings, Inc. was sold to a non-affilitated party, and the Company

28

----

moved its offices from the Alltech International Holdings,Inc. building.

OnSeptember 15, 2004, the Company borrowed $500,000 from Richard Dolan the  Company’s Chairman and majority shareholder. The Company issued to Mr. Dolan ademand note which bears interest at  6%per annum (accrued quarterly).  On April15, 2005 the Company repaid principal of $250,000.  As of June 30, 2006 there was no accruedinterest due Mr. Dolan for this note.

**Item 13. Exhibits.**
| a.                                |   | Exhibit Index                                                                |                      |   |   |
|-----------------------------------|--------|------------------------------------------------------------------------------|---------------------------|--------|--------|
|                              |   |                                                                         |                      |   |   |
| Exhibit Number  Page  # |   |                                                                         |                      |
|                              |   |                                                                         |                      |
| 2                                 |   | (i)                                                                          | Articles of Incorporation |   | *      |
|                              |   | (ii)                                                                         | Bylaws                    |   | *      |
|                              |   |                                                                         |                      |   |
| 6                                 |   | Material Contracts                                                           |                      |   |
|                              |   |                                                                         |                      |   |
|                              |   | (i)  Lease – Naples, Florida                                  |                      | *      |
|                              |   | (ii) Monthly Rental Agreement- Las Vegas                                     |                      | *      |
|                              |   | (iii) Demand note issued to Richard Dolan                                    |                      |   |
|                              |   |                                                                         |                      |   |   |
| 31.1                              |   | Certifications (of Chief Financial Officer)                                  |                      |   |
| 31.2                              |   | Certifications (of Chief Executive Officer)                                  |                      |   |
|                              |   |                                                                         |                      |   |
| 32.1                              |   | Certification of Chief Financial Officer Pursuant to  18 U.S.C. Section 1350 |                      |   |
|                              |   |                                                                         |                      |   |
| 32.2                              |   | Certification of Chief Executive Officer Pursuant to  18 U.S.C. Section 1350 |                      |   |
|                                   |        |                                                                              |                           |        |        |  |

 

**Item 14. Principal Accountant Feesand Services**

The Board of Directors, upon recommendation of the Audit Committee, appointed the firm of Altschuler, Melvoin & Glasser LLP (“AM&G”) certified public accountants for fiscal 2006.

AM&G has  a  continuing relationship  with  RSM McGladrey, Inc. (RSM) and had arelationship with American Express Tax and Business Services,  Inc. (TBS)    The Firm leases auditingstaff who are full time, permanent employees of RSM or were employees of TBSand through which its partners provide non-audit services.  As a result of this arrangement, the Firm hasno full time employees and therefore, none of the audit services performed wereprovided by permanent full-time employees of the Firm.  The Firm manages and supervises the audit andaudit staff, and is exclusively responsible for the opinion rendered inconnection with its examination.

Audit fees

Auditfees relate to audit work performed on the financial statements as well as workthat generally only the indepenedent auditor can reasonably be expected toprovide including discussions surrounding the proper application of financialaccounting and/or reporting standards and reviews of the financial statementsincluded in quarterly reports filed on Form 10QSB.  Fees billed for professional  audit services  rendered amounted toapproximately $85,500 and $73,000 for the fiscal years ended June 30, 2006 and2005, respectively.

 

----

* Incorporatedby reference from Company’s Form 10SB Amendment 3 dated May 21, 2001.

29

----

*Auditrelated fees*

None

*Tax Fees*

Tax  compliance services were provided by RSM forwhich fees amounted to approximately $16,000 for the fiscal year ended June 30,2006.  Tax compliance services wereprovided by TBS for which fees amounted to $15,000 for the fiscal year ended  June 30, 2005.

*All otherfees*

During  the year  ended  June  30, 2006,  AM&G  and performed management consulting services for which fees amounted toapproximately $13,590 .  These managementconsulting services were primarily related to the contemplated acquisition ofNEMC.   For the year ended June 30, 2005AM& G and  did not perform anymanagement consulting services for the Company.

*Preapprovalof Policies and Procedures by Audit Committee.*

The accountantsprovide a quote for services to the audit committee before work begins for thefiscal year.  After discussion the auditcommittee then makes a recommendation to the board on whether to accept theproposal.

*Percentageof services approved by Audit Committee.*

All services wereapproved by the audit committee.

**SIGNATURES**

In accordance withthe requirements of the Exchange Act, the Company caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
|        | QRS Music  Technologies, Inc.                                                                                                 |   |
|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                          |
|   | Date: 10/13/06                                                                                                                |
|   |                                                                                                                          |
|   |       /s/  Ann A. Jones             |   |
|   |                                                                                                                          |   |
|   | Ann A. Jones,  Chief Financial Officer                                                                                        |
|        |                                                                                                                               |        |  |

 

30

----